SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 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 number 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
incorporation or organization) Identification No.)
100 Light Street - Baltimore, MD 21202
(Address of principal executive offices) (Zip code)
(410) 539-0000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
64,878,166 shares of common stock and 2,419,894 exchangeable shares as of the
close of business on July 29, 2002. The exchangeable shares, which were
issued by Legg Mason Canada Holdings in connection with the acquisition of
Perigee Inc., are exchangeable at any time into common stock on a one-for-one
basis and entitle holders to dividend, voting and other rights equivalent to
common stock.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
Three months ended
June 30,
2002 2001
Revenues
Investment advisory and related fees $223,357 $169,453
Commissions......................... 84,828 83,343
Principal transactions.............. 36,235 33,246
Investment banking.................. 31,535 20,404
Interest............................ 29,540 54,743
Other............................... 11,882 19,811
Total revenues.................... 417,377 381,000
Interest expense.................... 24,953 34,678
Net revenues...................... 392,424 346,322
Non-Interest Expenses
Compensation and benefits........... 235,091 213,619
Communications and technology....... 22,660 26,181
Occupancy........................... 15,979 14,855
Amortization of intangible assets... 6,318 1,813
Other............................... 32,018 30,511
Total non-interest expenses....... 312,066 286,979
Earnings Before Income Tax Provision.. 80,358 59,343
Income tax provision................ 31,340 23,982
Net Earnings ......................... $ 49,018 $ 35,361
Earnings per Common Share
Basic............................... $ 0.74 $ 0.55
Diluted............................. 0.71 0.52
Weighted Average Number of Common
Shares Outstanding
Basic............................... 65,938 64,650
Diluted............................. 69,054 68,005
Dividends Declared per Common Share... $ 0.10 $ 0.09
Book Value per Common Share........... $ 16.88 $ 14.63
See notes to consolidated financial statements.
3
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
June 30, 2002 March 31, 2002
(Unaudited)
Assets
Cash and cash equivalents.................... $ 480,011 $ 468,377
Cash and securities segregated for regulatory
purposes or deposited with clearing
organizations............................... 2,430,978 2,501,613
Receivables:
Customers................................... 972,746 996,123
Brokers and dealers......................... 111,512 69,466
Others...................................... 157,967 164,138
Securities borrowed.......................... 268,698 324,417
Financial instruments owned, at fair value... 252,252 133,709
Investment securities, at fair value......... 25,806 27,737
Investments of finance subsidiaries.......... 104,729 97,263
Equipment and leasehold improvements, net.... 70,583 69,146
Intangible assets, net....................... 490,035 494,001
Goodwill..................................... 449,498 443,422
Other........................................ 149,765 150,202
Total Assets................................. $5,964,580 $5,939,614
Liabilities and Stockholders' Equity:
Liabilities
Payables:
Customers.................................. $3,179,921 $3,249,522
Brokers and dealers........................ 17,239 35,009
Securities loaned........................... 177,868 279,615
Short-term borrowings....................... 159,993 3,560
Financial instruments sold, but not yet
purchased, at fair value.................. 95,170 37,909
Accrued compensation........................ 117,811 202,433
Other....................................... 194,878 169,896
Notes payable of finance subsidiaries....... 105,343 97,659
Long-term debt.............................. 781,258 779,463
Total Liabilities............................ 4,829,481 4,855,066
Commitments and Contingencies (Note 8)
Stockholders' Equity
Common stock................................ 6,482 6,444
Shares exchangeable into common stock....... 9,117 9,400
Additional paid-in capital.................. 369,516 358,972
Deferred compensation and employee note
receivable................................. (36,677) (32,007)
Employee stock trust........................ (100,568) (90,674)
Deferred compensation employee stock trust.. 100,568 90,674
Retained earnings........................... 793,926 751,635
Accumulated other comprehensive loss, net... (7,265) (9,896)
Total Stockholders' Equity................... 1,135,099 1,084,548
Total Liabilities and Stockholders' Equity... $5,964,580 $5,939,614
See notes to consolidated financial statements.
4
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended
June 30,
2002 2001
Cash Flows from Operating Activities:
Net earnings........................................ $ 49,018 $ 35,361
Non-cash items included in earnings:
Depreciation and amortization..................... 13,815 8,198
Accretion and amortization of securities discounts
and premiums, net............................... 1,945 668
Originated mortgage servicing rights.............. (319) (218)
Deferred compensation............................. 2,502 2,006
Unrealized gains/losses on investments............ 651 (27)
Other............................................. 309 399
Deferred income taxes.............................. 8,865 8,803
Decrease(increase) in assets excluding acquisitions:
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations. 70,635 (31,636)
Receivables from customers......................... 23,377 32,282
Other receivables.................................. (35,188) (70,182)
Securities borrowed................................ 55,719 (29,239)
Financial instruments owned........................ (118,543) (20,410)
Other.............................................. (104) (25,818)
Increase (decrease) in liabilities excluding
acquisitions:
Payable to customers............................... (69,601) 764
Payable to brokers and dealers..................... (17,770) (26,147)
Securities loaned.................................. (101,747) 6,695
Financial instruments sold, but not yet purchased.. 57,261 (9,254)
Accrued compensation............................... (84,839) (37,886)
Other.............................................. 9,737 (13,012)
Cash Used for Operating Activities................... (134,277) (168,653)
Cash Flows from Investing Activities:
Payments for:
Equipment and leasehold improvements.............. (8,120) (5,550)
Asset management contracts and mortgage servicing
portfolios....................................... - (41)
Acquisitions, net of cash acquired................ - (7,250)
Purchases of investment securities.................. (5,572) (4,443)
Proceeds from sales and maturities of investment
securities........................................ 8,967 15,880
Cash Used for Investing Activities................... (4,725) (1,404)
5
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(Dollars in thousands)
(Unaudited)
Three months ended
June 30,
2002 2001
Cash Flows from Financing Activities:
Net increase in short-term borrowings............... 156,433 123,449
Net proceeds from issuance of long-term debt........ - 244,375
Repayment of notes payable of finance subsidiaries.. - (15,418)
Issuance of common stock............................ 8,089 8,172
Repurchase of common stock.......................... (8,090) -
Dividends paid...................................... (6,695) (5,878)
Cash Provided by Financing Activities................ 149,737 354,700
Effect of Exchange Rate Changes on Cash.............. 899 313
Net Increase in Cash and Cash Equivalents............ 11,634 184,956
Cash and Cash Equivalents at Beginning of Period..... 468,377 556,148
Cash and Cash Equivalents at End of Period........... $480,011 $741,104
SUPPLEMENTAL DISCLOSURE:
Noncash activity:
The value of common stock issued in connection with a business acquisition
was $3,262 for the quarter ended June 30, 2002. Of that amount, $1,783 was
attributable to goodwill, $1,416 was attributable to intangible assets and
$63 was attributable to tangible net assets.
See notes to consolidated financial statements.
6
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Three months
ended June 30,
2002 2001
Net Earnings................................ $49,018 $35,361
Other comprehensive income (loss):
Foreign currency translation adjustment... 5,007 606
Unrealized gains (losses) on investment
securities:
Unrealized holding losses arising
during the period................... (291) (318)
Reclassification adjustment for
gains included in net income........ - (160)
Net unrealized losses on investment
securities.......................... (291) (478)
Deferred losses on cash flow hedges....... (3,412) -
Deferred income taxes..................... 1,327 (201)
Total other comprehensive income (loss).... 2,631 (73)
Comprehensive Income........................ $51,649 $35,288
See notes to consolidated financial statements.
7
LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
June 30, 2002
(Unaudited)
1. Interim Basis of Reporting:
The accompanying unaudited interim consolidated financial
statements of Legg Mason, Inc. and its subsidiaries (collectively
"Legg Mason") have been prepared in accordance with accounting
principles generally accepted in the United States of America for
interim financial information. The interim consolidated financial
statements have been prepared utilizing the interim basis of reporting
and, as such, reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results for the periods
presented. The nature of Legg Mason's business is such that the
results of any interim period are not necessarily indicative of the
results for a full year.
The information contained in the interim consolidated financial
statements should be read in conjunction with Legg Mason's latest
Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Where appropriate, prior year's financial statements have
been reclassified to conform to the current year's presentation.
Unless otherwise noted, all per share amounts include both common
shares of Legg Mason and shares issued in connection with the
acquisition of Perigee Inc., which are exchangeable into common shares
of Legg Mason on a one-for-one basis at any time.
The interim 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 interim consolidated
financial statements and accompanying notes. Actual amounts could
differ from those estimates and the differences could have a material
impact on the interim consolidated financial statements.
2. Net Capital Requirements:
Legg Mason'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 June 30, 2002, the broker-dealer subsidiaries had
aggregate net capital, as defined, of $326,217, which exceeded
required net capital by $305,786.
8
3. Financial Instruments Owned, at Fair Value:
At June 30, 2002, Legg Mason had pledged securities owned of $406
as collateral to counterparties for securities loaned transactions,
which can be sold or repledged by the counterparties.
4. Intangible Assets and Goodwill:
The following table reflects the components of intangible assets
as of June 30, 2002:
Cost Accumulated
Amortization
Amortized intangible assets:
Asset management contracts $360,623 $35,805
Mortgage servicing contracts 9,246 3,047
Total amortized intangible assets $369,869 $38,852
Indefinite-life intangible assets:
Fund management contracts $104,318 $ -
Trade names 54,700 -
Total indefinite-life intangible assets $159,018 $ -
Estimated amortization expense for each of the next five fiscal
years is as follows:
Fiscal year ended March 31: Amount
2003 $24,827
2004 23,657
2005 23,351
2006 22,914
2007 22,214
The carrying value of goodwill of $449,498 at June 30, 2002 is
primarily attributable to Legg Mason's asset management reporting segment. The
increase in the carrying value of goodwill since March 31, 2002 reflects
the acquisition of the assets of an investment advisor, which was not
material to Legg Mason's financial statements, and the impact
of changes in foreign currency exchange rates.
5. Short-Term Borrowings:
At June 30, 2002, Legg Mason had an outstanding borrowing of
$94,993 under an existing compensating balance arrangement. The
proceeds of the borrowing were used to purchase short-term, highly
rated liquid securities. These securities are pledged as collateral
for the credit facility and, due to their characteristics, are
classified as cash equivalents on the June 30, 2002 Statement of
Financial Condition. As the securities mature, the cash proceeds are
9
used to pay-down the outstanding balance of the credit facility or to
purchase additional securities, which are then pledged as collateral
for the borrowing. In addition, on June 28, 2002, Legg Mason borrowed
$65,000, on an overnight basis, for the temporary facilitation of
customer transaction settlements.
6. 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 for the three months ended June 30, 2002 and 2001 (shares
in thousands):
Three months ended June 30,
2002 2001
Basic Diluted Basic Diluted
Weighted average common
shares outstanding 65,938 65,938 64,650 64,650
Potential common shares:
Employee stock options - 2,576 - 2,861
Shares related to
deferred compensation - 540 - 494
Weighted average common
and common equivalent
shares outstanding 65,938 69,054 64,650 68,005
Net earnings applicable
to common stock $49,018 $49,018 $35,361 $35,361
Earnings per common share $ 0.74 $ 0.71 $ 0.55 $ 0.52
7. Accounting Developments:
The Financial Accounting Standards Board ("FASB") issued the
following pronouncements, which were adopted by Legg Mason during the
quarter ended June 30, 2002.
Statement of Financial Accounting Standards ("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
10
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" primarily provides guidance for reporting gains and losses
from extinguishments of debt and sale-leaseback transactions.
SFAS Nos. 143, 144 and 145 did not have an impact on Legg Mason's
interim consolidated financial statements at June 30, 2002.
8. Legal Proceedings:
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.
11
9. Business Combinations:
Legg Mason acquired Royce & Associates, Inc. ("Royce") on October
1, 2001, and Private Capital Management, L.P. ("PCM") on August 1,
2001. The following unaudited pro forma consolidated results are
presented as though the acquisitions of Royce and PCM had occurred as
of the beginning of the three month period ended June 30, 2001.
Three months ended
June 30, 2001
Net revenues $377,286
Net earnings $ 42,535
Earnings per common share:
Basic $ 0.66
Diluted 0.63
Legg Mason has contractual obligations to make future payments in
connection with business acquisitions if the acquired entities achieve
certain revenue levels. These payments are payable through fiscal 2007
and will not exceed $818,400.
10. 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 its business segments.
Legg Mason allocates certain common income and expense items among its
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's primary source of income 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.
12
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:
Three months ended
June 30,
2002 2001
Net revenues:
Asset Management........... $163,031 $117,508
Private Client............. 157,049 158,059
Capital Markets............ 65,225 64,131
Other...................... 7,119 6,624
$392,424 $346,322
Earnings before income tax
provision:
Asset Management........... $ 46,343 $ 34,388
Private Client............. 22,274 12,718
Capital Markets............ 12,130 12,680
Other...................... (389) (443)
$ 80,358 $ 59,343
Legg Mason does not analyze asset information in all business
segments.
13
Legg Mason principally operates in the United States of America,
the 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:
Three months ended
June 30,
2002 2001
Net revenues:
United States........... $373,900 $328,016
United Kingdom.......... 9,549 8,802
Canada.................. 6,687 7,614
Other................... 2,288 1,890
$392,424 $346,322
Earnings before income tax
provision:
United States........... $ 78,116 $ 58,788
United Kingdom.......... (1,367) (3,123)
Canada.................. 2,773 3,096
Other................... 836 582
$ 80,358 $ 59,343
14
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Legg Mason, Inc., a holding company, 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. Legg Mason currently operates through four business
segments: Asset Management, Private Client, Capital Markets and Other.
Legg Mason's profitability may vary significantly from period to
period as a result of a variety of factors, including the amount of
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. Accordingly, sustained
periods of unfavorable market conditions may adversely affect
profitability. For a further discussion of factors that may affect
Legg Mason's results of operations, refer to Item 1 - "Business -
Factors Affecting the Company and the Financial Services Industry" in
our Annual Report on Form 10-K for the fiscal year ended March 31,
2002.
Terms such as "we," "us," "our," and "company" refer to Legg Mason.
Business Environment
Market conditions continued to be volatile and weak during the quarter
ended June 30, 2002 as the economic outlook remained uncertain. The
difficult equity market conditions continued to plague investors and
our industry. Corporate governance and quality of financial reporting
issues in the U.S. further eroded investor confidence. The Dow Jones
Industrial Average, the Nasdaq Composite Index and the S&P 500 were
down 11%, 21% and 14%, respectively, for the quarter ended June 30,
2002.
Results Of Operations
Despite the difficult equity market conditions, we were able to
achieve significant gains in net revenues, net earnings and diluted
earnings per share (up 13%, 39% and 37%, respectively) as compared to
the prior year's quarter, primarily as a result of the addition of
fees and earnings from Private Capital Management, L.P. ("PCM") and
Royce & Associates, Inc. ("Royce"), acquired on August 1, 2001 and
October 1, 2001, respectively. Compared to the quarter ended March
31, 2002, net revenues declined 1% as a result of lower revenues from
our securities brokerage activities and lower net interest profit,
offset in part by increased revenues from investment advisory and
investment banking activities. If weaknesses in the equity markets
and low investor confidence continue for the remainder of fiscal 2003,
our revenues and profits are likely to be negatively impacted.
During the fiscal quarter ended June 30, 2002, net revenues rose to
$392.4 million from $346.3 million in the prior year's quarter. Net
earnings and diluted earnings per share were $49.0 million and $0.71.
15
The increase in net earnings was principally the result of a 32%
increase in investment advisory and related fees primarily resulting
from the acquisitions of PCM and Royce, offset in part by a
significant decline in net interest profit.
Revenues from securities brokerage activities, including both
commissions and principal transactions, increased 4% to $121.1 million
as a result of the addition of commissions earned by PCM's brokerage
operations and an increase in the volume of fixed income securities
transactions. These increases were offset in part by a decline in
listed and over-the-counter retail securities transactions. Revenues
from investment banking activities increased 55% to $31.5 million
primarily due to a $5.0 million increase in corporate banking new
issue selling concessions and a $2.1 million increase in private
placement revenue. Other revenues declined 40% to $11.9 million,
primarily as a result of unrealized gains on warrants acquired in
connection with private placements in the prior year's quarter. Net
interest profit declined 77% to $4.6 million from $20.1 million in the
prior year's quarter as a result of an increase in acquisition-related
debt and significantly lower average interest rates earned on firm
investments and customer margin account balances, offset in part by a
decrease in interest paid on customer credit account balances due to
the decrease in interest rates. Net interest profit accounted for 6%
of consolidated pre-tax profits, down significantly from 34% in the
prior year's quarter.
Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001
Revenues By Segment:
The following table sets forth, for the periods indicated, net
revenues and pre-tax earnings by business segment. Where appropriate,
prior fiscal year information has been reclassified to conform to the
current year's presentation.
Three months ended
June 30,
2002 2001
Net revenues:
Asset Management........... $163,031 $117,508
Private Client............. 157,049 158,059
Capital Markets............ 65,225 64,131
Other...................... 7,119 6,624
$392,424 $346,322
Earnings before income tax
provision:
Asset Management........... $ 46,343 $ 34,388
Private Client............. 22,274 12,718
Capital Markets............ 12,130 12,680
Other...................... (389) (443)
$ 80,358 $ 59,343
16
Asset Management
Net revenues in Asset Management increased 39% to $163.0 million from
$117.5 million in the prior year's quarter primarily as a result of
the addition of net revenues from PCM and Royce. During the quarter
ended June 30, 2002, PCM and Royce contributed net revenues, net of
the impact of debt issued to fund the acquisitions, of approximately
$42.7 million. Asset Management represented 42% of consolidated net
revenues for the quarter ended June 30, 2002, an increase from 34% in
the corresponding quarter of the prior year. Total assets under
management were $177.7 billion as of June 30, 2002, an increase of
$32.1 billion or 22% from June 30, 2001, including assets of $20.2
billion managed by PCM and Royce. As of June 30, 2002, approximately
$63.6 billion or 36% of assets under management were equity related
and $114.1 billion or 64% were fixed income related. Our assets under
management mix as of June 30, 2002 was as follows: Mutual Funds -
$36.0 billion (20%); Institutional - $121.8 billion (69%); and Wealth
Management - $19.9 billion (11%).
Private Client
Private Client net revenues decreased slightly to $157.0 million from
$158.1 million for the prior year's quarter. Private Client
represented 40% of consolidated net revenues in June 2002, a decrease
from 46% in the prior year's quarter. Net interest profit in Private
Client decreased 23% to $12.6 million for the quarter ended June 30,
2002, primarily due to significantly lower average interest rates
earned on firm investments and customer margin account balances,
offset in part by a decrease in interest paid on customer credit
account balances. This decrease was offset in part by an increase of
$2.9 million in sales credits on underwritten offerings.
Capital Markets
Capital Markets net revenues of $65.2 million increased 2% from $64.1
million in the prior year's quarter. The increase in net revenues was
attributable to an increase in corporate banking activity, primarily
new issue selling concessions and private placements, and higher
institutional fixed income transaction volume, offset in part by the
prior year quarter's unrealized gains on warrants acquired in connection
with private placements. Capital Markets represented 17% of consolidated
net revenues for the quarter June 30, 2002, a decrease from 19% in the
prior year's quarter.
Other
Other revenues consist principally of the results of our real estate
service business and unallocated corporate revenues and expenses. Net
revenues increased 8% to $7.1 million from $6.6 million in the
corresponding prior year period, primarily due to an increase in loan
origination and servicing fees and realized losses on firm investments
in the prior year's quarter, offset in part by a decrease in net interest
profit resulting from lower interest rates.
17
Expenses
Interest expense
Interest expense primarily consists of interest paid to customers on
their credit account balances and interest incurred in connection with
Legg Mason's long and short-term borrowings. Interest expense
declined $9.7 million or 28% for the quarter ended June 30, 2002,
principally due to a decrease in average interest rates paid on
customer credit account balances, partially offset by an increase in
acquisition-related debt of $9.1 million.
Compensation and benefits:
Compensation and benefits increased 10% to $235.1 million from $213.6
million in the prior year's quarter, primarily attributable to the
addition of expenses of PCM and Royce. These increases were offset in
part by a decline in commissions of $3.5 million, primarily due to
lower payout rates on proprietary fund distribution fees.
Communications and technology:
Communications and technology expense declined 13% to $22.7 million
from $26.2 in the prior year's quarter, primarily as a result of
decreased costs for quote, printing services and technology consulting
fees.
Occupancy:
Occupancy was $16.0 million, up 8% from $14.9 million in the
corresponding prior year quarter, primarily due to the addition of
expenses of acquired entities.
Amortization of intangible assets:
Amortization of intangible assets increased to $6.3 million for the
quarter ended June 30, 2002 from $1.8 million primarily as a result of
amortization of asset management contracts acquired in the PCM
acquisition.
Other:
Other expenses increased 5% to $32.0 million from $30.5 million in the
prior year's quarter, primarily as a result of an increase in expenses
from Royce, principally commissions paid to third party distributors
of Royce funds. This increase was offset in part by a decline in
promotional expenses.
Income tax provision:
The provision for income taxes increased 31% to $31.3 million, from
$24.0 million in the prior year's quarter primarily as a result of the
increase in pre-tax earnings. In addition, the effective tax rate
declined to 39.0% in the June 2002 quarter from 40.4% in the June 2001
18
quarter due to lower state income taxes and a reduced foreign tax
rate.
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. For
a further discussion of our principal liquidity and capital resources
policies, see our Annual Report on Form 10-K for the fiscal year ended
March 31, 2002.
Except for the use of Legg Mason's short-term credit facilities and
the increase in stockholder's equity from the results of operations
for the quarter ended June 30, 2002, there has been no material change
in our financial condition since March 31, 2002.
At June 30, 2002, Legg Mason had an outstanding borrowing of $95
million under an existing compensating balance arrangement. The
proceeds of the borrowing were used to purchase short-term, highly
rated liquid securities. These securities are pledged as collateral
for the credit facility and, due to their characteristics, are
classified as cash equivalents on our June 30, 2002 Statement of
Financial Condition. As the securities mature, the cash proceeds are
used to pay-down the outstanding balance of the credit facility or to
purchase additional securities, which are then pledged as collateral
for the borrowing. In addition, on June 28, 2002, Legg Mason borrowed
$65 million, on an overnight basis, for the temporary facilitation of
customer transaction settlements.
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.
At June 30, 2002, Legg Mason's total assets and stockholder's equity
were $6.0 billion and $1.1 billion, respectively. During the three
months ended June 30, 2002, cash and cash equivalents increased $11.6
million. Cash flows from operating activities used approximately
$134.3 million, primarily attributable to higher levels of firm
securities inventory and the payment of accrued compensation costs.
These uses were offset in part by net cash earnings for the quarter.
Cash flows from investing activities used $4.7 million, which included
payments for equipment and leasehold improvements and purchases of
investment securities, offset in part by proceeds from sales and
maturities of investment securities. Financing activities provided
$149.7 million, of which $156.4 million, net of repayments, resulted
from the increase in short-term borrowings described above. During
the quarter ended June 30, 2002, we repurchased 156,000 shares of our
stock for $8.1 million and we paid cash dividends of $6.7 million.
19
Our 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 June 30, 2002, the broker-dealer subsidiaries
had aggregate net capital of $326.2 million, which exceeded minimum
net capital requirements by $305.8 million. The amount of the broker-
dealers' net assets that may be distributed is subject to restrictions
under applicable net capital rules.
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. During the quarter ended June 30, 2002, except for the short-
term borrowings described above, there were no material changes to
Legg Mason's contractual and contingent obligations as discussed under
the heading "Contractual and Contingent Obligations" in Part II, Item
7 of Legg Mason's Annual Report on Form 10-K for the fiscal year ended
March 31, 2002.
In August 2002, one of our subsidiaries entered into a ten year lease
commitment commencing in May 2004 to replace its current lease when it
expires. The minimum annual aggregate rental payments by fiscal year are
as follows: 2005 - $2.7 million, 2006 - $4.2 million, 2007 - $4.7 million,
thereafter - $35.2 million. Legg Mason, Inc. is a guarantor on the lease.
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. 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. During the quarter ended
June 30, 2002, there were no material changes to the matters discussed
under the heading "Critical Accounting Policies" in Part II, Item 7 of
Legg Mason's Annual Report on Form 10-K for the fiscal year ended
March 31, 2002.
Forward-Looking Statements
Legg Mason has made in this report, and from time to time may
otherwise make in its public filings, press releases and statements by
Company management, "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 concerning Legg
20
Mason's operations, economic performance and financial condition. The
words or phrases "can be", "may be", "expects", "may affect", "may
depend", "believes", "estimate", "project" and similar words and
phrases are intended to identify such forward-looking statements.
Such forward-looking statements are subject to various known and
unknown risks and uncertainties and Legg Mason cautions readers that
any forward-looking information provided by or on behalf of Legg Mason
is not a guarantee of future performance. Actual results could differ
materially from those anticipated in such forward-looking statements
due to a number of factors, some of which are beyond Legg Mason's
control, in addition to those discussed elsewhere herein, in Legg
Mason's Annual Report on Form 10-K for the fiscal year ended March 31,
2002 under the heading "Business-Factors Affecting the Company and the
Financial Services Industry," and in Legg Mason's other public
filings, press releases and statements by Company management,
including (i) the volatile and competitive nature of the financial
services business, (ii) changes in domestic and foreign economic and
market conditions, (iii) the effect of federal, state and foreign
regulation on Legg Mason's business, (iv) market, credit and
liquidity risks associated with Legg Mason's investment management,
underwriting, securities trading and market-making activities, (v)
impairment of acquired intangible assets and goodwill, (vi) potential
restrictions on the business of, and withdrawal of capital from,
certain subsidiaries of Legg Mason due to net capital requirements,
(vii) potential liability under federal and state securities laws and
other laws and regulations governing Legg Mason's business, (viii) the
relative investment performance of Legg Mason-sponsored investment
funds and other asset management products compared with competing
offerings and market indices, (ix) the ability of Legg Mason to
maintain investment management and administrative fees at current
levels, (x) the level of margin and customer account balances, (xi)
the ability to attract and retain key personnel and (xii) the effect
of acquisitions, including prior acquisitions. Due to such risks,
uncertainties and other factors, Legg Mason cautions each person
receiving such forward-looking information not to place undue reliance
on such statements. All such forward-looking statements are current
only as of the date on which such statements were made. Legg Mason
does not undertake any obligation to publicly update any forward-
looking statement to reflect events or circumstances after the date on
which any such statement is made or to reflect the occurrence of
unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the quarter ended June 30, 2002, there were no material changes
to the information contained in Part II, Item 7A of Legg Mason's
Annual Report on Form 10-K for the fiscal year ended March 31, 2002.
21
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On April 5, 2002, in connection with the acquisition by Bartlett
& Co., a wholly owned subsidiary of Legg Mason, of substantially all
of the assets and business of Wallington Asset Management, Inc.
("Wallington"), Legg Mason issued an aggregate of 59,943 shares of its
common stock, par value $.10 per share, to the sole stockholder of
Wallington as payment of the purchase price in the acquisition. The
issuance of these securities was deemed to be exempt from registration
under the Securities Act of 1933, as amended, by virtue of Section
4(2) thereof.
Item 6. Exhibits and Reports on Form 8-K
(a) 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)
12. Computation of consolidated ratios of
earnings to fixed charges
(b) No reports on Form 8-K were filed during the quarter
ended June 30, 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
LEGG MASON, INC.
(Registrant)
DATE: August 6, 2002 /s/Timothy C. Scheve
Timothy C. Scheve
Senior Executive Vice President
DATE: August 6, 2002 /s/Charles J. Daley, Jr.
Charles J. Daley, Jr.
Senior Vice President and
Treasurer
23
INDEX TO 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
the Company's Annual Report on Form 10-K for
the year ended March 31, 1988)
12. Computation of consolidated ratios of
earnings to fixed charges