FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
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
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The number of shares outstanding of the registrant's voting Common Stock
and the aggregate market value of such Common Stock held by non-affiliates on
February 23, 1999 was as follows:
Common Stock-$.01 Par Value Per Share
Authorized 15,000,000 Shares
4,731,204 Shares Outstanding
Aggregate Market Value $6,692,582
Document Incorporated by Reference.
Registrant's Proxy Statement for Annual Meeting of Stockholders to be held May
13, 1999 is incorporated by reference into Part III of this Filing.
PART I
The statements contained in the Annual Report on Form 10-K ("Annual
Report") which are not historical facts, including, but not limited to,
statements found in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements that involve
a number of risks and uncertainties. The actual results of the future events
described in such forward-looking statements in this Annual Report could differ
materially from those stated in such forward-looking statements. Among the
factors that could cause actual results to differ materially are risks and
uncertainties set forth below under the heading Risk Factors and other risks and
uncertainties discussed in this Annual Report and set forth from time to time in
the registrant's other public reports and filings and public statements.
Item 1. Business
HISTORY AND BUSINESS OF LEXINGTON GLOBAL ASSET MANAGERS, INC.
Lexington Global Asset Managers, Inc. (the "Company") was incorporated in
Delaware in September 1995 as a holding company that offers, through its
subsidiaries, a variety of asset management and related services to retail
investors, institutions and private clients.
Prior to the spin-off of the Company on December 13, 1995 (the
"Spin-off"), the Company was a wholly-owned subsidiary of Piedmont Management
Company Inc. ("Piedmont"), a Delaware corporation. Pursuant to the Spin-off,
Piedmont contributed to the Company all of its subsidiaries engaged in the asset
management business and distributed to each Piedmont stockholder one share of
Common Stock of the Company for each share of Piedmont common stock held by such
stockholder. The Spin-off resulted in 100% of the Common Stock of the Company
being distributed to Piedmont stockholders.
The Company manages portfolios of equity, balanced, fixed income,
mortgage-backed and money market investments, which are designed to meet a broad
range of investment objectives.
At December 31, 1998 total assets under management amounted to $3.2
billion, with $1.5 billion in mutual funds, $1.1 billion in institutional
accounts and $0.6 billion in private client accounts. The Company's client base
consists of approximately 141,000 mutual fund shareholder accounts,
approximately 20 institutional accounts, and approximately 680 private client
accounts. The tables below set forth the Company's total assets under management
in each of its three major markets at the dates indicated and the Company's
total assets under management by type of investment.
Asset Composition By Market (1)
(Dollars in Thousands)
December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
Mutual Funds $1,460,303 $1,896,293 $1,797,238 $1,517,260 $1,501,668
Institutional 1,115,762 1,109,339 1,047,244 1,134,080 1,472,122
Private Clients 594,913 467,072 360,226 428,434 421,204
------------------------------------------------------------------
Total $3,170,978 $3,472,704 $3,204,708 $3,079,774 $3,394,994
==================================================================
Asset Composition By Type of Investment
(Dollars in Thousands)
December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
Domestic Equity $1,807,759 $1,704,426 $1,330,398 $1,172,710 $1,096,988
Foreign Equity 363,770 850,274 807,962 699,842 696,882
------------------------------------------------------------------
Subtotal (2) 2,171,529 2,554,700 2,138,360 1,872,552 1,793,870
Precious Metals (3) 94,033 118,416 201,295 273,411 347,023
Fixed Income 758,686 634,029 668,841 712,830 976,104
Money Market Funds 146,730 165,559 196,212 220,981 277,997
------------------------------------------------------------------
Total $3,170,978 $3,472,704 $3,204,708 $3,079,774 $3,394,994
==================================================================
- -----------------------
(1) Included in the institutional assets under management are invested assets
of members of the Richardson Family (defined below, see "Risk
Factors---Substantial Stockholders"), principal stockholders of the
Company, and certain other related persons, which assets at December 31,
1998 were valued at approximately $867 million. The fees charged for the
management of such assets assets are based upon standard fee schedules and
are comparable with the fees charged to unaffiliated accounts.
(2) Excludes precious metal equities.
(3) Precious Metals includes precious metals and precious metal equities.
The following illustrates the structure of the Company as of December 31, 1998.
Lexington Global Asset Managers, Inc.
Lexington Management Corporation (100%)
Lexington Funds Distributor, Inc. (100%)
Market Systems Research Advisors, Inc. ( 65%)
Market Systems Research, Inc. (100% owned
by Market Systems Research Advisors, Inc.)
Piedmont Asset Advisors L.L.C. ( 51%)
Primary Markets and Strategy for Growth
Markets
The Company's business strategy is targeted at three large market segments:
Mutual Funds--The Company, through its subsidiaries, markets,
promotes, and distributes the Lexington family of 17 mutual funds (the
"Lexington Funds") providing a variety of investment choices for the
retail investor, financial planner and intermediary, and the defined
benefit and defined contribution marketplace, including the rapidly
growing 401(k) market.
Institutional Market--The institutional market for investment
management services includes corporate, government and multi-employee
(Taft Hartley) pension plans, charitable endowments and foundations,
insurance company general accounts and defined contribution and 401(k)
plans. Lexington has secured both domestic and international
assignments, utilizing investments in domestic and foreign equity
securities, precious metal equities, fixed income and its family of
mutual funds.
Private Clients--The Company offers equity, fixed income and
balanced fund alternatives, tailored to the individual investment
objectives of its private clients.
In each of these areas, management's overall objective is to execute
specific business strategies (see following discussions) to profitably maximize
assets under management and provide clients with investment performance that
meets their objectives.
The Company derives its revenues primarily from fees for its investment
advisory services provided to retail investors, institutions and private
clients.
Mutual Funds
Background. The mutual fund industry has expanded rapidly in the last
several years. According to the Investment Company Institute, the trade
association for investment companies, total assets of U.S. mutual funds have
increased from $810 billion at December 31, 1988 to $5.5 trillion at December
31, 1998, an average growth rate of approximately 21% per year.
In the mutual fund industry, mutual funds may be sold to investors with a
sales charge or a commission (a "load" fund) or without a sales charge or a
commission (a "no-load" fund). Of the seventeen Lexington Funds, fifteen are
no-load funds and two are load funds. Mutual funds may also be either closed-end
or open-end. Generally, closed-end funds raise money from stockholders only
once, unlike an open-end fund which issues and redeems shares of the fund on a
continuous basis. In addition, unlike open-end mutual funds, closed-end funds do
not stand ready to redeem their shares at net asset value. Instead, stockholders
wishing to sell their shares must do so by trading them on a national securities
exchange or in the over-the-counter market, at a price determined by the market,
which may be higher or lower than the fund's net asset value. All of the
Company's mutual funds are open-end funds.
The mutual fund industry is highly competitive and is currently
characterized by a high degree of fragmentation and a large and rapidly
increasing number of product offerings. The Company believes that the mutual
fund industry is becoming similar to the consumer products business, where
marketing strategies, product development, business development, sales expertise
and servicing are increasingly important.
Investment Products and Services. The Company has developed the Lexington
family of 17 mutual funds which are managed, marketed and distributed under the
Lexington name through Lexington Management Corporation and Lexington Funds
Distributor, Inc. The Lexington Funds are designed to provide a variety of
investment options for retail investors, financial planners and intermediaries,
and for the defined benefit and defined contribution marketplace, including the
401(k) market. These funds have been selected for inclusion in various no fee
transaction broker programs, such as the Charles Schwab Mutual Fund OneSource(R)
program.
Each of the Company's global/international equity funds may invest their
assets in any country approved by the fund's Board of Directors provided such
assets are custodied with an eligible custodian under Rule 17f-5 of the
Investment Company Act of 1940, as amended. Currently, Chase Manhattan Bank is
acting as master custodian of assets for each of the Lexington Funds.
Except for the Lexington Strategic Investments Fund, Inc., which has a
significant portion of its assets under management invested in South Africa, the
Lexington Goldfund, Inc., which has a significant portion of its assets under
management invested in Australia, Canada and South Africa, the Lexington Crosby
Small Cap Asia Growth Fund, which has a significant portion of its assets under
management invested in Asia, and the Lexington Troika Dialog Russia Fund, which
has a significant portion of its assets under management invested in Russia, the
Company believes that, in general, the assets under management in its
global/international and precious metal equities funds are invested in a
geographically diversified manner.
Strategy. The Company's current strategies in the mutual fund market are to:
(i) identify emerging trends in order to develop new investment products; (ii)
strengthen the "brand name" awareness of the Lexington Funds both at the
broker-dealer level and the retail investor level; (iii) broaden its efforts to
offer subadvisory and administration services to other mutual funds; (iv) expand
into other distribution channels; and, (v) evaluate and pursue acquisition
opportunities.
The Company believes that with focused market research efforts it can
identify demographic and industry trends relevant to the growth of the mutual
fund business and thereby develop products to meet emerging needs and
opportunities. For example, the Company launched the Lexington Global Fund, Inc.
in March 1987 after the Company's research indicated that international
investing was an emerging investment trend which offered the potential for
reduced risk and higher expected returns through global diversification.
Furthermore, the Company believes that its smaller relative size in the mutual
fund industry provides it with a competitive advantage by enabling the Company
to capitalize upon trends more quickly than its competitors. As another example,
in 1996, the Company launched the Lexington Troika Dialog Russia Fund, the first
open-end fund in the United States devoted to Russian equities.
To achieve greater "brand name" awareness, the Company has used media
relations consultants to assist in building relationships with the media. The
Company's portfolio managers, analysts and management have appeared in national
print publications as well as on television and radio. This program, combined
with the Company's internal promotion staff that communicates directly with
financial planners, is designed to enhance the "brand name" awareness of
Lexington and its investment products.
The Company continuously markets to insurance companies, financial planners,
consultants, bank trust departments and other financial intermediaries to sell
its subadvisory and fund administration services and secure new distribution
channels for its investment products.
The Company utilizes a formalized screening and valuation process to
identify potential acquisition candidates or strategic partners in order to
expand its business. In addition to the Company's management contacts in the
mutual fund and investment management industry, an outside consultant has been
used in the past to complement management's efforts in this area.
Management believes that the integration of financial products with targeted
services will also allow it to better pursue opportunities in various markets.
For example, the Company has developed funds for the specific purpose of funding
variable annuity and variable life insurance policies issued by insurance
companies. Currently, two such funds are being sold by six insurance companies.
Institutional Market
Background. The market for institutional clients includes corporate,
government and multi-employee (Taft Hartley) pension plans, charitable
endowments and foundations, insurance company general accounts, and defined
contribution and 401(k) plans. According to the 1998 Money Market Directory of
Pension Funds (including 401(k) plans), the institutional market represented
over $5.9 trillion in total assets under management, including defined benefit
plan assets, endowments and foundations.
The institutional market is extremely competitive with long lead times
between initial contact and acquisition of an account. Institutional investors
increasingly rely upon a competitive review process when selecting investment
advisory firms. The process often includes the assistance of independent
investment consultants, who analyze, rank and recommend advisors as well as
conduct searches for advisors on behalf of clients. Consultants typically
classify firms according to their investment style and place heavy emphasis upon
a demonstrated record of investment performance within a particular style. These
consultants often control access to prospective clients.
Investment Products and Services. The products the Company offers to the
institutional market include investments in domestic and foreign equity
securities, precious metal equities, fixed income securities and a family of
mutual funds to be utilized in a client's pension, defined contribution or
401(k) plan.
The Company, through its subsidiaries, acts as subadvisor under several
variable annuity contracts and variable life insurance policies, including
contracts and policies with London Pacific Life & Annuity Company. The Company
also makes certain of its mutual funds available to selected insurance companies
as funding vehicles for variable annuity contracts and variable life insurance
policies, including Aetna Insurance Company of America, SafeCo Life Insurance
Company, Kemper Investors Life Insurance Company, Transamerica Occidental Life
Insurance Company, Great-West Life & Annuity Insurance Company, and Fortis
Benefits Insurance Company.
Strategy. The Company's strategy in the institutional market is to target
specialized segments such as: (i) Taft Hartley and charitable foundations and
endowments, (ii) public retirement accounts, (iii) insurance company general
accounts and, (iv) broker wrap accounts. In addition, the Company has formed
joint management arrangements with other investment advisory companies which
offer specialized products or services.
By targeting specialized segments, management believes that it can market
directly to these segments and leverage upon the integrated financial products
and services that it offers. The Company believes the strategy will allow better
penetration of the institutional market.
The Company believes that the 401(k) market is of key interest. According
to Pensions and Investments, assets in the 401(k) market, where investment
decisions are made by the individual, will surpass the assets in the private
pension system. The Company is targeting the 401(k) market as a key growth
market by participating in administrative alliances and various discount broker
programs which target the defined contribution and 401(k) market.
The Company has formed joint management arrangements with investment
advisory firms to expand investment product offerings. The Company develops
investment products in consultation with these firms which usually have a
specialization in evaluating and investing in specific market segments such as
convertible securities, specific geographic regions and global fixed income.
These products are subsequently distributed utilizing Lexington's distribution
channels and are jointly managed by the Company and the investment advisory
firm. These joint management arrangements are subject to the approval of the
shareholders of the fund utilizing these services and the annual approval of the
Board of Directors of the fund. Firms with which the Company has developed joint
management arrangements include Ariston Capital Management Corporation
(convertible securities), Crosby Asset Management (US), Inc. (Asia), MFR
Advisors, Inc. (Maria Fiorini Ramirez) (global fixed income), Stratos Advisors
Inc. (emerging markets), and, Troika Dialog Asset Management, ZAO (Russia). Each
of these firms is a registered investment advisor.
The Lexington Crosby Small Cap Asia Growth Fund has a joint management
arrangement with Crosby Asset Management (US), Inc., a wholly-owned subsidiary
of the Crosby group. The Crosby group is an independent merchant bank in Asia
founded in 1984 which provides a variety of financial services including
investment management and corporate finance.
The Lexington Ramirez Global Income Fund has a joint management arrangement
with MFR Advisors, Inc., a subsidiary of Maria Fiorini Ramirez Inc. MFR
Advisors, Inc. was established in 1992 by the economist Maria Fiorini Ramirez to
provide global economic consulting, investment advisory and broker-dealer
services.
The Lexington Convertible Securities Fund has a joint management arrangement
with Ariston Capital Management Corporation, a corporation established in 1977.
Ariston Capital Management Corporation's president, Richard B. Russell, has over
20 years of experience in conducting research in the use of convertible
securities and market forecasting in portfolio management.
The Lexington Worldwide Emerging Markets Fund, Inc. and the Lexington
Emerging Markets Fund, Inc. have a joint management arrangement with Stratos
Advisors, Inc., which is an affiliate of VZB Partners, LLC. Stratos specializes
in managing assets in emerging markets and seeks to provide investment
management services to institutional investors for sophisticated individual
investors with net worth in excess of $1 million.
The Lexington Troika Dialog Russia Fund, Inc. has a joint management
arrangement with Troika Dialog Asset Management, ZAO, a Russian Closed Joint
Stock Company, established in 1991. Troika Dialog Asset Management, a pioneer in
the development of Russia's securities markets, is a sister company of the
largest brokerage firm in Russia, Troika Dialog.
Private Clients
Background. With the changing demographics of the United States, the aging
of the "baby boomer" generation and the accumulation of assets in retirement
accounts, the private client sector is a growing segment of the investment
advisory industry. The Company believes that the principal needs for private
clients are investment advice and asset management services because these
clients, as they near retirement, have a large amount of accumulated assets and
require sophisticated estate planning advice.
Investment Products and Services. The Company offers equity, fixed income
and balanced fund investment options to its high net worth clients through
portfolios which are tailored to the client's individual investment objectives.
The average account size of the Company's private clients is $875,000. With
approximately 680 private clients, the Company's clients are generally heads of
households in their mid-40s to 60s with a high proportion of their wealth in
liquid assets.
Strategy. The Company's strategies in the private client sector are to: (i)
integrate the products and services offered to these clients by the Company's
various subsidiaries, (ii) design an integrated set of financial products and
services to meet the financial service needs of these individuals and (iii)
excel in customer service through utilization of the most current and
sophisticated investment planning, management and reporting techniques.
The Company offers products and services to its private clients through
LMC's private client group. Currently, marketing of investment products and
services to high net worth prospects is primarily conducted by LMC through
direct sales and referral sales by retail stockbrokers, CPAs and lawyer
networks.
LMC and LFD
LMC and LFD, both located in Saddle Brook, New Jersey, form the core
business of the Company generating approximately 95% of revenues in 1998. LMC
and its predecessors have been active in the investment management business
since 1938. LMC provides products and services for institutional clients
including corporate, government and Taft Hartley pension plans, charitable
endowments and foundations, insurance company general and separate accounts and
defined contribution and 401(k) plans. The Company's private client business is
also conducted primarily through LMC. LMC targets accounts in this market with
up to $5 million to invest, which accounts typically include wealthy individuals
and smaller institutional accounts, including foundations, not-for-profit
corporations, pension plans and employee benefit plans.
LMC and LFD are responsible for managing, servicing, marketing and
distributing the Lexington Funds to financial intermediaries and the retail
market. The Lexington Funds are designed to provide a variety of investment
options for retail investors, financial planners and intermediaries, and for the
defined benefit and defined contribution marketplace, including the 401(k)
market. The Lexington Funds include equity, balanced, fixed income,
mortgage-backed and money market funds. The geographical orientation of the
Lexington Funds range from domestic to international to global.
Certain funds specialize in specific industries or sectors, such as
precious metals and natural resources, but most are broadly diversified.
Currently, the Lexington Funds have approximately 141,000 shareholders. Of the
seventeen Lexington Funds, two are load funds and fifteen are no-load funds.
Investment advisory services, as well as management research and statistical
services, are provided to each fund by LMC and LFD. As compensation for such
services, the mutual funds pay a fee which is based upon average net assets
under management.
The following table sets forth the assets for each of the five years ended
December 31, 1998 of each of the Lexington Funds and for each fund to which LMC
and LFD provides subadvisory and/or administration services.
Fund Assets (1)
(Dollars in Thousands)
December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
Domestic Equity*
Lexington Growth & Income Fund $245,734 $228,058 $200,231 $138,840 $124,292
Lexington Corporate Leaders Trust Fund 482,678 476,405 384,990 247,560 152,990
London Pacific Corporate Leaders 8,182 3,506 1,311 - -
Lexington Natural Resources Trust 35,442 65,320 37,896 16,962 13,620
Lexington SmallCap Value Fund, Inc. 8,165 9,578 8,056 - -
----------------------------------------------------------
Total Domestic Equity $780,201 $782,867 $632,484 $403,362 $290,902
----------------------------------------------------------
Fixed Income*
Lexington Money Market Trust $86,494 $94,349 $97,680 $88,961 $110,811
Lexington Short-Intermediate Government
Securities Fund, Inc. (2) - - - - 5,799
Lexington GNMA Income Fund, Inc. 273,063 157,608 133,660 130,735 132,362
Lexington Ramirez Global Income Fund (3) 36,411 23,569 28,992 10,754 10,578
Lexington Tax Free Money Fund, Inc. (4) - - 26,528 28,203 37,531
Lexington Convertible Securities Fund 10,306 10,350 11,208 11,634 8,021
SBL Fund Series K (5) (6) (7) 13,066 14,445 11,755 5,684 -
Security Income Fund-Global Aggressive
Bond Series (5) (6) (7) 4,327 6,269 4,915 4,409 -
----------------------------------------------------------
Total Fixed Income $423,667 $306,590 $314,738 $280,380 $305,102
----------------------------------------------------------
Global/ International Equity *
Lexington Worldwide Emerging Markets Fund, Inc. (8) $67,732 $137,988 $256,532 $260,423 $288,511
Lexington Global Fund, Inc. 17,846 35,088 37,216 53,635 67,353
Lexington Emerging Markets Fund, Inc. 15,357 24,061 21,581 7,840 4,598
Lexington International Fund, Inc. 24,000 19,950 18,891 17,855 17,811
Lexington Crosby Small Cap Asia Growth Fund 18,209 13,986 25,246 8,900 -
SBL Fund Series D (5) (6) (7) (10) - 285,864 246,908 177,935 147,028
Parkstone Advantage International Discovery Fund (7) - - - 11,649 9,501
Security Equity Fund-Global Series (5) (6) (7) (10) - 33,834 28,543 21,870 23,839
Lexington Troika Dialog Russia Fund (9) 19,258 137,649 13,804 - -
----------------------------------------------------------
Total Global/International Equity $162,402 $688,420 $648,721 $560,107 $558,641
----------------------------------------------------------
Precious Metal Equity*
Lexington Goldfund, Inc. $50,886 $53,945 $109,215 $136,361 $158,846
Lexington Strategic Investments Fund, Inc. (7) 17,502 20,760 43,702 76,280 138,164
Lexington Strategic Silver Fund, Inc. (7) 25,645 43,711 48,378 60,770 50,013
----------------------------------------------------------
Total Precious Metal Equity $94,033 $118,416 $201,295 $273,411 $347,023
----------------------------------------------------------
Total Funds $1,460,303 $1,896,293 $1,797,238 $1,517,260 $1,501,668
==========================================================
- --------------------------------------------------------
(1) Each of the funds listed is an open-end fund. Unless otherwise indicated,
each of the funds is a no-load fund.
(2) Fund liquidated in December 1995.
(3) Fund changed objective from tax-exempt bond fund to global income fund on
January 3, 1995.
(4) Fund liquidated in August 1997.
(5) Fund sponsored by Security Benefit Life Insurance Company.
(6) Fund to which the Company, through its subsidiaries, provides subadvisory
and administration services.
(7) Load fund.
(8) Fund changed objective from growth fund to emerging markets growth fund in
June 1991.
(9) Fund commenced operations in June 1996.
(10) Sub-advisory relationship terminated November 2, 1998.
* Of each of the Company's four market segments, Domestic Equity, Fixed
Income, Global/International Equity and Precious Metal Equity, invested
assets held by the Richardson Family constituted 30.8%, 22.2%, 31.0% and
0%, respectively, of the total assets under management with respect to
each segment at December 31, 1998.
Other Subsidiaries
At December 31, 1998, 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. MSR is owned 65% by the Company
and 35% by Frank A. Peluso, a principal employee who also serves as President
and a Director of the Company.
PAA--New York, New York.
The Company owns 51% of PAA, an entity formed in 1994 which served as a
general partner of a limited investment partnership engaged in the asset
management business. (PAA's activities in the limited partnership were
terminated in the third quarter of 1996.) The remainder of PAA is owned by
R.V.Consultants, Inc. a company which is owned by Messrs. Stuart S. Richardson,
Robert M. DeMichele and Richard M. Hisey, all of whom are principal employees of
the Company. At this point in time, PAA is an inactive company.
Marketing and Distribution
Traditionally, load mutual funds were principally sold by registered
representatives of broker-dealers, who received sales commissions as
compensation for fund sales. No-load mutual funds were sold directly to the
investing public without the assistance of a registered representative and
therefore no sales commission was imposed on the purchase.
The Company's products and services are marketed and distributed through a
variety of captive and non-captive distribution channels which are listed below.
The approximate percentage of assets under management distributed through each
of the Company's distribution channels listed below is provided in the
parenthetical immediately prior to the description of such distribution channel.
(57%) The Lexington Family of No Load Mutual Funds are sold through
direct sales and marketing efforts utilizing print, radio and television
advertising.
(37%) The Company also has shareholder servicing arrangements with
discount brokers, including Charles Schwab Mutual Fund OneSource(R), Fidelity
Funds Network(R), Jack White & Company No Transaction Fee Mutual Fund Service,
Waterhouse Mutual Fund Connection and First Trust Corporation. The Company also
has a number of its funds included in strategic alliances and "wrap" programs,
which will offer greater distribution opportunities in the future. At December
31, 1998, approximately $535 million, or 37%, of LMC's total mutual fund assets
have been generated through these named shareholder servicing arrangements.
Under these shareholder servicing arrangements, the discount broker, which
sells, markets and distributes many mutual funds other than the Lexington Funds
is paid a fee for recordkeeping, shareholder communications and other services
provided by the discount broker to investors purchasing shares of the Lexington
Funds through the discount broker's programs. This fee is typically based on the
average daily value of the investments in each Lexington Fund made by the
discount broker on behalf of investors participating in the discount broker's
program. While the Company has no reason to believe that such shareholder
servicing arrangements will be terminated, no assurances can be given that these
arrangements will continue or that they will continue to generate a substantial
portion of the Company's total mutual fund assets. The loss of any one or more
of these shareholder servicing arrangements may materially adversely affect the
Company's results of operations. The Company's ability to gain and maintain
access to these distribution channels is largely dependent on the investment
performance of the Company's products, the development of new investment
products, marketing and pricing strategies that serve the needs of investors and
discount brokers and the level of service provided by the Company. Although the
Company historically has been successful in these aspects of its business, there
can be no assurance that the Company can continue to maintain such access for
its products.
(1%) The Lexington Strategic Funds, which are precious metal stock
funds, as well as funds sponsored by Security Benefit Life Insurance Company are
sold with a sales charge through broker-dealers and directly by LFD.
(5%) The Lexington Funds are also sold through banks and insurance
companies.
Although the Company does not control all of its distribution channels, the
Company believes that the use of multiple distribution channels, including
competing non-captive distribution channels, stabilizes and increases the
distribution of its products.
Regulation
LMC and MSR are registered as investment advisors under the Investment
Advisers Act of 1940, as amended (the "Advisory Act"), and all applicable state
securities laws. LFD is registered as a broker/dealer under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and all applicable state
securities laws. Accordingly, this company is subject to regulation by the
Securities and Exchange Commission (the "SEC") and state securities commissions
and is required to furnish periodic reports and to observe restrictions on
certain activities. Each Lexington Fund is registered with the SEC under the
Investment Company Act of 1940, as amended (the "1940 Act"), and is qualified
for sale throughout the United States. The 1940 Act imposes restrictions on
certain transactions between the Lexington Funds and LMC.
All aspects of the Company's business are subject to the laws and
regulations of the countries and states in which Lexington, its subsidiaries and
affiliates conduct business. These laws and regulations are primarily intended
to benefit clients and shareholders and, in some instances may impose minimum
capital requirements. These laws and regulations generally grant supervisory
agencies broad administrative powers, including the power to limit or restrict
Lexington's business and impose sanctions, to suspend individual employees, to
limit the Company from engaging in business for specific periods, to revoke
LMC's registration as an investment advisor and LFD's registration as a
broker-dealer and to censure and levy fines. Applicable United States Federal
laws also include the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Securities Act of 1933, as amended (the "Securities
Act").
Competition
The asset management business is highly competitive. The Company competes
with a large number of other domestic and foreign asset management firms,
commercial banks, insurance companies, broker-dealers and others, although as a
practical matter the Company typically competes with other firms offering
comparable investment services and objectives. According to The Money Market
Directory of Pension Funds and their Investment Managers, the Company ranked
among the top 390 largest of investment counsel firms, as measured by total
tax-exempt assets under management at December 1998. As a result, some of the
financial services companies with which the Company competes have substantially
greater resources and assets under management than the Company and offer a wider
variety of products and services.
The Company believes factors which affect its competition for clients
include investment performance records, the range of products offered, the
abilities and reputations of its portfolio managers, management fees and the
development of new investment strategies and marketing, although the importance
of these factors can vary depending on the type of asset management service
involved. Client service is also an important competitive factor. The Company's
ability to increase or retain client assets could be adversely affected if
client accounts underperform the market or if portfolio managers leave the
Company. The ability of the Company to compete with other asset management firms
is also dependent, in part, on the relative attractiveness of its investment
philosophies and strategies under prevailing market conditions. There are
relatively few barriers to entry by new asset management firms which could
increase competitive pressure in the industry.
Selection of advisors by investors often is subject to a competitive review
process relying heavily upon historical performance.
A large number of mutual funds are sold to the public by asset management
firms, broker-dealers, insurance companies and banks in competition with the
Company's mutual funds. Many competitors apply substantial resources to
advertising and marketing their mutual funds which may adversely affect the
ability of the Company's mutual funds to attract new clients and to retain
assets under management.
Personnel
At December 31, 1998, the Company employed approximately 92 people.
Approximately 86, 2, 1, and 3 were located in Saddle Brook, New Jersey; Gold
River, California; Dallas, Texas; and New York, New York, respectively. None of
the Company's employees are represented by a labor union and the Company
believes that its relations with its employees are good.
RISK FACTORS
Dependence upon Performance Record
The market for providing investment management services is highly competitive
with investors generally favoring investment advisors with a sustained
successful investment performance record. The performance record of the Company
may be affected by factors over which the Company has little or no control,
including general economic conditions, other factors influencing the capital
markets, the net sales of mutual fund shares generally, and interest rate
fluctuations.
Concentration of Distribution Channels and Reliance on Certain Distributors
While the Company over time has used a variety of distribution channels,
currently a substantial percentage of the Company's investment product sales are
through non-captive distribution channels, including no transaction fee
programs. Such non-captive distribution channels generally offer competing
internally and externally sponsored or managed investment products and access to
these distribution channels is limited. The Company's ability to gain and
maintain access to these distribution channels is largely dependent on the
investment performance of the Company's products, the development of new
investment products, marketing and pricing strategies that serve the needs of
investors and the non-captive distribution channels and the level of service
provided by the Company. Although the Company historically has been successful
in these aspects of its business, there can be no assurance that the Company can
continue to maintain such access for its products.
As of December 31, 1998, approximately $535 million, or 37% , of the
Company's total mutual fund assets have been generated through shareholder
servicing arrangements with five discount brokers; Charles Schwab Mutual Fund
OneSource(R), Fidelity Funds Network(R), Jack White & Company No Transaction Fee
Mutual Fund Service, Waterhouse Mutual Fund Connection, and First Trust
Corporation. While the Company has no reason to believe that such shareholder
servicing arrangements will be terminated, no assurances can be given that these
arrangements will continue or that they will continue to generate a substantial
portion of the Company's total mutual fund assets under management. The loss of
any one or more of these arrangements could materially adversely affect the
Company's results of operations.
Changes in Market Conditions; Retention of Assets Under Management
The Company derives the major portion of its revenues from asset management
contracts with clients. Under these contracts, the asset management fee paid to
the Company is typically based on the market value from time to time of assets
under management. Accordingly, fluctuations in securities prices could
materially adversely affect the Company's results of operations.
In addition, institutional asset management contracts are generally
terminable upon 30 days' notice. Mutual fund and unit trust investors may
generally withdraw their funds at any time without prior notice. Institutional
clients may elect to terminate their relationship with the Company, or reduce
the aggregate amount of assets under management, and individual clients may
elect to close their accounts or redeem their shares in the Company's mutual
funds or unit trusts, or shift their funds to other types of accounts with
different rate structures, for any of a number of reasons, including investment
conditions or changes in prevailing interest rates or financial market
conditions. Fees vary with the aggregate amount of assets under management by
the Company and with the type of asset being managed, with higher fees earned on
actively managed equity and balanced accounts and lower fees earned on fixed
income and stable return accounts.
Global/International and Precious Metal Equity Mutual Fund Holdings
At December 31, 1998, approximately $0.5 billion, or 14.4%, of the Company's
total assets under management were invested in global/international and precious
metal equities. Many foreign markets, especially emerging markets and markets
where precious metals are mined, may be characterized by volatile economic,
political and social conditions. Many of these countries have also experienced
significant exchange rate fluctuations between the local currencies and the U.S.
dollar which may subject the U.S. dollar value of the Company's assets under
management in global/international and precious metal equities to currency
translation risk, which could materially adversely affect the Company's results
of operations. The markets in such countries may also be less liquid and less
efficient than domestic markets. While the Company believes international
investing offers the potential for reduced risk and higher expected returns
through global diversification, fluctuations in foreign markets may have a
material adverse effect on the value of the assets under management in the
Company's global/international and precious metal equities.
Except for the Lexington Strategic Investments Fund, Inc., which has a
significant portion of its assets under management invested in South Africa, the
Lexington Goldfund, Inc., which has a significant portion of its assets under
management invested in Australia, Canada and South Africa, the Lexington Crosby
Small Cap Asia Growth Fund, which has a significant portion of its assets under
management invested in Asia, and the Lexington Troika Dialog Russia Fund, Inc.,
which has a significant portion of its assets under management invested in
Russia, the Company believes that in general, the assets under management
in its global/international and precious metal equities funds are invested in
a geographically diversified manner.
Competition
The asset management business is highly competitive. The Company competes
with a large number of other domestic and foreign asset management firms,
commercial banks, insurance companies, broker-dealers and others, although as a
practical matter the Company typically competes with other firms offering
comparable investment services and objectives. Many of the financial services
companies with which the Company competes have substantially greater resources
and assets under management than the Company and offer a wider variety of
products and services.
Reliance on Key Personnel
The Company's business is managed by key executive officers, the loss of
whom could have a material adverse effect on the Company. The Company believes
that its continued success will depend in large part on its ability to attract
and retain highly skilled and qualified personnel. In the event that any
officers or directors of the Company cease to be associated with the Company,
the Company will seek to find a qualified person or persons to fill their
positions with the Company. There can, however, be no assurance that such
individuals could be engaged by the Company.
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.
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 prepare the Company's
computer systems and applications for the Year 2000, as well as to identify and
address any other Year 2000 operational issues which may affect the Company.
Progress reports on the Company's Year 2000 program are presented regularly to
the Company's Board of Directors and senior management.
The Company expects to be Year 2000 compliant during the second quarter of 1999
and is in the process of preparing a contingency plan, which should be completed
by the second quarter of 1999. Although the Company believes it is adequately
addressing its Year 2000 issues, the failure to correct a material Year 2000
problem could result in an interruption in, or a failure of, certain normal
business activities or operations. Such failure could materially affect the
Company's results of operations, liquidity and financial condition.
For additional information on Year 2000 status, please refer to Item 7,
Management's Discussion and Analysis.
Dividends and Dividend Policy
The decision whether to apply legally available funds to the payment of
dividends on the Common Stock will be made by the Board of Directors from time
to time in the exercise of its business judgment, taking into account, among
other things, the Company's results of operations and financial condition and
any then existing or proposed commitments for the use by the Company of
available funds.
The Company may in the future issue debt securities or preferred stock or
enter into loan or other agreements that restrict the payment of dividends on
and repurchases of the Company's capital stock.
Company Buy-Back Program
On March 7, 1997 and September 17, 1998 the Board of Directors of the
Company authorized share repurchase programs of up to 750,000 shares for a total
program of up to 1,500,000 shares. Repurchases have been and will be made from
time to time in the open market or through privately negotiated transactions at
market prices. The stock repurchase plans have terms of three years. During
1998, the Company repurchased 532,350 shares of stock for an aggregate purchase
price of $2,353,857. Also during 1998, 11,000 treasury shares were awarded under
the Company's Restricted Stock Award Plan. During 1997, the Company repurchased
313,000 shares of its common stock for an aggregate purchase price of
$2,280,375. Also during 1997, 233,000 treasury shares were awarded under the
Company's Restricted Stock Award Plan. To date, 244,000 shares have been awarded
and 77,671 shares have been issued under the plan.
Substantial Stockholders
Descendants of Lunsford Richardson, Sr., their spouses, trusts, a
corporation in which they have interests and charitable organizations
established by such descendants (the "Richardson Family") some of whom are
directors of the Company, beneficially own shares of Common Stock representing
over 48% of the voting power of all the Company's outstanding voting securities.
Accordingly, the Richardson Family has the ability to exert significant
influence over the outcome of any matters submitted to the Company's
stockholders for approval, including mergers, consolidations or the sale of all
or substantially all of the Company's assets, and to prevent or cause a change
in control of the Company.
At December 31, 1998 the Company also managed approximately $867 million in
invested assets of the Richardson Family and certain other related persons which
represent approximately 27.3% of the Company's total assets under management at
such date. The fees charged for the management of such assets are based upon
standard fee schedules and are comparable with the fees charged to unaffiliated
accounts. While the Company believes that it will continue to manage these
assets, no assurance can be given with respect to the continued management of
these assets. The loss of such assets would materially adversely affect the
Company's results of operations.
Item 2. Properties
Neither the Company nor its subsidiaries and majority owned companies own
real estate. The principal offices of the Company and its subsidiaries are
leased from unaffiliated third parties, which leases expire at various dates up
until the year 2003. The Company and its subsidiaries LMC and LFD are located in
Saddle Brook, New Jersey, occupying approximately 28,000 square feet of office
space at an annual rental of approximately $578,000 under a lease expiring in
2003.
MSR leases approximately 2,100 square feet of office space in New York, New
York, at an annual rental rate of approximately $42,000 under a lease expiring
in 1999.
Substantially all of the leases referred to above provide for the payment
of tax, escalation, maintenance, insurance and certain other operating expenses
applicable to the leased premises.
In addition to the above leases, the Company leases equipment on a long-term
or month-to-month basis, which rental expense was approximately $116,000 in
1998.
Additional information concerning leases is provided in Note 8 of the
Notes to Consolidated Financial Statements, and such information is incorporated
in this item by reference.
Item 3. Legal Proceedings
As part of the normal course of its operations, the Company and certain of
its subsidiaries and majority owned companies are named as defendants in various
legal actions seeking monetary damages. Management does not expect any material
adverse judgments to be rendered against the Company or its subsidiaries as a
result of pending legal actions.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Date of Meeting: May 13, 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 LLP as the
independent auditors for the current calendar year.
Votes: For Against Abstain
5,043,388 234 2,892
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded in the NASDAQ National Market System
under the symbol LGAM. The quarterly range of prices of the Company's Common
Stock as reported by the NASDAQ National Market System were as follows:
1998 1997
High Low High Low
First $ 9.500 $ 6.750 $ 7.125 $ 5.875
Second $ 8.500 $ 6.750 $ 7.000 $ 5.875
Third $ 7.250 $ 3.313 $ 9.500 $ 6.875
Fourth $ 5.250 $ 3.250 $ 10.125 $ 8.000
On March 7, 1997, and September 17, 1998 the Board of Directors of the Company
authorized share repurchase programs of up to 750,000 shares for a total program
of up to 1,500,000 shares. Repurchases have been and will be made from time to
time in the open market or through privately negotiated transactions at market
prices. The stock repurchase plans have terms of three years. During 1998, the
Company repurchased 532,350 shares of stock for an aggregate purchase price of
$2,353,857. Also during 1998, 11,000 treasury shares were awarded under the
Company's Restricted Stock Award Plan. During 1997, the Company repurchased
313,000 shares of its common stock for an aggregate purchase price of
$2,280,375. Also during 1997, 233,000 treasury shares were awarded under the
Company's Restricted Stock Award Plan. To date, 244,000 shares have been awarded
and 77,671 shares have been issued under the plan.
The payment of any dividends will depend, among other things, upon the
Company's earnings, assets and general financial condition, and upon other
relevant factors.
As of December 31, 1998, there were 607 holders of record of Common
Stock.
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
(000's omitted except per share data)
(Unaudited)
Results of Operation:
Total revenues (1) $19,437 $21,213 $21,824 $21,683 $22,982
Total expenses 17,962 17,548 18,697 19,361 17,878
Provision for taxes 724 1,208 1,270 700 2,059
Net income 714 2,397 2,475 1,579 2,990
Per Share Data:
Basic earnings per share $0.14 $0.45 $0.45 $0.29 $0.55
Diluted earnings per share $0.14 $0.45 $0.45 $0.29 $0.55
Financial Position:
Total assets $16,883 $17,433 $16,078 $14,774 $13,646
Total liabilities 7,514 6,938 5,911 6,994 16,201
Total stockholders' equity (deficit) 8,940 10,090 9,822 7,347 (2,908)
(1) Decrease in revenue from 1996 is attributable to the sale of four
subsidiaries, LFSI, LCMA, LPA, LCMII to Berkeley USA Holdings Limited and
a U.S. unit of London Pacific Group on September 30, 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1998 Compared with 1997
The consolidated net income in 1998 was $0.7 million, $0.14 per share, compared
to net income of $2.4 million, $0.45 per share in 1997.
Total assets under management at December 31, 1998 were $3.2 billion compared to
$3.5 billion at December 31, 1997. Mutual fund assets under management decreased
$0.4 billion from the prior year, while private account assets increased $0.1
billion. The decrease in mutual fund assets is mainly attributable to the
termination of an advisory relationship with one of the Company's larger
accounts in the fourth quarter of 1998. Assets under management in this
relationship were approximately $300 million. In addition, the turmoil in
emerging markets in 1998 adversely affected the Company's funds with exposure to
these markets. The Lexington Troika Dialog Russia Fund and the Lexington
Worldwide Emerging Markets Fund each declined by approximately $100 million from
December 31, 1997. Partially offsetting these declines was strong performance or
growth in several other products, most notably the Lexington GNMA Income Fund
which increased in size by approximately $100 million from December 31, 1997.
Both the private account and institutional segments, which are primarily
invested in the U.S. equity and bond markets, experienced growth in assets
through strong performance results associated with the robust U.S. capital
markets in 1998.
For the year ended December 31, 1998, total revenues of $19.4 million declined
by $1.8 million from $21.2 million in 1997. Net mutual fund revenues decreased
by approximately $2.6 million from $13.5 million to $10.9 million with the
decline in assets under management.
Mutual fund commissions of $72 thousand were more than the $63 thousand recorded
in 1997 because sales of the Company's two products with sales loads increased
as a result of investor interest in precious metals mutual funds.
Other management fees of $8.0 million are up approximately $1.0 million from
$7.0 million in 1997. The Company's private account business accounted for
approximately $0.9 million of the increase due to continued increases in assets
under management associated with the continuing strength of the U.S. equity
markets. Institutional asset management fees contributed $0.1 million of the
increase.
Commission income of $109 thousand decreased $42 thousand from $151 thousand in
1997. The decrease is due to client terminations.
Other income of $0.3 million decreased $0.2 million from $0.5 million in 1997.
The decrease is a result of unrealized depreciation of marketable securities.
The unrealized depreciation stems from the Company's investments in a number of
the funds managed by the Company.
Total expenses in 1998 increased by approximately $0.5 million to $18.0 million
from $17.5 million in 1997 due primarily to administrative and general expenses,
which increased $0.7 million. This increase is almost entirely attributable to
the Company's administrative contract with Select Advisors ("Select") for the
Company's private account business. This contract was part of the reorganization
of this business, which occurred in 1996. Under this contract the Company pays
fees to Select for administrative and support services for the Company's private
account clients. Because these clients are billed annually in advance, the
expenses incurred for the administrative contract are amortized evenly over a
twelve-month period. The 1998 expense includes amortization of the contract
expense across the entire client base. In 1997, the Company benefited from the
fact that no administrative fees were charged in 1997 for those accounts which
entered into or renewed advisory agreements in the first nine months of 1996;
i.e., prior to September 30, 1996, the date of the reorganization. Partially
offsetting the increase is a decrease of $0.3 million in selling and promotional
expense, mainly attributed to a reduction in advertising and sales literature
for the year. These expenses declined as the Company made greater use of public
relations in its promotional efforts. Total personnel costs of $9.0 million are
even with 1997. Although the costs are even, the Company recognized an increase
of $0.5 million of expense associated with the issuance of restricted stock to
certain key executive employees. In addition, salaries increased $0.2 million
due to annual salary increases. Offsetting the increase was a reduction in bonus
expense due to the Company's lower earnings.
Pre-tax income of $1.5 million is $2.2 million less than the $3.7 million
recorded in 1997. The provision for state and federal taxes decreased $0.5
million due to the decrease in taxable income. The Company used approximately
$1.8 million of net operating loss carryforwards (NOLs) in 1998 and has
remaining NOLs of approximately $0.2 million which are available to offset
future taxable income which expire over the period 2008 through 2013.
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 California 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 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 $21.2 million are 2.8% below 1996 when the Company recorded
revenues of $21.8 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
$17.8 million were $1.6 million above the $16.2 million recorded in 1996.
Net mutual fund management fees, the Company's largest revenue source, increased
approximately $1.8 million to $13.5 million in 1997 compared to $11.7 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 $17.5 million are $1.2 million below total expenses of $18.7
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, offset by an
increase of $0.9 million of subadvisor fees due to the increase in assets under
management with subadvisory agreements.
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 prior year, 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 $7.2 million are $1.0 million above the
prior year's figure of $6.2 million. The increase is primarily attributable to a
$0.9 million increase in subadvisory fees. The increase was due to an increase
in assets under management with subadvisory agreements. Also contributing to the
increase 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.
Offsetting the increase was a decrease in general and administrative costs
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.
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.
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 $0.3 million over the past three years. The primary use of cash
in 1998 was for the purchase of computer equipment.
Cash flows from financing activities consistently have been negative over the
past three years. On March 7, 1997, and September 17, 1998 the Board of
Directors of the Company authorized share repurchase programs of up to 750,000
shares for a total program of up to 1,500,000 shares. Repurchases have been and
will be made from time to time in the open market or through privately
negotiated transactions at market prices. The stock repurchase plans have terms
of three years. During 1998, the Company repurchased 532,350 shares of stock for
an aggregate purchase price of $2,353,857. During 1997, the Company repurchased
313,000 shares of its common stock for an aggregate purchase price of
$2,280,375. The Company may in the future issue debt securities or preferred
stock or enter into loan or other agreements that restrict the payment of
dividends on and repurchase of the Company's capital stock.
Historically, the Company has maintained a substantial amount of liquidity for
purposes of meeting regulatory requirements and potential business demands. At
December 31, 1998 the Company has $8.4 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, 1998 of $25,000. The aggregate net capital of LFD
was $0.3 million at December 31, 1998. 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, 1998 decreased to $8.9 million from $10.1
million a year earlier primarily as a result of the Company's purchase of
treasury shares.
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 prepare the Company's
computer systems and applications for the Year 2000, as well as to identify and
address any other Year 2000 operational issues which may affect the Company.
Progress reports on the Company's Year 2000 program are presented regularly to
the Company's Board of Directors and senior management.
The Company's Year 2000 program, which was commenced in June 1997 and is
administered by internal staff, consists of the following three components
relating to the Company's operations: (i) information technology ("IT") computer
systems and applications which may be impacted by the Year 2000 problem, (ii)
non-IT systems and equipment which include embedded technology which may be
impacted by the Year 2000 problem and (iii) third party vendors with which the
Company has significant relationships which could adversely affect the Company
if such parties fail to be Year 2000 compliant.
The general phases common to all three components of the Company's Year 2000
program are: (1) Awareness (the identification of the Year 2000 issues facing
the Company); (2) Assessment (the prioritization of the issues and the actions
to be taken); (3) Renovation (implementation of the specific actions determined
upon assessment, including repair, modification or replacement of items that are
determined not to be Year 2000 compliant); (4) Validation (testing of the new or
modified information systems, other systems, and equipment to verify the Year
2000 readiness); (5) Implementation (actual operation of such systems and
equipment and, if necessary, the actual implementation of any contingency plans
in the event Year 2000 problems occur, notwithstanding the Company's renovation
program).
The Company has completed an assessment of its Year 2000 readiness and is
undergoing a renovation of its internal systems which are not currently Year
2000 compliant. This phase involves the replacement of certain systems with
purchased software, the renovation of other systems, and the purchase of certain
hardware and other devices, all of which are Year 2000 compliant. The Company
anticipates that the renovation phase related to these applications should be
completed by the end of March 1999, and that the validation phase should be
completed by the end of April 1999. The implementation phase has commenced
(overlapping the validation phase) with systems being installed at the
completion of their validation testing. Excluding normal system upgrades, the
Company estimates that total costs for conversion and testing of new or modified
IT systems and applications will aggregate approximately $174,000, of which an
aggregate of $56,000 has been incurred to date.
The Company is keeping apprised of the progress of outside vendors' plans to
become Year 2000 compliant. All outside vendors are in the validation phase.
The Company expects to be Year 2000 compliant during the second quarter of 1999
and is in the process of preparing a contingency plan, which should be completed
by the second quarter of 1999.
Although the Company believes it is adequately addressing its Year 2000 issues,
the failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failure could materially affect the Company's results of
operations, liquidity and financial condition.
Item 8. Financial Statements
The following are included and filed under this item:
Independent Auditors' Report ...............................................18
LEXINGTON GLOBAL ASSET MANAGERS, INC.
Consolidated Statements of Financial Condition--December 31, 1998 and 1997...19
Consolidated Statements of Operations--Years Ended December 31, 1998,
1997 and 1996 ...............................................................20
Consolidated Statements of Changes in Stockholders' Equity--Years Ended
December 31, 1998, 1997 and 1996 ..........................................21
Consolidated Statements of Cash Flows--Years Ended December 31, 1998,
1997 and 1996 ..............................................................22
Notes to Consolidated Financial Statements ..................................23
Independent Auditors' Report
To the Board of Directors and Stockholders of
Lexington Global Asset Managers, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Lexington Global Asset Managers, Inc. and Subsidiaries ("the Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the two-year
period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
accompanying consolidated statements of operations, changes in stockholders'
equity, and cash flows for the year ended December 31, 1996 were audited by
other auditors whose report thereon, dated February 19, 1997, except for Note 15
as to which the date is March 22, 1999, expressed an unqualified opinion on
these consolidated financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 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, 1998
and 1997, and the results of their operations and their cash flows for the
two-year period then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
New York, New York
February 16, 1999
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
1998 1997
Assets:
Cash and cash equivalents:
Cash $ 228,347 $ 193,383
Money market accounts 8,209,827 8,511,915
-------------- ---------------
8,438,174 8,705,298
-------------- ---------------
Receivables:
Investment advisory and management fees 863,920 1,233,377
Due from funds and other 426,585 596,333
-------------- ---------------
1,290,505 1,829,710
-------------- ---------------
Trading securities 1,337,110 1,524,788
Prepaid expenses 1,859,517 1,608,122
Prepaid taxes 182,066 106,203
Fixed assets (net of accumulated depreciation and
amortization) 1,193,515 1,384,772
Intangible assets (net of accumulated amortization) 178,476 194,676
Assets associated with deferred compensation 834,309 -
Deferred tax asset, net 1,560,686 1,938,213
Other assets 8,608 141,491
-------------- ---------------
Total assets $ 16,882,966 $ 17,433,273
============== ===============
Liabilities:
Accounts payable and accrued expenses $ 769,969 $ 926,177
Accrued compensation 615,055 1,530,100
Accrued employee benefits 2,559,653 1,981,308
Deferred income 1,879,969 1,626,123
Deferred compensation 834,309 -
Federal income taxes payable 843,434 863,667
Other liabilities 11,391 10,579
-------------- ---------------
Total liabilities 7,513,780 6,937,954
-------------- ---------------
Minority interest 428,821 405,058
Stockholders' Equity:
Common stock, $.01 par value; 15,000,000 authorized
shares; 5,487,887 issued, 4,720,208 and 5,174,887,
respectively, outstanding 54,879 54,879
Additional paid-in capital 21,573,392 21,708,142
Accumulated deficit (8,633,541) (9,345,918)
Deferred compensation (1,118,758) (1,654,342)
Treasury stock at cost (2,935,607) (672,500)
-------------- ---------------
Total stockholders' equity 8,940,365 10,090,261
-------------- ---------------
Total liabilities and stockholders' equity $ 16,882,966 $ 17,433,273
============== ===============
See accompanying notes to the consolidated financial statements.
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
1998 1997 1996
Revenues:
Investment advisory:
Mutual fund management fees (including
approximately $318,000, $521,000 and $430,000,
respectively, from related parties) $ 10,920,941 $ 13,458,933 $ 11,736,786
Mutual fund commissions 71,600 62,838 215,656
Other management fees (including approximately
$2,954,000, $2,695,000 and $2,102,000,
respectively, from related parties) 7,991,944 7,044,356 7,395,337
Commissions income 108,508 151,334 1,734,411
Other income 343,711 495,175 742,092
-------------- -------------- --------------
Total revenues 19,436,704 21,212,636 21,824,282
-------------- -------------- --------------
Expenses:
Salaries and other compensation 9,011,246 9,015,128 11,241,242
Selling and promotional 971,841 1,299,742 1,231,927
Administrative and general 7,979,098 7,233,004 6,223,394
-------------- -------------- --------------
Total expenses 17,962,185 17,547,874 18,696,563
-------------- -------------- --------------
Income before income taxes, gain on sale of
subsidiaries, and minority interest 1,474,519 3,664,762 3,127,719
Gain on sale of subsidiaries - - 529,881
Provision (benefit) for income taxes:
Current 346,539 13,929 1,353,734
Deferred 377,527 1,193,629 (83,559)
-------------- -------------- --------------
Total provision 724,066 1,207,558 1,270,175
-------------- -------------- --------------
Income before minority interest 750,453 2,457,204 2,387,425
Minority interest 36,013 60,149 (87,227)
-------------- -------------- --------------
Net income $ 714,440 $ 2,397,055 $ 2,474,652
============== ============== ==============
Earnings per share (Note 12):
Basic earnings per share $0.14 $0.45 $0.45
============== ============== ==============
Diluted earnings per share $0.14 $0.45 $0.45
============== ============== ==============
Average shares outstanding during the period 4,994,048 5,322,172 5,487,887
============== ============== ==============
See accompanying notes to the consolidated financial statements.
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997, and 1996
Common Stock Total
Shares Additional Accumulated Deferred Treasury Stockholders'
Issued Amounts Paid-In Capital Deficit Compensation Shares Equity
-------- ------- --------------- ---------- ------------ ------- ------------
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 amortization - - - - (1,654,342) - (1,654,342)
-------- -------- ---------- ----------- ------------ ------------ ------------
Balance at December 31, 1997 5,487,887 54,879 21,708,142 (9,345,918) (1,654,342) (672,500) 10,090,261
Net income - - - 714,440 - - 714,440
Purchase of treasury shares at cost - - - - - (2,353,857) (2,353,857)
Issuance of restricted stock awards - - - (2,063) - 90,750 88,687
Deferred compensation amortization - - - - 535,584 - 535,584
Miscellaneous adjustment - - (134,750) - - - (134,750)
-------- -------- ---------- ----------- ------------ ------------ ------------
Balance at December 31, 1998 5,487,887 $54,879 $21,573,392 ($8,633,541) ($1,118,758)($2,935,607) $8,940,365
======== ======== ========== =========== ============ ============ ============
See accompanying notes to the consolidated financial statements.
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
Cash flows from operating activities:
Net income $ 714,440 $ 2,397,055 $ 2,474,652
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 337,706 319,267 389,090
Amortization of deferred costs - 9,220 36,884
Gain on sale of subsidiaries - - (529,881)
Deferred income taxes 377,527 1,193,629 (83,559)
Minority interest 36,013 60,149 (87,227)
Compensation expense for restricted shares awarded 624,271 151,908 -
Change in assets and liabilities
Receivables 539,205 200,412 754,372
Trading securities 187,678 (319,438) (273,068)
Prepaid expenses (251,395) (1,240,043) (17,391)
Prepaid taxes (75,863) (94,303) 30,465
Accounts payable and accrued expenses (492,908) 746,259 (566,869)
Federal income taxes payable (20,233) (151,684) 36,167
Deferred income 253,846 428,547 (394,955)
Other 133,695 45,432 48,823
Net assets of subsidiaries sold - - (286,425)
------------ ------------ ------------
Net cash provided by operating activities 2,363,982 3,746,410 1,531,078
------------ ------------ ------------
Cash flows from investing activities:
Purchases of furniture, equipment and leasehold
improvements (130,249) (340,515) (425,803)
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 (130,249) (290,561) 540,748
------------ ------------ ------------
Cash flows from financing activities:
Principal payments under capital lease obligations - - (157,019)
Dividends and other (147,000) - -
Purchase of treasury stock (2,353,857) (2,280,375) -
------------ ------------ ------------
Net cash used in financing activities (2,500,857) (2,280,375) (157,019)
------------ ------------ ------------
Net increase / (decrease) in cash and cash equivalents (267,124) 1,175,474 1,914,807
Cash and cash equivalents, beginning of year 8,705,298 7,529,824 5,615,017
------------ ------------ ------------
Cash and cash equivalents, end of year $ 8,438,174 $ 8,705,298 $ 7,529,824
============ ============ ============
Supplemental cash flow disclosure
Income taxes paid $ 302,543 $ 472,910 $ 1,665,849
============ ============ ============
See accompanying notes to the consolidated financial statements.
LEXINGTON GLOBAL ASSET MANAGERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997
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, Inc. ("LFD") is a registered broker/dealer under
the Securities Exchange Act of 1934, is a member of the National Association of
Securities Dealers, Inc. ("NASD"), and is therefore subject to various NASD
regulations, including net capital requirements.
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, 1998
and 1997 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 three business segments: mutual
funds, institutional, and private accounts.
Depreciation and Amortization
Furniture and equipment are depreciated on a straight-line basis over their
estimated useful lives. Leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or the estimated useful life.
Intangible Assets
The Company assesses the recoverability of its intangible assets whenever
significant events or changes occur which may impair recovery of recorded costs.
Based on its most recent analysis, the Company believes that no material
impairment of its intangible assets exists at December 31, 1998.
Stock-Based Compensation
The Company accounts for its employee stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25) and has adopted the disclosure requirements of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) effective January 1, 1996.
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, 1998 and 1997 consisted of the following:
1998 1997
Furniture, fixtures and equipment $3,191,678 $3,074,485
Leasehold improvements 168,577 155,521
------------- -------------
Depreciable fixed assets 3,360,255 3,230,006
Less accumulated depreciation and amortization 2,166,740 1,845,234
------------- -------------
Fixed assets, net $1,193,515 $1,384,772
============= =============
Depreciation and amortization charged to operations were $337,706, $319,267, and
$389,090 for the years ended December 31, 1998, 1997 and 1996, respectively.
These amounts include amortization of goodwill of approximately $16,200 each
year.
Depreciation and amortization are provided using the straight-line method over
the following estimated lives:
Asset Estimated Life
Furniture and fixtures 5 - 12 years
Office equipment 3 - 5 years
Leasehold improvements term of lease
4. Trading Securities
At December 31, 1998 and 1997, trading securities consisted of the following:
1998 1997
Funds advised by the Company $1,036,211 $1,272,519
Equity Securities 300,899 252,269
---------- ----------
Total trading securities $1,337,110 $1,524,788
========== ==========
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, 1998 and 1997, the balance in the
deferred income account was $1,879,969 and $1,626,123, respectively, and was
recorded as a liability in the accompanying consolidated statements of financial
condition.
LMC has an agreement with SAI Capital Holdings, Inc. ("Select"), whereby Select
provides back office and other administrative services for these clients in
return for an administration fee. The administration fee ranges from 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, 1998 and 1997, the balance in prepaid
expense for administrative services was $1,259,097 and $1,255,175, respectively.
6. Regulatory Requirements
The broker/dealer subsidiary is subject to rules and regulations of the
Securities and Exchange Commission which require maintenance of minimum net
capital and reserve accounts. At December 31, 1998, 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,
1998 amounted to $304,975.
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 $485,000 and
$469,000 at December 31, 1998 and 1997, respectively.
8. Commitments and Contingencies
The Subsidiaries lease administrative offices under noncancellable operating
leases.
The future minimum lease payments as of December 31, 1998 are as follows:
1999................................... $624,000
2000................................... 586,000
2001................................... 578,000
2002................................... 578,000
2003................................... 386,000
---------
$2,752,000
=========
Rent expense was approximately $736,000, $626,000, and $941,000, for the years
ended December 31, 1998, 1997, and 1996, respectively.
9. Preferred Stock
The Company has 5,000,000 shares of preferred stock, $.01 par value authorized;
no shares are issued or outstanding.
10. Incentive Plan
The Company has reserved 750,000 shares of common stock for issuance to key
employees under the Long Term Incentive Plan (the "Plan") established in 1995.
The Plan provides for the granting of stock options, stock appreciation rights
and other stock-based performance awards to employees.
Restricted Award Plan
Under the Plan the Company established the Restricted Stock Award Plan, which
provides for awards of common stock to key employees, subject to forfeiture if
employment terminates prior to the end of the prescribed periods. The
restrictions on the shares will be released over a three-year period as the
employees provide service. The market value of shares awarded under the plan is
recorded as deferred compensation in stockholders' equity. The unearned amounts
are amortized to compensation expense over the periods the employees provide
services.
During the years ended December 31, 1998 and 1997, the Company awarded
restricted shares which will be issued out of Treasury Stock when the awards
vest. The restricted shares awarded and the respective market values at date of
grant were as follows:
Shares Market
Awarded Value
February 3, 1997 33,000 $6.25
November 7, 1997 200,000 $8.00
April 1, 1998 11,000 $8.06
For the years ended December 31, 1998 and 1997, the Company recognized $624,271
and $151,908, respectively, of compensation expense relating to the Restricted
Stock Award Plan.
Stock Option Plan
Under the Plan the Company also established a Stock Option Plan, which reserve
shares of common stock for issuance to key employees. In 1998, 81,500 stock
options were granted at an exercise price of $8.06 and 7,000 stock options were
granted at an exercise price of $4.00, the market values at the respective dates
of grant. In 1997, 131,000 stock options were granted at an exercise price of
$6.25 and 10,000 stock options were granted at an exercise price of $8.00, the
market values at the respective dates of grant. No grants were made in 1996. No
options were exercised or expired in 1998, 1997 and 1996 although 170,250 were
exercisable at December 31, 1998.
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 1998, 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)
1998 1997 1996
Net earnings:
As reported $714 $2,397 $2,475
Pro forma $513 $2,252 $2,399
Basic earnings per share:
As reported $0.14 $0.45 $0.45
Pro forma $0.10 $0.42 $0.44
Diluted earings per share:
As reported $0.14 $0.45 $0.45
Pro forma $0.10 $0.42 $0.44
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 1998, 1997 and 1995: dividend yield of 0%;
expected volatility of 35.0%; risk-free interest rate of 5.23% to 6.64%; and
expected lives of 10 years.
The Stock Option Plan provides that shares granted come from the Company's
authorized but unissued or reacquired common stock. The price of the options
granted pursuant to the Stock Option Plan will not be less than 100 percent of
the fair market value of the shares on the date of grant. An option may not be
exercised within one year from the date of grant and no option will be
exercisable after ten years from the date of grant. Participants may exercise
approximately one-fourth of the stock option shares after the end of each year
of the cycle.
Information regarding the Stock Option Plan for 1998, 1997 and 1996 is as follows:
1998 1997 1996
------------------------- ----------- -----------
Weighted-
Average
Exercise
Shares Price Shares Shares
Options outstanding, beginning of year 321,000 $5.4634 180,000 180,000
Options exercised - - - -
Options granted 88,500 $7.7389 141,000 -
----------- ----------- -----------
Options outstanding, end of year 409,500 321,000 180,000
=========== =========== ===========
Option price range, end of year $4.00 $6.25 $4.75
$8.06 $8.00 -
Option price range for exercised shares - - -
Weighted-average fair value of options, granted during the year $7.7389 $6.3741 -
Weighted-average grant-date fair value of options, granted
during the year $4.5480 $3.8720 -
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted-
Average Weighted Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
$4.00 7,000 10 $4.00 - -
$4.75 180,000 7 $4.75 135,000 $4.75
$6.25 131,000 8 $6.25 32,750 $6.25
$8.00 - $8.06 91,500 9 $8.05 2,500 $8.00
----------- -----------
$4.00 - $8.06 409,500 170,250
=========== ===========
11. Common Stock Buy-Back Program
On March 7, 1997, and September 17, 1998 the Board of Directors of the Company
authorized share repurchase programs of up to 750,000 shares for a total program
of up to 1,500,000 shares. Repurchases have been and will be made from time to
time in the open market or through privately negotiated transactions at market
prices. The stock repurchase plans have terms of three years. During 1998, the
Company repurchased 532,350 shares of stock for an aggregate purchase price of
$2,353,857. Also during 1998, 11,000 treasury shares were awarded under the
Company's Restricted Stock Award Plan. During 1997, the Company repurchased
313,000 shares of its common stock for an aggregate purchase price of
$2,280,375. Also during 1997, 233,000 treasury shares were awarded under the
Company's Restricted Stock Award Plan. To date, 244,000 shares have been awarded
and 77,671 shares have been issued under the Restricted Stock Award Plan. At
December 31, 1998 and 1997, 767,679 and 313,000 treasury shares were held,
respectively.
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, 1998, 1997 and 1996.
1998 1997 1996
Numerator:
Net income $714,440 $2,397,055 $2,474,652
============= ============= =============
Numerator for basic and diluted
earnings per share - income
available to common stockholders $714,440 $2,397,055 $2,474,652
============= ============= =============
Denominator:
Denominator for basic earnings
per share-weighted-average
shares outstanding 4,994,048 5,322,172 5,487,887
Effect of dilutive securities:
Employee stock options 62,118 59,613 10,957
------------- ------------- -------------
Dilutive potential common shares 62,118 59,613 10,957
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 5,056,166 5,381,785 5,498,844
============= ============= =============
Basic earnings per share $0.14 $0.45 $0.45
============= ============= =============
Diluted earnings per share $0.14 $0.45 $0.45
============= ============= =============
13. Employee and Retiree Benefit Plans
Effective with the December 13, 1995 Spin-off of 100% of the common stock of the
Company being distributed to Piedmont Management stockholders, LMC has assumed
the sponsorship of certain of Piedmont's employee benefit plans and their
related trusts and insurance contracts, and is solely responsible for all
liabilities and obligations under such plans. In addition, in exchange for
payment from Piedmont, LMC assumed certain of Piedmont's obligations to provide
continuing medical and dental coverage to certain of Piedmont's and The
Reinsurance Corporation of New York's ("RECO") employees, and retirement and
postretirement medical and life insurance to former RECO employees.
Savings Plan
LMC's and MSR's employees participate in the 401(k) savings plan sponsored
by LMC. Employees are eligible to participate upon attaining age twenty-one and
completing six months of service. The savings plan provides for voluntary
participant contributions which may not exceed 10% of each participant's annual
salary. Additionally, for each participant's voluntary contribution not
exceeding 6% of the participant's annual salary, LMC or MSR contribute an amount
equal to 50% of the individual participant's contribution.
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 $117,498, $122,760,
and $114,409 for the years ended December 31, 1998, 1997, and 1996,
respectively.
Retirement Plan
LMC sponsors a defined benefit plan ("Retirement Plan") which is part of a
master trust. An employee becomes a participant in the Retirement Plan after
attaining age twenty-one and completing one year of service. Full vesting in the
accrued benefit occurs at the earlier of completing five years of service after
attaining age eighteen or reaching early retirement age. The funding policy for
the Retirement Plan is to annually contribute the statutory required minimum
amount as actuarially determined. Approximately 26% of the plan assets are
invested in the Lexington Group of Mutual Funds.
LMC also maintains non-qualified supplemental benefit plans ("SERP") for certain
employees. These plans replace the portion of benefits that exceed the
limitations established by the Internal Revenue Code for tax qualified benefit
plans. The amount charged to expense relating to these plans was approximately
$85,303, $86,900, and $116,600 for the years ended December 31, 1998, 1997, and
1996, respectively.
The following is selected actuarial information for the Retirement Plan and SERP
(the "Plans"):
The Plans' projected benefit obligation at December 31, 1998 and 1997 was
comprised of:
1998 1997
Benefit obligation at beginning of year $7,067,630 $5,888,552
Service cost 338,530 267,931
Interest cost 487,785 436,804
Actuarial loss 390,032 647,121
Benefits paid (309,508) (298,411)
--------- ---------
Benefit obligation at end of year $7,974,469 $6,941,997
========= =========
The plan assets at fair value for the years ended December 31, 1998 and 1997 was
comprised of:
1998 1997
Fair value of plan assets at beginning of year $5,158,165 $4,848,048
Actual return on plan assets 706,108 486,981
Employer contributions 138,656 121,547
Benefits paid (309,508) (298,411)
--------- ---------
Fair value of plan assets at end of year $5,693,421 $5,158,165
========= =========
The following table presents the Plans' funded status and amounts recorded in
the Company's accompanying consolidated statements of financial condition at
December 31, 1998 and 1997:
1998 1997
Funded status ($2,281,048) ($1,783,832)
Unrecognized net actuarial loss 685,031 631,001
Unrecognized transition obligation or(asset) 123,142 (20,164)
Unrecognized prior service cost 372,489 267,066
--------- ---------
Net amount recorded at end of year ($1,100,386) ($905,929)
========= =========
Amounts recorded in the consolidated statements of financial condition at
December 31, 1998 and 1997 consisted of:
1998 1997
Accrued benefit liability ($1,343,147) ($1,133,718)
Intangible asset 242,761 227,789
--------- ---------
Net amount recorded at end of year ($1,100,386) ($905,929)
========= =========
The following table presents year end information for the Plans' accumulated
benefit obligations in excess of plan assets at December 31, 1998 and 1997:
1998 1997
Projected benefit obligation $7,974,469 $6,941,997
Accumulated benefit obligation 7,036,568 6,193,505
Fair value of plan assets 5,693,421 5,158,165
Actuarial computations at December 31, 1998, 1997 and 1996 were made utilizing
the following assumptions:
1998 1997 1996
Discount rate 6.75% 7.00% 7.50%
Expected return on plan assets 10.00% 10.00% 10.00%
Rate of compensation increase 6.00% 6.00% 6.00%
Net expense under the Plans for the years ended December 31, 1998, 1997 and 1996
was comprised of:
1998 1997 1996
Service cost $338,530 $267,931 $309,741
Interest cost 487,785 436,804 404,717
Expected return on plan assets (501,717) (469,064) (449,958)
Amortization of prior service cost 26,188 18,674 5,760
Amortization of transitional asset (17,673) (26,196) (26,196)
--------- --------- --------
Net periodic benefit cost $333,113 $228,149 $244,064
========= ========= ========
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 transaction
obligation over a 20-year period.
The following is selected actuarial information for the Company's postretirement
employee benefits:
The postretirement employee benefits' accumulated benefit obligation at December
31, 1998 and 1997 was comprised of:
1998 1997
Benefit obligation at beginning of year $1,236,634 $1,473,965
Service cost 57,181 54,702
Interest cost 75,775 78,203
Actuarial gain (102,883) (286,666)
Benefits paid (28,628) (83,570)
----------- -----------
Benefit obligation at end of year $1,238,079 $1,236,634
=========== ===========
The following table presents the postretirement employee benefits' funded status
and amounts recorded in the Company's accompanying consolidated statements of
financial condition at December 31, 1998 and 1997:
1998 1997
Funded status ($1,238,079) ($1,103,304)
Unrecognized net actuarial gain (94,122) (109,028)
Unrecognized transition obligation 316,000 341,000
----------- -----------
Net amount recorded at end of year ($1,016,201) ($871,332)
=========== ===========
Amounts recorded in the accompanying consolidated statements of financial
condition at December 31, 1998 and 1997 consisted of:
1998 1997
Accrued benefit liability ($1,016,201) ($871,332)
----------- -----------
Net amount recorded at end of year ($1,016,201) ($871,332)
=========== ===========
Actuarial computations at December 31, 1998, 1997 and 1996 were made utilizing
the following assumptions:
1998 1997 1996
Discount rate 6.75% 7.00% 7.50%
For measurement purposes, a 9.8% (pre age 65 coverage) and 8.4% (post age 65
coverage) annual rate of increase in the per capita cost of covered health care
benefits was assumed for 1998. The rate is assumed to decrease gradually to 5%
for 2007 and remain at that level thereafter.
Net expense under the postretirement employee benefits for the years ended
December 31, 1998, 1997 and 1996 was comprised of:
1998 1997 1996
Service cost $57,181 $54,702 $76,000
Interest cost 75,775 78,203 96,000
Expected return on plan assets (3,260) (2,461) 4,000
Amortization of transitional obligation 25,000 25,000 25,000
----------- ----------- ---------
Net periodic benefit cost $154,696 $155,444 $201,000
=========== =========== =========
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
One-percentage One-percentage
point increase point decrease
--------------- ----------------
Effect on total of service and interest
cost components $26,340 ($26,340)
Effect on postretirement benefit
obligation 203,431 (203,431)
Deferred Compensation Program
The Company sponsors a supplemental retirement plan which is a
non-qualified deferred compensation plan (the "Plan"). The Plan is maintained by
the Company for purposes of providing deferred compensation for a select group
of key employees. The Company established a trust for this Plan and consolidates
the trust assets with those of the Company in the accompanying consolidated
statements of financial condition and records an offsetting liability. The
investments held in the trust consist of various mutual fund holdings, including
funds in the Lexington Group of Mutual Funds (approximately 27% of the trust's
assets). The value of these investments at December 31, 1998 was $834,309.
14. Income Taxes
A reconciliation of income tax expense computed at the U.S. statutory rate to
the effective rate reflected in the accompanying consolidated statements of
operations for the years ended December 31, 1998, 1997, and 1996 follows:
1998 1997 1996
Expected tax rate 34.00% 34.00% 34.00%
State and local taxes 9.92 6.81 6.35
Restricted Stock 8.02 - -
Other (1.61) (7.31) (6.43)
------------- ------------- --------------
Effective tax rate 50.33% 33.50% 33.92%
============= ============= ==============
The tax effects of temporary differences that give rise to the net deferred tax
asset at December 31, 1998 and 1997 are as follows:
1998 1997
Deferred tax assets:
Net operating loss carryforwards $63,213 $708,678
Deferred compensation 651,300 647,256
Retirement and postretirement 800,068 648,001
Other 189,059 90,349
------------- --------------
Total deferred tax asset 1,703,640 2,094,284
------------- --------------
Deferred tax liabilities:
Deferred state taxes (106,865) (86,976)
Other (36,089) (69,095)
------------- --------------
Total deferred tax liabilities (142,954) (156,071)
------------- --------------
Net deferred tax asset $1,560,686 $1,938,213
============= ==============
Income tax expense attributable to income for the years ended December 31, 1998,
1997, and 1996 consists of:
Current Deferred Total
------------- ------------- --------------
Year ended December 31, 1998:
U.S. Federal $71,794 $436,024 $507,818
State and local 274,745 (58,497) 216,248
------------- ------------- --------------
$346,539 $377,527 $724,066
============= ============= ==============
Current Deferred Total
------------- ------------- --------------
Year ended December 31, 1997:
U.S. Federal ($339,801) $1,175,028 $835,227
State and local 353,730 18,601 372,331
------------- ------------- --------------
$13,929 $1,193,629 $1,207,558
============= ============= ==============
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
============= ============= ==============
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 $186,000 which
are available to offset future taxable income which expire over the period 2008
through 2013.
15. Disclosures about Segments of an Enterprise and Related Information
The Company and its subsidiaries are principally engaged in a variety of asset
management and related services to retail investors, institutions and private
accounts.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which the Company has adopted in the current year. SFAS No. 131 establishes
standards for the way a public enterprise reports information about operating
segments in its annual and interim financial statements. Generally, financial
information will be required to be reported on the basis used by management for
evaluating segment performance and for deciding how to allocate resources to
segments.
The Company operates in three business segments: Mutual Funds, Institutional,
and Private Accounts. The mutual fund segment, through its subsidiaries,
markets, promotes, and distributes the Lexington family of 17 mutual funds
providing a variety of investment choices. The institutional segment for
investment management services includes corporate, government and multi-employee
pension plans, charitable endowments and foundations, insurance company general
accounts and defined contribution and 401(k) plans. The private account segment
offers equity, fixed income and balanced fund alternatives, tailored to the
individual investment objectives of its private clients.
Mutual Private
Year ended December 31, 1998 Funds Institutional Accounts Other Total
- --------------------------------------------------------------------------------------------------------------
Revenue $11,055,576 $4,052,963 $4,287,002 $41,163 $19,436,704
Salaries and other compensation $3,941,343 $3,852,303 $1,217,600 - $9,011,246
Selling and promotional $562,642 $255,755 $99,983 $53,461 $971,841
Administrative and general $3,459,644 $1,271,214 $2,979,938 $268,302 $7,979,098
Income before income taxes
and minority interest $3,091,947 ($1,326,309) ($10,519) ($280,600) $1,474,519
- --------------------------------------------------------------------------------------------------------------
Mutual Private
Year ended December 31, 1997 Funds Institutional Accounts Other Total
- --------------------------------------------------------------------------------------------------------------
Revenue $13,829,223 $3,899,630 $3,448,775 $35,008 $21,212,636
Salaries and other compensation $3,982,392 $3,913,902 $1,118,834 - $9,015,128
Selling and promotional $810,112 $337,928 $87,932 $63,770 $1,299,742
Administrative and general $3,982,367 $1,379,779 $1,624,753 $246,105 $7,233,004
Income before income taxes
and minority interest $5,054,352 ($1,731,979) $617,256 ($274,867) $3,664,762
- --------------------------------------------------------------------------------------------------------------
Mutual Private
Year ended December 31, 1996 Funds Institutional Accounts Other Total
- --------------------------------------------------------------------------------------------------------------
Revenue $12,353,380 $3,803,814 $5,592,285 $74,803 $21,824,282
Salaries and other compensation $3,752,832 $3,405,083 $4,083,327 - $11,241,242
Selling and promotional $804,776 $250,926 $128,525 $47,700 $1,231,927
Administrative and general $2,635,663 $1,132,598 $1,665,746 $789,387 $6,223,394
Income before income taxes
and minority interest $5,160,109 ($984,793) ($285,313) ($762,284) $3,127,719
- --------------------------------------------------------------------------------------------------------------
Management does not evaluate assets as a means to allocate resources and assess
performance. The Company is domiciled in the United States and does not have any
international operations.
16. Quarterly Financial Data (Unaudited)
The unaudited quarterly financial data for the years ended December 31,
1998, 1997, and 1996 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
1998 Results of operations:
Total revenues $5,148,793 $5,013,062 $4,567,306 $4,707,543
Total expenses 4,734,477 4,673,205 4,353,313 4,201,190
Provision for taxes 181,100 157,968 116,274 268,724
Net income 232,587 174,447 89,017 218,389
Basic earnings per share $ 0.04 $ 0.03 $ 0.02 $ 0.05
Diluted earnings per share $ 0.04 $ 0.03 $ 0.02 $ 0.05
Common stock price range:
High $ 9.500 $ 8.500 $ 7.250 $ 5.250
Low $ 6.750 $ 6.750 $ 3.313 $ 3.250
1997
Results of operations:
Total revenues $5,015,387 $5,205,805 $5,722,193 $5,269,251
Total expenses 3,740,999 4,050,523 4,532,895 5,223,457
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 $5,892,531 $5,838,642 $5,836,374 $4,256,735
Total expenses 5,130,544 5,088,203 5,104,182 3,373,634
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
PART III
Item 10. Directors and Executive Officers of the Registrant
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 31, 1998
with respect to the Company's executive officers.
Principal Occupation or Employment Office(s)
Name Age Year Elected Executive Officer
Stuart S. Richardson 52 Chairman (1995)
Robert M. DeMichele 54 President and Chief Executive Officer (1995)
Richard M. Hisey 40 Executive Vice President and Chief Financial
Officer (1995)
Lawrence Kantor 51 Executive Vice President and General
Manager - Mutual Funds (1995)
Other information required under this item is contained in the Registrant's
1999 definitive proxy statement which will be filed with the Commission within
120 days after the close of the fiscal year and is herein incorporated by
reference.
Item 11. Executive Compensation
Information required under this item is contained in the Registrant's 1999
definitive proxy statement which will be filed with the Commission within 120
days after the close of the fiscal year and is herein incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required under this item is contained in the Registrant's 1999
definitive proxy statement which will be filed with the Commission within 120
days after the close of the fiscal year and is herein incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Information required under this item is contained in the Registrant's 1999
definitive proxy statement which will be filed with the Commission within 120
days after the close of the fiscal year and is herein incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following information is filed under this item:
(a) (1) Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are included in Item 8: Consolidated Statements of Financial
Condition-December 31, 1998 and 1997; Consolidated Statements of
Operations-Years Ended December 31, 1998, 1997, 1996; Consolidated Statements of
Stockholders' Equity-Years Ended December 31, 1998, 1997, 1996; Consolidated
Statements of Cash Flows-Years Ended December 31, 1998, 1997, 1996; Notes to
Consolidated Financial Statements.
(a) (2) Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or are adequately explained in the
financial statements and, therefore, have been omitted.
Financial statements of interests of 50% or less, which are accounted for
by the equity method, have been omitted because they do not, considered in the
aggregate as a single subsidiary, constitute a significant subsidiary.
(a)(3) Exhibits
13.1 Registrant's Annual Report to Stockholders for the year ended December
31, 1998.
99.1 Report of Independent Accountants from predecessor auditors.
Exhibits specified by Item 601 of Regulation S-K, other than those listed above,
have been omitted since they are either not required or are not applicable.
(b) Report on Form 8-K
None filed during the fourth quarter of 1998
(c) Schedules described in item 14A (2) are excluded from the Registrant's
Annual Report to Stockholders.
(d) Items Incorporated by Reference
The Registrant's Definitive Proxy Statement for its 1999 Annual Stockholders'
meeting and its Annual Report to stockholders for the fiscal year ended December
31, 1998 are incorporated by reference herein. The Proxy Statement will be filed
with the Commission within 120 days after the close of the fiscal year, along
with a copy of the Registrant's Annual Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
LEXINGTON GLOBAL ASSET MANAGERS, INC.
By /s/ Richard M. Hisey
-----------------------------------------
Richard M. Hisey, Executive Vice President
(Chief Financial Officer)
Date March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/Stuart Smith Richardson
Stuart Smith Richardson, Chairman Date March 24, 1999
of the Board of Directors
/s/Robert M. DeMichele
Robert M. DeMichele, President & Director Date March 24, 1999
(Chief Executive Officer)
/s/Richard M. Hisey
Richard M. Hisey, Executive Vice President Date March 24, 1999
(Principal Financial and Accounting Officer)
/s/ Sion A. Boney
Sion A. Boney, III, Director Date March 24, 1999
/s/Haynes G. Griffin
Haynes G. Griffin, Director Date March 24, 1999
/s/William R. Miller
William R. Miller, Director Date March 24, 1999
/s/L. Richardson Preyer
L. Richardson Preyer, Director Date March 24, 1999
/s/Lunsford Richardson, Jr.
Lunsford Richardson, Jr., Director Date March 24, 1999
/s/Peter L. Richardson
Peter L. Richardson, Director Date March 24, 1999
/s/Carl H. Tiedemann
Carl H. Tiedemann, Director Date March 24, 1999
/s/ Marion A. Woodbury
Marion A. Woodbury, Director Date March 24, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lexington Global Asset Managers, Inc.
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity, and cash flows of Lexington Global Asset Managers, Inc.
and Subsidiaries (the "Company") for the year ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Lexington Global Asset Managers, Inc. and Subsidiaries, for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York February 19, 1997,
except for Note 15 as to which the date is
March 22, 1999.