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<SEC-DOCUMENT>0001021408-02-008941.txt : 20020628
<SEC-HEADER>0001021408-02-008941.hdr.sgml : 20020628
<ACCEPTANCE-DATETIME>20020628130254
ACCESSION NUMBER: 0001021408-02-008941
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20020331
FILED AS OF DATE: 20020628
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: LEGG MASON INC
CENTRAL INDEX KEY: 0000704051
STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211]
IRS NUMBER: 521200960
STATE OF INCORPORATION: MD
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-08529
FILM NUMBER: 02690800
BUSINESS ADDRESS:
STREET 1: 100 LIGHT ST
CITY: BALTIMORE
STATE: MD
ZIP: 21202-1476
BUSINESS PHONE: 4105390000
MAIL ADDRESS:
STREET 1: 100 LIGHT ST
CITY: BALTIMORE
STATE: MD
ZIP: 21202-1476
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d10k.txt
<DESCRIPTION>LEGG MASON, INC.
<TEXT>
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2002
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 No. 1-8529
______________________
LEGG MASON, INC.
(Exact name of registrant as specified in its charter)
_____________________
Maryland 52-1200960
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Light Street 21202
Baltimore, Maryland (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (410) 539-0000
______________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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. [_]
As of May 24, 2002, the aggregate market value of the registrant's
voting stock, consisting of the registrant's common stock and the exchangeable
shares discussed below, held by non-affiliates was $3,346,385,000
As of May 24, 2002, the number of shares outstanding of the
registrant's common stock was 64,861,185. In addition, on that date a subsidiary
of the registrant had outstanding 2,431,094 exchangeable shares which are
convertible on a one-for-one basis at any time into shares of common stock of
the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated June 20,
2002 are incorporated by reference into Part III.
================================================================================
<PAGE>
PART I
Item 1. Business.
General
We are a holding company that, through our subsidiaries, is
principally engaged in providing the following services to individuals,
institutions, corporations, governments and government agencies:
. asset management;
. securities brokerage;
. investment banking; and
. other related financial services.
We currently operate through four business segments: Asset Management, Private
Client, Capital Markets and Other.
In our Asset Management business segment, we provide
investment advisory services to company-sponsored investment funds and asset
management services to institutional and individual investors. As of March 31,
2002, our subsidiaries had an aggregate of $177.0 billion of assets under
management. We divide our asset management business into three groups: Mutual
Funds, Institutional and Wealth Management.
In our Mutual Funds business, we sponsor domestic and
international equity, fixed income and money market mutual and closed-end funds
and other proprietary funds. We have two asset management subsidiaries that
primarily focus on managing proprietary investment funds:
. Legg Mason Funds Management, Inc., which is located in
Baltimore Maryland; and
. Royce & Associates, LLC, which is located in New York, New
York.
Our Institutional asset management subsidiaries provide a wide
range of asset management services and products to domestic and international
institutional clients. Our Institutional asset management subsidiaries are:
. Western Asset Management Company and Western Asset Management
Company Limited, which are primarily located in Pasadena,
California and London, England;
. Perigee Investment Counsel Inc., which is primarily located in
Toronto, Canada;
. Brandywine Asset Management, LLC, which is located in
Wilmington, Delaware;
. Batterymarch Financial Management, Inc., which is primarily
located in Boston, Massachusetts;
. Legg Mason Capital Management, Inc., which is located in
Baltimore, Maryland; and
. Legg Mason Investors Holdings plc, which is located in London,
England.
Our Wealth Management subsidiaries provide customized,
discretionary investment management services and products to high net worth
individuals and families, endowments and foundations and institutions. Our
Wealth Management subsidiaries are:
. Private Capital Management, L.P., which is located in Naples,
Florida;
. Bartlett & Co., which is primarily located in Cincinnati Ohio;
. Barrett Associates, Inc., which is located in New York,
New York;
. Gray, Seifert & Co., Inc., which is located in New York,
New York;
<PAGE>
. Berkshire Asset Management, Inc., which is located in Wilkes-
Barre, Pennsylvania;
. Legg Mason Focus Capital, Inc., which is primarily located in
Bala Cynwyd, Pennsylvania; and
. Legg Mason Trust, fsb, which is located in Baltimore Maryland.
Our Private Client and Capital Markets business segments are
primarily conducted through Legg Mason Wood Walker, Incorporated ("Legg Mason
Wood Walker"), our principal broker-dealer subsidiary. Legg Mason Wood Walker is
a full service broker-dealer, investment adviser and investment banking firm
operating primarily in the Eastern and Southern regions of the United States.
Our Other business segment consists primarily of the
operations of Legg Mason Real Estate Services, Inc., our principal real estate
finance subsidiary. Legg Mason Real Estate Services is primarily engaged in
commercial mortgage banking and servicing and discretionary and
non-discretionary management of commercial real estate-related assets.
See "Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition - Fiscal 2002 Compared With Fiscal 2001 -
Revenues By Segment" for the net revenues and pre-tax earnings of each of our
business segments. See Note 17 of Notes to Consolidated Financial Statements in
Item 8 of this Report for the net revenues and pre-tax earnings generated by
Legg Mason in each of the four principal geographic areas in which we conduct
business.
Legg Mason, Inc. was incorporated in Maryland in 1981 to serve
as a holding company for Legg Mason Wood Walker and other subsidiaries. The
predecessor company to Legg Mason Wood Walker was formed in 1970 under the name
Legg Mason & Co., Inc. to combine the operations of Legg & Co., a Maryland-based
broker-dealer formed in 1899, and Mason & Company, Inc., a Virginia-based
broker-dealer formed in 1962. Our subsequent growth has occurred through
internal expansion as well as through the acquisition of asset management,
broker-dealer and commercial mortgage banking firms.
Unless the context otherwise requires, all references in this
Report to "we," "us," "our" and "Legg Mason" include Legg Mason, Inc. and its
predecessors and subsidiaries.
2
<PAGE>
Revenues by Source
This table shows information about our revenues by source.
LEGG MASON, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Investment Advisory and
Related Fees $ 781,572 53.9% $ 653,992 48.1% $ 563,463 44.5%
Commissions:
Listed and Over-the-
Counter 212,531 14.6 217,769 16.0 229,930 18.2
Mutual Funds 80,276 5.5 90,363 6.6 82,949 6.6
Insurance and Annuities 31,547 2.2 40,931 3.0 40,247 3.2
Options 6,539 0.5 9,499 0.7 9,761 0.7
------------- ----------- ------------ ----------- ------------- -----------
Total 330,893 22.8 358,562 26.3 362,887 28.7
Principal Transactions (1)
Customer Related:
Government and Agency 43,725 3.0 17,340 1.3 16,783 1.3
Municipal 28,809 2.0 34,178 2.5 39,244 3.1
Corporate Debt 28,829 2.0 23,723 1.7 21,157 1.7
Equities 25,513 1.8 39,716 2.9 36,183 2.9
------------- ----------- ------------ ----------- ------------- -----------
126,876 8.8 114,957 8.4 113,367 9.0
Dealer Related:
Government and Agency 3,143 0.2 2,406 0.2 2,327 0.2
Municipal 1,626 0.1 977 0.1 932 0.1
Corporate Debt 2,602 0.2 1,837 0.2 405 0.0
Equities 4,653 0.3 4,379 0.3 9,236 0.7
------------- ----------- ------------ ----------- ------------- -----------
12,024 0.8 9,599 0.8 12,900 1.0
------------- ----------- ------------ ----------- ------------- -----------
Total 138,900 9.6 124,556 9.2 126,267 10.0
Investment Banking:
Corporate 88,424 6.1 59,607 4.4 60,792 4.8
Municipal 13,760 0.9 6,270 0.4 8,113 0.7
------------- ----------- ------------ ----------- ------------- -----------
Total 102,184 7.0 65,877 4.8 68,905 5.5
Interest Income 168,073 11.6 282,201 20.7 223,030 17.6
Other (2) 56,990 3.9 51,065 3.8 55,033 4.3
------------- ----------- ------------ ----------- ------------- -----------
Total Revenues 1,578,612 108.8 1,536,253 112.9 1,399,585 110.6
Interest Expense 127,271 8.8 175,389 12.9 134,382 10.6
------------- ----------- ------------ ----------- ------------- -----------
Net Revenues $ 1,451,341 100.0% $ 1,360,864 100.0% $ 1,265,203 100.0
============= =========== ============ =========== ============= ===========
</TABLE>
(1) Principal transactions (securities transactions in which we buy for or sell
from our own inventory) are classified as "Customer Related" when they are
effected with a customer (whether an individual or institutional investor)
and as "Dealer Related" when they are effected with another dealer.
(2) Includes revenues from commercial mortgage servicing and commercial loan
originations in fiscal years 2002, 2001 and 2000 of $23,751, $20,648 and
$23,176, respectively.
3
<PAGE>
Asset Management Business Segment
Our Asset Management business segment provides investment
advisory services to company-sponsored investment funds and asset management
services to institutional and individual investors. Operating out of offices
primarily located in the United States, and also located in Canada, the United
Kingdom and Singapore, our asset management subsidiaries provide a broad array
of investment management products and services. Our investment products include
proprietary mutual funds ranging from money market and fixed income funds to
equity funds managed in a wide variety of investing styles, non-United States
funds and unregistered, alternative investment products.
As of March 31, 2002, our subsidiaries had an aggregate of
$177.0 billion of assets under management, of which approximately 38% was in
equity related products and approximately 62% was in fixed income related
products. During the year ended March 31, 2002, our assets under management grew
by 27%, primarily as a result of acquisitions of, and subsequent growth of
acquired, asset management companies and growth in assets managed in fixed
income advisory accounts resulting from net client inflows.
Our asset management business has had steady growth over the
last ten years, both in absolute terms and in terms of the percentage of our
revenues and profits that it generates. During that period, our assets under
management have grown from $10.9 billion to $177.0 billion and our investment
advisory and related fee revenues, which include distribution and service
revenues that are included in the Private Client business segment, have grown
from $67.9 million to $781.6 million. This growth in our asset management
business has occurred through both internal growth and strategic acquisitions of
asset management businesses. It is Legg Mason's strategy to continue to grow our
asset management business, both in absolute terms and as percentages of our
total revenues and profits.
We conduct our asset management business primarily through 16
subsidiaries. Each of these subsidiaries generally focuses on a different aspect
of the asset management business in terms of the types of assets managed
(primarily equity or fixed income), the types of products and services offered,
the investment styles utilized, the distribution channels used and the types and
geographic locations of its clients. These subsidiaries are generally operated
as individual businesses, in many cases with certain administrative functions
being provided by the parent company, that market their products and services
under their own brand names. Consistent with this approach, we have in place
revenue sharing agreements with Legg Mason Funds Management, Legg Mason Capital
Management, Royce & Associates, Western Asset Management Company, Brandywine
Asset Management, Batterymarch Financial Management, Private Capital Management,
Bartlett & Co., Barrett Associates and Berkshire Asset Management and/or certain
of their key officers. Pursuant to these revenue sharing agreements, a specified
percentage of the subsidiary's revenues is required to be distributed to us, and
the balance of the revenues is retained to pay operating expenses, including
salaries and bonuses, with specific expense and compensation allocations being
determined, subject to our approval, by the subsidiary's management.
We divide our asset management business into three groups:
Mutual Funds, Institutional and Wealth Management. Mutual Funds encompasses the
subsidiaries that are primarily engaged in providing investment advisory
services to proprietary mutual and closed-end funds and the proprietary funds
operations of our other asset managers. Our Institutional managers are our
subsidiaries that focus on providing asset management services for institutional
clients. Our Wealth Managers are our subsidiaries that focus on providing asset
management services for high net worth individuals and family groups. There is
overlap among the three groups of subsidiaries as many of our Institutional and
Wealth Management subsidiaries also manage mutual funds that are included in
Mutual Funds and each manager may provide asset management services to other
types of clients. These groups are described in more detail below.
Our assets under management mix is as follows: Mutual Funds-
$37.3 billion; Institutional-$119.3 billion and Wealth Management-$20.4 billion.
Mutual Funds includes all assets in our proprietary investment funds and all
separate accounts managed by our Mutual Funds subsidiaries. Institutional
includes all non-proprietary investment fund assets managed by our Institutional
managers. Wealth Management includes all
4
<PAGE>
non-proprietary investment fund assets managed by our Wealth Managers. In
addition, assets managed by other subsidiaries that are not part of our Asset
Management business segment are included in Institutional or Wealth Management
as appropriate.
Mutual Funds
In our Mutual Funds group, we sponsor domestic and
international equity, fixed income and money market mutual and closed-end funds
and other proprietary funds. Our mutual funds business primarily consists of
two families of proprietary mutual and closed-end funds, the Legg Mason Funds
and the Royce Funds. The Legg Mason Funds are 22 separate mutual funds that
invest in a wide range of domestic and international equity and fixed income
securities utilizing a number of different investment styles. The Royce Funds
are 14 separate mutual funds and three closed-end funds that invest in small-
and micro-cap domestic company stocks using a value investment approach. Of our
$37.3 billion in Mutual Funds assets as of March 31, 2002, $27.2 billion were in
these two proprietary mutual fund families.
The Legg Mason Funds consist of 22 separate mutual funds. Of
these funds, three are money market portfolios, seven invest primarily in
taxable or tax-free fixed income securities, nine invest primarily in domestic
equity securities and three invest primarily in international equity securities.
Investment objectives for the Legg Mason Funds include a variety of strategies.
Equity investment strategies may emphasize large-cap, mid-cap or small-cap
investing and capital appreciation and/or income investment objectives. The
largest of the Legg Mason Funds is Legg Mason Value Trust, Inc., which has
received wide recognition for its investment performance over the last eleven
calendar years.
Legg Mason Funds Management, Inc. is the primary equity
investment advisor to the Legg Mason Funds. Legg Mason Funds Management serves
as investment advisor to four of the equity funds in the Legg Mason Funds
family, including Legg Mason Value Trust, Inc. Legg Mason Funds Management also
subadvises the mutual fund managed by the joint venture described below and
investment products sponsored by Perigee and Legg Mason Investors. Legg Mason
Funds Management's investment process uses a variety of qualitative and
quantitative techniques to develop an estimate of the worth of a business over
the long term. The objective is to identify companies where the value of the
business is significantly higher than the current stock price. We also own 50%
of a joint venture with one of our employees that serves as investment manager
of one equity fund within the Legg Mason Funds family.
In addition to Legg Mason Funds Management and the joint
venture, a number of our other subsidiaries manage Legg Mason Funds. Western
Asset Management Company is investment advisor to four taxable fixed income
funds and two taxable money market funds, Legg Mason Trust, fsb serves as
investment adviser to three tax-exempt fixed income funds and one tax-exempt
money market fund, Batterymarch Financial Management serves as investment
advisor to two international funds, Brandywine Asset Management serves as
investment advisor to two equity funds, and Bartlett & Co. and Gray, Seifert
each serve as investment advisor to one equity fund. In addition, one
international fund is managed by an unaffiliated investment advisor.
The Royce Funds consist of 14 separate mutual funds and three
closed-end funds that invest in small-cap and micro-cap domestic company stocks.
The investment objective of each of these funds is long-term appreciation of
capital using a value approach. Several of the funds also have a secondary
objective of providing current income. The funds differ in whether they are
invested in small-cap stocks, micro-cap stocks or a mix of the two and in
whether they are invested in the securities of a concentrated, small number of
companies or a diversified, larger number of companies. Further, two of the
funds are used as investment vehicles for insurance products.
Royce & Associates, LLC is investment advisor to all of the
Royce Funds. In addition, Royce & Associates also manages other accounts that
invest primarily in small-cap and micro-cap company stocks, using a value
approach. Royce & Associates' stock selection process seeks to identify
companies with strong balance sheets, solid records of growth, and the ability
to generate free cash flow. Royce & Associates pursues securities that are
priced below their estimate of current worth. We acquired Royce & Associates
in October 2001.
5
<PAGE>
Our proprietary mutual funds are distributed through a number
of channels. Legg Mason Wood Walker is the principal underwriter for the Legg
Mason Funds. The Legg Mason Funds are primarily distributed to retail investors
through our Private Client Group financial advisors and through proprietary
funds marketing departments. The Royce Funds are primarily distributed through
non-affiliated funds supermarkets, non-affiliated wrap programs, direct
distribution and our Private Client Group financial advisors. In addition, two
of the portfolios in the Royce Funds are distributed only through insurance
companies. For the fiscal years ended March 31, 2002, 2001 and 2000, we received
from our proprietary mutual funds and offshore investment funds approximately
$157.5 million, $168.2 million and $158.8 million, respectively, in asset-based
distribution and service fees, which are included in the Private Client business
segment.
Our Mutual Funds group also includes the Western Asset Funds,
a proprietary family of mutual funds that are marketed primarily to
institutional investors. Western Asset Management Company sponsors these funds,
and manages them using a team approach under the supervision of Western Asset's
investment committee. The funds primarily invest in fixed income securities. The
Western Asset Funds, and the institutional and financial intermediary classes of
the Legg Mason Funds are marketed to institutional investors by a proprietary
funds marketing department.
Our Mutual Funds group also includes four groups of
proprietary funds that are sponsored and managed by our Institutional managers
and Legg Mason Funds Management and are offered and sold only outside the U.S.
to non-U.S. persons. Both the Legg Mason Global Funds, a family of 13 funds that
are managed by Western Asset, Legg Mason Funds Management and Batterymarch
Financial Management, and three other funds that are managed by Western Asset
are domiciled in the Netherlands Antilles. Domiciled in Ireland are four funds
managed by Western Asset and an equity fund managed by Legg Mason Funds
Management. The Legg Mason Worldwide family of funds is three funds domiciled in
Luxembourg and managed by Batterymarch Financial Management. Finally, Brandywine
Asset Management operates a hedge fund that is based in the Cayman Islands.
Institutional
Our Institutional managers provide a wide range of asset
management services and products to domestic and international institutional
clients. These subsidiaries manage a range of domestic, international and global
equity, balanced, fixed income and cash management portfolios for their
institutional clients. Our domestic and international institutional clients
include pension and other retirement funds, corporations, insurance companies,
endowments and foundations and governments. Our seven Institutional asset
management subsidiaries are described below.
As of March 31, 2002 and 2001, our Institutional asset
management subsidiaries managed assets with a value of $118.5 billion and $101.9
billion, respectively (excluding assets with a value of $12.0 billion and $10.4
billion, respectively, in proprietary funds managed by these subsidiaries).
These numbers also exclude $0.8 billion and $1.7 billion, respectively, of
institutional assets managed by subsidiaries outside of our Asset Management
business segment. Over 75% of the assets managed by our Institutional managers
are in fixed income accounts managed by Western Asset and Western Asset Limited.
Similarly, the growth in assets managed by these subsidiaries during the fiscal
year primarily resulted from growth in fixed income accounts managed by Western
Asset and Western Asset Limited, supplemented by growth in assets managed by
Brandywine, Legg Mason Capital Management and Batterymarch, and partially offset
by a decline in assets managed by Perigee.
Western Asset Management Company is a leading fixed income
asset manager for institutional clients. Among the services Western Asset
Management provides are management of separate accounts and management of mutual
funds, closed-end funds and other structured investment products. Based in
Pasadena, California, Western Asset Management offers over 25 fixed income asset
management products, including its "core" and "core plus" products. Western
Asset targets four key areas in managing fixed income portfolios -sector
allocation, issue selection, duration exposure and term structure weighting. For
global portfolios, country/currency allocation is a fifth key area.
6
<PAGE>
Western Asset Management Company Limited contains the United
Kingdom operations of Western Asset Management Company. Based in London, Western
Asset Management Company Limited manages non-United States dollar currency and
fixed income assets for many of the international clients of Western Asset
Management.
Perigee Investment Counsel Inc. is an institutional investment
manager in Canada. The types of clients for whom Perigee provides investment
management services include: pension plans for public and private sector
entities, managed on both a separate account and pooled basis; third-party
mutual funds; government sponsored funds; insurance companies; trusts and
foundations; and individual investors, whose portfolios are managed separately
or on a pooled basis. Perigee offers products managed in a number of different
equity and fixed income investment styles.
Brandywine Asset Management, LLC manages equity portfolios for
institutional and, through wrap accounts, high net worth individual clients and
manages global fixed income accounts for institutional clients. Brandywine,
based in Wilmington, Delaware, pursues one investment approach-value
investing-and is known for its "classic" or "deep" value equity management
style.
Batterymarch Financial Management, Inc. manages U.S.,
international and emerging markets equity portfolios for institutional clients.
Batterymarch also subadvises investment products sponsored by Perigee. Based in
Boston, Massachusetts, Batterymarch is known for its quantitative approach to
asset management. The firm's investment process for U.S. and international
portfolios is designed to enhance the fundamental investment disciplines by
using quantitative tools to process fundamental data.
Legg Mason Capital Management, Inc. manages equity portfolios
primarily for institutional accounts. Legg Mason Capital Management and Legg
Mason Funds Management are generally operated as a single business, and Legg
Mason Capital Management manages client portfolios using the same management
style and approaches that are used by Legg Mason Funds Management to manage its
proprietary funds.
Legg Mason Investors Holdings plc primarily manages unit and
investment trusts, which are similar to open and closed-end funds in the United
States, for investors in the United Kingdom. Legg Mason Investors utilizes a
team-oriented, research-driven approach to investment management. The firm's
approach is to seek industries that it believes are poised for future growth
and invest in companies within those industries based on market leadership,
management compabilities, cash flow generation and valuation. Legg Mason
Investors generally employs a growth investment style.
Wealth Management
Our Wealth Managers provide customized, discretionary investment
management services and products to high net worth individuals and families,
endowments and foundations and institutions. Our Wealth Managers seek to provide
portfolio management, client service and other financial services in a
disciplined manner that is tailored to meet our clients' particular needs and
objectives. This group includes six asset management subsidiaries, our trust
company subsidiary and a joint venture, all of which are described in more
detail below.
As of March 31, 2002 and 2001, our Wealth Management
subsidiaries managed assets with a value of $17.6 billion and $5.9 billion,
respectively (excluding assets with a value of $0.9 billion and $0.9 billion,
respectively, in proprietary funds managed by these subsidiaries). These numbers
also exclude $2.8 billion and $2.6 billion, respectively, of wealth management
assets managed by subsidiaries outside of our Asset Management business segment.
A majority of the assets managed by our Wealth Managers are managed by Private
Capital Management,L.P. Similarly, the growth in assets under management by
these subsidiaries during the fiscal year primarily resulted from the
acquisition and subsequent growth of Private Capital Management.
Private Capital Management, L.P. manages equity assets for
high net worth individuals and families, institutions, endowments and
foundations in separate accounts and limited partnerships. Based in Naples,
Florida, Private Capital Management's value-focused investment philosophy is
based on an analysis of a company's
7
<PAGE>
free cash flow. In executing this philosophy, Private Capital Management seeks
to build a portfolio consisting of securities of companies that possess several
basic elements, including significant free cash flow, a substantial resource
base, and a management team with the ability to correct problems that have been
excessively or inappropriately discounted by the public markets. Ultimately,
Private Capital Management seeks to find and to capture for its clients
undiscovered value that is not yet recognized in a company's stock price. Legg
Mason acquired Private Capital Management in August 2001.
Bartlett & Co. manages balanced, equity and fixed income
portfolios for high net worth individual and institutional clients. Bartlett
operates out of offices in Cincinnati and Dayton, Ohio and Indianapolis,
Indiana. Bartlett follows a value investment philosophy. Bartlett's research and
stock selection criteria emphasize a variety of fundamental factors, and they
seek to invest in companies that generally possess some combination of the
following characteristics: financial strength, potential for growth of earnings
and dividends, attractive profitability characteristics, sustainable competitive
advantage, and shareholder-oriented management.
Barrett Associates, Inc. (70% owned), is an equity asset
manager for high net worth individuals and family groups, endowments and
foundations. Based in New York, New York, Barrett Associates' focus is to build
wealth for their clients through the selection of stocks of high quality
companies. Barrett delivers services through separately managed portfolios for
individuals and institutions as well as through their proprietary mutual fund,
the Barrett Growth Fund.
Gray, Seifert & Co., Inc. primarily manages equity portfolios
for high net worth individuals and family groups, endowments and foundations.
Based in New York, New York, Gray, Seifert's approach to portfolio management is
geared toward long-term creation and preservation of wealth. Gray, Seifert uses
a current earnings approach to equity investing, and follows six principles of
investing: investment themes, current earnings growth, dividend growth, strong
balance sheet, relative value, and hands-on research.
Berkshire Asset Management, Inc. provides equity, balanced,
and intermediate duration high quality fixed income money management services to
individuals and institutions through separate accounts and limited partnerships.
Based in Wilkes-Barre, Pennsylvania, Bershire seeks to invest in high quality
businesses that are selling at prices below Berkshire's estimate of intrinsic
value. They believe over the long-term, equity prices are driven by an issuer's
ability to generate free cash flow and purchasing securities of these businesses
at discounts to intrinsic value provides for appreciation potential and reduces
risk.
Legg Mason Focus Capital, Inc. is focused on serving the
investment needs of high net worth investors and their related accounts. They
are primarily equity investors and feature three products: Focus Global Equity,
Whole Market Equity and Core Equity Income Plus. Focus Capital believes that the
market reflects all available public information, and that active management
adds value to an index over time by distinguishing information which is
reflected accurately from that which is distorted.
Legg Mason Trust, fsb is a federally chartered unitary thrift
institution with authority to exercise trust powers. Legg Mason Trust provides
services as a trustee for trusts established by our individual and employee
benefit plan clients and manages fixed income and equity assets. Through various
subsidiaries, Legg Mason provides brokerage and asset management services for a
significant portion of the assets held in Legg Mason Trust's accounts.
Bingham Legg Advisers LLC is a joint venture that is equally
owned by Legg Mason and Bingham Dana LLP, a Boston-based law firm. Bingham Legg
Advisers seeks to provide a coordinated approach to the financial needs of the
high net worth market. Bingham Legg limits its focus to clients with a minimum
of $1 million to invest and then seeks to provide them a high level of personal
service.
Each Wealth Management subsidiary retains its own investment
style and regional operations, seeking to generate ongoing growth in its core
business through direct new business efforts in its market. In addition to these
core efforts, we offer a new wealth management program, directAdvantage(SM),
which is designed to provide our Private Client Group financial advisors with a
single platform through which they can deliver the full range of
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our wealth management investment advisory services to our brokerage clients. The
directAdvantage initiative is a fee-based program enabling brokerage clients to
pay a single, asset-based fee and receive custody, recordkeeping, consolidated
reporting, transaction execution, and investment advisory services.
Private Client Business Segment
Our Private Client business segment distributes a wide range
of financial products through its branch distribution network, including equity
and fixed income securities, proprietary and non-affiliated mutual funds and
annuities. This business segment consists principally of the operations of Legg
Mason Wood Walker.
Private Client Securities Business
For the fiscal years ended March 31, 2002, 2001 and 2000, our
revenues derived from securities transactions for individual investors
(excluding interest on margin accounts) constituted approximately 66%, 78% and
80%, respectively, of our total revenues from securities transactions and 24%,
29% and 32%, respectively, of our net revenues. Despite a significant decline in
the percentage of revenues contributed by our Private Client securities business
as a result of difficult market conditions and an increase in asset management
revenues, we believe that these services will continue to be a significant
source of our revenues in the foreseeable future, although the percentage of net
revenues they provide may continue to decrease primarily as a result of
increases in asset management revenues. We charge retail commissions on both
exchange and over-the-counter ("OTC") transactions in accordance with an
internal schedule. We will grant discounts from the schedule in certain cases.
We also offer account arrangements under which a single fee is charged based on
a percentage of the assets held in a customer's account and no charge is imposed
on a transaction-by-transaction basis. This single fee covers all execution and
advisory services, including advisory services provided by our asset management
subsidiaries and selected independent advisory firms. In addition, we provide
asset allocation and advisor performance and selection consultation services.
When we execute OTC transactions as a dealer, we receive, in lieu of
commissions, mark-ups or mark-downs that are included in the "Revenues by
Source" table as customer-related principal transactions. We have entered into
dealer-sales agreements with a number of major distributors that offer mutual
fund shares through broker-dealers. In addition, we sell shares of our
proprietary mutual funds through our retail sales network. See "Asset Management
Business Segment -- Mutual Funds."
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Brokerage Offices
This table shows, as of March 31, 2002, information with respect to our
retail securities brokerage offices.
Number of
Financial Number of
Location Advisors Offices
-------- --------- ---------
United States:
Maryland 304 18
Pennsylvania 178 21
Virginia 141 17
Florida 84 12
North Carolina 76 10
Louisiana 76 7
Ohio 51 8
Massachusetts 48 3
South Carolina 45 4
New Jersey 44 5
Mississippi 40 4
Texas 39 4
New York 37 4
District of Columbia 37 1
Alabama 26 4
Tennessee 20 3
Maine 15 1
West Virginia 14 2
Georgia 12 1
Connecticut 10 2
Rhode Island 7 1
Delaware 6 1
New Hampshire 2 1
----- ----
Total 1,312 134
===== ====
Margin Accounts, Interest Income and Free Credit Balances
We effect customers' securities transactions on either a cash
or margin basis. In a cash transaction, the customer pays the price for the
securities in cash. In a margin transaction, the customer pays less than the
full cost of the securities purchased and we make a loan for the balance of the
purchase price. The loan is secured by the securities purchased or other
securities owned by the customer. The amount of the loan is subject to the
margin regulations (Regulation T) of the Board of Governors of the Federal
Reserve System, New York Stock Exchange, Inc. ("NYSE") margin requirements and
our internal policies. In some instances, our internal policies are more
stringent than Regulation T or NYSE requirements. In permitting a customer to
purchase securities on margin, we are subject to the risks that a market decline
could reduce the value of our collateral below the amount of the customer's
indebtedness and that the customer might be unable otherwise to repay the
indebtedness.
We charge interest on amounts borrowed by customers (debit balances) to
finance their margin transactions. The rate of interest we charge is the prime
rate plus or minus an additional amount that varies
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depending upon the amount of the customer's average debit balance. Interest
income derived from these sources constituted approximately 3%, 5% and 5%, of
our net revenues for the 2002, 2001 and 2000 fiscal years, respectively. We also
earn interest on securities we own and on operating and segregated cash
balances.
We finance customers' margin account borrowings primarily through free
credit balances (excess funds held by customers in their brokerage accounts). We
pay interest on free credit balances in Legg Mason Wood Walker customers'
accounts when the customer has indicated that the funds will be used for
reinvestment at a future date. In fiscal 2002, we paid interest on approximately
92% of Legg Mason Wood Walker's retail customer free credit balances.
Insurance Brokerage and Financial Planning
Substantially all of our financial advisors are licensed to sell
insurance. Our subsidiary Legg Mason Financial Services, Inc. acts as general
agent for several life insurance companies and sells fixed and variable
annuities and insurance. We also offer, through Legg Mason Wood Walker,
financial planning services to individuals. See "Revenues by Source" for
information regarding revenues generated by insurance brokerage activities.
Other Services
At March 31, 2002, Legg Mason Wood Walker served as a non-bank
custodian for approximately 384,000 IRAs, 30,000 Simplified Employee Pension
Plans and 16,000 Qualified Plans.
Registrations and Exchange Memberships
Legg Mason Wood Walker is registered as a broker-dealer with the
Securities and Exchange Commission ("SEC"), is a member of the NYSE, the
National Association of Securities Dealers, Inc. ("NASD") and the Securities
Investors Protection Corporation ("SIPC"), and is registered as a futures
commission merchant with the Commodity Futures Trading Commission. In addition,
Legg Mason Wood Walker is a member of the Philadelphia, Boston and Chicago stock
exchanges.
Capital Markets Business Segment
Our Capital Markets business segment is conducted primarily through
Legg Mason Wood Walker. This segment consists of our:
. equity and fixed income institutional sales and trading;
. syndicate; and
. corporate and public finance activities.
Institutional Business
We execute securities transactions for institutional investors such as
banks, mutual funds, insurance companies and pension and profit-sharing plans.
These investors typically purchase and sell securities in large quantities that
require special marketing and trading expertise. We believe that we receive a
significant portion of our institutional brokerage commissions as a consequence
of providing research opinions and services regarding specific corporations and
industries and other matters affecting the securities markets. See "Research."
We execute transactions as a broker or as a principal. We generally
offer discounts from our commission schedule to our institutional customers. The
size of these discounts varies with the size of particular transactions and
other factors. For the fiscal years ended March 31, 2002, 2001 and 2000, the
revenues we derived from securities transactions for institutional investors
constituted approximately 34%, 22% and 20%, respectively, of our total revenues
from securities transactions and 12%, 8% and 8% of our net revenues.
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Principal Transactions
We are a market maker in equity securities that are traded on the
Nasdaq Stock Market. We also are an active market maker and distributor of
municipal bonds, particularly bonds issued by municipalities located in the
Mid-Atlantic and Southern regions.
As of March 31, 2002, we made markets in equity securities of
approximately 255 corporations, including corporations for which we have acted
as a managing or co-managing underwriter. Among our traders, 49 are involved in
trading corporate equity and debt securities, 14 are involved in trading
municipal securities, 6 involved in trading government securities and 6 are
involved in trading mortgage-backed securities.
Our market-making activities are also conducted with other dealers, and
with institutional and individual customers of our branch office system. We
allocate mark-ups and mark-downs from market-making activities to the Private
Client business segment when the transaction involves an individual client. In
making markets in equity and debt securities, we maintain positions in the
securities to service our customers and accordingly expose our capital to the
risk of fluctuations in market value. We realize profits and losses from market
fluctuations in these securities, although we generally seek to avoid
substantial market risk, and may engage in hedging transactions to reduce risk.
Trading profits (or losses) depend upon the skills of the employees engaged in
market making, the amount of capital allocated to positions in securities and
the general level of activity and trend of prices in the securities markets.
Investment Banking
Corporate and Municipal Finance
We participate as an underwriter in public offerings of corporate debt
and equity issues and municipal securities. We also manage or co-manage some of
these offerings.
The following tables show, for the periods indicated, (i) the total
number and dollar amount of corporate stock and bond and municipal bond
offerings we managed or co-managed, and (ii) the total number and dollar amount
of our underwriting participations in both those offerings and offerings managed
by others.
Managed or Co-Managed Offerings
------------------------------------------------------
Calendar Year Number of Issues Amount of Offering
- ------------- ---------------- ------------------
Corporate Municipal Corporate Municipal
--------- --------- --------- ---------
1997 76 224 $ 8,453,000,000 $ 7,208,000,000
1998 45 223 8,090,054,000 8,381,696,000
1999 40 158 5,270,873,000 10,167,029,000
2000 25 158 4,821,910,000 4,350,577,000
2001 59 301 11,636,469,000 8,485,172,000
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Underwriting Participations
-------------------------------------------------------
Calendar Year Number of Issues Amount of Participation
- ------------- ---------------- -----------------------
Corporate Municipal Corporate Municipal
--------- --------- --------- ---------
1997 298 198 $1,380,000,000 $ 936,668,000
1998 153 237 827,443,000 1,476,674,000
1999 206 159 697,336,000 1,118,887,000
2000 146 162 705,899,000 409,059,000
2001 210 323 2,199,901,000 1,453,477,000
Underwriting involves both economic and regulatory risks. An
underwriter may incur losses if it is unable to resell the securities it is
committed to purchase, or if it is forced to liquidate its commitments at less
than the agreed purchase price. In addition, an underwriter is subject to
substantial potential liability for material misstatements or omissions in
prospectuses and other communications with respect to underwritten offerings.
See "Item 3. Legal Proceedings." Furthermore, because underwriting commitments
require a charge against net capital, we could find it necessary to limit our
underwriting participations to remain in compliance with regulatory net capital
requirements. See "Net Capital Requirements."
Other Investment Banking Activities
Our investment banking activities also include debt and equity private
placements and advice with respect to merger and acquisition transactions, and
provision of financial advisory services to corporate and municipal clients.
At March 31, 2002, we had 95 professionals engaged in investment
banking activities, including 62 in corporate finance and 33 in municipal
finance.
Merchant Banking
Our subsidiary Legg Mason Merchant Banking, Inc. manages and sponsors
private equity funds. As of March 31, 2002, Legg Mason Merchant Banking, Inc.
managed Legg Mason Capital Partners, L.P., a private equity fund raised in
September 1996 which has commitments for approximately $41 million in capital,
and Legg Mason Capital Partners II, L.P., a private equity fund raised in
February 2000 which has commitments for approximately $100 million in capital.
Other Business Segment
Our Other businesses are principally our real estate service business
and unallocated corporate revenues and expenses. The real estate service
business is conducted through Legg Mason Real Estate Services, Inc. ("LMRES").
Real Estate Services
LMRES is engaged in the commercial mortgage banking business. The firm
originates, structures, places and services commercial mortgages on
income-producing properties for insurance companies, pension funds and other
investors. LMRES is also engaged in the business of discretionary and
non-discretionary management of commercial real estate-related assets for
institutional clients. In addition, LMRES provides real estate consulting
services, specializing in sports arena and facility feasibility, analysis and
financing, as well as in providing corporate real estate services and equity
sales. LMRES' headquarters are located in Philadelphia, Pennsylvania, and it has
offices located in the Mid-Atlantic and Southeastern regions of the United
States.
As of March 31, 2002 and 2001, the commercial mortgage servicing
portfolio of LMRES was $8.3 billion and $7.6 billion, respectively.
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Research
Legg Mason Wood Walker employs 45 equity analysts who develop
investment recommendations and market information with respect to companies and
industries. Legg Mason Wood Walker's research has focused on the identification
of securities of financially sound, well-managed companies that appear to be
undervalued in relation to their long-term earning power or the value of their
underlying assets. Our equity research also focuses on companies in certain
business sectors, including companies in the following sectors:
. biotechnology;
. consumer services;
. financial services;
. industrial;
. real estate investment trust;
. technology; and
. telecommunications.
These research services are supplemented by research services purchased from
outside firms.
Our clients do not pay for research services directly,
although we are often compensated for our research services by institutional
clients through the direction of brokerage transactions to Legg Mason Wood
Walker for execution. We believe that our research activities are important in
attracting and retaining institutional and individual brokerage clients.
Administration
Our administrative and operations personnel are responsible
for the processing of securities transactions; receipt, identification and
delivery of funds and securities; internal financial controls; office services;
custody of customers' securities; and the handling of margin accounts. At March
31, 2002, we had approximately 270 full-time employees performing these
functions.
There is considerable fluctuation during any year and from
year to year in the volume of transactions we must process. We record
transactions and post our books on a daily basis. Our operations personnel
monitor day-to-day operations to determine compliance with applicable laws,
rules and regulations. Any failure to keep current and accurate books and
records can render Legg Mason Wood Walker liable to disciplinary action by
governmental and self-regulatory authorities, as well as to claims by its
clients.
Legg Mason Wood Walker executes and clears securities
transactions as a member of the NYSE and various regional exchanges, and is a
participant in both The Depository Trust Company and National Securities
Clearing Corporation. Legg Mason Wood Walker also provides clearing services to
affiliated and unaffiliated broker-dealers.
We believe that our internal controls and safeguards are
adequate, although fraud and misconduct by customers and employees and the
possibility of theft of securities are risks inherent in the financial services
industry. As required by the NYSE and certain other authorities, we carry a
fidelity bond covering loss or theft of securities, forgery of checks and drafts
and embezzlement and misplacement of securities.
Employees
At March 31, 2002, we had approximately 5,290 employees. None
of our employees is covered by a collective bargaining agreement. We consider
our relations with our employees to be satisfactory. However, competition for
experienced financial services personnel, especially financial advisors and
investment management professionals, is intense and from time to time we may
experience a loss of valuable personnel.
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We recognize the importance to our private client business of
hiring and training financial advisors. We train new financial advisors who are
required to take examinations given by the NYSE, the NASD and various states in
order to be registered and qualified, and maintain ongoing training for
financial advisors.
Competition
We are engaged in an extremely competitive business. Our
competition includes, with respect to one or more aspects of our business,
numerous national, regional and local asset management firms and broker-dealers,
and commercial banks and thrift institutions. Many of these organizations have
substantially more personnel and greater financial resources than we have.
Discount brokerage firms oriented to the individual investor market, including
firms affiliated with banks and mutual fund organizations and on-line brokerage
firms, are devoting substantial funds to advertising and direct solicitation of
customers in order to increase their share of commission dollars and other
securities-related income. In many instances, we are competing directly with
these organizations. We also compete for investment funds with banks, insurance
companies and investment companies. The principal competitive factors relating
to our business are the quality of advice and services provided to investors and
the price of those services.
Competition in our business periodically has been affected by
significant developments in the financial services industry. See "Factors
Affecting the Company and the Financial Services Industry -- Industry Changes
and Competitive Factors."
Regulation
The financial services industry in the United States is
subject to extensive regulation under both Federal and state laws. The SEC is
the Federal agency charged with administration of the Federal securities laws.
Financial services firms are also subject to regulation by state securities
commissions in those states in which they conduct business. In addition,
financial services firms are subject to regulation by various foreign
governments, securities exchanges, central banks and regulatory bodies,
particularly in those countries where they have established offices.
Our asset managers and sponsored mutual funds are subject to
extensive regulation. Our U.S. asset managers are registered as investment
advisers with the SEC and are also required to make notice filings in certain
states. Virtually all aspects of the asset management business are subject to
various federal and state laws and regulations. These laws and regulations are
primarily intended to benefit the asset management clients and generally grant
supervisory agencies and bodies broad administrative powers, including the power
to limit or restrict an investment advisor from conducting its asset management
business in the event that it fails to comply with such laws and regulations.
Possible sanctions that may be imposed for a failure include the suspension of
individual employees, limitations on the asset managers engaging in the asset
management business for specified periods of time, the revocation of
registrations, other censures and fines. A regulatory proceeding, regardless of
whether it results in a sanction, can require substantial expenditures and can
have an adverse effect on the reputation of an asset manager.
Broker-dealers are subject to regulations that cover all
aspects of the securities business, including:
. sales methods;
. trading practices among broker-dealers;
. uses and safekeeping of customers'funds and securities;
. capital structure and financial soundness of securities firms;
. recordkeeping; and
. the conduct of directors, officers and employees.
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Additional legislation, changes in rules promulgated by the SEC and
self-regulatory authorities, or changes in the interpretation or enforcement of
existing laws and rules, may directly affect the mode of operation and
profitability of broker-dealers. Much of the regulation of broker-dealers has
been delegated to self-regulatory authorities, principally the NASD and the
securities exchanges. These self-regulatory organizations conduct periodic
examinations of member broker-dealers in accordance with rules they have adopted
and amended from time to time, subject to approval by the SEC. The SEC,
self-regulatory authorities and state securities commissions may conduct
administrative proceedings that can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers or employees. Such administrative
proceedings, whether or not resulting in adverse findings, can require
substantial expenditures and can have an adverse impact on the reputation of a
broker-dealer. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets, rather
than protection of creditors and stockholders of the regulated entity.
Our broker-dealer subsidiaries are required by federal law to
belong to the SIPC. When the SIPC fund falls below a certain amount, members are
required to pay annual assessments of up to 1% of adjusted gross revenues. As a
result of adequate fund levels, each of our broker-dealer subsidiaries was
required to pay the minimum annual assessment of $150 in fiscal 2002. The SIPC
fund provides protection for securities held in customer accounts up to $500,000
per customer, with a limitation of $100,000 on claims for cash balances. Legg
Mason Wood Walker purchases a bond that provides additional protection for
securities of up to $24,500,000 per customer.
Net Capital Requirements
Every registered broker-dealer doing business with the public
is subject to the Uniform Net Capital Rule ("Rule 15c3-1") promulgated by the
SEC. Rule 15c3-1, which is designed to measure the financial soundness and
liquidity of broker-dealers, specifies minimum net capital requirements. Since
Legg Mason, Inc. is not itself a registered broker-dealer, it is not directly
subject to Rule 15c3-1. However, our broker-dealer subsidiaries are subject to
Rule 15c3-1, and a provision of Rule 15c3-1 requires that a broker-dealer notify
the SEC prior to the withdrawal of equity capital by a parent company if the
withdrawal would exceed the greater of $500,000 or 30 percent of the
broker-dealer's excess net capital.
Rule 15c3-1 provides that a broker-dealer doing business with
the public shall not permit its aggregate indebtedness to exceed 15 times its
net capital (the "primary method") or, alternatively, that it not permit its net
capital to be less than 2% of its aggregate debit items (primarily receivables
from customers and broker-dealers) computed in accordance with Rule 15c3-1. As
of March 31, 2002, our broker-dealer subsidiaries had aggregate net capital of
$310.6 million, which exceeded the minimum net capital requirements by $289.4
million.
Under NYSE Rule 326, Legg Mason Wood Walker as a member
organization that carries customer accounts, would be required to reduce its
business activities if its net capital, as defined, was less than 4% of
aggregate debit items, as defined, and would be precluded from expanding its
business if its net capital was less than 5% of aggregate debit items. As of
March 31, 2002, Legg Mason Wood Walker's net capital was 29% of its aggregate
debit items.
Compliance with applicable net capital rules could limit the
operations of our broker-dealer subsidiaries, particularly operations such as
underwriting and trading activities that require use of significant amounts of
capital. A significant operating loss or an extraordinary charge against net
capital could adversely affect the ability of our broker-dealers to expand or
even maintain their present levels of business. See Note 16 of Notes to
Consolidated Financial Statements in Item 8 of this Report.
Legg Mason Wood Walker has in the past incurred subordinated
liabilities ("Subordinated Liabilities") to Legg Mason, Inc. which it was
permitted to treat as capital for the purposes of the Uniform Net Capital Rule
and NYSE Rules 325 and 326. During fiscal 2002, Legg Mason Wood Walker repaid
all outstanding Subordinated Liabilities.
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Factors Affecting the Company and the Financial Services Industry
The financial services industry is characterized by frequent
changes, the effects of which have been difficult to predict. In addition to an
evolving regulatory environment, the industry has been subject to radical
changes in pricing structure, alternating periods of contraction and expansion
and intense competition from within and outside the industry.
Importance of Investment Performance
We believe that investment performance is one of the most
important factors for the growth of assets under management for a company like
us in the asset management business. Poor investment performance could impair
the revenues and growth of a company like us because:
. existing clients might withdraw funds in favor of better
performing products, which would result in lower investment
advisory fees; or
. our ability to attract funds from existing and new clients
might diminish.
If our revenues decline without a commensurate reduction in our expenses, our
net income will be reduced.
Assets Under Management May Be Withdrawn
Investment advisory and administrative contracts are generally
terminable at will or upon relatively short notice, and mutual fund investors
may redeem their investments in the funds at any time without prior notice.
Institutional and individual clients can terminate their relationships with an
asset manager, reduce the aggregate amount of assets under management, or shift
their funds to other types of accounts with different rate structures for any
number of reasons, including investment performance, changes in prevailing
interest rates, loss of key investment management personnel and financial market
performance. In a declining stock market the pace of mutual fund redemptions
could accelerate. Poor performance relative to other investment management firms
tends to result in decreased purchases of fund shares, increased redemptions of
fund shares, and the loss of institutional or individual accounts. The decrease
in revenues that could result from any such event could have a material adverse
effect on our business.
Fluctuating Securities Volume and Prices
There are substantial fluctuations in volume and price levels
of securities transactions in the financial services industry. These
fluctuations can occur on a daily basis and over longer periods as a result of
national and international economic and political events, broad trends in
business and finance, and interest rate movements. Reduced volume and prices
generally result in lower brokerage and investment banking revenues, trading
losses as both principal and underwriter, and loss or reduction in incentive and
performance fees. Periods of reduced volume will adversely affect profitability
because fixed costs remain relatively unchanged. To the extent that purchases of
securities are permitted to be made on margin, securities firms also are subject
to risks inherent in extending credit. These risks are particularly high during
periods of rapidly declining markets because a market decline could reduce
collateral value below the amount of a customer's indebtedness. The business
cycles of our different operations and subsidiaries may occur contemporaneously.
Consequently, the effect of an economic downturn may have a magnified negative
effect on our business. In a period of reduced margin usage by clients, the
interest profit of a securities firm may be adversely affected. In the past,
heavy trading volume has caused clearance and processing problems for securities
firms, and this could occur in the future. In addition, securities firms face
risk of loss from errors that can occur in the execution and settlement process.
See "Administration."
A large portion of our revenues is derived from investment
advisory contracts with clients. Under these contracts, the investment advisory
fees we receive are typically based on the market value of assets under
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management. Accordingly, a decline in the prices of securities generally may
cause our revenues and income to decline by:
. causing the value of our assets under management to decrease, which
would result in lower investment advisory fees;
. causing our clients to withdraw funds in favor of investments they
perceive offer greater opportunity or lower risk, which would also
result in lower investment advisory fees; or
. decreasing the performance fees earned by our asset management
subsidiaries.
If our revenues decline without a commensurate reduction in our expenses, our
net income will be reduced.
Industry Changes and Competitive Factors
The financial services businesses we are engaged in are
extremely competitive. Competition includes numerous national, regional and
local asset management firms and broker-dealers, and commercial bank and thrift
institutions. Many of these organizations have substantially more personnel and
greater financial resources than we do. Discount brokerage firms oriented to the
individual investor market, including firms affiliated with banks and mutual
fund organizations and on-line brokerage firms, are devoting substantial funds
to advertising and direct solicitation of customers in order to increase their
share of commission dollars and other securities-related income. We also compete
for investment funds with banks, insurance companies and investment companies.
The financial services industry has had considerable
consolidation as numerous financial services firms have either been acquired by
other financial services firms or ceased operations. In many cases, this has
resulted in firms with greater financial resources than us. In addition, a
number of heavily capitalized companies that were not previously engaged in the
financial services business have made investments in and acquired financial
services firms. Increasing competitive pressures in the financial services
industry require firms of our size to offer to their customers many of the
services that are provided by much larger firms that have substantially greater
resources than us. A sizable number of new asset management firms and mutual
funds have been established in recent years, increasing competition in that area
of our activities.
An increasing number of firms that offer discount brokerage
services to individual investors have been established in recent years. Included
in these firms are on-line brokerage firms and affiliates of banks and mutual
fund organizations. These firms generally effect transactions at substantially
lower commission rates on an "execution only" basis, including through the
Internet, without offering other services like investment and financial advice
and research that are provided by "full-service" brokerage firms such as us.
Some of these discount brokerage firms have increased the range of services that
they offer. Continued increases in the number of discount brokerage firms or
services provided by these firms may adversely affect us.
In addition, some full-service brokerage firms have begun to
provide to customers discount services, including on-line trading over the
Internet. Our private client business may be adversely affected by the demand
for and availability of on-line securities trading.
Certain institutions, notably commercial banks and thrift
institutions, have become a competitive factor in the financial services
industry by offering investment banking and corporate and individual financial
services traditionally provided only by securities firms. Commercial banks,
generally, are expanding their securities activities and their activities
relating to the provision of financial services, and are deriving more revenue
from these activities. In addition, in November 1999, legislation was passed
that effectively repealed certain laws that separated commercial banking,
investment banking and insurance activities. This legislation allows commercial
banks, securities firms and insurance firms to affiliate, which may accelerate
consolidation and lead to increasing competition in markets traditionally
dominated by investment banks and brokerage firms. Continued expansion of
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the type and extent of competitive services that banks and other institutions
offer or further repeal or modification of administrative or legislative
barriers may adversely affect firms such as us that are heavily oriented to
individual investors.
Acquisitions
As part of our business strategy, we review acquisitions in
the ordinary course and regularly engage in discussions with respect to
potential acquisitions, some of which may be material. Acquisitions involve a
number of risks and present financial, managerial and operational challenges,
including:
. adverse effects on our reported earnings per share in the
event acquired intangible assets become impaired;
. existence of unknown liabilities; and
. potential disputes with the sellers.
An acquisition increases the risk that any business may lose customers or
employees, including key employees of the acquired business. An acquired
business could underperform relative to our expectations and we may not realize
the value we expect from the acquisition. Adverse market conditions or poor
investment or other performance by an acquired company may adversely affect
revenue and, in the case of an asset manager, its assets under management and
performance fees. We could also experience financial or other setbacks if an
acquired company has problems of which we are not aware. Future acquisitions may
further increase our leverage or, if we issue equity securities to pay for the
acquisitions, dilute the holdings of our existing stockholders.
Regulation
Our business is subject to regulation by various regulatory
authorities that are charged with protecting the interests of broker-dealers'
and investment advisers' customers. See "Regulation."
Effect of Net Capital Requirements
The SEC and the NYSE have stringent rules with respect to the
net capital requirements of securities firms. A significant operating loss or
extraordinary charge against net capital may adversely affect the ability of our
broker-dealer subsidiaries to expand or even maintain their present levels of
business. See "Net Capital Requirements."
Litigation
Many aspects of our business involve substantial risks of
liability. In the normal course of business, our subsidiaries have been named as
defendants or co-defendants in lawsuits seeking substantial damages. We are also
involved from time to time in governmental and self-regulatory agency
investigations and proceedings. There has been an increased incidence of
litigation in the financial services industry in recent years, including
customer claims as well as class action suits seeking substantial damages. See
"Item 3. Legal Proceedings."
Importance of Key Personnel
We are dependent on the continued services of our management
team, including our Chief Executive Officer, and a number of our key asset
management and securities personnel. The loss of such personnel without adequate
replacement could have a material adverse effect on us. Additionally, we need
qualified managers and skilled employees with financial services experience in
order to operate our business successfully. If we are unable to attract and
retain qualified individuals or our costs to do so increase significantly, our
operations would be materially adversely affected.
19
<PAGE>
Operational Risks
There is considerable fluctuation during any year and from
year-to-year in the volume of transactions we must process. We record
transactions and post our books on a daily basis. Operations personnel monitor
day-to-day operations to determine compliance with applicable laws, rules and
regulations. Failure to keep current and accurate books and records can render
us liable to disciplinary action by governmental and self-regulatory
authorities, as well as to claims by our clients.
We depend on our headquarters and operations center for the continued
operation of our business. A disaster directly affecting our headquarters or
operations center may have a material adverse impact on our ability to continue
to operate our business without interruption. Although we have disaster recovery
programs in place, there can be no assurance that these will be sufficient to
mitigate the harm that may result from such a disaster. In addition, insurance
and other safeguards might only partially reimburse us for our losses.
International Operations
A number of our subsidiaries operate in Canada and the United Kingdom
on behalf of Canadian and UK clients. We also have offices in Spain, Singapore
and Switzerland. Our international operations require us to comply with the
legal requirements of foreign jurisdictions and expose us to the political
consequences of operating in foreign jurisdictions. Our foreign business
operations are also subject to the following risks:
. difficulty in managing, operating and marketing our
international operations;
. fluctuations in currency exchange rates which may result in
substantial negative effects on assets under management; and
. significant adverse changes in foreign legal and regulatory
environments.
Item 2. Properties.
We lease all of our office space. Our headquarters, Baltimore
sales office and other functions are located in an office building in which we
are the major tenant. In that building, we currently occupy approximately
370,000 square feet with annual base rent of approximately $7.8 million. The
initial term of the lease will expire in 2009, with two renewal options of eight
years each.
Our brokerage operations and technology functions are housed
in a separate office building in which we are the sole tenant, currently
occupying approximately 120,000 square feet with annual base rent of
approximately $1.9 million. The initial term of the lease will expire in 2011,
with three renewal options of five years each.
Information concerning the location of Legg Mason's retail
sales offices is contained in Item 1 of this Report. See Note 9 of Notes to
Consolidated Financial Statements in Item 8 of this Report for a discussion of
our lease obligations.
Item 3. Legal Proceedings.
Our subsidiaries are the subject of customer complaints, have
been named as defendants or co-defendants in various lawsuits alleging
substantial damages and have been involved in certain governmental and
self-regulatory agency investigations and proceedings. These proceedings arise
primarily from securities brokerage, asset management and investment banking
activities. Some of these proceedings relate to public offerings of securities
in which one or more of our subsidiaries participated as a member of the
underwriting syndicate. We are also aware of litigation against certain
underwriters of offerings in which one or more of our subsidiaries was a
20
<PAGE>
participant, but where the subsidiary is not now a defendant. In these latter
cases, it is possible that a subsidiary may be called upon to contribute to
settlements or judgments. While the ultimate resolution of pending litigation
and other matters cannot be currently determined, in the opinion of our
management, after consultation with legal counsel, these actions are expected to
be resolved with no material adverse effect on our financial condition. However,
if during any period a potential adverse contingency should become probable or
resolved, the results of operations in that period could be materially affected.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4A. Executive Officers of the Company.
Information (not included in our definitive proxy statement
for the 2002 Annual Meeting of Stockholders) regarding certain of our executive
officers is as follows:
Peter L. Bain, age 43, was elected Executive Vice President of
Legg Mason in July 2001, and was named head of our wealth management investment
advisory group in June 2000. From 1995 to 2000, Mr. Bain was a Managing Director
of Berkshire Capital Corporation, a privately held investment bank, and from
1997 to 2000 he was a member of the Management Committee of that company. Mr.
Bain is responsible for the strategic direction of our wealth management
investment advisory subsidiaries and for ongoing acquisition strategy in the
wealth management market sector.
F. Barry Bilson, age 48, was elected Senior Vice President
of Legg Mason in October 1998. Mr. Bilson was Vice President-Finance of Legg
Mason from June 1984 through October 1998. Mr. Bilson has served in various
financial management capacities since joining us in 1981, and presently has
responsibility for business development projects. Mr. Bilson is a certified
public accountant.
Charles J. Daley, Jr., age 40, became Senior Vice President
and Treasurer of Legg Mason in January 2002 and Senior Vice President, Chief
Financial Officer and Treasurer of Legg Mason Wood Walker in December 2001. He
had been Vice President of Legg Mason since July 1999 and of Legg Mason Wood
Walker since 1997. From September 1988 through September 1997, he served as
Assistant Controller of Legg Mason and of Legg Mason Wood Walker. Mr. Daley is a
certified public accountant.
Mark R. Fetting, age 47, was elected Executive Vice
President of Legg Mason in July 2001. From June 2000 until July 2001, he served
as a Senior Advisor to Legg Mason. From 1991 to 2000, Mr. Fetting was Division
President and Senior Officer to Prudential Financial Group, Inc., a financial
services company. Mr. Fetting has responsibility for our mutual funds business.
Mr. Fetting is a director of 4 funds within the Legg Mason mutual funds complex
and 17 funds within the Royce & Associates mutual funds complex.
Thomas P. Mulroy, age 41, was elected Senior Vice President of
Legg Mason in July 2000 and an Executive Vice President of Legg Mason Wood
Walker in November 2000. He became a Senior Vice President of Legg Mason Wood
Walker in August 1998. From 1986 through 1998, Mr. Mulroy held various positions
in Legg Mason Wood Walker's equity capital markets operations. Mr. Mulroy has
responsibility for Legg Mason Wood Walker's equity capital markets operations.
Robert F. Price, age 54, became Secretary of Legg Mason in
July 2000 and of Legg Mason Wood Walker in November 2000, and has been Senior
Vice President and General Counsel of Legg Mason and of Legg Mason Wood Walker
since November 1998. From September 1991 through August 1997, Mr. Price was
Secretary and General Counsel of Alex. Brown Incorporated. From September 1997
until October 1998, Mr. Price was a Managing Director of BT Alex. Brown
Incorporated, a wholly owned subsidiary of Bankers Trust Corporation.
21
<PAGE>
Robert G. Sabelhaus, age 54, was elected Executive Vice
President of Legg Mason in July 2001 and Executive Vice President of Legg Mason
Wood Walker in August 1993. Mr. Sabelhaus is an executive officer in the private
client brokerage division of Legg Mason Wood Walker.
Timothy C. Scheve, age 44, became a Senior Executive Vice
resident of Legg Mason in July 2000 and of Legg Mason Wood Walker in November
2000. He had been Executive Vice President of Legg Mason and of Legg Mason Wood
Walker since January 1998 Mr. Scheve has served in various financial and
administrative capacities since joining us in 1984, and presently has primary
responsibility for our administrative functions.
Elisabeth N. Spector, age 54, became a Senior Vice President
of Legg Mason in January 1994. She has general responsibilities in business
strategy.
Joseph A. Sullivan, age 44, became a Senior Vice President of
Legg Mason in July 2000 and of Legg Mason Wood Walker in August 1994. He manages
Legg Mason Wood Walker's fixed income capital markets operations and has
responsibility for the oversight of the taxable and municipal fixed income
banking, trading, institutional sales, and research departments of Legg Mason
Wood Walker. He is a former member of the Board of Directors of the Bond Market
Association.
Edward A. Taber, III, age 58, became a Senior Executive
Vice President of Legg Mason in July 1995. He has overall responsibility for our
institutional investment management activities. Mr. Taber is a director of the
Western Asset Funds, Inc., a mutual fund consisting of six portfolios.
22
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Shares of Legg Mason, Inc. common stock are listed and traded
on the New York Stock Exchange (symbol LM). As of March 31, 2002, there were
2,008 holders of record of Legg Mason's common stock. Information with respect
to our dividends and stock prices is as follows:
<TABLE>
<CAPTION>
Quarter ended
- ------------------------------------------------------------------------------------------------------
Mar. 31 Dec. 31 Sept. 30 June 30
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 2002
Cash dividend per share $ 0.10 $ 0.10 $ 0.10 $ 0.09
Stock price range:
High 57.10 50.80 50.93 51.50
Low 48.36 38.35 34.25 38.06
Fiscal 2001
Cash dividend per share(1) $ 0.09 $ 0.09 $ 0.09 $ 0.08
Stock price range:
High 56.99 59.63 60.25 52.38
Low 40.15 42.88 47.63 35.13
</TABLE>
_________________________
/(1)/ Excluding $.16 per share declared by Perigee Inc. prior to being acquired
in the quarter ended June 30, 2000.
Equity Compensation Plan Information
The following table provides information about our equity
compensation plans as of March 31, 2002.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation plans
(excluding securities
reflected in column (a))
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity compensation plans approved 11,285,130(1) $ 37.55(2) 6,193,828(3) (4)
by stockholders
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not 1,219,075(5) --(6) --(7)
approved by stockholders
- ----------------------------------------------------------------------------------------------------------------------
Total 12,504,205(1)(5) $ 37.55(2)(6) 6,193,828(3)(7)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 1,879,425 shares of Legg Mason Common Stock ("Common Stock")
that are currently held in a trust pending distribution of phantom
stock units. The phantom stock units, which are converted into shares
of Common Stock on a one-for-one basis upon distribution, were granted
to plan participants upon their deferral of compensation or dividends
paid on phantom stock units. When amounts are deferred, participants
receive a number of phantom stock units equal to the deferred amount
divided by 90% to 100% of the fair market value of a share of Common
Stock.
23
<PAGE>
(2) Does not include phantom stock units that are converted into Common
Stock on a one-for-one basis upon distribution at no additional cost,
but were acquired as described in footnote (1).
(3) In addition, an unlimited number of shares of Common Stock may be
issued under the Legg Mason Wood Walker, Incorporated Deferred
Compensation/Phantom Stock Plan upon the distribution of phantom stock
units that may be acquired in the future as described in footnote (1).
(4) 2,682,970 of these shares may be issued under our omnibus equity plan
as stock options, restricted or unrestricted stock grants or any other
form of equity compensation. 2,945,446 of these shares may be purchased
under our employee stock purchase plan, which acquires the shares that
are purchased thereunder in the open market.
(5) Includes 1,164,988 shares of Common Stock that are currently held in a
trust pending distribution of phantom stock units. The phantom stock
units, which are converted into shares of Common Stock on a
one-for-one basis upon distribution, were granted to plan participants
upon their deferral of compensation or dividends paid on phantom stock
units. When amounts are deferred, participants receive a number of
phantom stock units equal to the deferred amount divided by the fair
market value, or 95% of the fair market value, of a share of Common
Stock. Also includes 54,087 shares of Common Stock issuable under the
Howard Weil Plan (as defined below).
(6) Phantom stock units are converted into Common Stock on a one-for-one
basis upon distribution at no additional cost, but were acquired as
described in footnote (5). The Howard Weil Plan provides for the
issuance of shares of Common Stock upon the occurrence of certain
events at no additional cost to the recipient, however, these rights
were acquired upon the recipients' deferral of compensation or
dividends on rights held with a value equal to the market value of the
shares acquirable under the plan.
(7) There is an unlimited number of shares of Common Stock that may be
issued under the phantom stock plans described below upon distribution
of phantom stock units that may be acquired in the future as described
in footnote (5). Under the Howard Weil Plan, 54,087 shares of Common
Stock are currently held in a trust to be issued under the plan,
however, dividends on these shares are reinvested in the right to
receive additional shares of Common Stock which are purchased in the
market to fulfill this obligation.
Set forth below is a brief description of the material terms
of our equity compensation plans that have not been approved by our
stockholders. For all of our phantom stock plans described below, we issue to a
trust shares of our Common Stock that are available for distribution under the
plans.
Legg Mason Wood Walker, Incorporated Private Client Group Deferred Compensation
Plan ("PCG Plan")
Under the PCG Plan, financial advisors in our Private Client
Group are eligible to earn deferred bonuses in each calendar year based upon
several performance measures. Deferred bonuses under the PCG Plan may be deemed
invested in either an interest account or a "phantom stock" account. Amounts
deemed invested in phantom stock accounts are credited as a number of phantom
stock units based on a unit price equal to the market price for a share of Legg
Mason Common Stock. The number of phantom stock units credited to an account
will be adjusted over the deferral period to account for any stock dividends,
stock splits and similar events. Dividends paid on Common Stock are credited to
phantom stock accounts by adding a number of phantom stock units based on a unit
price equal to 95% of the market price for a share of Common Stock. Amounts
deemed invested in interest accounts are annually credited with interest.
Deferred bonuses under the PCG Plan vest at the end of the sixth calendar year
after they are credited, and are subject to forfeiture if the recipient's
employment with us terminates prior to the vesting date, other than a
termination as a result of death, disability or retirement. Vested deferred
bonuses are distributed to the recipient, at the election of the recipient, upon
either (i) the date they vest or (ii) the date the recipient's employment with
us terminates. Upon a distribution, the participant receives (in a lump sum or
in periodic installments, at the participant's election) a number of shares of
Common Stock equal to the number of
24
<PAGE>
phantom stock units that are to be distributed, or cash in the amount of
the balance of the interest account.
In 2002, the PCG Plan was replaced with the Legg Mason Wood
Walker, Incorporated Financial Advisor Deferred Compensation Plan (the "FA
Plan"). All future deferred bonuses will be awarded under the FA Plan, however
the PCG Plan continues to apply to deferred bonuses for prior years. The FA Plan
is substantially similar to the PCG Plan, except that all distributions are made
in a lump sum at the time the deferred bonuses vest.
Legg Mason Wood Walker, Incorporated Key Employee Phantom Stock Agreements (the
"Key Employee Agreements")
Under the Key Employee Agreements, certain employees, as part
of their recruitment by our Private Client Group, are offered deferred
compensation bonuses credited within the first year of their employment.
Deferral amounts under the Key Employee Agreements are deemed invested in
"phantom stock" units based on a unit price equal to the market price for a
share of Legg Mason Common Stock. The number of phantom stock units credited to
an account will be adjusted over the deferral period to account for any stock
dividends, stock splits and similar events. Dividends paid on Common Stock are
credited to phantom stock accounts by adding a number of phantom stock units
based on a unit price equal to 95% of the market price for a share of Common
Stock. A portion of the deferred amounts under the Key Employee Agreements vest
each year over a period of five years, and are subject to forfeiture if the
recipient's employment with us terminates prior to the vesting date, other than
a termination as a result of death or disability. Vested deferred amounts are
distributed to the recipient, at the election of the recipient, upon one of (i)
the date they vest, (ii) the date the entire deferred amount vests, or (iii) the
date the recipient's employment with us terminates. Upon a distribution, the
participant receives (in a lump sum or in periodic installments, at the
participant's election) a number of shares of Common Stock equal to the number
of phantom stock units that are to be distributed.
Legg Mason Wood Walker, Incorporated Professional Branch Manager Phantom Stock
Agreements (the "Branch Manager Plan")
Under the Branch Manager Plan, certain of the branch managers
in our Private Client Group may elect to defer up to $12,000 of compensation in
any calendar year. We "match" dollar-for-dollar all amounts deferred under the
Branch Manager Plan. Deferred and match amounts under the Branch Manager Plan
are deemed invested in "phantom stock" units based on a unit price equal to the
market price for a share of Common Stock. The number of phantom stock units
credited to an account will be adjusted over the deferral period to account for
any stock dividends, stock splits and similar events. Dividends paid on Common
Stock are credited to phantom stock accounts by adding a number of phantom stock
units based on a unit price equal to 95% of the market price for a share of
Common Stock. Phantom stock units resulting from the Legg Mason "match" vest six
full years after they are credited, and are subject to forfeiture if the
recipient's employment with us terminates prior to the vesting date, other than
a termination as a result of death, disability or retirement. Vested deferred
amounts are distributed to the recipient, at the election of the recipient, upon
either (i) the date they vest or (ii) the date the recipient's employment with
us terminates. In a distribution, the participant receives (in a lump sum or in
periodic installments, at the participant's election) a number of shares of
Common Stock equal to the number of phantom stock units that are to be
distributed.
Howard, Weil, Labouisse, Friedrichs, Inc. Equity Incentive Plan (the "Howard
Weil Plan")
Under the Howard Weil Plan, certain employees of Howard, Weil,
Labouisee, Friedrichs, Inc. ("Howard Weil") were entitled to defer their receipt
of compensation. The deferred amounts were deemed invested in Voting Stock of
Howard Weil. When we acquired Howard Weil in 1987, the deferred amounts were
funded by placing Howard Weil stock into a trust, and the stock in the trust was
converted into Legg Mason Common Stock. Since the acquisition, no additional
amounts have been deferred under the Howard Weil Plan. However, the Howard Weil
plan governs the distribution of shares from the trust to participants. In
addition, dividends paid on the shares held in the trust are used to purchase
additional shares of Legg Mason Common Stock in the open market, which are then
credited to the accounts of participants.
25
<PAGE>
Item 6. Selected Financial Data.
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Years ended March 31,
2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results
Total revenues $ 1,578,612 $ 1,536,253 $ 1,399,585 $ 1,070,670 $ 909,306
Interest expense 127,271 175,389 134,382 94,974 73,776
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues 1,451,341 1,360,864 1,265,203 975,696 835,530
Non-interest expenses 1,198,092 1,095,044 1,010,765 818,885 707,965
- ---------------------------------------------------------------------------------------------------------------------------
Earnings before income tax provision 253,249 265,820 254,438 156,811 127,565
Income tax provision 100,313 109,590 104,025 63,537 52,258
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 152,936 $ 156,230 $ 150,413 $ 93,274 $ 75,307
- ---------------------------------------------------------------------------------------------------------------------------
Per Common Share/(1)/
Earnings per share:
Basic $ 2.35 $ 2.45 $ 2.43 $ 1.57 $ 1.26
Diluted 2.24 2.30 2.27 1.48 1.19
Weighted average shares outstanding (in thousands):
Basic 65,211 63,793 61,868 59,516 59,611
Diluted 68,262 67,916 65,967 62,836 63,187
Dividends declared/(2)/ $ .390 $ .350 $ .305 $ .250 $ .214
Book value 16.20 14.14 12.09 9.51 8.48
- ---------------------------------------------------------------------------------------------------------------------------
Financial Condition
Total assets $ 5,939,614 $ 4,687,626 $ 4,812,107 $ 3,500,202 $2,856,389
Long-term debt 779,463 99,770 99,723 99,676 99,628
Notes payable of finance subsidiaries/(3)/ 97,659 119,200 239,268 -- --
Stockholders' equity 1,084,548 927,720 770,808 571,969 510,808
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Adjusted to reflect all stock splits.
/(2)/ Excluding $.16, $.60 and $.19 per share declared by Perigee Inc. prior to
acquisition in 2001, 2000 and 1999, respectively.
/(3)/ Non-recourse, secured fixed-rate notes of Legg Mason Investors' finance
subsidiaries, the proceeds of which are invested in financial instruments
with similar maturities. See Notes 2 and 8 of Notes to Consolidated
Financial Statements.
26
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Business Description
Legg Mason, Inc. (the "Parent"), a holding company, and its subsidiaries
(collectively with the Parent, "Legg Mason") are principally engaged in
providing asset management, securities brokerage, investment banking and related
financial services to individuals, institutions, corporations and
municipalities. Terms such as "we," "us," "our" and "company" refer to Legg
Mason.
Legg Mason has operations principally in the United States of America, the
United Kingdom and Canada and also has offices in Spain, Switzerland and
Singapore. The financial services industry in which Legg Mason operates is very
competitive and highly regulated. Our profitability is sensitive to a variety of
factors including the amount of our assets under management, the volume of
trading in securities, the volatility and general level of securities prices and
interest rates, the level of customer margin and credit account balances and the
demand for investment banking services. In addition, overall market conditions,
the diversification of services and products offered, investment performance and
client relations are significant factors in determining whether we are
successful in retaining and attracting clients. In the past decade, we have
experienced substantial expansion due to internal growth and the strategic
acquisition of asset management firms that provided, among other things, a
broader range of investment expertise, additional product diversification and
increased assets under management.
Legg Mason currently operates through four business segments: Asset
Management, Private Client, Capital Markets and Other. The business segments are
based upon factors such as the services provided and distribution channels
utilized. Certain services that we offer are provided to clients through more
than one of our business segments. As such, the same revenue category may be
reflected in multiple segments. We allocate certain common income and expense
items among our business segments based upon various methodologies and factors.
The Asset Management segment provides investment advisory services to
company-sponsored investment funds and asset management services to
institutional and individual clients. Investment advisory and related fees
earned by Asset Management vary based upon factors such as the type of
underlying investment product, the amount of assets under management and the
type of services that are provided. In addition, performance fees may be earned
on certain investment advisory contracts for exceeding performance benchmarks.
The Private Client segment distributes a wide range of financial products
through its branch distribution network, including equity and fixed income
securities, proprietary and non-affiliated mutual funds and annuities. At March
31, 2002, Private Client's financial advisors operated out of 134 retail branch
offices. The primary sources of net revenues for Private Client are commissions
and principal credits earned on equity and fixed income transactions in customer
brokerage accounts, distribution fees earned on mutual funds, fees earned on
fee-based brokerage and managed accounts and net interest from customers' margin
loan and credit account balances. Sales credits associated with underwritten
offerings initiated in the Capital Markets segment are reported in Private
Client when sold through its branch distribution network.
The Capital Markets segment consists of our equity and fixed income
institutional sales and trading and corporate and public finance advisory and
underwriting activities. Fixed income institutional sales and trading include
transactions in both taxable and municipal products. Although we maintain
securities in inventory primarily to facilitate customer transactions, Capital
Markets also realizes profits and losses from trading activities. Sales credits
associated with underwritten offerings are reported in Capital Markets when sold
through institutional distribution channels. The results of this business
segment also include realized and unrealized gains and losses on investments
acquired in connection with merchant banking and investment banking activities.
The Other segment consists principally of our real estate service business
and unallocated corporate revenues and expenses.
All references to fiscal 2002, 2001 or 2000 refer to our March 31 fiscal year
then ended.
27
<PAGE>
Business Environment
For the U.S. economy, fiscal 2002 was a period of slower economic growth,
declines in corporate earnings and rising unemployment levels. During fiscal
2002, the equity markets continued to be volatile and weak, particularly in the
technology and telecommunications sectors. Corporate failures and the associated
accounting questions have also contributed to the negative market conditions and
low investor confidence. Finally, the events of the September 11 terrorist
attacks and the political unrest abroad have also contributed to the sluggish
economy. In an effort to stimulate the lagging economy, the U.S. Federal Reserve
significantly lowered the overnight interest rate 11 times or 6.5% over the last
15 months. Although we were not physically impacted by the events of September
11, its effect on the economy and investor confidence negatively impacted our
business and, in particular, our Private Client business. Despite the difficult
market conditions, we were able to achieve record net revenues primarily as a
result of the addition of fees from acquired entities and growth in fixed income
investment advisory accounts.
Results of Operations
Our financial position and results of operations are materially affected by the
overall trends and conditions of the financial markets, particularly in the
United States. Results of any individual period should not be considered
representative of future results. Many of our activities have fixed operating
costs that do not decline with reduced levels of business activity. Accordingly,
sustained periods of unfavorable market conditions are likely to affect our
profitability adversely.
The following table sets forth, for the periods indicated, items in the
Consolidated Statements of Earnings as percentages of net revenues and the
increase (decrease) by item as a percentage of the amount for the previous
period:
<TABLE>
<CAPTION>
Percentage of Net Revenues Period to Period Change
-------------------------------------------------------------------
Years ended March 31, 2002 2001
------------------------------------- Compared Compared
2002 2001 2000 to 2001 to 2000
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Investment advisory and related fees ........... 53.9% 48.1% 44.5% 19.5% 16.1%
Commissions .................................... 22.8 26.3 28.7 (7.7) (1.2)
Principal transactions ......................... 9.6 9.2 10.0 11.5 (1.4)
Investment banking ............................. 7.0 4.8 5.5 55.1 (4.4)
Interest ....................................... 11.6 20.7 17.6 (40.4) 26.5
Other .......................................... 3.9 3.8 4.3 11.6 (7.2)
----- ----- -----
Total revenues. .............................. 108.8 112.9 110.6 2.8 9.8
Interest expense ............................... 8.8 12.9 10.6 (27.4) 30.5
----- ----- -----
Net revenues ................................. 100.0 100.0 100.0 6.6 7.6
===== ===== =====
Non-Interest Expenses
Compensation and benefits ...................... 60.9 59.1 59.2 9.8 7.4
Communications and technology .................. 6.8 7.6 7.0 (3.7) 16.3
Occupancy ...................................... 4.3 3.8 3.8 20.4 7.3
Amortization of intangible assets .............. 1.3 0.9 0.9 51.8 13.1
Other .......................................... 9.3 9.1 9.0 9.1 8.2
----- ----- -----
Total non-interest expenses .................. 82.6 80.5 79.9 9.4 8.3
----- ----- -----
Earnings Before Income Tax Provision .............. 17.4 19.5 20.1 (4.7) 4.5
Income tax provision ........................... 6.9 8.0 8.2 (8.5) 5.3
----- ----- -----
Net Earnings ...................................... 10.5% 11.5% 11.9% (2.1) 3.9
===== ===== =====
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
Fiscal 2002 Compared with Fiscal 2001
Financial Overview
In fiscal 2002, net revenues reached record levels and increased 7% to $1.45
billion, primarily as a result of an increase in investment advisory and related
fees. On August 1, 2001, we acquired Private Capital Management, L.P. and its
affiliated entities ("PCM"), a high net worth investment manager in Naples,
Florida. At acquisition date, PCM managed $8.6 billion of assets, primarily in
small to mid-cap stocks. On October 1, 2001, we acquired Royce & Associates,
Inc. ("Royce"), an investment manager located in New York City. At acquisition
date, Royce managed $4.7 billion of assets, primarily in small and micro-cap
mutual funds. Both acquisitions were accounted for as purchase transactions.
Under purchase accounting, the net assets and results of operations of both PCM
and Royce are included in our financial statements from the respective dates of
their acquisition. Revenues from investment advisory and related activities
(including distribution fees from mutual funds) rose $127.6 million or 20% to
$781.6 million in fiscal 2002, primarily as a result of the acquisitions of PCM
and Royce, which contributed $97.1 million of the increase. The remainder of the
increase is primarily attributable to growth in assets under management in fixed
income advisory accounts.
Revenues from securities brokerage activities, including both commissions
and principal transactions, declined 3% to $469.8 million as a result of a
decrease in retail securities transactions and non-affiliated mutual fund and
variable annuity sales. These declines were offset in part by increases in fixed
income and equity institutional securities transaction volume. Revenues from
investment banking activities increased 55% to $102.2 million primarily due to a
$34.2 million increase in new issue sales concessions and increased municipal
banking fees. Other revenues increased 12% to $57.0 million primarily as a
result of realized and unrealized gains on firm investments and an increase in
loan origination fees, partially offset by the sale of a merchant banking
related investment in the prior fiscal year. Our net interest profit declined
62% to $40.8 million from $106.8 million in the prior fiscal year as a result of
lower average interest rates earned on firm investments, lower customer margin
account balances and an increase in acquisition-related debt. Net interest
profit accounted for 16% of consolidated pre-tax profits, down significantly
from 40% in the prior fiscal year.
Despite the increase in net revenues during fiscal 2002, net earnings
declined 2% to $152.9 million from fiscal 2001 as a result of increased
expenses, including profitability-based incentive compensation, the addition of
expenses of acquired entities and litigation-related costs. In fiscal 2002,
basic earnings per share declined 4% to $2.35 from $2.45 in fiscal 2001. Diluted
earnings per share in fiscal 2002 declined 3% to $2.24 from $2.30 in fiscal
2001.
The results for fiscal 2002 also include the effect of adopting Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," which resulted in an expense reduction of $7.8 million ($6.7
million net of tax). This expense reduction increased both basic and diluted
earnings per share by $0.10 in fiscal 2002.
Investment Advisory Revenues and
Assets Under Management
Assets Under Management Investment Advisory and Related Fee
(in billions,"B") Revenues (in millions, "M")
98 $ 71.0B $315.8M
99 $ 88.9B $414.7M
00 $111.8B $563.5M
01 $139.9B $654.0M
02 $177.0B $781.6M
Revenues By Segment
The following table sets forth, for the periods indicated, net revenues and
pre-tax earnings by segment:
Years ended March 31,
------------------------------------
(in millions) 2002 2001 2000
- -------------------------------------------------------------------------------
Net revenues:
Asset Management .................... $ 557.9 $ 445.0 $ 376.7
Private Client ...................... 618.2 707.4 694.2
Capital Markets ..................... 242.2 174.3 157.1
Other ............................... 33.0 34.2 37.2
- -------------------------------------------------------------------------------
Total ................................. $1,451.3 $1,360.9 $1,265.2
- -------------------------------------------------------------------------------
Pre-tax earnings:
Asset Management .................... $ 159.2 $ 132.3 $ 129.5
Private Client ...................... 53.3 113.3 114.2
Capital Markets ..................... 39.3 15.5 5.0
Other ............................... 1.4 4.7 5.7
- -------------------------------------------------------------------------------
Total ................................. $ 253.2 $ 265.8 $ 254.4
- -------------------------------------------------------------------------------
Asset Management
Net revenues in Asset Management increased 25% to $557.9 million primarily as a
result of the acquisitions of PCM and Royce. Asset Management represented 38% of
consolidated net revenues in fiscal 2002, an increase from 33% in fiscal 2001.
Revenues from Asset Management tend to be more stable than those from Private
Client and Capital Markets because they are less affected by changes in
securities market conditions. Total assets under management were $177.0 billion
as of March 31, 2002, an increase of $37.1 billion or 27% from March 31, 2001.
As of March 31, 2002, approximately $67.2 billion or 38% of assets under
management were in equity related products and $109.8 billion or 62% were in
fixed income related products. In fiscal 2002, PCM and Royce contributed fees of
$97.1 million and the internal growth of our core fixed income institutional
manager increased revenues by $29.2 million. Performance fees,
29
<PAGE>
which are included in investment advisory and related fees, increased to $20.6
million in fiscal 2002 from $6.0 million in fiscal 2001, principally due to fees
earned by PCM and Royce, as well as additional fees earned by other
subsidiaries.
Private Client
The difficult market conditions in fiscal 2002, as well as significantly lower
interest rates and lower retail transaction volume, negatively impacted Private
Client. Accordingly, net revenues decreased 13% to $618.2 million for fiscal
2002. Private Client represented 43% of consolidated net revenues in fiscal
2002, a decrease from 52% in the prior fiscal year. Net interest profit in
Private Client decreased 35% to $57.1 million in fiscal 2002 because of
significantly lower average interest rates and lower average customer margin
account balances, offset in part by an increase in average firm investment
balances, principally funds segregated for regulatory purposes.
Commissions from retail securities transactions, including listed and
over-the-counter trading, decreased approximately $38.6 million or 26% during
fiscal 2002 from the prior year. Net revenues also declined from decreases in
retail generated principal transactions and sales of non-affiliated mutual funds
and annuities.
Capital Markets
Capital Markets achieved record net revenues in fiscal 2002. Net revenues
increased 39% to $242.2 million in fiscal 2002, primarily as a result of higher
institutional equity and fixed income transaction volume. Capital Markets
represented 17% of consolidated net revenues in fiscal 2002, an increase from
13% in fiscal 2001.
Other
Other consists principally of the results of our real estate service business
and unallocated corporate revenues and expenses. Net revenues were down slightly
for the fiscal year from $34.2 million to $33.0 million, primarily due to a
decrease in interest income resulting from lower interest rates.
Expenses
Interest Expense
Interest expense primarily consists of interest paid to customers on their
credit account balances and interest incurred in connection with our long and
short-term borrowings. Interest expense declined $48.1 million or 27% in fiscal
2002, principally due to the sharp decrease in average interest rates paid on
customer credit account balances and stock borrow balances. Offsetting these
declines, we incurred $30.2 million of interest expense on long-term debt issued
in fiscal 2002 to fund the acquisitions of PCM and Royce. See Note 8 of Notes to
Consolidated Financial Statements for information regarding Legg Mason's
long-term debt.
Compensation and Benefits
Compensation and benefits expense increased 10% to $883.4 million, primarily
attributable to significantly higher profitability-based incentive compensation
which increased by $36.9 million, the addition of $28.2 million in expenses as a
result of the acquisitions of PCM and Royce and an increase in vested deferred
compensation of $10.8 million during fiscal 2002. These increases were offset in
part by a decline in variable sales commissions of $10.6 million. A substantial
part of compensation expense fluctuates in proportion to the level of business
activity. Other compensation costs, primarily salaries and benefits, are fixed
and typically do not decline with reduced levels of business activity.
Communications and Technology
Communications and technology expense declined 4% to $99.0 million as a result
of decreased costs for telephone usage, quote services and printing, offset in
part by the addition of expenses of acquired entities.
Occupancy
Occupancy costs increased 20% to $62.2 million in fiscal 2002 from $51.7 million
in fiscal 2001 as a result of a full year impact of prior year expansion,
including an operations center and new branch offices, as well as the addition
of expenses of acquired entities.
Amortization of Intangible Assets
Amortization of intangible assets increased $6.4 million or 52% to $18.8 million
from the prior fiscal year, primarily attributable to $11.0 million of
amortization of PCM's asset management contracts, offset in part by the impact
of adopting SFAS No. 142, under which goodwill and indefinite life intangible
assets are no longer amortized. See Note 6 of Notes to Consolidated Financial
Statements.
Other Expenses
Other expenses increased 9% to $134.7 million, primarily attributable to an
increase in litigation-related costs of $12.7 million (net of recoveries of
$11.1 million). Fiscal 2002 net litigation-related costs were $15.1 million
compared to $2.4 million in fiscal 2001.
Income Tax Provision
The income tax provision decreased 9% to $100.3 million in fiscal 2002 due to
lower pre-tax earnings and lower state income taxes. Legg Mason's effective
income tax rate was 39.6% in fiscal 2002, down from 41.2% in fiscal 2001 due to
lower state income taxes and the impact of adopting SFAS No. 142, which
eliminated non-deductible amortization of goodwill for book purposes.
30
<PAGE>
Fiscal 2001 Compared with Fiscal 2000
Financial Overview
In fiscal 2001, revenues, net earnings and earnings per share were higher than
fiscal 2000 as we achieved record levels. Net revenues increased 8% to $1.4
billion and total revenues were $1.5 billion, an increase of 10% from revenues
of $1.4 billion in fiscal 2000. Investment advisory and related fees increased
16% to $654 million, primarily as a result of growth in assets under management
in fixed income advisory accounts, fee-based brokerage accounts and company-
sponsored mutual funds as well as the results of acquired subsidiaries. Net
interest profit increased 21% to $106.8 million in fiscal 2001 from $88.6
million in fiscal 2000 due to increased interest income on higher margin account
balances and average firm investments as well as higher average interest rates.
Net earnings were $156.2 million, up 4% from net earnings in the prior fiscal
year. Basic earnings per share increased 1% to $2.45 from $2.43. Diluted
earnings per share increased 1% to $2.30 from $2.27.
Revenues By Segment
Asset Management
Net revenues in Asset Management rose 18% to $445.0 million in fiscal 2001,
primarily as a result of growth in assets under management in fixed income
investment advisory accounts and company-sponsored mutual funds and a full year
of fees earned by Legg Mason Investors Holdings plc ("Legg Mason Investors"),
which was acquired in December 1999. Total assets under management as of March
31, 2001 were $139.9 billion, up 25% from $111.8 billion as of March 31, 2000.
Of the total assets under management as of March 31, 2001, approximately 33%
were in equity related products and approximately 67% were in fixed income
related products.
Private Client
Net revenues in Private Client were up 2% from $694.2 million in fiscal 2000 to
$707.4 million in fiscal 2001, primarily as a result of a 14% increase in net
interest income to $88.4 million driven by higher average interest rates and
higher levels of customer margin account balances and firm investments,
predominately funds segregated for regulatory purposes. Sales of non-proprietary
mutual funds also increased. Offsetting these increases were lower volumes of
retail over-the-counter, listed and fixed income transactions.
Capital Markets
In fiscal 2001, net revenues in Capital Markets increased 11% to $174.3 million
as a result of an increase in institutional equity securities transaction volume
and sales and trading profits on taxable fixed income products. These increases
were offset in part by a decline in investment banking fees, primarily from
equity and municipal underwritings.
Other
In fiscal 2001, net revenues declined 8% to $34.2 million as a result of a
decline in loan origination fees at the Parent's real estate services
subsidiary.
Expenses
Interest Expense
Interest expense increased 31% to $175.4 million, primarily due to higher
interest-bearing customer credit account balances and higher average interest
rates.
Compensation and Benefits
Compensation and benefits expense increased 7% to $804.8 million as a result of
higher fixed compensation costs, primarily attributable to an increase in the
number of employees and higher incentive and sales compensation related to asset
management activities.
Communications and Technology
Communications and technology expense increased 16% to $102.8 million due to new
and expanded branch office locations, increased investments in technology and
increased quote and telephone usage due to an increase in the number of
employees.
Occupancy
Occupancy costs increased 7% to $51.7 million as a result of additional costs
for new and expanded branch office locations and the impact of acquired
companies.
Amortization of Intangible Assets
Amortization of intangible assets increased $1.4 million or 13% due to business
acquisitions.
Other Expenses
Other expenses increased 8% to $123.4 million. This increase is primarily
attributable to the impact of a full year of expenses of Legg Mason Investors,
increased promotional expenses and costs associated with the acquisition of
Perigee Investment Counsel Inc. These increases were offset in part by a
decrease in floor brokerage and clearing fees.
Income Tax Provision
The income tax provision rose 5% to $109.6 million in fiscal 2001 as a result of
increased pre-tax earnings and an increase in Legg Mason's effective tax rate to
41.2% in fiscal 2001 from 40.9% in the prior year. The increase in the effective
tax rate is primarily attributable to non-deductible foreign losses and higher
statutory tax rates in foreign jurisdictions.
31
<PAGE>
Liquidity and Capital Resources
The primary objective of our capital structure and funding practices is to
appropriately support Legg Mason's business strategies, as well as the
regulatory capital requirements of our subsidiaries, and to provide needed
liquidity at all times. Liquidity and the access to liquidity are essential to
the success of our on-going operations. Our overall funding needs and capital
base are continually reviewed to determine if the capital base meets the
expected needs of our businesses. We continue to explore potential acquisition
opportunities as a means of diversifying our businesses. These opportunities may
involve acquisitions that are material in size and may require, among other
things, the raising of additional capital and/or the issuance of additional
debt.
We emphasize diversification of funding sources and seek to manage exposure
to refinancing risk. Legg Mason has committed short-term financing on both a
secured and unsecured basis. Secured financing is obtained through the use of
securities lending agreements and secured bank loans, which are primarily
collateralized by short-term U.S. government and agency securities, highly-rated
corporate debt, money market funds and equity securities. Short-term funding is
generally obtained at rates based upon benchmarks such as federal funds, LIBOR
or money market rates.
We maintain a committed, unsecured revolving credit facility of $100 million
that matures on June 30, 2003 for general corporate purposes. The facility has
restrictive covenants that require us, among other things, to maintain specified
levels of net worth and debt-to-equity ratios. There were no borrowings
outstanding under the facility as of March 31, 2002 and 2001. Our real estate
service subsidiary has two committed short-term financing facilities that mature
on September 15, 2002 and are used in connection with its business operations.
The first is a $50 million warehouse line of credit from a national bank ($3.6
million and $4.9 million outstanding at March 31, 2002 and 2001, respectively)
that is used to provide interim financing for the funding of commercial mortgage
loans. The Parent is a guarantor on this credit facility. The weighted average
interest rates for fiscal 2002 and fiscal 2001 were 3.80% and 5.58%,
respectively. The second credit facility is a financing agreement with the same
national bank that allows for borrowing funds for short-term investing of up to
$125 million at an interest rate of 0.80% based upon the amount of customer
escrow funds that are on deposit with the same bank. The credit facility is
collateralized by the securities that are purchased with the funds, which are
primarily short-term U.S. government and agency securities, highly rated
corporate commercial paper and money market funds. There were no outstanding
balances on this line as of March 31, 2002 and 2001. We have maintained
compliance with all applicable covenants of these facilities throughout the
year. In the event that we fail to meet the covenants specified by these credit
facilities, these lines of credit may not be available to us.
Legg Mason also maintains uncommitted credit facilities from several banks
and financial institutions. Uncommitted facilities consist of lines of credit
that we have been advised are available, but for which no contractual lending
obligation exists. As such, these uncommitted facilities would likely be
unavailable to us if any material adverse effect on our financial condition
occurred. We have not relied on the issuance of short-term commercial paper to
fund our operating needs nor do we utilize unconsolidated special purpose
entities to provide operating liquidity.
Legg Mason's assets consist primarily of cash and cash equivalents,
collateralized short-term receivables, investment advisory fee receivables,
securities owned and borrowed, intangible assets and goodwill. Our assets are
principally funded by payables to customers, securities loaned, bank loans,
long-term debt and equity. The collateralized short-term receivables consist
primarily of customer margin loans, securities purchased under agreements to
resell and securities borrowed, all of which are secured by U.S. government and
agency securities and corporate debt and equity securities. The investment
advisory fee receivables, although not collateralized, are short-term in nature
and collectibility is reasonably certain. Excess cash is currently invested
primarily in institutional money market funds. The highly liquid nature of our
assets provides us with flexibility in financing and managing our anticipated
operating needs.
Legg Mason's total assets increased $1.2 billion from $4.7 billion at March
31, 2001 to $5.9 billion at March 31, 2002. This increase was principally due to
a net increase in intangible assets and goodwill of $446.6 million and $341.3
million, respectively, primarily the result of the acquisitions of PCM and
Royce. The increase in intangible assets and goodwill was accompanied by a
corresponding increase in long-term debt of $679.7 million, which was the
primary source of funds for the acquisitions of PCM and Royce. Stockholders'
equity surpassed the one billion dollar mark for the first time in Legg Mason's
history. As of March 31, 2002, stockholders' equity was $1.1 billion. Cash and
cash equivalents decreased $87.8 million, which primarily reflects the use of
cash in connection with the acquisitions of PCM and Royce. For fiscal 2002, cash
flows from operating activities provided approximately $86.3 million, primarily
attributable to net earnings, adjusted for non-cash charges. Cash and securities
segregated for regulatory purposes or deposited with clearing organizations
increased $486.3 million reflecting an increase in customer credit account
balances and a decrease in customer margin account balances.
32
<PAGE>
As of March 31, 2002, Legg Mason had three long-term fixed rate debt
facilities. We had $100 million outstanding of senior notes due February 15,
2006, which bear interest at a stated rate of 6.5%. The notes were originally
issued in February 1996 at a discount to yield 6.57%. During fiscal 2002, we
issued long-term fixed rate debt to fund acquisitions.
On June 6, 2001, we issued $567 million principal amount at maturity of
zero-coupon contingent convertible senior notes due on June 6, 2031, resulting
in net proceeds of approximately $244 million. The convertible notes were issued
in a private placement to qualified institutional buyers at an initial offering
price of $440.70 per $1,000 principal amount at maturity. The discounted price
reflects a yield to maturity of 2.75% per year. Upon certain events, including
the sale price of our stock reaching certain thresholds, the convertible notes
being rated below specified credit ratings and the convertible notes being
called for redemption, each note is convertible into 7.7062 shares of our common
stock, subject to adjustment. We may redeem the convertible notes for cash on or
after June 6, 2006 at their accreted value. In addition, we may be required to
repurchase the convertible notes at their accreted value, at the option of the
holders, on June 6, 2003, 2005, 2007, 2011 and every five years thereafter until
2026 or upon a change in control of Legg Mason. Such repurchases can be paid in
cash, shares of our common stock or a combination of both. Approximately 4.4
million shares of common stock are reserved for issuance upon conversion.
On July 2, 2001, we issued $425 million principal amount of senior notes due
July 2, 2008, which bear interest at 6.75%. The notes were sold at a discount to
yield 6.80%. The net proceeds were approximately $421 million.
On August 1, 2001, Legg Mason purchased PCM for cash of $682 million,
excluding acquisition costs. The transaction includes two contingent payments
based on PCM's revenue growth for the years ending on the third and fifth
anniversaries of closing, with the aggregate purchase price to be no more than
$1.4 billion. As such, we may be required to make maximum payments in the amount
of $400 million on August 1, 2004 and $300 million on August 1, 2006 if certain
conditions are met. On October 1, 2001, we completed the acquisition of Royce
for cash of $115 million, excluding acquisition costs. The transaction includes
three contingent payments based on Royce's revenue growth for the years ending
on the third, fourth and fifth anniversaries of closing, with the aggregate
purchase price to be no more than $215 million. We may, therefore, be required
to make a maximum payment in the amount of $100 million on October 1, 2004 as
part of this acquisition if certain conditions are met. We have the option to
pay as much as 50% of the remaining purchase price for Royce in common stock. We
expect to fund these commitments through operations, available lines of credit
or the capital markets. In addition to PCM and Royce, we acquired two smaller
investment management firms for approximately $7.6 million in cash.
As of March 31, 2002, we had $75 million remaining for the issuance of
additional debt or convertible debt securities pursuant to a shelf registration
statement. A shelf filing permits us to register securities in advance and then
sell them when financing needs arise or market conditions are favorable. We
intend to use the shelf registration for general corporate purposes including
the expansion of our business. There are no assurances as to the terms of any
securities that may be issued pursuant to the shelf registration since they
depend on market conditions and interest rates at the time of issuance.
Certain finance subsidiaries of Legg Mason previously issued secured, fixed
rate long-term debt in connection with their investment operations. The
long-term debt of the finance subsidiaries is scheduled to mature in fiscal
2003. As described in Market Risk below, there are specific assets that were
purchased with the proceeds of the debt that will mature or will be available
for sale to meet this obligation.
During fiscal 2002, the Board of Directors authorized Legg Mason, at its
discretion, to purchase up to 3 million shares of its own common stock. As of
March 31, 2002, we repurchased 136,800 shares for $7.1 million. In fiscal 2002
and 2001, we paid cash dividends of $25.1 million and $23.6 million,
respectively.
The Parent's broker-dealer subsidiaries are subject to the requirements of
the Securities and Exchange Commission's Uniform Net Capital Rule, which is
designed to measure the general financial soundness and liquidity of
broker-dealers. As of March 31, 2002, the broker-dealer subsidiaries had
aggregate net capital of $310.6 million, which exceeded minimum net capital
requirements by $289.4 million. The amount of the broker-dealers' net assets
that may be distributed is subject to restrictions under applicable net capital
rules. The Parent's trust subsidiary is subject to the requirements of the
Office of Thrift Supervision, which requires compliance with two overlapping
sets of regulatory capital standards. We believe that the trust subsidiary has
met all capital adequacy requirements to which it is subject.
Contractual and Contingent Obligations
Legg Mason has contractual obligations to make future payments in connection
with our short and long-term debt and non-cancelable lease agreements. In
addition, we may also be required to make contingent payments under business
purchase agreements if certain future events occur. See Notes 2, 7, 8 and 9 of
Notes to Consolidated Financial Statements for additional disclosure related to
our commitments.
33
<PAGE>
The following table sets forth these contractual and contingent obligations by
fiscal year:
Contractual and Contingent Obligations
<TABLE>
<CAPTION>
(in millions) 2003 2004 2005 2006 2007 Thereafter Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Contractual Obligations:
Short-term borrowings by contract maturity ......... $ 3.6 $ -- $ -- $ -- $ -- $ -- $ 3.6
Long-term borrowings by contract maturity (a) ...... 100.9 264.0 -- 100.0 -- 425.0 889.9
Coupon interest on long-term borrowings ............ 35.2 35.2 35.2 35.2 31.9 43.0 215.7
Minimum rental commitments ......................... 61.8 47.5 34.9 26.0 21.1 47.3 238.6
- --------------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations ................... $ 201.5 $ 346.7 $ 70.1 $ 161.2 $ 53.0 $ 515.3 $ 1,347.8
- --------------------------------------------------------------------------------------------------------------------------
Contingent Obligations:
Contingent payments related to business
acquisitions (b) ................................ 3.6 1.0 500.0 13.8 300.0 -- 818.4
- --------------------------------------------------------------------------------------------------------------------------
Total Contractual and Contingent Obligations (c) ... $ 205.1 $ 347.7 $ 570.1 $ 175.0 $ 353.0 $ 515.3 $ 2,166.2
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The amount reflected for long-term borrowings due in 2003 represents notes
payable of finance subsidiaries. This obligation will be funded by proceeds
from the related investments, which will mature or will be available for
sale in 2003. Payments in 2004 reflect amounts that may be due to holders of
the zero-coupon contingent convertible senior notes, which represents the
accreted value on the earliest possible date that the holders may require us
to purchase the notes. Legg Mason may choose to pay the purchase price in
cash, shares of our common stock or a combination of both.
(b) The amount of contingent payments reflected for any year represents the
maximum amount that could be payable at the earliest possible date under the
terms of business purchase agreements.
(c) The table above does not include approximately $10.3 million in capital
commitments to investment partnerships in which Legg Mason is a limited
partner. These obligations will be funded, as required, through the end of
the commitment periods that range from 2005 to 2010.
Risk Management
Risk is an inherent part of our business and activities. The extent to which we
properly and effectively identify, assess, monitor and manage each of the
various types of risk involved in our activities is critical to our soundness
and profitability. We seek to identify, assess, monitor and manage the following
principal risks involved in our business activities: funding, market, credit,
operational and legal.
Risk management at Legg Mason is a multi-faceted process that requires
communication, judgment and knowledge of financial products and markets. Senior
management takes an active role in the risk management process and requires
specific administrative and business functions to assist in the identification,
assessment and control of various risks. Currently, we have four formal risk
management committees: credit, capital markets commitments, new products and new
business. Our risk management policies, procedures and methodologies are fluid
in nature and are subject to ongoing review and modification. Funding risk is
discussed in "Liquidity and Capital Resources."
Market Risk
The potential for changes in the value of the financial instruments we own is
referred to as market risk. Our market risk generally represents the risk of
loss that may result from a change in the value of a financial instrument as a
result of fluctuations in interest rates, credit spreads, equity prices and the
correlation among them, along with the level of volatility. Interest rate risks
result primarily from exposure to changes in the yield curve, the volatility of
interest rates, mortgage prepayments and credit spreads. Equity price risks
result from exposure to changes in prices and volatilities of individual
equities, equity baskets and equity indices.
Legg Mason makes dealer markets in equity and debt securities. To facilitate
customer order flow, we may be required to own equity and debt securities in our
trading and inventory accounts. The majority of our trading and inventory
accounts consist of fixed income debt instruments. We attempt to hedge our
exposure to market risk by managing our net long or short position. For example,
we may hedge a municipal portfolio by taking an offsetting position in a related
futures contract. Due to imperfections in correlations, gains and losses can
occur even for positions that are hedged. Position limits in trading and
inventory accounts are established and monitored on an ongoing basis. Each day,
consolidated position and exposure reports are prepared and distributed to
various levels of management, which enable management to monitor inventory
levels and results of the trading groups. We also monitor inventory aging,
pricing, concentration and securities ratings.
34
<PAGE>
The following table categorizes Legg Mason's market risk sensitive
financial instruments:
Financial Instruments with Market Risk at March 31, 2002
<TABLE>
<CAPTION>
Years to Maturity
----------------------------------------------------------------
(in thousands) 1 or less 1 to 5 5 to 10 Over 10 Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fair Value of Trading Securities:
U.S. government and agencies ................................ $ -- $ (21,169) $ (984) $ 9,870 $ (12,283)
Corporate debt .............................................. 7,076 7,254 1,172 4,657 20,159
State and municipal bonds ................................... 52,886 2,173 3,148 19,482 77,689
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt securities ..................................... 59,962 (11,742) 3,336 34,009 85,565
Equity and other securities ................................. -- -- -- 10,235 10,235
- ------------------------------------------------------------------------------------------------------------------------------------
Total trading securities .................................. $ 59,962 $ (11,742) $ 3,336 $ 44,244 $ 95,800
- ------------------------------------------------------------------------------------------------------------------------------------
Fair Value of Other Financial Instruments:
U.S. government and agencies ................................ $ 123,114 $ 996 $ 206 $ 2,765 $ 127,081
Corporate debt .............................................. 6,657 -- -- -- 6,657
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt securities ..................................... 129,771 996 206 2,765 133,738
Equity and other securities ................................. -- -- -- 16,858 16,858
- ------------------------------------------------------------------------------------------------------------------------------------
Total other financial instruments ......................... $ 129,771 $ 996 $ 206 $ 19,623 $ 150,596
- ------------------------------------------------------------------------------------------------------------------------------------
Total trading and other financial instruments ............. $ 189,733 $ (10,746) $ 3,542 $ 63,867 $ 246,396
====================================================================================================================================
Weighted Average Yield:
U.S. government and agencies ................................ 3.10% 4.67% 5.41% 5.40%
Corporate debt .............................................. 2.26 5.47 6.07 6.47
State and municipal bonds ................................... 1.37 3.86 4.54 4.99
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Financial Instruments with Market Risk at March 31, 2001
<TABLE>
<CAPTION>
Years to Maturity
----------------------------------------------------------------
(in thousands) 1 or less 1 to 5 5 to 10 Over 10 Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fair Value of Trading Securities:
U.S. government and agencies ................................ $ 3 $ (24,183) $ 77 $ 760 $ (23,343)
Corporate debt .............................................. 1,514 10,939 7,184 15,158 34,795
State and municipal bonds ................................... 755 8,901 22,670 40,226 72,552
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt securities ..................................... 2,272 (4,343) 29,931 56,144 84,004
Equity and other securities ................................. -- -- -- 4,370 4,370
- ------------------------------------------------------------------------------------------------------------------------------------
Total trading securities .................................. $ 2,272 $ (4,343) $ 29,931 $ 60,514 $ 88,374
- ------------------------------------------------------------------------------------------------------------------------------------
Fair Value of Other Financial Instruments:
U.S. government and agencies ................................ $ 65,156 $ 256 $ 281 $ 4,101 $ 69,794
Corporate debt .............................................. 2,184 -- -- -- 2,184
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt securities ..................................... 67,340 256 281 4,101 71,978
Equity and other securities ................................. -- -- -- 6,521 6,521
- ------------------------------------------------------------------------------------------------------------------------------------
Total other financial instruments ......................... $ 67,340 $ 256 $ 281 $ 10,622 $ 78,499
- ------------------------------------------------------------------------------------------------------------------------------------
Total trading and other financial instruments ............. $ 69,612 $ (4,087) $ 30,212 $ 71,136 $ 166,873
====================================================================================================================================
Weighted Average Yield:
U.S. government and agencies ................................ 5.29% 5.27% 5.03% 6.03%
Corporate debt .............................................. 5.43 6.86 6.39 7.76
State and municipal bonds ................................... 4.61 4.09 4.07 4.53
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tables include net long and short values, which is consistent with the way
the firm manages risk exposure. See Notes 4 and 5 of Notes to Consolidated
Financial Statements for the related gross long and short fair values of
financial instruments owned and investments. Fair value of other financial
instruments includes U.S. treasury securities segregated for regulatory purposes
of $122.9 million and $64.4 million at March 31, 2002 and 2001, respectively.
35
<PAGE>
The purpose of Legg Mason Investors' finance subsidiaries (see Note 2 of
Notes to Consolidated Financial Statements) is to raise funds by issuing secured
fixed rate loan securities and to use the proceeds to invest in a portfolio of
bonds issued by various financial institutions which are not generally available
to the public in tranches small enough for the retail investor. The Investments
of finance subsidiaries and the Notes payable of finance subsidiaries on the
Consolidated Statements of Financial Condition are directly related, have
offsetting risk characteristics and do not represent a material market risk to
Legg Mason. Additionally, claims of the note holders are limited to the assets
of the finance subsidiaries, which limits our exposure to default risk on the
investments. The assets and liabilities of the finance subsidiaries mature or
are available for sale during fiscal 2003.
In addition to the financial instruments included in the table, we have
three long-term debt facilities, which are described in "Liquidity and Capital
Resources." Our net investments in foreign subsidiaries are impacted by
fluctuations of foreign exchange rates. These fluctuations are recorded as a
component of stockholders' equity and are not material to our financial
condition. For fiscal 2002, the impact of currency fluctuations on our results
of operations was not material.
Credit Risk
Credit risk represents the loss that we would incur if a client, counterparty or
issuer of securities or other instruments held by Legg Mason fails to perform
its contractual obligations to us. We follow industry practice to reduce credit
risk related to various investing and financing activities by obtaining and
maintaining collateral. Credit exposure associated with our private client
business consists primarily of customer margin accounts, which are monitored
daily. We monitor exposure to industry sectors and individual securities and
perform sensitivity analyses on a regular basis in connection with our margin
lending activities. We adjust margin requirements if we believe the risk
exposure is not appropriate based on market conditions.
Operational Risk
Operational risk generally refers to the risk of loss resulting from our
operations, including, but not limited to, improper or unauthorized execution
and processing of transactions, deficiencies in our operating systems, business
disruptions and inadequacies or breaches in our internal control processes. We
operate different businesses in diverse markets and we are reliant on the
ability of our employees and systems to process high numbers of transactions
often within short time frames. In the event of a breakdown or improper
operation of systems, human error or improper action by employees, Legg Mason
could suffer financial loss, regulatory sanctions or damage to its reputation.
In order to mitigate and control operational risk, we have developed and
continue to enhance policies and procedures that are designed to identify and
manage operational risk at appropriate levels. For example, we have procedures
that require that all transactions are confirmed on a timely basis, that
position valuations are subject to periodic independent review procedures and
that collateral and adequate documentation are obtained from counterparties in
appropriate circumstances. September 11 heightened the need for comprehensive
disaster recovery plans. Disaster recovery plans exist for our critical systems,
and redundancies are built into the systems as deemed appropriate. We believe
that our disaster recovery program, including off-site back-up technology and
operational facilities, is adequate to handle a reasonable business disruption.
However, there can be no assurances that a disaster directly affecting our
headquarters or our operations center would not have a material adverse impact.
Insurance and other safeguards might only partially reimburse us for our losses.
We also use periodic self-assessments, internal audit reviews and independent
consultants as a further check on operational risk and exposure.
Legal Risk
Legal risk includes the risk of non-compliance with applicable legal and
regulatory requirements. Legg Mason is subject to extensive regulation in the
different jurisdictions in which we conduct our business. We have various
procedures addressing issues such as regulatory capital requirements, sales and
trading practices, use of and safekeeping of customer funds, credit granting,
collection activities, money-laundering and record keeping.
36
<PAGE>
Critical Accounting Policies
Accounting policies are an integral part of the preparation of our financial
statements in accordance with accounting principles generally accepted in the
United States of America. Understanding these policies, therefore, is a key
factor in understanding the reported results of operations and the financial
position of Legg Mason. See Note 1 of Notes to Consolidated Financial Statements
for a discussion of our significant accounting policies and other information.
Certain critical accounting policies require us to make estimates and
assumptions that affect the amounts of assets, liabilities, revenues and
expenses reported in the financial statements. Due to their nature, estimates
involve judgment based upon available information. Therefore, actual results or
amounts could differ from estimates and the difference could have a material
impact on our consolidated financial statements.
We consider the following to be among Legg Mason's current accounting
policies that involve significant estimates or judgments.
Valuation of Financial Instruments
Substantially all financial instruments are reflected in the financial
statements at fair value or amounts that approximate fair value. Cash and
securities segregated for regulatory purposes or deposited with clearing
organizations, Financial instruments owned, Investment securities, Investments
of finance subsidiaries and Financial instruments sold, but not yet purchased on
the Consolidated Statements of Financial Condition include forms of financial
instruments. Unrealized gains and losses related to these financial instruments
are reflected in net earnings or other comprehensive income, depending on the
underlying purpose of the instrument. Where available, we use prices from
independent sources such as listed market prices or broker or dealer price
quotations. For investments in illiquid and privately held securities that do
not have readily determinable fair values, the determination of fair value
requires management to estimate the value of the securities based upon available
information such as projected cash flows and a review of the financial and
market conditions of the underlying company. In instances where a security is
subject to transfer restrictions, the value of the security is based primarily
on the quoted price of the same security without restriction but may be reduced
by an amount estimated to reflect such restrictions. In addition, even where the
value of a security is derived from an independent market price or broker or
dealer quote, certain assumptions may be required to determine the fair value.
For instance, we generally assume that the size of positions in securities that
we hold would not be large enough to affect the quoted price of the securities
if we sell them, and that any such sale would happen in an orderly manner.
However, these assumptions may be incorrect and the actual value realized upon
disposition could be different from the current carrying value.
We evaluate our non-trading securities for "other than temporary"
impairment. Impairment may exist when the fair value of an investment security
has been below the current value for an extended period of time. If an "other
than temporary" impairment is determined to exist, the difference between the
value of the investment security recorded on the financial statements and its
current fair value is recognized as a charge to earnings in the period in which
the impairment is determined.
As of March 31, 2002, we own approximately $4.6 million of financial
instruments that are valued solely on our assumptions or estimates.
Intangible Assets and Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. In addition, it provides that the cost of an acquired
entity must be allocated to the assets acquired, including identifiable
intangible assets, and liabilities assumed based on their estimated fair values
at date of acquisition. The excess cost over the fair value of the net assets
acquired must be recognized as goodwill.
SFAS No. 142 provides that goodwill is no longer amortized and the value of
an identifiable intangible asset must be amortized over its useful life, unless
the asset is determined to have an indefinite useful life.
In allocating the purchase price of an acquisition to intangible assets, we
must determine the fair value of the assets acquired. We determine fair values
of intangible assets acquired, primarily asset management contracts and trade
names, based upon certain estimates and assumptions including projected future
cash flows, growth or attrition rates for acquired contracts based upon
historical experience, estimated contract lives, discount rates and investment
performance. The determination of estimated contract lives requires judgement
based upon historical client turnover and attrition rates and the probability
that contracts with termination dates will be renewed.
The value of contracts to manage assets in mutual funds and the value of
trade names are classified as indefinite-life intangible assets. The assignment
of indefinite lives to mutual fund contracts is based upon the assumption that
there is no foreseeable limit on the contract period to manage mutual funds due
to the likelihood of continued renewal at little or no cost. The assignment of
indefinite lives to trade names is based on the assumption that they are
expected to generate cash flows indefinitely.
For significant acquisitions, including PCM and Royce, we engage the
services of third party consultants to perform independent valuations of assets
acquired and liabilities assumed.
37
<PAGE>
As of March 31, 2002, we had $443.4 million in goodwill, $158.7 million in
indefinite-life intangible assets and $335.3 million in amortizable intangible
assets. The estimated useful lives of our amortizable intangible assets range
from 5 to 20 years.
Intangible assets subject to amortization are reviewed for impairment at
each reporting period utilizing an undiscounted cash flow analysis. SFAS No. 142
requires intangible assets with indefinite lives and goodwill to be reviewed for
impairment at least annually based on a fair value analysis. If an asset is
impaired, the difference between the value of the asset reflected on our
financial statements and its current fair value must be recognized as an expense
in the period in which the impairment occurs. For intangible assets with
indefinite lives, fair value is determined based on anticipated discounted cash
flows.
Goodwill is impaired when the carrying amount of a reporting unit exceeds
the fair value of the reporting unit. In estimating the fair value of the
reporting unit, we use valuation techniques based on multiples of revenues and
discounted cash flows, similar to the models we employ in analyzing the purchase
price of an acquisition target. Substantially all of our goodwill is assigned to
our asset management operating segment. We have defined our asset management
reporting units to be wealth management, institutional and mutual funds, which
are one level below the operating segment.
During fiscal 2002, Legg Mason recognized an impairment charge of $1.2
million related to terminated asset management contracts acquired in a prior
business combination. As of March 31, 2002, we have determined that our goodwill
and indefinite life intangible assets have not been impaired, based upon the
methods described above.
Some of our business acquisitions, such as PCM and Royce, involved closely
held companies in which certain key employees were also owners of those
companies. In establishing the overall purchase price, we may include contingent
consideration whereby only a portion of the purchase price is paid on the
acquisition date. These contingent payments are consistent with our methods of
valuing and establishing the purchase price, and we record these payments as
additional purchase price and not compensation when the contingencies are met.
Generally contingent payments are recorded as additional goodwill.
Reserves for Losses and Contingencies
Legg Mason is the subject of customer complaints and has also been named as a
defendant in various legal actions arising primarily from securities brokerage,
asset management and investment banking activities, including certain class
actions which primarily allege violations of securities laws and seek
unspecified damages which could be substantial. Legg Mason has also been
involved in governmental and self regulatory agency investigations and
proceedings. In accordance with SFAS No. 5 "Accounting for Contingencies," we
have established reserves for potential losses that may result from such
complaints, legal actions, investigations and proceedings. In establishing these
reserves, we use our judgment to determine the probability that losses may be
incurred and a reasonable estimate of the amount of the losses. In making these
decisions, we base our judgments on our knowledge of the situations,
consultation with legal counsel and our experience. If our judgments prove to be
incorrect, our reserves may not accurately reflect actual losses that result
from these actions, which could materially affect results in the period the
expenses are ultimately determined. See Note 9 of Notes to Consolidated
Financial Statements for additional disclosures regarding contingencies.
Special Purpose Entities
Special purpose entities ("SPEs") are trusts, partnerships, corporations or
other vehicles that are established for a limited business purpose. SPEs
generally involve the transfer of assets and liabilities in which the transferor
may or may not have continued involvement, derive continued benefit, exhibit
control or have recourse. We do not utilize SPEs as a form of financing or to
provide liquidity, nor have we recognized any gains from the sale of assets to
SPEs.
Our primary relationship with SPEs involves one of our asset management
subsidiaries, which is the collateral manager of a Collateralized Debt
Obligation ("CDO") SPE. The CDO was established during fiscal 2002 as a vehicle
for investors and issued approximately $383 million of debt and acquired a
portfolio consisting primarily of high quality asset-backed securities. We did
not sell any assets to the CDO. For our services as collateral manager, we
receive senior and subordinated management fees up to approximately $1.5 million
annually. We may be removed as collateral manager under certain conditions.
Currently, we do not own an equity interest in the entity, however, we have
entered into a derivative contract whereby we may purchase $4.2 million of
preference shares (approximately 1% of the entity) in four years. Other than
this derivative, we have no financial commitments or guarantees to the CDO and
the underlying debt is non-recourse to us as collateral manager. As such, we do
not consolidate this entity.
The FASB has currently undertaken a project to address accounting for SPEs
and we will continue to monitor the FASB's project to determine whether or not
consolidation of the CDO will be required in the future.
Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net earnings by the
weighted average number of common shares outstanding. Diluted EPS is similar to
basic EPS, but adjusts for the effect of potential common shares. Diluted EPS
does not include 4.4 million shares that may be issued upon conversion of the
zero-coupon contingent convertible senior notes due to the contingent nature of
the conversion feature, which provides for conversion only in limited
circumstances, including the sale price of our common stock reaching certain
thresholds, the notes being rated below specified credit ratings and the notes
being called for redemption. In the event that the notes become convertible into
shares of common stock, or the shares are required to be included in EPS,
diluted EPS will likely be negatively impacted.
38
<PAGE>
Forward-Looking Statements
Information or statements provided by or on behalf of Legg Mason from time to
time, including those within this Report, may contain certain
"forward-looking information," including information relating to anticipated
growth in revenues or earnings per share, anticipated changes in our businesses
or in the amount of client assets under management, anticipated expense levels,
the expected effects of acquisitions and expectations regarding financial market
conditions. We caution readers that any forward-looking information provided by
or on behalf of Legg Mason is not a guarantee of future performance. Actual
results may differ materially from those in forward-looking information as a
result of various factors, some of which are outside of our control, including
but not limited to those discussed below and in "Item 1. Business-Factors
Affecting the Company and the Financial Services Industry." Further, such
forward-looking statements speak only as of the date on which such statements
are made, and we undertake no obligations to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
Legg Mason's future revenues may fluctuate due to numerous factors, such
as: the total value and composition of assets under management; the volume of
trading in securities; the volatility and general level of securities prices and
interest rates; the relative investment performance of company-sponsored
investment funds and other asset management products compared with competing
offerings and market indices; investor sentiment and confidence; general
economic conditions; the ability of Legg Mason to maintain investment management
and administrative fees at current levels; the level of margin and customer
account balances; competitive conditions in each of our business segments; the
demand for investment banking services; the ability to attract and retain key
personnel and the effects of acquisitions, including prior acquisitions.
Our future operating results are also dependent upon the level of operating
expenses, which are subject to fluctuation for the following or other reasons:
variations in the level of compensation expense incurred by Legg Mason as a
result of changes in the number of total employees, competitive factors, or
other reasons; variations in expenses and capital costs, including depreciation,
amortization and other non-cash charges incurred by us to maintain our
administrative infrastructure; unanticipated costs that may be incurred by Legg
Mason from time to time to protect client goodwill or in connection with
litigation; and the effects of acquisitions.
Legg Mason's business is also subject to substantial governmental
regulation and changes in legal, regulatory, accounting, tax and compliance
requirements that may have a substantial effect on our business and results of
operations.
Effects of Inflation
Based on today's modest inflationary rates and because our assets are primarily
monetary in nature, consisting of cash and cash equivalents, securities and
receivables, we believe that our assets are not significantly affected by
inflation. The rate of inflation, however, can affect various expenses,
including employee compensation, communications and technology and occupancy,
which may not be readily recoverable in charges for services provided by us.
Recent Accounting Developments
The FASB issued the following pronouncements that will be adopted by Legg Mason
during fiscal 2003.
SFAS No. 143, "Accounting for Asset Retirement Obligations" requires the
fair value of a liability to be recorded for costs associated with the
retirement of tangible long-lived assets in the period in which the liability is
incurred if it can be reasonably estimated.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement principally
deals with implementation issues of SFAS No. 121, including developing a single
accounting model for long-lived assets to be disposed of by sale.
SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections as of April 2002." SFAS No.
145 primarily provides guidance for reporting gains and losses from
extinguishments of debt and sale-leaseback transactions.
We are currently evaluating the provisions of SFAS Nos. 143, 144 and 145 to
determine the potential impacts, if any, to Legg Mason's consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks.
See "Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition - Liquidity and Capital Resources--Risk Management" for
disclosure about market risk.
39
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Management's Discussion on Responsibility for Financial Reporting
The management of Legg Mason, Inc. and its subsidiaries (collectively "Legg
Mason") is responsible for the preparation and fair presentation of the
accompanying Consolidated Financial Statements and related Notes. Management is
also responsible for the fair presentation of other financial data that is
included in the Annual Report and believes that this information is accurate and
consistent with the Consolidated Financial Statements and Notes, where
applicable.
Management understands and recognizes the importance of safeguarding Legg
Mason's assets. In connection with this, management believes that Legg Mason
maintains a system of internal controls that is adequate to ensure that
transactions are properly authorized, that its assets are safeguarded and that
its financial records are reliable. The system of internal controls includes,
but is not limited to, maintaining risk and operational management committees,
maintaining internal audit, legal and compliance departments, establishing
formal written policies and procedures and segregating key duties and functions,
where appropriate. Due to the fact that the operational environment in which
Legg Mason operates is constantly changing, management periodically evaluates
and implements changes to improve its system of internal controls.
The Audit Committee of the Board of Directors participates in reviewing the
adequacy of the system of internal controls and financial reporting. The Audit
Committee consists of directors who are independent from Legg Mason. They meet
regularly with management, the internal auditors as well as the independent
accountants to review the scope of their work and findings.
Finally, the independent accounting firm of PricewaterhouseCoopers LLP has
performed an audit of Legg Mason's financial statements. As part of the audit,
management believes it has made available to PricewaterhouseCoopers LLP all of
the financial records, related data and minutes of stockholders' and directors'
meetings that PricewaterhouseCoopers LLP believed was necessary in order to
render their independent audit report. As part of its audit,
PricewaterhouseCoopers LLP obtains specific representations from management of
Legg Mason. Management believes that all representations made to
PricewaterhouseCoopers LLP during its audit were valid and accurate. A copy of
the independent accountants' audit report follows.
/s/ Raymond A. Mason
Raymond A. Mason
Chairman, President and Chief Executive Officer
/s/ Timothy C. Scheve
Timothy C. Scheve
Senior Executive Vice President
Chief Administrative Officer
/s/ Charles J. Daley, Jr.
Charles J. Daley, Jr.
Senior Vice President and Treasurer
Principal Financial Officer
40
<PAGE>
Report of Independent Accountants
To the Board of Directors
and Stockholders of Legg Mason, Inc.
In our opinion, the accompanying consolidated statements of financial condition
of Legg Mason, Inc. and Subsidiaries ("Legg Mason") and the related consolidated
statements of earnings, changes in stockholders' equity, comprehensive income
and cash flows present fairly, in all material respects, the consolidated
financial position of Legg Mason at March 31, 2002 and 2001, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of Legg Mason's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 6 of Notes to Consolidated Financial Statements,
effective April 1, 2001, Legg Mason adopted the provisions of Statements of
Financial Accounting Standards No. 141 "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets."
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
May 3, 2002
41
<PAGE>
Consolidated Statements of Earnings
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Years ended March 31,
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Investment advisory and related fees $ 781,572 $ 653,992 $ 563,463
Commissions 330,893 358,562 362,887
Principal transactions 138,900 124,556 126,267
Investment banking 102,184 65,877 68,905
Interest 168,073 282,201 223,030
Other 56,990 51,065 55,033
- ------------------------------------------------------------------------------------------------------------
Total revenues 1,578,612 1,536,253 1,399,585
Interest expense 127,271 175,389 134,382
- ------------------------------------------------------------------------------------------------------------
Net revenues 1,451,341 1,360,864 1,265,203
- ------------------------------------------------------------------------------------------------------------
Non-Interest Expenses
Compensation and benefits 883,426 804,776 749,147
Communications and technology 98,956 102,764 88,375
Occupancy 62,186 51,670 48,175
Amortization of intangible assets 18,808 12,387 10,953
Other 134,716 123,447 114,115
- ------------------------------------------------------------------------------------------------------------
Total non-interest expenses 1,198,092 1,095,044 1,010,765
- ------------------------------------------------------------------------------------------------------------
Earnings Before Income Tax Provision 253,249 265,820 254,438
Income tax provision 100,313 109,590 104,025
- ------------------------------------------------------------------------------------------------------------
Net Earnings $ 152,936 $ 156,230 $ 150,413
============================================================================================================
Earnings per Common Share
Basic $ 2.35 $ 2.45 $ 2.43
Diluted 2.24 2.30 2.27
============================================================================================================
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
Consolidated Statements of Financial Condition
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31,
2002 2001
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 468,377 $ 556,148
Cash and securities segregated for regulatory purposes or deposited
with clearing organizations 2,501,613 2,015,348
Receivables:
Customers 996,123 1,102,920
Brokers and dealers 69,466 35,322
Others 164,138 121,600
Securities borrowed 324,417 247,229
Financial instruments owned, at fair value 133,709 127,188
Investment securities, at fair value 27,737 14,050
Investments of finance subsidiaries 97,263 115,226
Equipment and leasehold improvements, net 69,146 71,645
Intangible assets, net 494,001 47,375
Goodwill 443,422 102,074
Other 150,202 131,501
- ------------------------------------------------------------------------------------------------------------
Total Assets $ 5,939,614 $ 4,687,626
============================================================================================================
Liabilities and Stockholders' Equity
Liabilities
Payables:
Customers $ 3,249,522 $ 2,909,147
Brokers and dealers 35,009 45,787
Securities loaned 279,615 252,925
Short-term borrowings 3,560 4,900
Financial instruments sold, but not yet purchased, at fair value 37,909 38,814
Accrued compensation 202,433 146,279
Other 169,896 143,084
Notes payable of finance subsidiaries 97,659 119,200
Long-term debt 779,463 99,770
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 4,855,066 3,759,906
- ------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
- ------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, par value $.10; authorized 250,000,000 shares;
issued 64,443,574 shares in 2002 and 62,849,994 shares in 2001 6,444 6,285
Shares exchangeable into common stock 9,400 10,439
Additional paid-in capital 358,972 330,394
Deferred compensation and employee note receivable (32,007) (36,406)
Employee stock trust (90,674) (81,225)
Deferred compensation employee stock trust 90,674 81,225
Retained earnings 751,635 624,665
Accumulated other comprehensive loss, net (9,896) (7,657)
- ------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 1,084,548 927,720
- ------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 5,939,614 $ 4,687,626
============================================================================================================
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock
Beginning balance $ 6,285 $ 5,860 $ 5,638
Shares issued for:
Stock option exercises 109 115 130
Deferred compensation trust 25 19 21
Deferred compensation 12 50 71
Exchangeable shares 27 241 --
Shares retired (14) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 6,444 6,285 5,860
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Exchangeable into Common Stock
Beginning balance 10,439 19,527 19,527
Exchanges (1,039) (9,088) --
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 9,400 10,439 19,527
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Paid-In Capital
Beginning balance 330,394 271,687 215,387
Stock option exercises 17,607 17,073 17,440
Deferred compensation trust 11,517 9,128 13,411
Deferred compensation 5,558 23,659 25,449
Exchangeable shares 1,012 8,847 --
Shares retired (7,116) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 358,972 330,394 271,687
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred Compensation and Employee Note Receivable
Beginning balance (36,406) (19,003) (5,362)
Increase in unearned compensation (5,076) (22,820) (14,342)
Repayment of employee note receivable 634 -- --
Amortization of deferred compensation 8,841 5,417 701
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance (32,007) (36,406) (19,003)
- ------------------------------------------------------------------------------------------------------------------------------------
Employee Stock Trust
Beginning balance (81,225) (50,699) (18,475)
Shares issued to employee stock trust, net (9,449) (30,526) (32,224)
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance (90,674) (81,225) (50,699)
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred Compensation Employee Stock Trust
Beginning balance 81,225 50,699 (11,470)
Net increase in deferred compensation 9,449 30,526 62,169
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 90,674 81,225 50,699
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Earnings
Beginning balance 624,665 493,696 368,804
Dividends declared (25,966) (24,817) (25,521)
Adjustment to conform fiscal year of pooled entity -- (444) --
Net earnings 152,936 156,230 150,413
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance 751,635 624,665 493,696
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Income (Loss), net
Beginning balance (7,657) (959) (2,080)
Unrealized holding gains (losses) on investment securities, net of taxes (681) 2,767 731
Reclassification adjustment for (gains) losses included in net income, net of taxes (1,161) (354) 25
Unrealized losses on cash flow hedges, net of taxes (172) -- --
Foreign currency translation adjustment (225) (9,111) 365
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance (9,896) (7,657) (959)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 1,084,548 $ 927,720 $ 770,808
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
44
<PAGE>
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Earnings $ 152,936 $ 156,230 $ 150,413
Other comprehensive income (loss):
Foreign currency translation adjustment (225) (9,111) 365
- ---------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) arising
during the year (348) 3,230 866
Reclassification adjustment for (gains) losses
included in net income (1,865) (582) 42
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) on investment securities (2,213) 2,648 908
- ---------------------------------------------------------------------------------------------------------------------
Deferred losses on cash flow hedges (277) -- --
- ---------------------------------------------------------------------------------------------------------------------
Deferred income taxes 476 (235) (152)
- ---------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (2,239) (6,698) 1,121
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 150,697 $ 149,532 $ 151,534
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
45
<PAGE>
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 152,936 $ 156,230 $ 150,413
Non-cash items included in earnings:
Depreciation and amortization 48,202 36,448 30,774
Accretion and amortization of securities discounts and premiums, net 6,909 2,884 394
Originated mortgage servicing rights (2,068) (1,827) (2,685)
Deferred compensation 8,841 5,417 6,131
Unrealized gains/losses on investments (2,029) 4,490 (4,802)
Other 1,620 (582) 70
Deferred income taxes 4,358 4,959 (5,207)
Decrease (increase) in assets excluding acquisitions:
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations (486,265) (496,637) (93,937)
Receivables from customers 106,797 283,756 (500,174)
Other receivables (50,634) 14,798 (30,347)
Securities borrowed (77,188) 424,023 (362,533)
Financial instruments owned (6,521) (24,281) 41,091
Other (13,778) (37,227) 8,965
Increase (decrease) in liabilities excluding acquisitions:
Payable to customers 340,375 275,605 462,954
Payable to brokers and dealers (10,778) 31,454 4,815
Securities loaned 26,690 (435,406) 376,513
Financial instruments sold, but not yet purchased (905) 11,101 15,891
Accrued compensation 29,562 (1,951) 34,630
Other 10,174 (30,242) 36,505
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Provided by Operating Activities 86,298 223,012 169,461
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments for:
Equipment and leasehold improvements (20,785) (34,311) (23,297)
Asset management contracts and mortgage servicing portfolios (2,657) (3,818) (95)
Acquisitions, net of cash acquired (792,856) (16,601) (87,637)
Proceeds from sale of assets -- 2,417 --
Net (increase) decrease in securities purchased under agreements to resell -- 170,643 (29,627)
Purchases of investment securities (25,304) (13,096) (52,309)
Proceeds from sales and maturities of investment securities 36,707 129,279 54,034
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used for) Investing Activities (804,895) 234,513 (138,931)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net decrease in short-term borrowings (1,340) (18,390) (25,972)
Net proceeds from issuance of long-term debt 664,714 -- --
Repayment of notes payable of finance subsidiaries (26,676) (105,909) (678)
Issuance of common stock 26,707 21,037 20,780
Repurchase of common stock (7,130) -- --
Dividends paid (25,149) (23,615) (24,509)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used for) Financing Activities 631,126 (126,877) (30,379)
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (300) 12,297 327
Net Increase (Decrease) in Cash and Cash Equivalents (87,771) 342,945 478
Cash and Cash Equivalents at Beginning of Year 556,148 213,203 212,725
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 468,377 $ 556,148 $ 213,203
===================================================================================================================================
Supplementary Disclosure
Cash paid for:
Income taxes $ 88,389 $ 98,804 $ 97,280
Interest 100,788 176,460 127,224
</TABLE>
See notes to consolidated financial statements.
46
<PAGE>
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts or unless otherwise noted)
1. Summary of Significant Accounting Policies
Basis of Presentation
Legg Mason, Inc. ("Parent") and its subsidiaries (collectively, "Legg Mason")
are principally engaged in providing asset management, securities brokerage,
investment banking and related financial services to individuals, institutions,
corporations and municipalities.
The consolidated financial statements include the accounts of the Parent
and its subsidiaries. All material intercompany balances and transactions have
been eliminated. Unless otherwise noted, all per share amounts include both
common shares of Legg Mason and shares issued in connection with the acquisition
of Perigee Investment Counsel Inc. ("Perigee"), which are exchangeable into
common shares of Legg Mason on a one-for-one basis at any time. Where
appropriate, prior years' financial statements have been reclassified to conform
to the current year presentation.
Use of Estimates
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require
management to make assumptions and estimates that affect the amounts reported in
the financial statements and accompanying notes. Actual amounts could differ
from those estimates and the differences could have a material impact on the
consolidated financial statements.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturities of 90
days or less, other than those held for sale in the ordinary course of business.
Securities Purchased Under Agreements to Resell
Legg Mason invests in short-term securities purchased under agreements to resell
collateralized by U.S. government and agency securities, which are included in
Cash and securities segregated for regulatory purposes or deposited with
clearing organizations. Securities purchased under agreements to resell are
accounted for as collateralized financings. It is the policy of Legg Mason to
obtain possession of collateral with a market value in excess of the principal
amount loaned. Collateral is valued daily and Legg Mason may require
counterparties to deposit additional collateral when appropriate. Securities
purchased under agreements to resell are carried at the amounts at which the
securities will be subsequently resold, as specified in the respective
agreements, plus accrued interest.
Securities Transactions
Customer securities transactions are recorded on a settlement date basis, with
related commission revenues and expenses recorded on a trade date basis.
Receivables from and payables to customers represent balances arising from cash
and margin transactions. Securities owned by customers held as collateral for
the receivable balances are not reflected in the consolidated financial
statements. See Note 15 for a discussion of off-balance sheet risk.
Securities Lending
Securities borrowed and loaned are accounted for as collateralized financings
and recorded at the amount of collateral advanced or received. Securities
borrowed transactions require Legg Mason to deposit cash or other collateral
with the lender. Legg Mason generally receives collateral in the form of cash
for securities loaned. The fee received or paid by Legg Mason is recorded as
interest income or expense. Legg Mason monitors the fair value of securities
borrowed and loaned on a daily basis, with additional collateral obtained or
refunded, as necessary.
Financial Instruments
Substantially all financial instruments are reflected in the financial
statements at fair value or amounts that approximate fair value. Cash and
securities segregated for regulatory purposes or deposited with clearing
organizations, Financial instruments owned, Investment securities, Investments
of finance subsidiaries and Financial instruments sold, but not yet purchased on
the Consolidated Statements of Financial Condition include forms of financial
instruments.
The Parent and its non-broker-dealer subsidiaries hold debt and marketable
equity investments which are generally classified as available-for-sale and
held-to-maturity. Debt and marketable equity securities classified as
available-for-sale are reported at fair value and resulting unrealized gains and
losses are reflected in stockholders' equity and comprehensive income, net of
applicable income taxes.
Debt securities held by Legg Mason's finance subsidiaries, for which there
is positive intent and ability to hold to maturity, are classified as
held-to-maturity. These investments are recorded at amortized cost and
amortization of discount or premium is included in current period earnings.
Financial instruments used in trading activities of the Parent's primary
broker-dealer subsidiary are recorded on a trade date basis and carried at fair
value with unrealized gains and losses reflected in current period earnings. In
addition, investments held by one of Legg Mason's asset management subsidiaries
are classified as trading securities. These investments are recorded at fair
value and unrealized gains and losses are included in earnings. Realized gains
and losses for all investments are included in current period earnings.
Fair values are generally based upon prices from independent sources, such
as listed market prices or broker or dealer price quotations. For investments in
illiquid and privately-held securities that do not have readily determinable
fair values, the determination of the fair value requires management to estimate
the value of the security based upon available information, such as projected
cash flows and a review of the financial and market conditions of the underlying
company. In instances where a security is subject to transfer restrictions, the
value of the security is based primarily on the quoted price of the same
security without restriction, but may be reduced by an amount estimated to
reflect such restrictions. In addition, even where the value of a security is
derived from an independent market price or broker or dealer quote, certain
assumptions may be required to deter-
47
<PAGE>
mine the fair value. Legg Mason generally assumes that the size of positions in
securities that it holds would not be large enough to affect the quoted price of
the securities if sold, and that any such sale would happen in an orderly
manner. However, these assumptions may be incorrect and the actual value
realized upon disposition could be different from the current carrying value.
Legg Mason evaluates its non-trading securities for "other than temporary"
impairment. Impairment may exist when the fair value of an investment security
has been below the current value for an extended period of time. If an "other
than temporary" impairment is determined to exist, the difference between the
value of the investment security recorded on the financial statements and its
current value is recognized as a charge to earnings in the period the impairment
is determined.
As of March 31, 2002, Legg Mason has approximately $4.6 million of
financial instruments that are valued solely based upon management's assumptions
or estimates.
Equipment and Leasehold Improvements
Equipment and leasehold improvements consists primarily of furniture,
communications and technology hardware and software and leasehold improvements.
Equipment and leasehold improvements are reported at cost, net of accumulated
depreciation and amortization of $78,015 and $71,895 at March 31, 2002 and 2001,
respectively.
Depreciation and amortization are determined by use of the straight-line
method. Equipment is depreciated over the estimated useful life of the asset,
while leasehold improvements are generally amortized over the term of the lease.
Maintenance and repair costs are expensed as incurred. Depreciation and
amortization expense was $25,801, $23,348 and $19,532 for 2002, 2001 and 2000,
respectively.
Intangible Assets and Goodwill
Intangible assets consist principally of asset management contracts and trade
names. Legg Mason also capitalizes costs incurred in acquiring mortgage
servicing rights through loan origination activities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Intangible assets are amortized over their estimated useful lives, ranging from
five to twenty years, using the straight-line method, unless the asset is
determined to have an indefinite useful life. Amounts assigned to
indefinite-life intangible assets primarily represent the value of contracts to
manage assets in mutual funds, for which there is no foreseeable limit on the
contract period and trade names.
Goodwill represents the excess cost of a business acquisition over the fair
value of the net assets acquired. In accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets," indefinite-life intangible assets and goodwill are not
amortized.
Legg Mason periodically reviews its intangible assets and goodwill,
considering factors such as projected cash flows and revenue multiples, to
determine whether the value of the assets are impaired and the amortization
periods are appropriate. If an asset is impaired, the difference between the
value of the asset reflected on the financial statements and its current fair
value is recognized as an expense in the period in which the impairment occurs.
Intangible assets subject to amortization are reviewed for impairment at each
reporting period using an undiscounted cash flow analysis. For intangible assets
with indefinite lives, fair value is determined based on anticipated discounted
cash flows. Goodwill is impaired when the carrying amount of the reporting unit
exceeds the implied fair value of the reporting unit. In estimating the fair
value of the reporting unit, Legg Mason uses valuation techniques based on
multiples of revenues and discounted cash flows similar to models employed in
analyzing the purchase price of an acquisition target. Substantially all of Legg
Mason's goodwill is assigned to the asset management operating segment. Legg
Mason has defined the asset management reporting units to be wealth management,
institutional and mutual funds, which are one level below the operating segment.
See Note 6 for additional information regarding intangible assets and goodwill.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries that are denominated in non-U.S.
dollar functional currencies are translated at exchange rates as of the
statement of financial condition date. Revenues and expenses are translated at
average exchange rates during the period. The gains or losses resulting from
translating foreign currency financial statements into U.S. dollars are included
in stockholders' equity and comprehensive income. Gains or losses resulting from
foreign currency transactions are included in earnings.
Investment Advisory and Related Fees
Legg Mason earns investment advisory fees on assets in accounts managed by its
subsidiaries, distribution fees on assets in company-sponsored mutual funds and
asset-based fees on various types of single-fee brokerage accounts. In addition,
Legg Mason earns fees for performing certain administrative services for its
funds. Revenues from investment advisory and related activities are recognized
over the period in which services are performed. Performance fees are recognized
at the end of the performance period.
Investment Banking
Underwriting revenues and fees from advisory assignments are recorded when the
underlying transaction is completed under the terms of the engagement. Expenses
related to securities offerings in which Legg Mason acts as principal or agent
are deferred until the related revenue is recognized. Expense reimbursements
related to advisory activities are recorded as a reduction of related expenses.
Stock-Based Compensation
Legg Mason accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" as permitted by SFAS No. 123, "Accounting for Stock-Based
48
<PAGE>
Compensation." Legg Mason's stock-based compensation plans include stock
options, restricted awards, stock purchase plans and deferred compensation
payable in stock.
In accordance with APB No. 25, compensation expense is not recognized for
stock options that have no intrinsic value (the exercise price is not less than
the market price) on the date of grant. The pro forma effects of SFAS No. 123 on
net income and earnings per share are presented in Note 13.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss represents cumulative foreign currency
translation adjustments and net gains and losses on investment securities and
cash flow hedges that are not reflected in earnings. At March 31, 2002 and 2001,
Legg Mason's accumulated other comprehensive loss consists of $10,879 and
$10,654, respectively, of foreign currency translation loss adjustments, $1,155
and $2,997, respectively, of unrealized gains on investment securities and $172
and $0, respectively, of unrealized losses on cash flow hedges.
Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing net earnings by the
weighted average number of common shares outstanding. Diluted EPS is similar to
basic EPS, but adjusts for the effect of potential common shares.
The following table presents the computations of basic and diluted EPS:
<TABLE>
<CAPTION>
Years ended March 31,
(shares in thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average common shares outstanding ................. 65,211 63,793 61,868
Potential common shares:
Employee stock options ................................... 2,567 3,622 3,794
Shares related to deferred compensation .................. 484 501 257
Shares issuable upon conversion of debentures ............ -- -- 48
- ---------------------------------------------------------------------------------------------------------
Total weighted average diluted common shares ............... 68,262 67,916 65,967
- ---------------------------------------------------------------------------------------------------------
Net earnings $ 152,936 $ 156,230 $ 150,413
Adjustment related to deferred compensation, net of tax .... -- -- (638)
Interest expense on convertible debentures, net of tax ..... -- -- 18
- ---------------------------------------------------------------------------------------------------------
Net earnings applicable to diluted common shares ........... $ 152,936 $ 156,230 $ 149,793
- ---------------------------------------------------------------------------------------------------------
Basic EPS .................................................. $ 2.35 $ 2.45 $ 2.43
- ---------------------------------------------------------------------------------------------------------
Diluted EPS ................................................ 2.24 2.30 2.27
- ---------------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 2002, 2001 and 2000, options to purchase 3,680,690 shares,
1,897,850 shares and 57,000 shares, respectively, were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average price of the common shares for the period. In
addition, at March 31, 2002, 2001 and 2000, 591,816 shares, 633,967 shares and
69,405 shares, respectively, held in an employee stock trust were antidilutive
and therefore excluded from the computation of diluted earnings per share.
Diluted EPS does not include 4.4 million shares that may be issued upon
conversion of the zero-coupon contingent convertible senior notes due to the
contingent nature of the conversion features, which provides for conversion only
in limited circumstances, including the sale price of our common stock reaching
certain thresholds, the notes being rated below specified credit ratings and the
notes being called for redemption.
Derivative Instruments
Effective April 1, 2001, Legg Mason adopted the provisions of SFAS No. 133, as
amended, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 requires Legg Mason to report derivative instruments as assets or
liabilities on the balance sheet and to measure those instruments at fair value.
Legg Mason generally does not engage in derivative or hedging activities, except
for limited trading-related activities at the Parent's primary broker-dealer
subsidiary and in a transaction with a special purpose entity ("SPE").
The primary broker-dealer subsidiary uses futures contracts as a means of
hedging interest rate risk in its trading activities. Gains and losses on these
transactions are included in Principal transactions on the Consolidated
Statements of Earnings. In addition, one of the Parent's asset management
subsidiaries is the collateral manager of a Collateralized Debt Obligation
("CDO") SPE. Legg Mason entered into a forward purchase agreement to purchase a
1% interest in the entity. The value of derivatives at March 31, 2002 is not
material to the consolidated financial statements.
Special Purpose Entities
SPEs are trusts, partnerships, corporations or other vehicles that are
established for a limited business purpose. SPEs generally involve the transfer
of assets and liabilities in which the transferor may or may not have continued
involvement, derive continued benefit, exhibit control or have recourse. Legg
Mason does not utilize SPEs as a form of financing or to provide liquidity.
One of the Parent's asset management subsidiaries is the collateral manager
of a CDO SPE. The CDO was established during fiscal 2002 as a vehicle for
investors and issued approximately $383 million of debt and acquired a portfolio
consisting primarily of high quality asset-backed securities. Legg Mason did not
sell any assets to the CDO. For its services as collateral manager, Legg Mason
receives senior and subordinated management fees up to approximately $1.5
million annually. Legg Mason may be removed as collateral manager under certain
conditions.
49
<PAGE>
Currently Legg Mason does not own an equity interest in the CDO; however, a
derivative contract was entered into whereby Legg Mason may purchase $4.2
million of preference shares (approximately 1% of the entity) in four years.
Other than this derivative, Legg Mason has no financial commitments or
guarantees to the CDO and the underlying debt is non-recourse to Legg Mason as
collateral manager. As such, this entity is not consolidated.
The Financial Accounting Standards Board ("FASB") has undertaken a project to
address the accounting for SPEs and Legg Mason will continue to monitor that
project to determine whether or not consolidation of the CDO will be required in
the future.
2. Business Combinations
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which
provides that all business combinations initiated after June 30, 2001 shall be
accounted for using the purchase method. Under the purchase method, net assets
and results of operations of acquired companies are included in the consolidated
financial statements from the date of acquisition. In addition, SFAS No. 141
provides that the cost of an acquired entity must be allocated to the assets
acquired, including identifiable intangible assets, and the liabilities assumed
based on their estimated fair values at the date of acquisition. The excess cost
over the fair value of the net assets acquired must be recognized as goodwill.
On October 1, 2001, Legg Mason completed the acquisition of Royce &
Associates, Inc. ("Royce") which manages small and micro-cap mutual funds. At
the date of acquisition, Royce managed assets of approximately $4.7 billion.
Legg Mason acquired Royce for an initial cash payment of $115,000 plus
acquisition costs of $1,059. The acquisition of Royce fits Legg Mason's
strategic objective to grow its asset management business. The determination of
the purchase price was made on the basis of, among other things, the revenues,
profitability and growth rates of Royce.
A summary of the fair values of the net assets acquired is as follows:
Liabilities, net ...................................... $ (829)
Fixed assets .......................................... 1,272
Trade name ............................................ 7,700
Asset management contracts ............................ 5,700
Mutual fund contracts ................................. 99,200
Goodwill .............................................. 3,016
- -----------------------------------------------------------------------
Total purchase price .................................. $ 116,059
- -----------------------------------------------------------------------
The fair value of the asset management contracts of $5,700 is being amortized
over an average life of seven years. The value of the trade name, mutual fund
contracts and goodwill are not subject to amortization.Goodwill is deductible
for tax purposes and is attributable to the Asset Management segment.
The transaction also includes three contingent payments based on Royce's
revenue growth for the years ending on the third, fourth and fifth anniversaries
of closing, with the aggregate purchase price to be no more than $215,000. Legg
Mason has the option to pay as much as 50% of the remaining purchase price in
common stock. Any additional payments required as a result of the contingency
will be allocated to goodwill.
On August 1, 2001, Legg Mason completed the acquisition of Private Capital
Management, L.P. and its affiliated entities ("PCM") for cash of approximately
$682,000 plus acquisition costs of $1,000. PCM, a leading high net worth
investment manager, managed assets of approximately $8.6 billion at the date of
acquisition. The acquisition of PCM fits Legg Mason's strategic objective to
grow its asset management business. The determination of the purchase price was
made on the basis of, among other things, the revenues, profitability and growth
rates of PCM.
A summary of the fair values of the net assets acquired is as follows:
Current assets, net .................................. $ 4,228
Fixed assets ......................................... 1,903
Trade name ........................................... 47,000
Asset management contracts ........................... 298,000
Goodwill ............................................. 331,869
- ---------------------------------------------------------------------
Total purchase price ................................. $ 683,000
- ---------------------------------------------------------------------
The fair value of the asset management contracts of $298,000 are being amortized
over an average life of eighteen years. The value of the trade name and goodwill
is not subject to amortization.Goodwill is deductible for tax purposes and is
attributable to the Asset Management segment.
The transaction also includes two contingent payments based on PCM's revenue
growth for the years ending on the third and fifth anniversaries of closing,
with the aggregate purchase price to be no more than $1.382 billion. Any
additional payments required as a result of the contingency will be allocated to
goodwill.
The following unaudited pro forma consolidated results are presented as
though the acquisitions of PCM and Royce had occurred as of the beginning of
each period presented.
Years ended March 31,
2002 2001
- ----------------------------------------------------------------------
Net revenues ..................... $ 1,498,484 $ 1,425,568
Net earnings ..................... $ 163,123 $ 161,298
Earnings per common share:
Basic ......................... $ 2.50 $ 2.53
Diluted ....................... $ 2.39 $ 2.37
On February 5, 2001, Legg Mason acquired an approximate 70% ownership interest
in Barrett Associates, Inc. ("Barrett"), a high net worth asset manager for
individuals, families, endowments and foundations. Legg Mason acquired this
controlling interest for approximately $15,900, after a contingent purchase
price adjustment. The acquisition was accounted for as a purchase. The fair
value of the asset management contracts acquired of $5,747 is being amortized
over 15 years. The excess of the purchase price over the fair value of assets
acquired of $8,787 was recognized as goodwill. The ownership interest not owned
by Legg Mason is recorded as
50
<PAGE>
minority interest and is not material. In April 2002, minority shareholders
representing 11.6% of the outstanding shares of Barrett notified Legg Mason of
their intention to exercise their rights to put shares to Legg Mason on June 30,
2002, for a purchase price of $3,116. Under the terms of the acquisition
agreement, the remaining 18.4% interest will be acquired in 2006 for an
additional amount up to $13,798 based on Barrett's revenues in the fifth year.
On May 26, 2000, Legg Mason completed the acquisition of Perigee, one of
Canada's leading institutional investment managers. In April 2001, Perigee Inc.
was merged into its operating subsidiary, Perigee Investment Counsel Inc. Under
the terms of the acquisition agreement, each outstanding share of Perigee was
exchanged for 0.387 of an exchangeable share of Legg Mason Canada Holdings, a
subsidiary of Legg Mason. Holders of exchangeable shares have dividend, voting
and other rights equivalent to those of common stockholders. These exchangeable
shares are the economic equivalent of common shares of Legg Mason and may be
exchanged for those shares on a one-for-one basis at any time. Legg Mason issued
approximately 5.2 million exchangeable shares in this transaction. The
acquisition was accounted for as a pooling of interests and, accordingly, all
prior period consolidated financial statements were restated to include the
combined results of operations, financial position and cash flows of Perigee.
In December 1999, Legg Mason completed the acquisition of Legg Mason
Investors Holdings plc ("Legg Mason Investors"), formerly Johnson Fry Holdings
PLC, a London-based retail fund management company. The acquisition was
accounted for as a purchase. The total purchase price was approximately $72,000,
including $67,000 of cash and $5,000 in liabilities. The excess of the purchase
price over the tangible net assets acquired consists of goodwill of
approximately $56,000 and intangible assets of approximately $8,000. The
intangible assets represent contracts to manage assets in investment funds,
which are deemed to have indefinite lives.
Legg Mason Investors has two finance subsidiaries. The purpose of the finance
companies is to raise funds by issuing secured fixed rate loan securities, with
a minimum maturity of five years, and to use the proceeds to invest in a
portfolio of bonds issued by various financial institutions that are not
generally available to the public in tranches small enough for the retail
investor. See Notes 5 and 8.
On September 30, 1999, Legg Mason entered into a joint venture with Bingham
Dana LLP, a Boston-based law firm, to acquire a 50% interest in its trust
administration business for $10,000. The investment in this joint venture is
being accounted for under the equity method.
On September 2, 1999, Legg Mason acquired the assets of Berkshire Asset
Management, Inc. ("Berkshire") for $18,000. Berkshire provides investment
management services for predominantly domestic equity and fixed income accounts
for high net worth individuals and institutions. The acquisition was accounted
for as a purchase. The fair value of the asset management contracts acquired of
$7,587 is being amortized over 12 years. The excess of the purchase price over
the fair value of net assets acquired of $10,033 was recognized as goodwill.
3. Receivable from and Payable to Customers
Receivable from and payable to customers represent balances arising from cash
and margin transactions. Securities owned by customers are held as collateral
for the receivable balances. Included in payable to customers are free credit
balances of approximately $3,067,134 and $2,746,055 as of March 31, 2002, and
2001, respectively. Legg Mason pays interest on certain customer free credit
balances held for investment purposes.
4. Financial Instruments Owned, at Fair Value
Securities positions used in Legg Mason's trading activities consist of the
following at March 31:
Financial instruments
owned
2002 2001
- ----------------------------------------------------------------------
U.S. government and agencies ........ $ 18,448 $ 10,945
Corporate debt ...................... 26,073 37,522
State and municipal bonds ........... 77,853 73,314
Equity and other. ................... 11,335 5,407
- ---------------------------------------------------------------------
Total ............................... $ 133,709 $ 127,188
- ---------------------------------------------------------------------
Financial instruments sold,
but not yet purchased
2002 2001
- -------------------------------------------------------------------------
U.S. government and agencies ......... $ 30,731 $ 34,288
Corporate debt ....................... 5,914 2,727
State and municipal bonds ............ 164 762
Equity and other ..................... 1,100 1,037
- -------------------------------------------------------------------------
Total ................................ $ 37,909 $ 38,814
- --------------------------------------------------------------------------
At March 31, 2002 and 2001, Legg Mason had pledged securities owned of $300
and $352, respectively, as collateral to counterparties for securities loaned
transactions and for commodities clearing requirements, which can be sold or
repledged.
51
<PAGE>
5. Investments
Legg Mason has two categories of investments: Investment securities and
Investments of finance subsidiaries. These investments are generally classified
as available-for-sale, held-to-maturity and trading as described in Note 1.
Investment securities consist of highly liquid debt and equity securities.
Investments of finance subsidiaries consist of bonds issued by various financial
institutions.
The proceeds and gross realized gains and losses from sales and maturities
of available-for-sale and held-to-maturity investments are as follows:
Years ended March 31,
2002 2001 2000
- --------------------------------------------------------------------------------
Available-for-sale:
Proceeds ............................. $ 16,760 $ 17,525 $ 54,034
Gross realized gains ................. 1,865 621 423
Gross realized losses ................ -- (39) (493)
Held-to-maturity:
Proceeds ............................. $ 19,947 $111,754 $ --
Investments as of March 31, 2002 and 2001 are as follows:
2002 2001
- --------------------------------------------------------------------------------
Investment securities:
Available-for-sale ............... $ 12,067 $ 13,116
Held-to-maturity ................. -- 784
Trading .......................... 8,605 150
Non-qualifying/(1)/ .............. 7,065 --
- --------------------------------------------------------------------------------
Total ............................... $ 27,737 $ 14,050
- --------------------------------------------------------------------------------
Investments of finance
subsidiaries:
Available-for-sale ............... $ 97,155 $ 96,320
Held-to-maturity ................. 108 18,906
- --------------------------------------------------------------------------------
Total ............................... $ 97,263 $115,226
- --------------------------------------------------------------------------------
/(1)/ Non-qualifying for purposes of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities;" contains investments in private
equity securities that do not have readily determinable fair values and
non-trading securities held by the Parent's broker-dealer subsidiaries.
Information regarding Legg Mason's available-for-sale and held-to-maturity
investments, categorized by maturity date, is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
March 31, 2002 March 31, 2001
- ----------------------------------------------------------------------------------------------------------------------------
Cost/ Gross Gross Cost/ Gross Gross
amortized unrealized unrealized Fair amortized unrealized unrealized Fair
cost gains losses value cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:
Corporate debt:
Within one year $ 102,762 $ 1,203 $ (153) $ 103,812 $ 1,469 $ -- $ (69) $ 1,400
One to five years -- -- -- -- 94,032 2,288 -- 96,320
U.S. government and
agency securities:
Within one year 250 5 -- 255 697 10 -- 707
One to five years 989 9 (2) 996 249 7 -- 256
Five to ten years 193 13 -- 206 266 15 -- 281
Over ten years 2,674 96 (5) 2,765 3,941 160 -- 4,101
Equities 1,102 153 (67) 1,188 5,291 1,125 (45) 6,371
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 107,970 $ 1,479 $ (227) $ 109,222 $ 105,945 $3,605 $(114) $ 109,436
- ----------------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Corporate debt:
Within one year $ -- $ -- $ -- $ -- $ 19,581 $ 169 $ (68) $ 19,682
Other debt securities:
Within one year 108 -- -- 108 -- -- -- --
One to five years -- -- -- -- 109 1 -- 110
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 108 $ -- $ -- $ 108 $ 19,690 $ 170 $ (68) $ 19,792
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
6. Intangible Assets and Goodwill
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 provides that goodwill is no longer amortized and the
value of an identifiable intangible asset must be amortized over its useful
life, unless the asset is determined to have an indefinite useful life. Goodwill
and indefinite-life intangible assets must be tested for impairment at least
annually. Legg Mason completed its testing of goodwill and indefinite-life
intangible assets and has determined that there is no impairment as of March 31,
2002.
The results for the fiscal year ended March 31, 2002 include the effect of
adopting SFAS No. 142, which resulted in an expense reduction of $7,785 ($6,737
net of tax). This expense reduction increased both basic and diluted earnings
per share by $0.10 for the fiscal year ended March 31, 2002.
The pre-tax reduction of intangible amortization expense for the fiscal
year represents the amount of amortization of goodwill and indefinite-life
intangible assets that arose from acquisitions prior to June 30, 2001 and are no
longer amortized. Amounts assigned to indefinite-life intangible assets
primarily represent the value of contracts to manage assets in mutual funds and
trade names.
The following table reflects consolidated results adjusted as if the
adoption of SFAS No. 142 occurred as of the beginning of the fiscal year ended
March 31, 2001:
Years ended March 31,
2002 2001
- --------------------------------------------------------------------------------
Net earnings:
As reported ......................................... $152,936 $156,230
Goodwill amortization ............................... -- 4,791
Indefinite-life intangibles amortization ............ -- 1,039
- --------------------------------------------------------------------------------
As adjusted ......................................... $152,936 $162,060
- --------------------------------------------------------------------------------
Basic earnings per share:
As reported ......................................... $ 2.35 $ 2.45
Goodwill amortization ............................... -- 0.07
Indefinite-life intangibles amortization ............ -- 0.02
- --------------------------------------------------------------------------------
As adjusted ......................................... $ 2.35 $ 2.54
- --------------------------------------------------------------------------------
Diluted earnings per share:
As reported ......................................... $ 2.24 $ 2.30
Goodwill amortization ............................... -- 0.07
Indefinite-life intangibles amortization ............ -- 0.02
- --------------------------------------------------------------------------------
As adjusted ......................................... $ 2.24 $ 2.39
- --------------------------------------------------------------------------------
The following tables reflect the components of intangible assets as of
March 31:
2002 2001
- --------------------------------------------------------------------------------
Amortized intangible assets, cost:
Asset management contracts ....................... $ 358,630 $ 51,242
Mortgage servicing contracts ..................... 8,926 7,821
- -------------------------------------------------------------------------------
Total ......................................... $ 367,556 $ 59,063
- -------------------------------------------------------------------------------
Amortized intangible assets, accumulated
amortization:
Asset management contracts ....................... $ (29,617) $ (12,741)
Mortgage servicing contracts ..................... (2,655) (3,708)
- -------------------------------------------------------------------------------
Total ......................................... $ (32,272) $ (16,449)
- -------------------------------------------------------------------------------
Indefinite-life intangible assets:
Fund management contracts ........................ $ 104,017 $ 4,761
Trade names ...................................... 54,700 --
- -------------------------------------------------------------------------------
Total ......................................... $ 158,717 $ 4,761
- -------------------------------------------------------------------------------
During fiscal year 2002, Legg Mason recorded an impairment charge of
$1,164, net of tax, representing the fair value of asset management contracts,
acquired in a prior business combination, that were terminated during the
period.
Estimated amortization expense for each of the next five fiscal years is as
follows:
- --------------------------------------------------------------------------------
2003 ................................................................ $ 24,586
2004 ................................................................ 23,481
2005 ................................................................ 23,178
2006 ................................................................ 22,745
2007 ................................................................ 22,059
- --------------------------------------------------------------------------------
Legg Mason's carrying value of goodwill of $443,422 at March 31, 2002 is
primarily attributable to its asset management reporting segment. The increase
in the carrying value of goodwill since March 31, 2001 reflects the acquisitions
of PCM, Royce and a Pennsylvania-based investment advisor (which was not
material to Legg Mason's financial statements).
7. Short-Term Borrowings
Legg Mason obtains short-term financing on a secured and unsecured basis. The
secured financing is obtained through the use of securities lending agreements
and secured bank loans, which are primarily collateralized by agency, corporate
and equity securities.
Legg Mason has a committed, secured compensating balance line of credit
which allows for borrowings of up to $125,000, based on the amount of underlying
customer escrow funds, that matures on September 15, 2002. Legg Mason intends to
use the facility for short-term investing, with interest accruing at 0.80%. The
facility is collateralized by the securities that are purchased with the funds.
There were no borrowings outstanding under the facility at March 31, 2002 and
2001.
53
<PAGE>
Legg Mason has a committed, unsecured revolving credit facility of $100,000
that matures on June 30, 2003. The facility has restrictive covenants that
require Legg Mason, among other things, to maintain specified levels of net
worth and debt-to-equity ratios. Legg Mason intends to use the facility for
general corporate purposes including the expansion and diversification of its
business. Interest on this facility is based upon federal funds rates, prime
rates or LIBOR. There were no borrowings outstanding under the facility at March
31, 2002 and 2001.
Legg Mason has a committed, secured warehouse line of credit of $50,000
that matures on September 15, 2002. Legg Mason uses the facility to fund
commercial mortgage loans. Outstanding loan balances were $3,560 and $4,900 at
March 31, 2002 and 2001 with weighted average interest rates of 3.80% and 5.58%,
respectively.
Legg Mason has maintained compliance with the applicable covenants of these
facilities.
8. Long-term Debt
Legg Mason's long-term debt at March 31, 2002 consists of $423,979 of 6.75%
senior notes, $255,667 of zero-coupon contingent convertible senior notes and
$99,817 of 6.50% senior notes. During 2002, Legg Mason issued long-term fixed
rate debt to fund acquisitions.
On July 2, 2001, Legg Mason issued $425,000 principal amount of senior
notes due July 2, 2008, which bear interest at 6.75%. The notes were sold at a
discount to yield 6.80%. The net proceeds of the notes were approximately
$421,000, after payment of debt issuance costs.
On June 6, 2001, Legg Mason issued $567,000 principal amount at maturity of
zero-coupon contingent convertible senior notes due on June 6, 2031, resulting
in gross proceeds of approximately $250,000. The convertible notes were issued
in a private placement to qualified institutional buyers at an initial offering
price of $440.70 per $1,000 principal amount at maturity. The discounted price
reflects a yield to maturity of 2.75% per year. Upon certain events, including
the sale price of Legg Mason's common stock reaching certain thresholds, the
convertible notes being rated below specified credit ratings and the convertible
notes being called for redemption, each note is convertible into 7.7062 shares
of Legg Mason's common stock, subject to adjustment. Legg Mason may redeem the
convertible notes for cash on or after June 6, 2006 at their accreted value. In
addition, Legg Mason may be required to repurchase the convertible notes at
their accreted value, at the option of the holders, on June 6, 2003, 2005, 2007,
2011 and every five years thereafter until 2026 or upon a change of control in
Legg Mason. Such repurchases can be paid in cash, shares of Legg Mason's common
stock or a combination of both. The net proceeds of the offering were $244,375,
after payment of debt issuance costs. The debt issuance costs are included in
other assets and are being amortized over a two-year period up to the date of
the first repurchase option of the holders. Approximately 4.4 million shares of
common stock are reserved for issuance upon conversion.
Legg Mason also has outstanding $100,000 principal amount of senior notes
due February 15, 2006, which bear interest at 6.50%. The notes were issued at a
discount to yield 6.57%.
As described in Note 2, Legg Mason's finance subsidiaries issued a series
of secured, fixed rate notes with a minimum maturity of five years. These
obligations become due beginning October 2002 through March 2003 at interest
rates ranging from 6.829% to 7.0%.
At March 31, 2002, Legg Mason had $75,000 available for the issuance of
additional debt or convertible debt securities pursuant to a shelf registration
statement.
As of March 31, 2002, the aggregate maturities of long-term debt, based on
their contractual terms, are as follows:
- --------------------------------------------------------------------------------
2003 ............................................................. $ 100,851
2004 ............................................................. --
2005 ............................................................. --
2006 ............................................................. 100,000
2007 ............................................................. --
Thereafter ....................................................... 992,000
- --------------------------------------------------------------------------------
Total ............................................................ $ 1,192,851
- --------------------------------------------------------------------------------
The fair value of long-term debt at March 31, 2002 and 2001, was $798,942
and $97,480, respectively. These fair values are estimated using current market
prices.
9. Commitments and Contingencies
Legg Mason leases office facilities and equipment under non-cancelable operating
leases and also has multi-year agreements for data processing and other
services. These leases and service agreements expire on varying dates through
2013. Certain leases provide for renewal options and contain escalation clauses
providing for increased rentals based upon maintenance, utility and tax
increases. As of March 31, 2002, the minimum annual aggregate rentals are as
follows:
- --------------------------------------------------------------------------------
2003 ............................................................... $ 61,762
2004 ............................................................... 47,483
2005 ............................................................... 34,906
2006 ............................................................... 26,047
2007 ............................................................... 21,066
Thereafter ......................................................... 47,336
- --------------------------------------------------------------------------------
Total .............................................................. $ 238,600
- --------------------------------------------------------------------------------
The minimum rental commitments shown above have not been reduced by $17,627 of
minimum sublease rentals to be received in the future under non-cancelable
subleases. The table above also does not include aggregate rental commitments of
$339 for furniture and equipment under capital leases, most of which is due in
2003.
Rental expense, under all operating leases and service contracts, was
$70,024, $66,945 and $51,935 for 2002, 2001 and 2000, respectively. Rental
expense was net of any sublease income received, which is not material in each
of the three years.
54
<PAGE>
As of March 31, 2002 and 2001, Legg Mason had commitments to invest $10,252
and $9,778, respectively, in limited partnerships that make private equity
investments. These commitments will be funded as required through the end of the
respective investment periods ranging from 2005 to 2010.
As discussed in Note 2, Legg Mason has contingent payments related to
acquisitions. These payments are payable through fiscal 2007 and will not exceed
$818,400.
Legg Mason enters into when-issued and underwriting commitments. Had the open
transactions relating to these commitments as of March 31, 2002 been closed, the
effect on the consolidated financial statements of Legg Mason would not have
been material.
Legg Mason has been the subject of customer complaints and has also been
named as a defendant in various legal actions arising primarily from securities
brokerage, asset management and investment banking activities, including certain
class actions, which primarily allege violations of securities laws and seek
unspecified damages which could be substantial. Legg Mason has also been
involved in governmental and self regulatory agency investigations and
proceedings. In accordance with SFAS No. 5 "Accounting for Contingencies," Legg
Mason has established reserves for potential losses that may result from pending
complaints, legal actions, investigations and proceedings. While the ultimate
resolution of these actions cannot be currently determined, in the opinion of
management, after consultation with legal counsel, the actions are expected to
be resolved with no material adverse effect on Legg Mason's financial condition.
However, if during any period a potential adverse contingency should become
probable or resolved, the results of operations in that period could be
materially affected. In addition, the ultimate costs of litigation-related
charges can vary significantly from period to period, depending on factors such
as market conditions, the size and volume of customer complaints and claims,
including class action suits and recoveries from indemnification, contribution
or insurance reimbursement. During 2002, 2001, and 2000, Legg Mason recorded
litigation-related charges of approximately $15,100 (net of recoveries of
$11,100), $2,400 and $8,300, respectively.
10. Income Taxes
The components of income tax expense are as follows:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Federal .................................. $ 83,180 $ 85,067 $ 81,499
Foreign .................................. 4,657 7,365 7,409
State and local .......................... 12,476 17,158 15,117
- -------------------------------------------------------------------------------
Total .................................... $ 100,313 $ 109,590 $ 104,025
- -------------------------------------------------------------------------------
Current .................................. $ 95,955 $ 104,631 $ 109,232
Deferred ................................. 4,358 4,959 (5,207)
- --------------------------------------------------------------------------------
Total .................................... $ 100,313 $ 109,590 $ 104,025
- --------------------------------------------------------------------------------
A reconciliation of the difference between the effective income tax rate and
the statutory federal income tax rate follows:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Taxes at statutory rates .................... $ 88,637 $ 93,061 $ 89,053
State income taxes,
net of federal income
tax benefit ............................... 8,109 11,153 9,985
Tax-exempt interest
income, net ............................... (937) (727) (403)
Goodwill amortization ....................... -- 2,017 1,851
Foreign losses with no
tax benefit ............................... 1,197 1,684 1,417
Differences in tax rates
applicable to non-U.S.
earnings .................................. 595 1,408 1,530
Other non-deductible
expenses .................................. 1,220 1,099 1,110
Other, net .................................. 1,492 (105) (518)
- --------------------------------------------------------------------------------
Total ....................................... $ 100,313 $ 109,590 $ 104,025
- --------------------------------------------------------------------------------
Components of Legg Mason's deferred tax assets and liabilities, included in
other assets and liabilities, are as follows:
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Deferred tax assets:
Accrued compensation
and benefits ..................................... $ 16,971 $ 17,395
Accrued expenses .................................. 15,820 9,440
Operating loss carryforwards ...................... 4,801 6,896
Amortization ...................................... -- 2,965
Other ............................................. 3,801 1,201
Valuation allowance ............................... (4,697) (6,875)
- --------------------------------------------------------------------------------
Total ............................................... $ 36,696 $ 31,022
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation ...................................... $ 1,454 $ 931
Deferred expenses ................................. 631 1,003
Deferred income ................................... 1,559 1,071
Purchased intangibles ............................. 7,071 --
Amortization ...................................... 7,890 --
Imputed interest .................................. 1,239 --
- --------------------------------------------------------------------------------
Total ............................................... $ 19,844 $ 3,005
- --------------------------------------------------------------------------------
At March 31, 2002 and 2001, the deferred tax valuation allowance was
primarily for benefits related to net operating losses. These operating losses
have two components: domestic (state) and foreign. The state net operating
losses expire between 2004 and 2020. The foreign net operating losses will
continue until utilized and otherwise have no expiration date.
55
<PAGE>
11. Employee Benefits
Legg Mason, through its subsidiaries, maintains various defined contribution
plans covering substantially all employees. In addition to discretionary
contributions, Legg Mason matches 50% of employee 401(k) contributions up to 6%
of employee compensation with a maximum of two thousand five hundred dollars per
year. Contributions charged to operations amounted to $27,858, $27,782 and
$29,478 in 2002, 2001 and 2000, respectively. In addition, employees can make
voluntary contributions under certain plans.
12. Capital Stock
At March 31, 2002, the authorized numbers of common, preferred and exchangeable
shares were 250 million, 4 million and an unlimited number, respectively. In
addition, at March 31, 2002 and 2001, there were 12.8 million and 13.9 million
shares of common stock, respectively, reserved for issuance under Legg Mason's
stock option plans and 2.5 million and 2.8 million common shares, respectively,
reserved for exchangeable shares in connection with the Perigee transaction (see
Note 2). Additionally, at March 31, 2002, Legg Mason has approximately 4.4
million shares of common stock reserved for issuance upon conversion of the
zero-coupon contingent convertible senior notes. Dividends declared but not paid
at March 31, 2002, 2001 and 2000 were $6,695, $5,878 and $4,676, respectively.
During fiscal 2002, the Board of Directors approved a stock repurchase plan.
Under this plan, Legg Mason is authorized to repurchase up to 3 million shares
on the open market at its discretion. As of March 31, 2002, Legg Mason
repurchased and retired 136,800 shares at a cost of $7,130.
13. Employee Incentive Plans
At March 31, 2002, 13.0 million shares were authorized to be issued under Legg
Mason's active omnibus employee stock plan. In addition, deferred compensation
payable in shares of Legg Mason common stock has been granted to certain
employees in mandatory and elective plans. The vesting in the plans can range
from immediate to periods up to six years and dividends are reinvested in common
stock at a 5% discount. There is no limit on the number of shares authorized to
be issued under these deferred arrangements. Options under Legg Mason's employee
stock plans have been granted at prices not less than 100% of the fair market
value. Options are generally exercisable in 20%, 25% or 33 1/3% increments over
3 to 5 years and expire within 5 to 10 years from the date of grant.
Stock option transactions under the plans during the three years ended March
31, 2002 are summarized below:
- -----------------------------------------------------------
Weighted-
average
Number of exercise
shares price
- -----------------------------------------------------------
Options outstanding at
March 31, 1999 ................ 7,373,135 $ 18.49
Granted .......................... 1,613,600 35.84
Exercised ........................ (1,349,288) 10.75
Canceled ......................... (193,002) 27.02
- -----------------------------------------------------------
Options outstanding at
March 31, 2000 ................ 7,444,445 $ 23.43
Granted .......................... 2,023,310 51.71
Exercised ........................ (1,181,885) 11.80
Canceled ......................... (204,501) 31.72
- -----------------------------------------------------------
Options outstanding at
March 31, 2001 ................ 8,081,369 $ 32.00
Granted .......................... 2,334,950 48.52
Exercised ........................ (1,117,867) 16.22
Canceled ......................... (286,039) 41.13
- -----------------------------------------------------------
Options outstanding at
March 31, 2002 ................ 9,012,413 $ 37.95
- -----------------------------------------------------------
The following information summarizes Legg Mason's stock options outstanding
at March 31, 2002:
- -----------------------------------------------------------
Weighted- Weighted-
Option average average
Exercise shares exercise remaining life
price range outstanding price (in years)
- -----------------------------------------------------------
$ 6.30-$ 26.94 ... 1,334,182 $ 15.73 2.1
26.95- 32.32 ... 2,218,313 29.87 5.3
32.33- 48.49 ... 1,890,228 38.68 5.9
48.50- 53.88 ... 3,569,690 50.90 6.8
- -----------------------------------------------------------
At March 31, 2002, 2001 and 2000, options were exercisable on 3,248,279
shares, 2,972,113 shares and 2,790,652 shares, respectively, and the weighted
average exercise prices were $28.03, $20.28 and $14.54, respectively.
The following information summarizes Legg Mason's stock options exercisable
at March 31, 2002:
- ---------------------------------------------------------
Weighted-
Option average
Exercise shares exercise
price range exercisable price
- ---------------------------------------------------------
$ 6.30-$ 26.94 ............... 1,079,231 $ 14.61
26.95- 32.32 ............... 1,353,626 29.66
32.33- 48.49 ............... 472,008 36.00
48.50- 53.88 ............... 343,414 52.87
- ---------------------------------------------------------
56
<PAGE>
During fiscal 2002, Legg Mason granted 22,448 shares of restricted common
stock at a fair value of $46.64 per share. The restricted shares, granted under
Legg Mason's employee stock plans, vest in 33 1/3% increments over three years.
Compensation expense is being recognized over the three-year vesting period. The
restricted stock awards were non-cash transactions. In fiscal 2002, 2001 and
2000, Legg Mason recognized $952, $787 and $674, respectively, in compensation
expense for grants made under Legg Mason's stock plans. In addition, $7,929,
$4,631 and $6,399 was recognized as compensation expense in fiscal 2002, 2001
and 2000, respectively, for deferred compensation arrangements payable in shares
of common stock.
The following table reflects pro forma results as if compensation expense
associated with option grants is recognized over the vesting period:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Net earnings
As reported ............................. $ 152,936 $ 156,230 $ 150,413
Pro forma ............................... 137,853 146,364 143,903
Earnings per share
As reported:
Basic ................................. $ 2.35 $ 2.45 $ 2.43
Diluted ............................... 2.24 2.30 2.27
Pro forma:
Basic ................................. $ 2.11 $ 2.29 $ 2.33
Diluted ............................... 2.02 2.16 2.17
- --------------------------------------------------------------------------------
The weighted average fair value of stock options granted in fiscal 2002, 2001
and 2000 using an option-pricing model, was $18.59, $20.15 and $13.00 per option
share, respectively.
The following weighted average assumptions were used in the model for grants
in fiscal 2002, 2001 and 2000:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Expected dividend yield .......................... 0.81% 0.85% 1.10%
Risk-free interest rate .......................... 4.65% 6.18% 6.02%
Expected volatility .............................. 35.58% 32.15% 27.68%
Expected lives(in years) ......................... 5.66 5.70 6.03
Legg Mason also has a stock option plan for non-employee directors. Options
granted under the plan are immediately exercisable at a price equal to the fair
value of the shares on the date of grant. Options issuable under the plan,
limited to 1.1 million shares in aggregate, have a term of not more than ten
years from the date of grant. At March 31, 2002, options on 531,920 shares have
been granted, of which 372,292 are currently outstanding.
Legg Mason has a qualified Employee Stock Purchase Plan covering
substantially all employees. Shares of common stock are purchased in the open
market on behalf of participating employees, subject to a 3 million total share
limit under the plan. Purchases are made through payroll deductions and Legg
Mason provides a 10% contribution towards purchases, which is charged to
stockholders' equity.
14. Deferred Compensation Stock Trust
In accordance with Emerging Issues Task Force ("EITF") Issue 97-14, "Accounting
for Deferred Compensation Arrangements Where Amounts are Held in a Rabbi Trust
and Invested," assets of rabbi trusts are to be consolidated with those of the
employer, and the value of the employer's stock held in the rabbi trusts should
be classified in stockholders' equity and generally accounted for in a manner
similar to treasury stock. Therefore, the shares Legg Mason has issued to its
rabbi trust and the corresponding liability related to the deferred compensation
plans are presented as components of stockholders' equity as employee stock
trust and deferred compensation employee stock trust, respectively. Shares held
by the Plan at March 31, 2002 and 2001 were 3,044,413 and 2,855,192,
respectively.
15. Off-Balance Sheet Risk and Concentration of Credit
In the normal course of business, Legg Mason executes, settles and finances
customer and proprietary securities transactions. These activities expose Legg
Mason to off-balance sheet risk in the event that customers or other parties
fail to satisfy their obligations.
Securities transactions generally settle three business days after trade
date. Should a customer or broker fail to deliver cash or securities as agreed,
Legg Mason may be required to purchase or sell securities at unfavorable market
prices.
Legg Mason extends credit to customers, collateralized by cash and
securities, subject to regulatory and internal requirements. Customer margin
transactions include purchases of securities, sales of securities not yet
purchased and option contracts. Legg Mason continually monitors margin
requirements and requests customers to deposit additional collateral or reduce
positions when necessary. Such transactions expose Legg Mason to risk in the
event that margin requirements are insufficient to fully cover customer losses.
Legg Mason invests in short-term resale agreements collateralized by U.S.
government and agency securities. Legg Mason generally takes possession of
securities purchased under these agreements. Such transactions expose Legg Mason
to risk in the event the counterparty does not repurchase the securities and the
value of the collateral held is less than the underlying receivable. Legg Mason
monitors the value of the collateral daily and requests additional collateral
when necessary. Legg Mason borrows and lends securities to finance transactions
and facilitate the settlement process, utilizing both firm proprietary positions
and customer margin securities held as collateral. In addition, Legg Mason
engages in conduit securities borrowing and lending activities in which it acts
as an agent to facilitate settlement for other institutions. In both firm and
conduit transactions, Legg Mason deposits or receives cash generally equal to
102% of the market value of the securities exchanged and monitors the adequacy
of collateral levels on a daily basis. Legg Mason sells securities it does not
currently own, and is obligated to subsequently purchase such securities at
prevailing market prices. Legg Mason is exposed to risk of loss if securities
prices increase prior to closing the transactions.
Legg Mason periodically borrows from banks on a collateralized basis
utilizing firm securities. Should the counterparty fail to return customer
securities pledged, Legg Mason is subject to the risk of acquiring the
securities at prevailing market prices in order to satisfy its customer
obligations.
57
<PAGE>
Legg Mason's customer financing and securities lending activities require
Legg Mason to pledge customer securities as collateral for various financing
sources such as bank loans and securities lending. At March 31, 2002, Legg Mason
had approximately $1.3 billion of customer securities under customer margin
loans that are available to be pledged, of which Legg Mason has repledged
approximately $18,974 under securities loan agreements. In addition, Legg Mason
has received collateral of approximately $312,712 under securities lending
agreements, of which Legg Mason has repledged approximately $258,665. Legg Mason
has also received collateral of approximately $2.3 billion under reverse
repurchase agreements for its customer reserve requirement, none of which has
been repledged.
16. Regulatory Requirements
The Parent's broker-dealer subsidiaries are subject to the Securities and
Exchange Commission's Uniform Net Capital Rule. The rule provides that equity
capital may not be withdrawn or cash dividends paid if resulting net capital
would fall below specified levels. As of March 31, 2002, the broker-dealer
subsidiaries had aggregate net capital, as defined, of $310,644, which exceeded
required net capital by $289,361.
The Parent's principal broker-dealer subsidiary must maintain a separate
account for the exclusive benefit of customers in accordance with Securities and
Exchange Commission Rule 15c3-3, as determined by periodic computations. The
rule allows the broker-dealer to maintain the required amounts in cash or
qualified securities.
The Parent's trust subsidiary is subject to the requirements of the Office of
Thrift Supervision, which requires compliance with two overlapping sets of
regulatory capital standards. As of March 31, 2002, the trust subsidiary met all
capital adequacy requirements to which it is subject.
17. Business Segment Information
Legg Mason currently operates through four business segments: Asset Management,
Private Client, Capital Markets and Other. The business segments are based upon
factors such as the services provided and distribution channels served. Certain
services that Legg Mason offers are provided to clients through
more than one of our business segments. Legg Mason allocates certain common
income and expense items among our business segments based upon various
methodologies and factors.
The Asset Management segment provides investment advisory services to
company-sponsored investment funds and asset management services to
institutional and individual clients. Investment advisory and related fees
earned by Asset Management vary based upon factors such as the type of
underlying investment product, the amount of assets under management and the
type of services that are provided. In addition, performance fees may be earned
on certain investment advisory contracts for meeting or exceeding performance
benchmarks.
The Private Client segment distributes a wide range of financial products
through its branch distribution network, including equity and fixed income
securities, proprietary and non-affiliated mutual funds and annuities. Private
Client consists of net interest from customers' margin loan and credit account
balances, commissions and principal credits earned on equity and fixed income
transactions in customer brokerage accounts, distribution fees earned on mutual
funds and fees earned on fee-based brokerage and managed accounts. Sales credits
associated with underwritten offerings initiated in the Capital Markets segment
are reported in Private Client when sold through its branch distribution
network.
The Capital Markets segment consists of Legg Mason's equity and fixed income
institutional sales and trading and corporate and public finance advisory and
underwriting activities. Sales credits associated with underwritten offerings
are reported in Capital Markets when sold through institutional distribution
channels. The results of this business segment also include realized and
unrealized gains and losses on investments acquired in connection with merchant
banking and investment banking activities.
The Other segment consists principally of Legg Mason's real estate service
business and unallocated corporate revenues and expenses.
Business segment financial results are as follows:
- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Net revenues:
Asset Management ....................... $ 557,876 $ 445,029 $ 376,660
Private Client ......................... 618,252 707,366 694,214
Capital Markets ........................ 242,168 174,274 157,137
Other .................................. 33,045 34,195 37,192
- -------------------------------------------------------------------------------
Total .................................... $ 1,451,341 $ 1,360,864 $1,265,203
- -------------------------------------------------------------------------------
Earnings before income
tax provision:
Asset Management ....................... $ 159,171 $ 132,260 $ 129,536
Private Client ......................... 53,345 113,304 114,215
Capital Markets ........................ 39,294 15,571 5,027
Other .................................. 1,439 4,685 5,660
- -------------------------------------------------------------------------------
Total .................................... $ 253,249 $ 265,820 $ 254,438
- -------------------------------------------------------------------------------
Legg Mason does not analyze asset information in all business segments.
Legg Mason principally operates in the United States, United Kingdom and
Canada. Revenues and expenses for geographic purposes are generally allocated
based on the location of the office providing the service. Results by geographic
region are as follows:
- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Net revenues:
United States ........................... $ 1,376,193 $1,285,453 $1,211,200
United Kingdom .......................... 37,312 36,422 18,894
Canada .................................. 29,006 32,544 28,720
Other ................................... 8,830 6,445 6,389
- -------------------------------------------------------------------------------
Total ..................................... $ 1,451,341 $1,360,864 $1,265,203
- -------------------------------------------------------------------------------
Earnings before income
tax provision:
United States ........................... $ 242,935 $ 257,224 $ 246,950
United Kingdom .......................... (3,783) (8,663) (5,732)
Canada .................................. 11,945 15,017 15,297
Other ................................... 2,152 2,242 (2,077)
- -------------------------------------------------------------------------------
Total ..................................... $ 253,249 $ 265,820 $ 254,438
- -------------------------------------------------------------------------------
58
<PAGE>
Quarterly Financial Data
(Dollars in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 2002 Mar. 31 Dec. 31 Sept. 30 June 30
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 420,855 $ 403,805 $ 372,952 $ 381,000
Interest expense 25,670 29,039 37,884 34,678
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues 395,185 374,766 335,068 346,322
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest expenses 319,261 307,762 284,090 286,979
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income tax provision 75,924 67,004 50,978 59,343
Income tax provision 29,827 25,916 20,588 23,982
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 46,097 $ 41,088 $ 30,390 $ 35,361
====================================================================================================================================
Earnings per share:
Basic $ .70 $ .63 $ .47 $ .55
Diluted .67 .60 .45 .52
Cash dividend per share .10 .10 .10 .09
Stock price range:
High 57.10 50.80 50.93 51.50
Low 48.36 38.35 34.25 38.06
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of May 28, 2002, the closing price of Legg Mason's common stock was $54.39.
<TABLE>
<CAPTION>
Quarter ended
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 2001 Mar. 31 Dec. 31 Sept. 30 June 30
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 380,011 $ 393,656 $ 375,769 $ 386,817
Interest expense 41,266 44,571 45,865 43,687
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenues 338,745 349,085 329,904 343,130
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest expenses 274,443 279,334 267,108 274,159
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income tax provision 64,302 69,751 62,796 68,971
Income tax provision 26,983 28,430 25,590 28,587
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 37,319 $ 41,321 $ 37,206 $ 40,384
====================================================================================================================================
Earnings per share:
Basic $ .58 $ .65 $ .58 $ .63
Diluted .55 .61 .55 .60
Cash dividend per share/(1)/ .09 .09 .09 .08
Stock price range:
High 56.99 59.63 60.25 52.38
Low 40.15 42.88 47.63 35.13
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excluding $0.16 per share declared by Perigee Inc. prior to acquisition in
quarter ended June 30, 2000.
59
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is contained under the caption
"Election of Directors" on pages 2 and 3 of our definitive proxy statement for
the 2002 Annual Meeting of Stockholders and the caption "Compliance With Section
16(a) of the Securities Exchange Act of 1934" on page 16 of that proxy
statement. That information is incorporated herein by reference to the proxy
statement. See Part I, Item 4A of this Report for information regarding certain
of our executive officers.
Item 11. Executive Compensation.
The information required by this item is contained under the caption
"Compensation of Directors" on page 4 of our definitive proxy statement for the
2002 Annual Meeting of Stockholders and the captions "Executive Compensation"
and "Stock Options" on pages 7 and 8 of our definitive proxy statement for the
2002 Annual Meeting of Stockholders. That information is incorporated herein by
reference to the proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is contained under the caption
"Security Ownership of Management and Principal Stockholders" on pages 5 and 6
of our definitive proxy statement for the 2002 Annual Meeting of Stockholders.
That information is incorporated herein by reference to the proxy statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is contained under the caption
"Certain Transactions" on page 15 of our definitive proxy statement for the 2002
Annual Meeting of Stockholders. That information is incorporated herein by
reference to the proxy statement.
60
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as a part of the report:
1. The following consolidated financial statements are included in Item
8 of this Report:
Page Number in
this Report
Report of Independent Accountants 41
Consolidated Statements of Earnings 42
Consolidated Statements of Financial
Condition 43
Consolidated Statements of Changes in
Stockholders' Equity 44
Consolidated Statements of Comprehensive
Income 45
Consolidated Statements of Cash Flows 46
Notes to Consolidated Financial
Statements 47-58
2. Financial Statement Schedules (included on pages S-1 to S-7 of
this Report):
Report of Independent Accountants on Financial Statement
Schedules
Schedule I - Condensed Financial Statements of Registrant
All other schedules to the consolidated financial statements for
which provision is made in the accounting regulations of the Securities and
Exchange Commission are not applicable or are not required and therefore have
been omitted.
3. Exhibits
3.1 Articles of Incorporation of Legg Mason, as amended
(incorporated by reference to Form 10-Q for the quarter
ended September 30, 2000)
3.2 By-laws of Legg Mason as amended and restated April 25,
1988 (incorporated by reference to Legg Mason's Annual
Report on Form 10-K for the year ended March 31, 1988)
4. Legg Mason hereby agrees, pursuant to Item
601(b)(4)(iii)(A) of Regulation S-K, to furnish to the
Commission upon request a copy of each instrument with
respect to the rights of holders of long-term debt of
Legg Mason or its subsidiaries.
10.1 Legg Mason, Inc. Stock Option Plan For Non-Employee
Directors (incorporated by reference to Legg Mason's
Annual Report on Form 10-K for the year ended March 31,
1998)*
61
<PAGE>
10.2 Form of Option Agreement under Legg Mason, Inc. Stock
Option Plan for Non-Employee Directors (incorporated by
reference to Form 10-Q for the quarter ended June 30,
1998)*
10.3 Legg Mason Wood Walker, Incorporated Deferred
Compensation/Phantom Stock Plan (June 1999 Amending
Restatement, as amended July 2001) (incorporated by
reference to Appendix A to the definitive proxy
statement for Legg Mason's 2001 Annual Meeting of
Stockholders)
10.4 Legg Mason, Inc. 1991 Omnibus Long-Term Compensation
Plan (incorporated by reference to Exhibit A to the
definitive proxy statement for Legg Mason's 1991 Annual
Meeting of Stockholders)*
10.5 Form of Option Agreement under Legg Mason, Inc. 1991
Omnibus Long-Term Compensation Plan (incorporated by
reference to Legg Mason's Annual Report on Form 10-K for
the year ended March 31, 1993)*
10.6 Legg Mason, Inc. Executive Incentive Compensation Plan
(incorporated by reference to Appendix A to the
definitive proxy statement for Legg Mason's 2000 Annual
Meeting of Stockholders)*
10.7 Legg Mason, Inc. 1996 Equity Incentive Plan
(incorporated by reference to Registration Statement No.
333-08721 on Form S-8)*
10.8 Form of Option Agreement under Legg Mason, Inc. 1996
Equity Incentive Plan (incorporated by reference to Legg
Mason's Annual Report on Form 10-K for the year ended
March 31, 1996)*
10.9 Form of Non-Qualified Stock Option Agreement under Legg
Mason, Inc. 1996 Equity Incentive Plan (incorporated by
reference to Form 10-Q for the quarter ended September
30, 1996)*
10.10 Executive Stock Purchase and Loan Agreement between Legg
Mason, Inc. and an Executive Officer of Legg Mason,
Inc., dated as of December 8, 1998 (incorporated by
reference to Form 10-Q for the quarter ended December
31, 1998)*
10.11 Restricted Stock Agreement between Legg Mason, Inc. and
an Executive Officer of Legg Mason, Inc., dated as of
December 8, 1998 (incorporated by reference to Form 10-Q
for the quarter ended December 31, 1998)*
10.12 Promissory Note of Executive Officer of Legg Mason,
Inc., dated as of December 8, 1998 (incorporated by
reference to Form 10-Q for the quarter ended December
31, 1998)*
10.13 Pledge Agreement by and between Legg Mason, Inc. and an
Executive Officer of Legg Mason, Inc., dated as of
December 8, 1998 (incorporated by reference to Form 10-Q
for the quarter ended December 31, 1998)*
10.14 Form of Restricted Stock Agreement under the Legg Mason,
Inc. 1996 Equity Incentive Plan (incorporated by
reference to Legg Mason's Annual Report on Form 10-K for
the year ended March 31, 2001)*
10.15 Legg Mason Wood Walker, Incorporated Private Client
Group Deferred Compensation Plan (incorporated by
reference to Legg Mason's Annual Report on Form 10-K for
the year ended March 31, 2001)*
62
<PAGE>
10.16 Legg Mason Wood Walker, Incorporated Financial Advisor
Deferred Compensation Plan, filed herewith*
10.17 Form of Legg Mason Wood Walker, Incorporated Key Employee
Phantom Stock Agreements (incorporated by reference to
Registration Statement No. 333-59841 on Form S-8)*
10.18 Form of Legg Mason Wood Walker, Incorporated Professional
Branch Manager Phantom Stock Agreements (incorporated by
reference to Registration Statement No. 333-53102 on Form
S-8)*
10.19 Purchase Agreement dated as of May 29, 2001 by and among
Legg Mason, Inc., Carnes Capital Corporation, Private
Capital Management, L.P., PCM-GP, Inc., MCC-PCM, Inc., Miles
S. Collier, Bruce S. Sherman and Gregg J. Powers
(incorporated by reference to Form 10-Q for the quarter
ended June 30, 2001)
10.20 Stock Purchase Agreement, dated as of July 16, 2001, by and
among Legg Mason, Inc,, Royce & Associates, Inc., the
shareholders of Royce & Associates, Inc. and Royce
Management Company (incorporated by reference to Form 10-Q
for the quarter ended September 30, 2001)
12 Computation of consolidated ratios of earnings to fixed
charges, (filed herewith)
21 Subsidiaries of the Company, filed herewith
23 Consent of independent accountants, filed herewith
- ---------------
*These exhibits are management contracts or compensatory plans or
arrangements.
(b) No reports on Form 8-K were filed during the quarter ended March
31, 2002.
63
<PAGE>
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.
LEGG MASON, INC.
By: /s/ Raymond A. Mason
----------------------------------
Raymond A. Mason, Chairman of the
the Board, President and
Chief Executive Officer
Date: June 28, 2002
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Raymond A. Mason
- --------------------------- Chairman of the Board, June 28, 2002
Raymond A. Mason President and Chief
Executive Officer
(Principal Executive Officer)
/s/ Charles J. Daley, Jr.
- --------------------------- Senior Vice President June 28, 2002
Charles J. Daley, Jr. and Treasurer
(Principal Financial and
Accounting Officer)
/s/ James W. Brinkley
- --------------------------- Director June 28, 2002
James W. Brinkley
/s/ Harry M. Ford, Jr.
- --------------------------- Director June 28, 2002
Harry M. Ford, Jr.
/s/ Nicholas J. St. George
- --------------------------- Director June 28, 2002
Nicholas J. St. George
/s/ Richard J. Himelfarb
- --------------------------- Director June 28, 2002
Richard J. Himelfarb
/s/ James E. Ukrop
- --------------------------- Director June 28, 2002
James E. Ukrop
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Harold L. Adams
- --------------------------- Director June 28, 2002
Harold L. Adams
/s/ John E. Koerner, III
- --------------------------- Director June 28, 2002
John E. Koerner, III
/s/ Roger W. Schipke
- --------------------------- Director June 28, 2002
Roger W. Schipke
/s/ Edward I. O'Brien
- --------------------------- Director June 28, 2002
Edward I. O'Brien
/s/ Peter F. O'Malley
- --------------------------- Director June 28, 2002
Peter F. O'Malley
/s/ Kurt L Schmoke
- --------------------------- Director June 28, 2002
Kurt L Schmoke
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
Our report on the consolidated financial statements of Legg Mason, Inc.
and Subsidiaries is included on page 41 in this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedules listed in the index on page 61 of this Form 10-K.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
May 3, 2002
S-1
<PAGE>
Schedule I
LEGG MASON, INC.
(Parent Company Only)
STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31,
------------------------------------------
2002 2001
--------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 166,293 $ 217,033
Investment securities, at fair value 639 3,707
Intangible assets, net 9,674 10,307
Goodwill 9,200 11,258
Investments in and advances
to subsidiaries 1,665,820 780,754
Other 30,904 16,118
--------------- --------------
$ 1,882,530 $ 1,039,177
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Dividends payable $ 6,445 $ 5,624
Other 12,074 6,063
Long-term debt 779,463 99,770
--------------- --------------
797,982 111,457
--------------- --------------
Stockholders' equity
Common stock, par value $.10;
authorized 250,000,000 shares;
issued 64,443,574 in 2002
and 62,849,994 in 2001 6,444 6,285
Shares exchangeable into common stock 9,400 10,439
Additional paid-in capital 358,972 330,394
Deferred compensation and employee note
receivable (32,007) (36,406)
Employee stock trust (90,674) (81,225)
Deferred compensation employee stock trust 90,674 81,225
Retained earnings 751,635 624,665
Accumulated other comprehensive loss, net (9,896) (7,657)
--------------- --------------
1,084,548 927,720
--------------- --------------
$ 1,882,530 $ 1,039,177
=============== ==============
</TABLE>
See notes to financial statements.
S-2
<PAGE>
Schedule I
LEGG MASON, INC.
(Parent Company Only)
STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------------
2002 2001 2000
----------- ------------ -----------
<S> <C> <C> <C>
Revenues
Interest $ 16,156 $ 24,107 $ 16,012
Other (2,711) 2,805 353
---------- ----------- -----------
13,445 26,912 16,365
---------- ----------- -----------
Expenses
Interest 37,121 6,619 7,357
Other 1,992 6,718 3,644
---------- ----------- -----------
39,113 13,337 11,001
---------- ----------- -----------
Earnings before income tax provision (benefit) and
equity in net earnings of subsidiaries (25,668) 13,575 5,364
Federal and state income tax provision (9,626) 5,339 958
---------- ----------- -----------
Earnings before equity in net
earnings of subsidiaries (16,042) 8,236 4,406
Equity in net earnings of
subsidiaries 168,978 147,994 146,007
---------- ----------- -----------
Net earnings 152,936 156,230 150,413
---------- ----------- -----------
Other comprehensive income (loss):
Foreign currency translation adjustment (225) (9,111) 365
---------- ----------- -----------
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) arising
during the period (348) 3,230 866
Reclassification adjustment for (gains) losses
included in net income (1,865) (582) 42
---------- ----------- -----------
Net unrealized gains (losses) on investment securities (2,213) 2,648 908
Deferred losses on cash flow hedges (277) - -
---------- ----------- -----------
Deferred income taxes 476 (235) (152)
---------- ----------- -----------
Total other comprehensive income (loss) (2,239) (6,698) 1,121
---------- ----------- -----------
Comprehensive income $150,697 $149,532 $151,534
========== =========== ===========
</TABLE>
See notes to financial statements.
S-3
<PAGE>
Schedule I
LEGG MASON, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------
2002 2001 2000
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 152,936 $ 156,230 $ 150,413
Equity in earnings of subsidiaries (168,978) (147,994) (146,007)
Amortization 3,636 569 366
Accretion and amortization of securities discounts and premiums, net 5,836 47 47
Other 992 577 572
(Increase) decrease in assets excluding acquisitions (7,646) (220) 4,439
Increase (decrease) in liabilities excluding acquisitions 9,377 4,373 (2,703)
--------- --------- ---------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (3,847) 13,582 7,127
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in securities purchased under agreements to
resell - 110,643 (37,627)
Purchases of investment securities (251) (4,499) (3,772)
Proceeds from sales and maturities of investment securities 1,299 2,003 7,038
Investments in and advances to subsidiaries 85,773 69,295 86,627
Acquisitions, net of cash acquired (792,856) (16,601) (87,637)
--------- --------- ---------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (706,035) 160,841 (35,371)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt 664,714 - -
Issuance of common stock 26,707 21,037 20,780
Repurchase of common stock (7,130) - -
Dividends paid (25,149) (23,615) (24,509)
--------- --------- ---------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 659,142 (2,578) (3,729)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (50,740) 171,845 (31,973)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 217,033 45,188 77,161
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 166,293 $ 217,033 $ 45,188
========= ========= =========
</TABLE>
Interest payments were $20,844 in 2002, $6,500 in 2001 and $6,832 in 2000.
No income tax payments were made in 2002, 2001 and 2000.
See notes to financial statements.
S-4
<PAGE>
LEGG MASON, INC.
(Parent Company Only)
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
1. Basis of Presentation
The Parent Company Only financial statements include the accounts of Legg
Mason, Inc ("the Parent Company"). In addition, all the assets and liabilities
of its subsidiaries are presented in Investments in and advances to
subsidiaries.
The Notes to the Consolidated Financial Statements of Legg Mason, Inc. and
Subsidiaries included in Item 8 of this Report include disclosures with respect
to the Parent Company Only.
2. Transactions with Affiliates
Parent Company interest income for 2002, 2001 and 2000 includes $6,890,
$10,324 and $6,617, respectively, arising from promissory notes between the
Parent Company and its subsidiaries. The notes, $76,027 at March 31, 2002 and
$117,369 at March 31, 2001, are included in Investments in and advances to
subsidiaries. During the fiscal year, a broker-dealer subsidiary of the Parent
Company repaid a $35,000 subordinated loan.
All income tax payments are made by Legg Mason Wood Walker, Inc., a
wholly-owned subsidiary.
3. Firm Investments
Firm investments include investments in marketable and private equity
securities and limited partnerships that make private equity investments.
Unrealized gains and losses on marketable equity securities are included in
accumulated other comprehensive loss unless an "other than temporary"
impairment is determined to exist in which case the unrealized loss is charged
to earnings. Realized and unrealized gains and losses on private equity
securities are included in other revenue. The Parent Company shares ratably in
the income and expenses of its investments in limited partnerships and records
its interest on the equity method.
4. Intangible Assets and Goodwill
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible". SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. In addition, it provides that the cost of an
acquired entity must be allocated to the assets acquired, including identifiable
intangible assets, and liabilities assumed based on their estimated fair values
at date of acquisition. The excess cost over the fair value of the net assets
acquired must be recognized as goodwill.
SFAS No. 142 provides that goodwill is no longer amortized and the value of
an identifiable intangible asset must be amortized over its useful life, unless
the asset is determined to have an indefinite useful life. Goodwill must be
tested for impairment at least annually. The testing of goodwill has been
completed and there was no impairment as of March 31, 2002.
Intangible assets, consisting of asset management contracts are reported at
cost, net of accumulated amortization of $1,073 and $440, at March 31, 2002 and
2001, respectively. Estimated amortization expense for each of the five years
subsequent to March 31, 2002 is $633 per year.
The carrying value of goodwill of $9,200 and $11,258 at March 31, 2002 and
2001, respectively, is attributable to the asset management reporting segment.
S-5
<PAGE>
5. Long-term Debt
The Parent Company's long-term debt at March 31, 2002 consists of $423,979 of
6.75% senior notes, $255,667 of zero-coupon contingent convertible senior notes
and $99,817 of 6.50% senior notes. During 2002, the Parent Company issued
long-term fixed rate debt to fund acquisitions.
On July 2, 2001, the Parent Company issued $425,000 principal amount of
senior notes due July 2, 2008, which bear interest at 6.75%. The notes were sold
at a discount to yield 6.80%. The net proceeds of the notes were approximately
$421,000, after payment of debt issuance costs.
On June 6, 2001, the Parent Company issued $567,000 principal amount at
maturity of zero-coupon contingent convertible senior notes due on June 6, 2031,
resulting in gross proceeds of approximately $250,000. The convertible notes
were issued in a private placement to qualified institutional buyers at an
initial offering price of $440.70 per $1,000 principal amount at maturity. The
discounted price reflects a yield to maturity of 2.75% per year. Upon certain
events, including the sale price of the Parent Company's common stock reaching
certain thresholds, the convertible notes being rated below specified credit
ratings and the convertible notes being called for redemption, each note is
convertible into 7.7062 shares of the Parent Company's common stock, subject to
adjustment. The Parent Company may redeem the convertible notes for cash on or
after June 6, 2006 at their accreted value. In addition, the Parent Company may
be required to repurchase the convertible notes at their accreted value, at the
option of the holders, on June 6, 2003, 2005, 2007, 2011 and every five years
thereafter until 2026 or upon a change of control in the Parent Company. Such
repurchases can be paid in cash, shares of the Parent Company's common stock or
a combination of both. The net proceeds of the offering were $244,375, after
payment of debt issuance costs. The debt issuance costs are included in other
assets and are being amortized over a two-year period up to the first repurchase
option of the holders. Approximately 4.4 million shares of common stock are
reserved for issuance upon conversion.
The Parent Company also has outstanding $100,000 principal amount of senior
notes due February 15, 2006, which bear interest at 6.50%. The notes were issued
at a discount to yield 6.57%.
At March 31, 2002, the Parent Company had $75,000 available for the issuance
of additional debt or convertible debt securities pursuant to a shelf
registration.
At March 31, 2002, the aggregate maturities of long-term debt, based on their
contractual terms, are as follows:
- ---------------------------------------------------------------
2003 ............................................ $ --
2004 ............................................ --
2005 ............................................ --
2006 ............................................ 100,000
2007 ............................................ --
Thereafter ...................................... 992,000
- ---------------------------------------------------------------
$1,092,000
- ---------------------------------------------------------------
6. Deferred Compensation Stock Trust
In accordance with Emerging Issues Task Force ("EITF") Issue 97-14,
"Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held
in a Rabbi Trust and Invested," assets of rabbi trusts are to be consolidated
with those of the employer, and the value of the employer's stock held in the
rabbi trusts should be classified in stockholders' equity and generally
accounted for in a manner similar to treasury stock. Therefore, the shares the
Parent Company has issued to its rabbi trust and the corresponding liability
related to the deferred compensation plans are presented as components of
stockholders' equity as employee stock trust and deferred compensation employee
stock trust, respectively. Shares held by the Plan at March 31, 2002 and 2001
were 3,044,413 and 2,855,192, respectively.
S-6
<PAGE>
7. Stock Repurchase
During fiscal 2002, the Board of Directors approved a stock repurchase plan.
Under this plan, the Parent Company is authorized to repurchase up to 3 million
shares on the open market at its discretion. As of March 31, 2002, the Parent
Company repurchased and retired 136,800 shares at a cost of $7,130.
8. Commitments and Contingencies
As of March 31, 2002, the Parent Company has contingent obligations of up to
$818,400 related to its business acquisitions that are payable through March 31,
2007.
In addition, the Parent Company is guarantor on certain leases for office
facilities and equipment under non-cancelable operating leases. The Parent
Company also guarantees a secured warehouse line of credit used by a subsidiary
to fund commercial mortgage loans.
S-7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>3
<FILENAME>dex1016.txt
<DESCRIPTION>FINANCIAL ADVISOR DEFERRED COMPENSATION PLAN
<TEXT>
<PAGE>
Exhibit 10.16
LEGG MASON WOOD WALKER, INCORPORATED
FINANCIAL ADVISOR DEFERRED COMPENSATION PLAN
This document constitutes the Legg Mason Wood Walker,
Incorporated Financial Advisor Deferred Compensation Plan (the "Plan").
1. Purpose - The purpose of the Plan is to enhance the ability
of Legg Mason Wood Walker, Incorporated (the "Company") to attract and retain
full-time financial advisors by providing for the payment of deferred bonus
commissions.
2. Definitions - As used herein, the following definitions
shall apply:
(a) "Account" means a Financial Advisor's combined Interest
Account and Phantom Stock Account.
(b) "Committee" means the Legg Mason Wood Walker,
Incorporated Financial Advisor Deferred Compensation Plan Committee consisting
of such members as the Company's President shall select from time to time.
(c) "Company" means Legg Mason Wood Walker, Incorporated.
(d) "Credit Interest Asset Base" means for each month, the
product of (A) the product of (X) 0.0833 and (Y) the sum of the average credit
interest and Legg Mason money market fund balances of the FA for the month
(calculated by dividing the sum of the closing balances in the account for each
day by the number of days in the month), less the applicable threshold for that
Plan Year as set forth in the FA Compensation Schedule, and (B) 0.001 (or the
different number for the applicable Plan Year as is set forth in the FA
Compensation Schedule).
(e) "Credit Interest Deferred Bonus" means the deferred
bonus credited under Section 4(b) with respect to the combined balance in credit
interest accounts and Legg Mason money market fund accounts in excess of the
applicable threshold contained in the FA Compensation Schedule.
(f) "Credit Interest Rate" means the average of the twelve
month end rates of the Company's credit interest rate paid during a Plan Year to
the Company's cash reinvestment accounts.
(g) "Deferred Bonus Commission" means the Production
Deferred Bonus, the Credit Interest Deferred Bonus and the 12b-1 Deferred
Bonus.
(h) "Disability" means a medically determinable physical or
mental impairment which, as determined by the Committee using such criteria as
it establishes in its sole and absolute discretion, will prevent the FA from
performing his or her usual duties or any other similar duties available in the
Company's employ for a period of at least twelve (12) months.
<PAGE>
(i) "Distribution Valuation Date" means (i) in the case of
a distribution following the death of a FA or the termination of a FA's
employment as a result of Disability, the date that is ten (10) business days
before the applicable Payment Date; and (ii) in all other cases, January 25/th/
(or, if Legg Mason Common Stock is not traded on its principal exchange on that
day, the next following day on which Legg Mason Common Stock is traded on its
principal exchange) preceding the applicable Payment Date.
(j) "Dividend Payment Date" has the meaning specified in
Section 6(d)(i).
(k) "Eligible FA" means a FA (i) who is employed in the
Company's Private Client Group, (ii) who is classified by the Company as a
full-time FA, and (iii) who is employed by the Company on the last day of the
Plan Year, or who terminated employment during the Plan Year by reason of death,
Disability or Retirement. A FA who is not classified by the Company as a
"full-time" FA is not eligible to participate in the Plan, regardless of the
number of hours devoted to services as a FA.
(l) "Eligible Gross Production" means Gross Production that
is eligible for a Production Deferred Bonus, as determined annually in
accordance with the FA Compensation Schedule.
(m) "FA Compensation Schedule" means the Legg Mason
Financial Advisor Compensation Schedule that is in effect for a particular Plan
Year.
(n) "Fair Market Value" means an amount equal to the
average of the closing prices on the principal exchange on which Legg Mason
Common Stock is traded for the date on which the price is being determined
(i.e., the Valuation Date, Dividend Payment Date, Distribution Valuation Date or
other specified date) and the four (4) trading days immediately following the
applicable date on which the value is being determined or, if Legg Mason Common
Stock is not then traded on an exchange, such amount as is determined by the
Committee, in its discretion, using any reasonable method of valuation. Any
decline in the actual trading price of Legg Mason Common Stock during the five
(5) day pricing period shall be the sole risk of the FA.
(o) "Financial Advisor" or "FA" means an employee who
devotes all of his or her working time to the generation of commission and fee
revenues through the sale of investment products and services to the public and
is compensated on a commission basis. This definition excludes any executive
office/departmental personnel unless specifically included by separate
agreement. Notwithstanding the forgoing, a Branch Manager who receives
non-commission compensation shall be considered a "Financial Advisor" or "FA"
and shall be entitled to participate hereunder (but solely with respect to his
or her personal Gross Production).
(p) "Gross Production" means the gross commission and fee
revenue (other than investment banking fees and order fees, both of which are
excluded from the calculation of Gross Production) that is received by the
Company from sales of products and services by a Financial Advisor. If
production is split between one or more Financial Advisors,
2
<PAGE>
each Financial Advisor's "Gross Production" will be based on his or her own
cumulative production level.
(q) "Interest Account" means the investment account
established for Deferred Bonus Commissions pursuant to Section 5(a) and Section
6(c) of the Plan.
(r) "Legg Mason Common Stock" means shares of common
stock of Legg Mason, Inc.
(s) "Legg Mason Share Units" or "Share Units" means units
that are economically equivalent to, but are not actual, shares of Legg Mason
Common Stock.
(t) "Legg Mason Tier II Assets" means mutual fund shares
sold between January 1, 1999 and August 21, 1999 (inclusive) and not redeemed in
those mutual funds that were classified as "Legg Mason funds" during such
period.
(u) "Monthly Credit Interest Amount" means for each
month, the amount determined by multiplying 0.40 (or the different number for
the applicable Plan Year as is set forth in the FA Compensation Schedule) by the
Credit Interest Asset Base for the FA for that month, however, a Monthly Credit
Interest Amount that is a negative number shall be deemed to be zero.
(v) "Payment Date" the date a FA receives a payment from
the Company pursuant to the Plan.
(w) "Phantom Stock Account" means the investment account
established for Deferred Bonus Commissions pursuant to Section 5(a) and Section
6(d) of the Plan.
(x) "Plan Year" means the calendar year.
(y) "Production Deferred Bonus" means the deferred bonus
credited under Section 4(a) with respect to Gross Production in excess of the
applicable Gross Production threshold contained in the FA Compensation Schedule.
(z) "Retirement" means a FA's termination of employment
with the Company (i) on or after age sixty-five (65); or (ii) at any time when
the sum of the FA's age at termination of employment and his or her years of
service with the Company equals at least seventy (70).
(aa) "12b-1 Applicable Percentage" means ten percent (10%)
on Legg Mason Tier II Assets over $5,000,000 (up to $20,000,000) and twelve
percent (12%) on Legg Mason Tier II Assets over $20,000,000.
(bb) "12b-1 Deferred Bonus" means the deferred bonus
credited under Section 4(c) for the 2002 Plan Year with respect to Legg Mason
Tier II Assets in excess of the applicable threshold.
3
<PAGE>
(cc) "Valuation Date" means February 15/th/ of each year or,
if that day is not a day on which Legg Mason Common Stock is traded on the
principal exchange on which it is regularly traded, the next following trading
day.
3. Plan Participation - Eligible FA's shall become participants
in the Plan on the last day of the first Plan Year during which they become an
Eligible FA. In order to receive a Deferred Bonus Commission for any Plan Year
during which the Eligible FA was employed, the FA must be an Eligible FA, and if
the employment of a FA terminates during a Plan Year by reason of the FA's
death, Disability or Retirement, the FA shall be entitled to a prorated Deferred
Bonus Commission for such Plan Year (determined in accordance with Section 4).
If a FA ceases to be an Eligible FA (e.g., because he or she ceases to
be classified as a full-time FA), but remains in the employ of the Company, the
FA will continue to participate in the Plan, but only with respect to amounts
previously credited to the FA's Account. If a FA ceases to be an Eligible FA,
the value of the Account shall continue to be credited with earnings pursuant to
Section 5 (subject to the forfeiture provisions of Section 7(a)), but no further
Deferred Bonus Commissions will be credited to the Account with respect to any
subsequent periods.
4. Deferred Bonus Commissions - As of the end of each Plan Year
commencing with the 2002 Plan Year, or in the case of Section 4(c) below, only
as of the end of the 2002 Plan Year, the Company will credit the following
amounts to the Account of each Eligible FA:
(a) Production Deferred Bonus - The amount determined by
applying the applicable rate schedule in the FA Compensation Schedule for the
Plan Year to the FA's Eligible Gross Production for that Plan Year.
(b) Credit Interest Deferred Bonus - The sum of the Monthly
Credit Interest Amounts of the FA for that Plan Year.
(c) 12b-1 Deferred Bonus - An amount equal to the 12b-1
Applicable Percentage times 12b-1 gross commissions generated with respect to
Legg Mason Tier II Assets for the Plan Year times forty-five percent (45%). This
Section 4(c) shall apply only for the 2002 Plan Year, and no 12b-1 Deferred
Bonus shall be paid or earned for any Plan Year other than 2002.
Deferred Bonus Commissions which the FA elects to invest in
the Phantom Stock Account will be allocated as of the Valuation Date following
the close of the Plan Year to which the Deferred Bonus Commission relates.
If the employment of an Eligible FA terminates during a Plan
Year by reason of the FA's death, Disability or Retirement, the FA shall be
entitled to a prorated Deferred Bonus Commission for such Plan Year. Such
proration shall be made by:
(i) multiplying the applicable thresholds in Sections 4(a)
and 4(c) and the related provisions of the FA Compensation Schedule by a
fraction, the numerator of which is the
4
<PAGE>
number of calendar days during which the FA was employed by the Company and the
denominator of which is 365; and
(ii) applying such adjusted thresholds and making the required
determinations with respect to the FA's Eligible Gross Production (under Section
4(a)) and 12b-1 Applicable Percentage (under Section 4(c)) as of the last day of
the month during which the FA terminated employment and adding to that amount
any Credit Interest Deferred Bonus related to the months in which the FA was
employed.
5. Establishment of FA Accounts
(a) Account Established for Each Eligible FA - An individual
Account shall be established on the books of the Company in the name of each
Eligible FA, for the purpose of accounting for Deferred Bonus Commissions
credited to the FA, and to account for investment adjustments made pursuant to
Section 6. A separate sub-account shall be established with respect to Deferred
Bonus Commissions credited for each Plan Year (to which Deferred Bonus
Commissions for the Plan Year and any investment adjustments made pursuant to
Section 6 shall be credited). Other sub-accounts may be established as the
Committee or the Company deems appropriate to properly implement the provisions
of the Plan.
(b) Account Statements - As soon as practicable after the
Valuation Date, the Company shall provide each Eligible FA who has a balance in
his or her Account with a statement showing the Deferred Bonus Commissions
credited to his or her Account with respect to each Plan Year, the manner in
which Deferred Bonus Commissions for a particular Plan Year are deemed to be
invested, the date on which the FA is scheduled to vest in the Deferred Bonus
Commissions (and investment adjustments thereon) for each Plan Year, and such
other information as the Committee shall deem relevant.
6. Investment of Deferred Bonus Commissions
(a) Phantom Stock or Interest Credit - For investment
purposes, Deferred Bonus Commissions credited to a FA's Account shall be
allocated to, and accrue in, either the Phantom Stock Account or Interest
Account.
(b) Investment Designation - Subject to such limitations,
rules and procedures as may from time to time be imposed by the Committee, each
Eligible FA shall elect annually, prior to the end of each Plan Year, on a form
prescribed by the Committee, whether any Deferred Bonus Commissions for such
Plan Year shall be allocated to, and accrue in, the Interest Account or the
Phantom Stock Account. Once an election has been made for a particular Plan
Year, it may not be changed. A separate election may be made with respect to
each Plan Year. Except as the Committee shall otherwise determine, any
investment election with respect to the Deferred Bonus Commission for a Plan
Year shall apply to the Deferred Bonus Commission for each following Plan Year
unless and until a new investment election is filed with the Committee. In the
event the Committee does not receive an initial investment election, or it
receives an investment election which it deems to be incomplete, unclear, not in
accordance with procedures established by the Committee, or otherwise improper,
the FA's existing investment election then in effect shall remain in effect,
unless the Committee provides for, and
5
<PAGE>
permits, corrective action. If there is no existing investment election, or, if
after the expiration of any opportunity provided for corrective action, the
Committee still possesses incomplete investment instructions, the FA shall be
deemed to have designated that any non-directed Deferred Bonus Commission be
allocated to the Interest Account.
(c) Interest Account - The Company will establish an Interest
Account on its books and records for the benefit of the FA and shall credit such
Interest Account with the Deferred Bonus Commissions allocated to the Interest
Account. As of the last day of each Plan Year, the balance of a FA's Interest
Account (as determined prior to the allocation of any Deferred Bonus Commissions
for such Plan Year) shall be credited with an amount equal to one year's
interest based on the Credit Interest Rate. Deferred Bonus Commissions which the
FA elects to invest in the Interest Account will be allocated as of December 31
of the Plan Year to which the Deferred Bonus Commission relates (but will not be
included for purposes of determining the amount of interest allocated for such
Plan Year).
(d) Phantom Stock Account - All Deferred Bonus Commissions for a
Plan Year that are allocated to the Phantom Stock Account for that Plan Year
shall be deemed converted into Legg Mason Share Units. The Company will
establish a Phantom Stock Account on its books and records for the benefit of
the FA and shall credit such Phantom Stock Account with the amount of Share
Units resulting from the conversion of the Deferred Bonus Commissions. The
number of Share Units into which such Deferred Bonus Commission shall be
converted (calculated to four decimal places) will be determined as of the
Valuation Date and will be equal to the amount of the Deferred Bonus Commission
for the Plan Year divided by the Fair Market Value of a share of Legg Mason
Common Stock on the Valuation Date. The conversion of Deferred Bonus Commission
into Legg Mason Share Units will be made by the Committee as soon as
administratively practicable after the Valuation Date following the Plan Year to
which the Deferred Bonus Commission relates.
(i) Adjustment to Phantom Stock Account upon Dividend by the
Company - If, prior to a Payment Date, the Company pays any dividend (other than
in Legg Mason Common Stock) on its Common Stock, or makes any distribution
(other than in Legg Mason Common Stock) with respect thereto, the FA's Phantom
Stock Account will be credited with a number of additional Share Units
determined by dividing the amount of the dividend or other distribution
allocable to the Share Units already credited to the Phantom Stock Account as of
the record date for the dividend or distribution, by 95% of the Fair Market
Value of a share of Legg Mason Common Stock on the payment date for the dividend
or distribution (the "Dividend Payment Date"). Amounts to be credited under this
subsection 6(d)(i) will be credited as soon as administratively practicable
after the applicable Dividend Payment Date.
(ii) Adjustment to Phantom Stock Account upon Certain Events -
In the event that, prior to a Payment Date, the number of outstanding shares of
Legg Mason Common Stock is changed by reason of a stock split, stock dividend,
combination of shares or recapitalization, or Legg Mason Common Stock is
converted into or exchanged for other shares as a result of a merger,
consolidation, sale of assets or other reorganization or recapitalization, the
number of Share Units then credited to a FA's Phantom Stock Account will be
appropriately adjusted so as to reflect such change (based upon the best
estimate of the Company as to relative values).
6
<PAGE>
(iii) Rights as LMI Stockholder - Neither the allocation of Deferred
Bonus Commissions to the Phantom Stock Account, nor any other provision of the
Plan, shall confer or be construed as conferring upon a FA any rights as a
stockholder of the Company or any right to have access to the books and records
of the Company or any affiliate or subsidiary.
7. Vesting; Forfeiture Of Account -
(a) Vesting - The Deferred Bonus Commission for each Plan
Year is subject to a six year "class year" vesting schedule; that is, the
Deferred Bonus Commission for a particular Plan Year (together with any related
investment adjustments thereto) shall vest if the FA remains continuously
employed by the Company through the last day of the sixth (6th) Plan Year
following the Plan Year to which the Deferred Bonus Commission relates. If a
FA's employment with the Company terminates for any reason (whether involuntary
or voluntary and whether with or without cause) other than death, Disability or
Retirement on or before the last day of the sixth Plan Year following the year
to which the Deferred Bonus Commission relates, the portion of the FA's Interest
Account and Phantom Stock Account that relates to such non-vested Deferred Bonus
Commission (and the related investment adjustments thereto) shall be forfeited
in their entirety.
(b) Retirement, Death or Disability - A FA shall become
fully (100%) vested in his or her Account upon Retirement, death or Disability.
However, the distribution (and potential forfeiture) of the Account to a retired
FA shall be conditioned upon his or her continued compliance with the provisions
of Section 10.
(c) Forfeitures - Forfeited amounts (including amounts
forfeited pursuant to Section 10) shall revert to the Company and will not be
allocated to other FA's.
8. Distributions -
(a) During Employment - Except for cases of Retirement,
death or Disability, and subject to Section 11, distributions of the Deferred
Bonus Commission credited to a FA's Account (together with any investment
adjustments made pursuant to Section 6 with respect to such Deferred Bonus
Commission) shall be made within seventy-five (75) days after the last day of
the sixth (6/th/) Plan Year following the Plan Year to which the Deferred Bonus
Commission relates.
(b) Retirement - In the event a FA's employment with the
Company terminates as a result of Retirement, distribution of the FA's remaining
Account (including any prorated Deferred Bonus Commission to which the FA may be
entitled for the Plan Year pursuant to Section 4) shall be made, subject to
Section 11, within seventy-five (75) days after the close of the Plan Year
following the Plan Year in which the FA retired, unless distribution of benefits
is forfeited pursuant to Section 10.
(c) Disability of FA - In the event a FA's employment with
the Company terminates as a result of the FA's Disability, all amounts in the
FA's Account (including any prorated Deferred Bonus Commission to which the FA
may be entitled for the Plan Year pursuant to Section 4) shall be paid, subject
to Section 11, within seventy-five (75)
7
<PAGE>
days following the later of (i) the date on which the FA's employment terminated
and (ii) the date the Committee determines that the FA's employment terminated
as a result of the FA's Disability. The Committee, in its sole discretion, may
determine that a FA has a Disability and that the FA's employment with the
Company terminated as a result of such Disability at any time before, at the
time of, or after the FA's termination of employment.
(d) Death -
(i) Death During Employment - If a FA's employment
with the Company terminates as a result of the FA's death, all amounts in the
FA's Account (including any prorated Deferred Bonus Commission to which the FA
may be entitled for the Plan Year pursuant to Section 4) shall be paid to the
FA's beneficiary (as determined pursuant to Section 8(d)(iii)) within
seventy-five (75) days following the date of the FA's death.
(ii) Death Following Retirement - In the event of a
FA's death subsequent to the date of the FA's Retirement and at a time during
which the FA's remaining Account under the Plan has not been distributed, all
amounts then remaining in the FA's Account shall be paid to the FA's beneficiary
(as determined pursuant to Section 8(d)(iii)) within seventy-five (75) days
following Committee's receipt of written notification of the FA's death.
(iii) Designation of Beneficiary - Each FA from time to
time may designate, on such form as the Committee may prescribe from time to
time, any person or persons (who may be named contingently or successively) to
receive any amount payable under the Plan upon or after his or her death, and
such designation may be changed from time to time by the FA by filing a new
designation with the Committee. Each designation will revoke all prior
designations by the FA, shall be on a form prescribed by the Committee, and will
be effective only when filed in writing with the Committee during the FA's
lifetime. In the absence of a valid beneficiary designation, or if, at the time
any amount is payable to a FA or beneficiary, there is no living beneficiary
eligible to receive the payment that has been validly named by the FA, then
Company shall pay any such amount to the FA's surviving spouse (if the FA was
legally married at the time of his or her death) or if there is no surviving
spouse, to the FA's estate. In determining the existence or identity of anyone
entitled to payment, the Committee may rely conclusively upon information
supplied by the personal representative of the FA's estate. In the event of a
lack of adequate information having been supplied to the Committee, or in the
event that any question arises as to the existence or identity of anyone
entitled to receive a payment as aforesaid, or in the event that a dispute
arises with respect to any such payment, or in the event that a beneficiary
designation conflicts with applicable law, or in the event the Committee is in
doubt for any other reason as to the right of any person to receive a payment as
beneficiary then, notwithstanding the foregoing, the Company, in its sole
discretion, may, in complete discharge, and without liability for any tax or
other consequences which might flow therefrom: (i) distribute the payment to the
FA's estate, (ii) retain such payment, without liability for interest, until the
rights thereto are determined, or (iii) deposit the payment into any court of
competent jurisdiction.
8
<PAGE>
9. Form of Distribution -
(a) Interest Account - The portion allocable to a FA's
Interest Account shall be distributed in cash.
(b) Phantom Stock Account - The portion allocable to a FA's
Phantom Stock Account shall be distributed in whole shares of Legg Mason Common
Stock as described below, based on the Fair Market Value of Legg Mason Common
Stock on the Distribution Valuation Date. Whole Share Units to be distributed
within an FA's Phantom Stock Account will be converted into shares of Legg Mason
Common Stock on a one-for-one basis. The portion of a FA's Phantom Stock Account
that represents fractional Share Units and thus cannot be converted into whole
shares of Legg Mason Common Stock shall be distributed in cash. There is no
limit on the total number of shares of Legg Mason Common Stock that may be
distributed under this Section. Any decline in the actual trading price of Legg
Mason Common Stock during the period between the Distribution Valuation Date and
the applicable Payment Date, as well as any brokerage commissions, fees or other
charges incurred by a FA in connection with the disposition of any shares of
Legg Mason Common Stock that are distributed to the FA, shall be the sole risk
and responsibility of the FA.
10. Non-Compete - If a retired FA engages in competition with the
Company prior to the date of a distribution, the FA's Account shall be forfeited
in its entirety. Forfeited amounts shall revert to the Company and will not be
allocated to other FAs.
(a) For purpose of this Section, a FA shall be deemed to
have "engaged in competition" with the Company if he or she:
(i) discloses the names of or otherwise identifies
any of the Company's customers to any person, firm, corporation, association, or
other entity which provides products or services that are similar to those
provided by the Company;
(ii) discloses to any person, firm, corporation,
association, or other entity any information regarding the Company's general
business practices or procedures, methods of sale, list of products, personnel
information or any other information concerning the Company's business;
(iii) owns, manages, operates, controls, is employed
by, acts as an agent for, participates in or is connected in any manner with the
ownership, management, operation or control of any firm, corporation,
association or other entity which is engaged in businesses which are or may be
competitive to the business of the Company; provided further that this
restrictive covenant shall encompass the State of Maryland and any other states
where the Company is engaged in business, and every city, county, and other
political subdivision of such states; or
(iv) solicits or calls, either by himself or at his
or her direction has any other person or firm solicit or call, any of the
customers of the Company on whom the
9
<PAGE>
FA called, with whom the FA became acquainted, or of whom the FA learned of
during his or her employment by the Company.
(b) The determination of whether a FA has violated the terms
of Section 10(a) shall be made by the Committee, in its sole and absolute
discretion, and the determination of the Committee shall be final, conclusive
and binding upon both the FA (or any person or entity claiming through the FA)
and the Company.
(c) As a condition precedent to any distribution, the
Committee may require a certificate from the FA certifying that he or she has
not violated any of the provisions of Section 10(a).
(d) It is the intention of the Company that this Section be
given the broadest protection allowed by law with regard to the restrictions
herein contained. Each restriction set forth in this Section shall be construed
as a condition separate and apart from any other restriction or condition. To
the extent that any restriction contained in this Section is determined by any
court of competent jurisdiction to be unenforceable by reason of it being
extended for too great a period of time, or as encompassing too large a
geographic area, or over too great a range of activity, or any combination of
these elements, then such restriction shall be interpreted to extend only over
the maximum period of time, geographic area, and range of activities which the
court deems reasonable and enforceable.
(c) In the event a FA desires a ruling as to the potential
application of this Section, he may request a ruling from the Committee in
accordance with Section 16.
(d) If the Committee in its discretion determines that an
activity otherwise described herein would not be injurious to the Company, it
may waive the application of this Section to such activity, which waiver shall
be binding upon the FA and the Company. The Committee shall exercise such
discretion in a uniform, nondiscriminatory manner.
11. Withholding Taxes - Amounts payable under the Plan shall be
subject to such deductions or withholding as may be required by law.
Notwithstanding anything herein to the contrary, the Company may delay any
distribution under the Plan until the recipient of the distribution has
separately provided for the payment of any required withholding taxes with
respect to the distribution by check or other method approved by the Committee
in its sole discretion. The Company, to the extent permitted or required by law,
shall have the right (i) to deduct any federal, state or local taxes of any kind
required by law to be withheld with respect to any taxable event under the Plan
from any amount payable hereunder or from any Commission or other payment
(including salary or bonus) otherwise due to a FA, and (ii) to retain or sell
without notice a sufficient number of shares of Legg Mason Common Stock to be
issued to such FA (or any other person entitled to receive the payment due a FA)
to cover any such taxes.
12. Assignment Of Benefits - No amount payable, or other right or
benefit, under the Plan will, except as otherwise specifically provided by the
Plan or by applicable law, be subject to sale, assignment, transfer, pledge,
encumbrance, attachment, garnishment or levy prior to distribution to a FA.
Since the Plan is intended to be a non-qualified, unfunded plan not subject to
the Employment Retirement Income Security Act of 1974, as amended, payments
10
<PAGE>
under the Plan will not be subject to the provisions of any qualified domestic
relations order (as defined under the Internal Revenue Code of 1986, as amended)
applicable to a FA's Account.
13. Right To Offset - Notwithstanding any provision herein to the
contrary, any distribution payable under the Plan may be used, at the discretion
of the Committee and subject to compliance with applicable law, to offset any
debt owed by a FA to the Company at the date such distribution would otherwise
be paid. The Company may withhold distributions payable under the Plan to offset
any debts or other liabilities owed by a FA to the Company. If the Company is
aware of any errors, loans outstanding, or outstanding or pending liabilities of
a FA, the Company may withhold distributions under the Plan until such time as
the liabilities are satisfied or the Company has determined that an outstanding
or pending liability no longer exists.
14. Unfunded Nature Of The Plan - The Company will not be required to
purchase, hold or dispose of any investments with respect to amounts credited to
the Account of any FA participating in the Plan. A FA has no interest in the
Account or in any investments the Company may purchase with such amounts, except
as a general, unsecured creditor of the Company.
The Plan at all times shall be entirely unfunded. The FA's Account
(including the Interest Account and Phantom Stock Account) is merely a record
for measuring and determining the amount of Deferred Bonus Commissions to be
paid by the Company to, or with respect to, the FA under the Plan, and such
Account shall be established solely for such bookkeeping purposes. The Company
shall not be required to segregate any funds or other assets to be used for
payment of benefits under the Plan. The FA's Account shall not be, or be
considered as evidence of the creation of, a trust fund, an escrow or any other
segregation of assets for the benefit of the FA or any beneficiary of the FA.
There is no guaranty of benefit payments to the FA.
The obligation of the Company to make the payments described in the
Plan is an unsecured contractual obligation only, and neither the FA nor any
beneficiary of the FA shall have any beneficial or preferred interest by way of
trust, escrow, lien or otherwise in and to any specific assets or funds. The FA
and each beneficiary of the FA shall look solely to the general credit of the
Company for satisfaction of any obligations due or to become due under the Plan.
Should the Company elect to make contributions to a trust (hereinafter
referred to as the "Trust") to assist the Company in paying the benefits which
may accrue hereunder, the amounts contributed shall be used to purchase the
deemed investments under Section 6, subject to application of the provisions of
this Section 14 to the actual investments. However, contributions to the Trust
shall not reduce or otherwise affect the Company's liability to pay benefits
under the Plan (which benefits may be paid from the Trust or from the Company's
general assets, in the discretion of the Company), except that the Company's
liability shall be reduced by actual benefit payments from the Trust (and the
Account shall be appropriately adjusted to reflect such payments). If any such
investments, or any contributions to the Trust, are made by the Company, such
investments shall have been made solely for the purpose of aiding the Company in
meeting its obligations under the Plan, and, except for actual contributions to
the Trust, no trust or trust fund is intended. To the extent that the Company
11
<PAGE>
does, in its discretion, purchase or hold any such investments (other than
through contributions to the Trust), the Company will be named sole owner of all
such investments and of all rights and privileges conferred by the terms of the
instruments or certificates evidencing such investments. Nothing stated herein
will cause such investments, or the Trust, to form part of the Account, or to be
treated as anything but the general assets of the Company, subject to the claims
of its general creditors, nor will anything stated herein cause such
investments, or the Trust, to represent the vested, secured or preferred
interest of the FA. The Company shall have the right at any time to use such
investments not held in the Trust in the ordinary course of its business.
Neither the FA nor any of his or her beneficiaries shall at any time have any
interest in the Account or the Trust or in any such investments, except as a
general, unsecured creditor of the Company to the extent of the Deferred Bonus
Commissions which are the subject of the Plan.
15. Effect On Employment Rights And Other Benefit Programs - Neither
participation in nor any of the provisions of the Plan shall give the FA any
right to be retained in the employment of the Company. The Plan shall not be
construed as a contract of employment. The Company maintains an
employment-at-will policy. As a FA is free to end his or her employment with the
Company at any time for any reason or no reason, the Company is free to end the
employment with a FA at any time for any reason or no reason. Furthermore, the
Company may end at any time a FA's employment as a Financial Advisor. In the
event a FA is no longer employed as a Financial Advisor or otherwise ceases to
be an Eligible FA, the FA will no longer be entitled to Deferred Bonus
Commissions pursuant to the Plan. However, as long as a FA continues to be
employed in good standing by the Company, the FA shall continue to be entitled
to the Deferred Bonus Commissions previously credited to the FA's Account under
the Plan. The Plan is in addition to, and not in lieu of, any other employee
benefit plan or program in which the FA may be or become eligible to participate
by reason of employment with the Company, and the timing of receipt of benefits
hereunder shall have no effect on contributions to or benefits under such other
plans or programs except as the provisions hereof and of each such plan or
program may specify.
16. Administration - The Committee, as constituted from time to time,
shall have full power to interpret, construe and administer the Plan, including
authority to determine any dispute or claim with respect thereto. The
determination of the Committee in any matter within the powers and discretion
granted to it under the Plan, made in good faith, shall be binding and
conclusive upon the Company, the FA and all other persons having any right or
benefit hereunder. If the FA is a member of the Committee at any time, the FA
shall have no authority as such member with respect to any matter specifically
affecting the FA's interest hereunder (such as determination of the amount, form
or time of benefit payments to the FA), all such authority being reserved to the
other Committee members, to the exclusion of the FA, and the FA shall act only
in his or her individual capacity in connection with any such matter.
17. Paperless Communications - Notwithstanding anything contained herein
to the contrary, the Committee from time to time may establish uniform
procedures whereby with respect to any or all instances herein where a writing
is required, including but not limited to any required written notice, election,
consent, authorization, instruction, direction, designation, request or claim,
communication may be made by any other means designated by the Committee,
including by paperless communication, and such alternative communication shall
be deemed to constitute a writing to the extent permitted by applicable law,
provided that such
12
<PAGE>
alternative communication is carried out in accordance with such procedures in
effect at such time.
18. Arbitration - As a condition precedent to the crediting and
receipt of Deferred Bonus Commissions under the Plan, each FA agrees that any
controversy or dispute arising under the Plan which cannot be resolved by the
Committee shall be submitted for arbitration upon demand of either party in
accordance with the rules of the National Association of Securities Dealers,
Inc. or the New York Stock Exchange, Inc.
19. Controlling Law - The Plan shall be construed, and the legal
relations between the parties in connection with any dispute relating to the
Plan shall be determined, in accordance with the laws of the State of Maryland.
20. Amendment Or Termination - The Company reserves the right to
amend or terminate the Plan at any time. Any such amendment or termination shall
be by action of the Board of Directors of the Company or any Executive Committee
thereof.
21. Effect Of Amendment Or Termination - No amendment or termination
of the Plan shall directly or indirectly affect the rights of any FA (or the
FA's designated beneficiary) to payment of the amount in his or her Account, to
the extent that such amount was payable under the terms of the Plan prior to the
effective date of such amendment or termination.
13
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>4
<FILENAME>dex12.txt
<DESCRIPTION>COMPUTATION OF CONSOLIDATED RATIOS
<TEXT>
<PAGE>
Exhibit 12
Legg Mason, Inc.
Computation of Consolidated Ratios of Earnings to Fixed Charges
(dollars in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
2002 2001 2000 1999 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings before income taxes $253,249 $265,820 $254,438 $156,811 127,565
Fixed Charges
Interest expense 127,271 175,389 134,383 94,974 73,776
Portion of rental expense 23,341 22,315 17,312 14,457 12,823
representative of interest factor*
Earnings available for fixed charges $403,861 $463,524 $406,133 $266,242 $214,164
Fixed Charges:
Interest expense $127,271 $175,389 $134,383 $ 94,974 $73,776
Portion of rental expense
representative of interest 23,341 22,315 17,312 14,457 12,823
factor*
Total fixed charges $150,612 $197,704 $151,695 $109,431 $ 86,599
Consolidated ratio of earnings to 2.7 2.3 2.7 2.4 2.5
fixed charges
</TABLE>
* The portion of rental expense representative of interest factor is calculated
as one-third of the total of Rent, DP Service Bureau and Equipment Rental
expenses.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>5
<FILENAME>dex21.txt
<DESCRIPTION>LIST OF SIGNIFICANT SUBSIDIARIES
<TEXT>
<PAGE>
Exhibit 21
----------
List of Significant Subsidiaries
--------------------------------
<TABLE>
<CAPTION>
State (Jurisdiction) of Incorporation
Name of Subsidiary or Organization
------------------ -------------------------------------
<S> <C>
Legg Mason Wood Walker, Incorporated Maryland
Howard Weil Financial Corporation Louisiana
Western Asset Management Company California
Legg Mason Real Estate Services, Inc. Pennsylvania
Legg Mason Merchant Banking, Inc. Maryland
Legg Mason Fund Adviser, Inc. Maryland
Legg Mason Capital Management, Inc. Maryland
Legg Mason Financial Services, Inc. Maryland
Legg Mason Mortgage Capital Corporation Maryland
Legg Mason Trust, fsb USA
Legg Mason Funding, Corp. Delaware
LM Financial Partners, Inc. Maryland
Gray, Seifert & Co., Inc. New York
Batterymarch Financial Management, Inc. Maryland
Orchard Financial Services, Inc. Maryland
Bartlett & Co. Ohio
Bartlett Real Estate, Inc. (1) Ohio
Brandywine Asset Management, LLC Delaware
Berkshire Asset Management, Inc. Maryland
Legg Mason Funds Management, Inc. Maryland
Legg Mason Real Estate Investors, Inc. Maryland
Barrett Associates, Inc. New York
Legg Mason Limited England and Wales
Legg Mason Focus Capital, Inc. Maryland
LM Holdings Limited England and Wales
Legg Mason Holdings Limited (2) England and Wales
Western Asset Management Company Limited (3) England and Wales
Legg Mason (UK) Holdings Plc (2) England and Wales
LeggMason Investors Holdings plc (4) England and Wales
LeggMason Investors Finance plc (5) England and Wales
LeggMason Investors Finance No. 2 plc (5) England and Wales
LeggMason Investors plc (5) England and Wales
LeggMason Investors Asset Managers plc (6) England and Wales
Johnson Fry General Partner One Limited (6) England and Wales
LeggMason Investors Unit Trust Managers Limited (7) England and Wales
3040692 Nova Scotia Company Canada
Legg Mason Canada Holdings Ltd. (8) Canada
Perigee Investment Counsel Inc. (9) Canada
Royce & Associates, LLC Delaware
Royce Fund Services, Inc. (10) New York
Royce Management Company, LLC (10) New York
</TABLE>
<PAGE>
PCM Holdings, Inc. New York
PCM Holdings II, LLC Delaware
Carnes Capital Corporation (11) New York
Private Capital Management, L.P. (12) New York
____________________________________
(1) Subsidiary of Bartlett & Co.
(2) Subsidiary of LM Holdings Limited
(3) Subsidiary of Legg Mason Holdings Limited
(4) Subsidiary of Legg Mason (UK) Holdings plc
(5) Subsidiary of LeggMason Investors Holdings plc
(6) Subsidiary of LeggMason Investors plc
(7) Subsidiary of Johnson Fry General Partner One Limited
(8) Subsidiary of 3040692 Nova Scotia Company
(9) Subsidiary of Legg Mason Canada Holdings Ltd.
(10) Subsidiary of Royce & Associates, LLC
(11) Subsidiary of PCM Holdings, Inc.
(12) Subsidiary of PCM Holdings, Inc. and PCM Holdings II, LLC
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>6
<FILENAME>dex23.txt
<DESCRIPTION>CONSENT OF INDEPENDENT ACCOUNTANTS
<TEXT>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statements on Form S-8 (File Nos. 2-87754; 33-20027; 33-28609;
33-45453; 33-48239; 33-55814; 33-61441; 33-61445; 333-08721; 333-45307;
333-59841; 333-61163; 333-66891; 333-86863; 333-86869; 333-53102; 333-53104 and
333-72904) and on Form S-3 (File Nos. 333-00151; 333-33298; 333-34674; 333-67602
and 333-68922) of Legg Mason, Inc. of our report dated May 3, 2002 relating to
the consolidated financial statements, which appears in this Annual Report on
Form 10-K. We also consent to the incorporation by reference of our report dated
May 3, 2002 relating to the financial statement schedule, which appears in this
Form 10-K
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCooopers LLP
Baltimore, Maryland
June 27, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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