EX-12 3 r10q0902.txt EARNINGS TO FIXED CHARGES 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 September 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. 64,776,549 shares of common stock and 2,415,520 exchangeable shares as of the close of business on November 4, 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 Six months ended September 30, ended September 30, 2002 2001 2002 2001 Revenues Investment advisory and related fees $203,133 $181,819 $425,481 $351,272 Commissions......................... 79,138 79,402 163,966 162,745 Principal transactions.............. 41,188 31,207 77,423 64,453 Investment banking.................. 28,075 27,214 59,610 47,618 Interest............................ 30,266 48,843 59,806 103,586 Other............................... 13,715 4,467 26,606 24,278 Total revenues.................... 395,515 372,952 812,892 753,952 Interest expense.................... 24,149 37,884 49,102 72,562 Net revenues...................... 371,366 335,068 763,790 681,390 Non-Interest Expenses Compensation and benefits.......... 217,523 202,616 452,614 416,235 Communications and technology...... 22,865 24,960 45,525 51,141 Occupancy.......................... 17,144 16,132 33,123 30,987 Amortization of intangibles........ 6,227 4,531 12,545 6,344 Other.............................. 35,362 35,851 67,380 66,362 Total non-interest expenses....... 299,121 284,090 611,187 571,069 Earnings Before Income Tax Provision. 72,245 50,978 152,603 110,321 Income tax provision............... 26,874 20,588 58,214 44,570 Net Earnings ........................ $ 45,371 $ 30,390 $ 94,389 $ 65,751 Earnings per common share Basic.............................. $ 0.69 $ 0.47 $ 1.43 $ 1.01 Diluted............................ $ 0.66 $ 0.45 $ 1.37 $ 0.97 Weighted average number of common shares outstanding Basic.............................. 66,020 65,171 66,008 64,912 Diluted............................ 68,446 68,055 68,785 68,042 Dividends declared per common share.. $ 0.11 $ 0.10 $ 0.21 $ 0.19 Book value per common share.......... $ 17.40 $ 15.09
See notes to consolidated financial statements. 3
LEGG MASON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands) September 30, March 31, 2002 2002 (Unaudited) Assets Cash and cash equivalents.................... $ 559,889 $ 468,377 Cash and securities segregated for regulatory purposes or deposited with clearing organizations............................... 2,579,382 2,501,613 Securities purchased under agreements to resell...................................... 63,000 - Receivables: Customers................................... 940,123 996,123 Investment advisory and related fees........ 107,526 114,546 Brokers and dealers and other............... 80,503 119,058 Securities borrowed.......................... 238,999 324,417 Financial instruments owned, at fair value... 162,384 133,709 Investment securities, at fair value......... 23,696 27,737 Investments of finance subsidiaries.......... 96,128 97,263 Equipment and leasehold improvements, net.... 71,832 69,146 Intangible assets, net....................... 483,511 494,001 Goodwill..................................... 453,442 443,422 Other........................................ 154,389 150,202 Total Assets.................................. $6,014,804 $5,939,614 Liabilities and Stockholders' Equity Liabilities Payables: Customers.................................. $3,234,421 $3,249,522 Brokers and dealers........................ 37,529 35,009 Securities loaned........................... 198,455 279,615 Short-term borrowings....................... 118,547 3,560 Financial instruments sold, but not yet purchased, at fair value.................. 36,549 37,909 Accrued compensation........................ 152,500 202,433 Other....................................... 176,636 169,896 Notes payable of finance subsidiaries....... 108,954 97,659 Long-term debt.............................. 783,084 779,463 Total Liabilities............................ 4,846,675 4,855,066 Commitments and Contingencies (Note 8) Stockholders' Equity Common stock................................ 6,470 6,444 Shares exchangeable into common stock....... 9,102 9,400 Additional paid-in capital.................. 361,154 358,972 Deferred compensation and employee note receivable................................. (33,790) (32,007) Employee stock trust........................ (102,817) (90,674) Deferred compensation employee stock trust.. 102,817 90,674 Retained earnings........................... 831,909 751,635 Accumulated other comprehensive loss, net... (6,716) (9,896) Total Stockholders' Equity................... 1,168,129 1,084,548 Total Liabilities and Stockholders' Equity.... $6,014,804 $5,939,614
See notes to consolidated financial statements. 4
LEGG MASON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Six months ended September 30, 2002 2001 Cash Flows from Operating Activities: Net earnings........................................ $ 94,389 $ 65,751 Non-cash items included in earnings: Depreciation and amortization..................... 27,424 19,312 Accretion and amortization of securities discounts and premiums, net............................... 3,828 2,232 Originated mortgage servicing rights.............. (758) (981) Deferred compensation............................. 4,951 4,339 Unrealized (gains)losses on investments......... 2,482 (2,576) Other............................................. 1,086 849 Deferred income taxes.............................. 7,402 6,930 Decrease(increase) in assets excluding acquisitions: Cash and securities segregated for regulatory purposes or deposited with clearing organizations. (77,769) (226,533) Receivable from customers.......................... 56,000 74,396 Receivable from investment advisory and related fees.............................................. 7,213 (11,217) Receivable from brokers and dealers and other...... 38,998 (43,226) Securities borrowed................................ 85,418 (4,458) Financial instruments owned........................ (28,675) (106,737) Other.............................................. (5,819) (13,880) Increase (decrease) in liabilities excluding acquisitions: Payable to customers............................... (15,101) 120,469 Payable to brokers and dealers..................... 2,520 51,119 Securities loaned.................................. (81,160) (40,999) Financial instruments sold, but not yet purchased.. (1,360) 24,506 Accrued compensation............................... (50,121) (10,494) Other.............................................. (6,414) (13,760) Cash Provided by (Used for) Operating Activities..... 64,534 (104,958) Cash Flows from Investing Activities: Payments for: Equipment and leasehold improvements.............. (16,011) (10,691) Asset management contracts and mortgage servicing portfolios....................................... - (2,163) Acquisitions, net of cash acquired................ (3,115) (688,736) Net increase in securities purchased under agreements to resell.............................. (63,000) (115,000) Purchases of investment securities.................. (8,309) (6,716) Proceeds from sales and maturities of investment securities........................................ 24,288 27,925 Cash Used for Investing Activities................... (66,147) (795,381)
5
LEGG MASON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars in thousands) (Unaudited) Six months ended September 30, 2002 2001 Cash Flows from Financing Activities: Net increase in short-term borrowings............... 114,987 84,531 Net proceeds from issuance of long-term debt........ - 664,837 Repayment of notes payable of finance subsidiaries.. - (26,676) Issuance of common stock............................ 13,327 15,244 Repurchase of common stock.......................... (22,291) - Dividends paid...................................... (13,422) (11,822) Cash Provided by Financing Activities................ 92,601 726,114 Effect of Exchange Rate Changes on Cash.............. 524 1,186 Net Increase (Decrease) in Cash and Cash Equivalents........................................ 91,512 (173,039) Cash and Cash Equivalents at Beginning of Period..... 468,377 556,148 Cash and Cash Equivalents at End of Period........... $559,889 $383,109
SUPPLEMENTAL DISCLOSURE: Noncash activity: The value of common stock issued in connection with a business acquisition was $3,262 for the six months ended September 30, 2002. See notes to consolidated financial statements. 6
LEGG MASON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (Unaudited) Three months ended Six months ended September 30, September 30, 2002 2001 2002 2001 Net earnings........................... $45,371 $30,390 $94,389 $65,751 Other comprehensive income: Foreign currency translation adjustment.......................... 184 1,608 5,191 2,214 Unrealized gains(losses)on investment securities: Unrealized holding gains (losses) arising during the period......... (136) 968 (427) 650 Reclassification adjustment for (gains)losses included in net income............................ 90 - 90 (160) Net unrealized gains (losses)...... (46) 968 (337) 490 Deferred gains(losses) on cash flow hedges.............................. 686 - (2,726) - Deferred income taxes................. (275) (35) 1,052 (236) Total other comprehensive income..... 549 2,541 3,180 2,468 Comprehensive income................... $45,920 $32,931 $97,569 $68,219
See notes to consolidated financial statements. 7 LEGG MASON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) September 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 September 30, 2002, the broker-dealer subsidiaries had aggregate net capital, as defined, of $326,620 which exceeded required net capital by $306,616. 3. Financial Instruments Owned, at Fair Value: At September 30, 2002, Legg Mason had pledged securities owned of $540 as collateral to counterparties for securities loaned transactions, which can be sold or repledged by the counterparties. 8 4. Intangible Assets and Goodwill: The following table reflects the components of intangible assets as of September 30, 2002: Cost Accumulated Amortization Amortized intangible assets: Asset management contracts $359,277 $41,140 Mortgage servicing contracts 9,676 3,443 Total amortized intangible assets $368,953 $44,583 Indefinite-life intangible assets: Fund management contracts $104,441 $ - Trade names 54,700 - Total indefinite-life intangible assets $159,141 $ - Included in other expenses for the quarter ended September 30, 2002 is an impairment charge of $687 related to Legg Mason's asset management segment. This charge represents acquired asset management contracts that were terminated during the period. Estimated amortization expense for each of the next five fiscal years is as follows: Fiscal year ended March 31: Amount 2003 $24,839 2004 23,611 2005 23,304 2006 22,828 2007 22,088 The carrying value of goodwill of $453,442 at September 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 approximately $5,200 from the impact of changes in foreign currency exchange rates, approximately $3,000 related to an increase in ownership interest in Barrett Associates, Inc. and approximately $1,800 from the acquisition of the assets of an investment advisor which was not material to Legg Mason's financial statements. 5. Short-Term Borrowings: At September 30, 2002, Legg Mason had an outstanding borrowing of $118,547 under a compensating balance arrangement. The proceeds of the borrowing were used to purchase short-term, highly liquid securities. These securities are pledged as collateral for the credit 9 facility and, due to their characteristics, are classified as cash equivalents on the September 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. 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 tables present the computations of basic and diluted EPS for the three and six months ended September 30, 2002 and 2001 (shares in thousands):
Three months ended September 30, 2002 2001 Basic Diluted Basic Diluted Weighted average common shares outstanding 66,020 66,020 65,171 65,171 Potential common shares: Employee stock options - 1,962 - 2,394 Shares related to deferred compensation - 464 - 490 Weighted average common and common equivalent shares outstanding 66,020 68,446 65,171 68,055 Net earnings applicable to common stock $45,371 $45,371 $30,390 $30,390 Earnings per common share $ 0.69 $ 0.66 $ 0.47 $ 0.45
Six months ended September 30, 2002 2001 Basic Diluted Basic Diluted Weighted average common shares outstanding 66,008 66,008 64,912 64,912 Potential common shares: Employee stock options - 2,263 - 2,629 Shares related to deferred compensation - 514 - 501 Weighted average common and common equivalent shares outstanding 66,008 68,785 64,912 68,042 Net earnings applicable to common stock $94,389 $94,389 $65,751 $65,751 Earnings per common share $ 1.43 $ 1.37 $ 1.01 $ 0.97
7. Accounting Developments: The following pronouncements have been issued by the Financial Accounting Standards Board ("FASB"). 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 addresses 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" primarily provides guidance for reporting gains and losses from extinguishments of debt and sale-leaseback transactions. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces the existing guidance provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. 11 During the six months ended September 30, 2002, SFAS Nos. 143, 144 and 145 became effective and did not impact the consolidated financial statements. Legg Mason has not yet determined the impact of adoption of SFAS No. 146. 8. 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 2015. Certain leases provide for renewal options and contain escalation clauses providing for increased rentals based upon maintenance, utility and tax increases. The minimum annual aggregate rentals for each fiscal year are as follows: Remaining 2003.................... $ 33,817 2004.............................. 58,451 2005.............................. 47,988 2006.............................. 40,079 2007.............................. 35,422 Thereafter........................ 108,289 Total............................. $ 324,046 In August 2002, one of Legg Mason's subsidiaries entered into a ten-year lease commitment commencing May 2004 to replace its current lease when it expires. Legg Mason, Inc. is a guarantor on the lease. The minimum annual aggregate rentals under this lease are included in the table above. 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 12 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. 9. Business Combinations and Dispositions: 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 each period presented. Three months ended Six months ended September 30, 2001 September 30, 2001 Net revenues $349,182 $726,533 Net earnings $ 32,030 $ 74,605 Earnings per common share: Basic $ 0.49 $ 1.15 Diluted $ 0.47 $ 1.10 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 approximately $814,900. During the quarter ended September 30, 2002, Legg Mason sold certain contracts in its bank brokerage network for proceeds of $1,600, which resulted in a pre-tax gain of $1,300. Additionally, the sale provides for future contingent proceeds over the next two years based on certain performance provisions. The total sales price is not expected to exceed $3,200. 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. These methodologies are by their nature subjective and are reviewed periodically by management. Business segment results in the future may reflect reallocations of revenues and expenses that result from changes in methodologies, but such reallocations will have no effect on Legg Mason's consolidated results of operations. The Asset Management segment provides investment advisory services to company-sponsored investment funds and asset management 13 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 sources of revenues consist of 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 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 Six months ended September 30, September 30, 2002 2001 2002 2001 Net revenues: Asset Management........... $151,636 $124,150 $314,667 $241,658 Private Client............. 145,600 151,440 302,057 309,499 Capital Markets............ 67,712 49,846 133,529 113,977 Other...................... 6,418 9,632 13,537 16,256 $371,366 $335,068 $763,790 $681,390 Earnings before income tax provision: Asset Management........... $ 40,127 $ 30,490 $ 86,469 $ 64,878 Private Client............. 18,966 14,035 39,613 26,753 Capital Markets............ 13,994 5,658 27,751 18,338 Other...................... (842) 795 (1,230) 352 $ 72,245 $ 50,978 $152,603 $110,321
14 Legg Mason does not analyze asset information in all business segments. Legg Mason principally operates in the United States of America, the United Kingdom and Canada. Revenues and expenses for geographic purposes are allocated based on the location of the office providing the service. Results by geographic region are as follows:
Three months ended Six months ended September 30, September 30, 2002 2001 2002 2001 Net revenues: United States............. $354,551 $317,312 $728,452 $645,328 United Kingdom............ 8,385 8,868 17,934 17,670 Canada.................... 5,938 7,302 12,625 14,916 Other..................... 2,492 1,586 4,779 3,476 $371,366 $335,068 $763,790 $681,390 Earnings before income tax provision: United States............. $ 71,790 $ 47,089 $149,906 $105,878 United Kingdom............ (850) (355) (2,218) (3,479) Canada.................... 1,196 3,846 3,969 6,943 Other..................... 109 398 946 979 $ 72,245 $ 50,978 $152,603 $110,321
15 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. We currently operate through four business segments: Asset Management, Private Client, Capital Markets and Other. Our 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 our profitability. For a further discussion of factors that may affect our 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 September 30, 2002 as the economic outlook remained uncertain. The difficult equity market conditions continued to plague investors and our industry and 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 18%, 20% and 18%, respectively, for the quarter ended September 30, 2002 and down 27%, 37% and 29%, respectively, for the six months ended September 30, 2002. In addition, regulatory proceedings and investigations of the relationships between research analysts and investment banking operations at financial services companies has created uncertainty as to whether companies in the industry will be required to make significant changes in their research or investment banking operations. Fixed income markets benefited during the quarter due to declining interest rates and significant volatility in corporate bond trading. Results of Operations Despite the difficult equity market conditions, net revenues, net earnings and diluted earnings per share were up 11%, 49% and 47%, respectively as compared to the prior year's quarter, and were up 12%, 44% and 41%, respectively as compared to the prior six month period. These increases were primarily the result of the addition of fees and earnings from Royce & Associates, Inc. ("Royce"), acquired on October 1, 2001, a full period of fees and earnings from Private Capital Management, L.P. ("PCM"), acquired on August 1, 2001, as well as growth at Royce, PCM and our fixed income investment advisor. Compared to the quarter ended June 30, 2002, net revenues, net 16 earnings and diluted earnings per share declined 5%, 7% and 7%, respectively. These decreases were primarily a result of lower revenues from our asset management and investment banking activities, offset in part by decreased compensation costs and increased net interest profit. 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 second fiscal quarter and the six months ended September 30, 2002, net revenues rose 11% to $371.4 million and 12% to $763.8 million, respectively, over the prior year periods. Net earnings increased 49%, to $45.4 million, and 44%, to $94.4 million, during the quarter and six months ended September 30, 2002, respectively. Diluted earnings per share for the quarter and six months ended were $0.66 and $1.37, an increase of 47% and 41%, respectively, over the prior year periods. The increase in net earnings in both the quarter and six months ended September 30, 2002 was principally the result of an increase in investment advisory and related fees, resulting primarily from the acquisitions of PCM and Royce and growth at our fixed income investment advisor, offset in part by a significant decline in net interest profit. Revenues from asset management activities increased 12% to $203.1 million during the quarter ended September 30, 2002, and increased 21% to $425.5 million during the six months ended September 30, 2002. These increases result primarily from the impact of the acquisitions of Royce and PCM and growth at our fixed income investment advisor, offset in part by declines in fees from company-sponsored equity mutual funds. Revenues from securities brokerage activities, including both commissions and principal transactions, increased 9% to $120.3 million during the quarter ended September 30, 2002, primarily as a result of an increase in institutional fixed income transaction volume. Securities brokerage revenues increased 6% to $241.4 million during the six months ended September 30, 2002 as a result of an increase in the volume of institutional fixed income and listed securities transactions and an increase in sales of non-affiliated mutual funds. These increases were offset in part by a decline in retail equity securities transactions. Revenues from investment banking activities increased 3% to $28.1 million during the quarter ended September 30, 2002, primarily due to an increase in corporate selling concessions and other fees from underwritten transactions, as well as municipal banking fees. Investment banking revenues increased 25% to $59.6 million during the six months ended September 30, 2002, primarily due to a $10.4 million increase in corporate selling concessions and underwriting fees. Other revenues during the quarter ended September 30, 2002 increased 207% to $13.7 million, primarily as a result of $5.6 million of unrealized losses in the prior year's quarter on warrants acquired in connection with private placements and a $1.3 million realized gain on the sale in the current quarter of certain contracts in our bank 17 brokerage network. These increases were offset by a decline in loan origination fees earned at our mortgage banking subsidiary. Other revenues during the six months ended September 30, 2002 increased 10% to $26.6 million, primarily as a result of an increase in customer related account fees and the realized gain on the sale of the bank brokerage contracts, offset by unrealized losses on firm investments and a decline in activity from our mortgage banking subsidiary. Net interest profit declined 44% to $6.1 million from $11.0 million in the prior year's quarter primarily as a result of significantly lower average interest rates earned on lower customer margin and firm investment account balances, offset in part by lower interest rates paid on customer credit account balances. Net interest profit declined 66% to $10.7 million from $31.0 million in the prior six month period, primarily as a result of an increase in acquisition-related debt and lower average interest rates earned on customer margin and firm investment account balances. During the quarter and six months ended September 30, 2002, net interest profit accounted for 8% and 7% of consolidated pre-tax profits, down significantly from 22% and 28%, respectively, in the prior year periods. Quarter Ended September 30, 2002 Compared to Quarter Ended September 30, 2001 Revenues By Segment The following table sets forth, for the periods indicated, net revenues and pre-tax earnings by business segment.
Three months ended September 30, 2002 2001 Net revenues: Asset Management........... $151,636 $124,150 Private Client............. 145,600 151,440 Capital Markets............ 67,712 49,846 Other...................... 6,418 9,632 $371,366 $335,068 Earnings before income tax provision: Asset Management........... $ 40,127 $ 30,490 Private Client............. 18,966 14,035 Capital Markets............ 13,994 5,658 Other...................... (842) 795 $ 72,245 $ 50,978
Asset Management: Asset Management net revenues increased by $27.5 million or 22% and pre-tax earnings increased $9.6 million or 32% over last year's quarter. The impact of the acquisition of Royce and a full quarter of 18 results from PCM added net revenues of $27.1 million and pre-tax earnings of $9.6 million (including the interest expense related to the debt issued to finance the acquisitions). Our fixed income investment advisor contributed $10.3 million to the increase in net revenues. These increases were offset in part by declines in fees from company-sponsored equity mutual funds. The pre-tax profit margin increased to 27% from 25%. Asset Management represented 41% of consolidated net revenues for the quarter ended September 30, 2002, an increase from 37% in the corresponding quarter of the prior year. Total assets under management were $176.6 billion as of September 30, 2002, an increase of $19.2 billion or 12% from September 30, 2001, including assets managed by Royce. As of September 30, 2002, approximately $54.4 billion or 31% of assets under management were equity related and $122.2 billion or 69% were fixed income related. As of September 30, 2001, approximately $51.4 billion or 33% of assets under management were equity related and $106.0 billion or 67% were fixed income related. Our assets under management mix as of September 30, 2002 was as follows: Mutual Funds - $32.2 billion (18%); Institutional - $126.3 billion (72%); and Wealth Management - $18.1 billion (10%). Private Client: Private Client net revenues decreased $5.8 million, while pre-tax earnings increased by $4.9 million or 35% over the prior year's quarter. Despite a 4% decline in net revenues, which primarily resulted from a decrease in distribution fee revenues on company- sponsored equity mutual funds, improved net earnings resulted from a sharp decline in expenses, primarily attributable to expense reduction initiatives implemented last year, including consolidated branches, reductions in employees, and lower costs for communication services. In addition, net revenues and pre-tax earnings benefited from the sale of certain contracts in our bank brokerage network for $1.6 million, which resulted in a pre-tax gain of $1.3 million. The pre-tax profit margin increased to 13% from 9%. Private Client represented 39% of consolidated net revenues in September 2002, a decrease from 45% in the prior year's quarter. Net interest profit in Private Client decreased 17% to $13.0 million for the quarter ended September 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. Capital Markets: Capital Markets net revenues of $67.7 million increased 36% from $49.8 million in the prior year's quarter and pre-tax earnings rose $8.3 million to $14.0 million, primarily as a result of an increase in institutional fixed income and equity transaction volume and higher trading profits. Additionally, unrealized losses recorded in the prior year's quarter related to warrants acquired in connection with private placements and an increase in fees from real estate financing transactions contributed to the increases. The pre-tax profit margin increased to 21% from 11%. Capital Markets represented 18% of 19 consolidated net revenues for the quarter September 30, 2002, an increase from 15% 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 decreased 33% to $6.4 million from $9.6 million in the corresponding prior year period, primarily due to a reduction in loan origination and mortgage servicing fees. Expenses Compensation and benefits: Compensation and benefits increased 7% to $217.5 million from $202.6 million in the prior year's quarter, primarily attributable to the addition of expenses of PCM and Royce of approximately $12.2 million and higher profitability-based incentive expense related to asset management activities. These increases were offset in part by a decline in commissions of $1.8 million, primarily due to a decline in sales and distribution fee commissions and reduced expenses due to a lower number of private client employees. Communications and technology: Communications and technology expense declined 8% to $22.9 million from $25.0 million in the prior year's quarter, primarily as a result of decreased costs for technology, quote services and postage. Occupancy: Occupancy was $17.1 million, up 6% from $16.1 million in the corresponding prior year quarter, primarily due to increases in operating expenses at our corporate headquarters. Amortization of intangible assets: Amortization of intangible assets increased to $6.2 million for the quarter ended September 30, 2002 from $4.5 million, primarily as a result of amortization of asset management contracts acquired in the PCM acquisition. Other: Other expenses decreased 1% to $35.4 million from $35.9 million in the prior year's quarter, primarily as a result of a decrease in litigation expenses of approximately $3.5 million, partially offset by an increase in expenses from Royce, principally commissions paid to third party distributors of Royce funds. 20 Income tax provision: The provision for income taxes increased 31% to $26.9 million, from $20.6 million in the prior year's quarter, primarily as a result of the increase in pre-tax earnings. The effective tax rate declined to 37.2% in the September 2002 quarter from 40.4% in the September 2001 quarter due to lower effective state income tax rates, $2.0 million in one-time net state income tax refunds and a reduced effective foreign tax rate. Six Months Ended September 30, 2002 Compared to Six Months Ended September 30, 2001 Revenues By Segment The following table sets forth, for the periods indicated, net revenues and pre-tax earnings by business segment.
Six months ended September 30, 2002 2001 Net revenues: Asset Management........... $314,667 $241,658 Private Client............. 302,057 309,499 Capital Markets............ 133,529 113,977 Other...................... 13,537 16,256 $763,790 $681,390 Earnings before income tax provision: Asset Management........... $ 86,469 $ 64,878 Private Client............. 39,613 26,753 Capital Markets............ 27,751 18,338 Other...................... (1,230) 352 $152,603 $110,321
Asset Management: Net revenues in Asset Management increased by $73.0 million or 30% and pre-tax earnings increased $21.6 million or 33% over the prior year's period principally as a result of the addition of $69.2 million of net revenues and $26.2 million of pre-tax earnings from Royce and PCM (including an increase of $8.0 million in interest expense related to the debt issued to finance the acquisitions), as well as growth at our fixed income investment advisor. These increases were offset in part by declines in fees from company-sponsored equity mutual funds. In addition, interest revenue decreased $6.1 million, primarily as a result of lower account balances and a decrease in average interest rates earned on firm investments. Proceeds from the issuance of debt were included in the prior year period. The pre-tax profit margin increased to 28% from 27%. Asset Management represented 41% of consolidated net revenues for the six months ended September 30, 2002, an increase from 35% in the prior year's period. 21 Private Client: Private Client net revenues for the six months ended September 30, 2002 decreased $7.4 million, while pre-tax earnings increased by $12.9 million or 48%, over the prior year's period. Net revenues declined primarily due to a decrease in distribution fee revenues on company- sponsored equity mutual funds. The pre-tax profit margin increased to 13% from 9%. The improvements in net earnings and profit margin are due to a decline in non-interest expenses, primarily attributable to expense reduction initiatives implemented last year, including consolidated branches, a reduced number of employees, and lower costs for communication services. Private Client represented 40% of consolidated net revenues in September 2002, a decrease from 45% in the prior year's period. Net interest profit in Private Client decreased 22% to $24.9 million for the six months ended September 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. Capital Markets: Capital Markets net revenues were $133.5 million, an increase of 17% from $114.0 million in the prior year's period, and the pre-tax profit margin increased to 21% from 16%. These increases were attributable to an increase in institutional fixed income and equity transaction volume and higher trading profits, coupled with increased revenues from structured financings. These increases were partially offset by a decrease in fees earned on corporate banking transactions and an unrealized loss on warrants acquired in connection with private placements. Capital Markets represented 17% of consolidated net revenues in both the six months ended September 30, 2002 and 2001. Other: Other revenues consist principally of the results of our real estate service business and unallocated corporate revenues and expenses. In the six months ended September 30, 2002, net revenues and pre-tax earnings declined $2.7 million and $1.6 million, respectively, from the prior year's period, reflecting reductions in loan origination fees and interest on firm investments, partially offset by a $0.9 million write-down of private equity investments in the September 2001 period. Expenses Compensation and benefits: Compensation and benefits increased 9% to $452.6 million from $416.2 million in the prior year's period, primarily attributable to the addition of expenses of PCM and Royce of approximately $28.3 million and higher profitability-based incentive expense related to asset management and fixed income capital markets activities. These 22 increases were offset in part by a decline in sales and distribution fee commissions of $5.4 million and reduced expenses due to a lower number of private client employees. Communications and technology: Communications and technology expense declined 11% to $45.5 million from $51.1 million in the prior year's period, primarily as a result of decreased costs for quote services, printed materials and technology. Occupancy: Occupancy was $33.1 million, up 7% from $31.0 million in the prior year's period, primarily due to the addition of expenses of acquired entities and increases in operating expenses at our corporate headquarters. Amortization of intangible assets: Amortization of intangible assets increased to $12.5 million for the six months ended September 30, 2002 from $6.3 million in the prior year, primarily as a result of amortization of asset management contracts acquired in the PCM acquisition. Other: Other expenses increased 2% to $67.4 million from $66.4 million in the prior year's period, primarily as a result of an increase in expenses from Royce, principally commissions paid to third party distributors of Royce funds, offset in part by a decline in litigation expenses of approximately $3.2 million. Income tax provision: The provision for income taxes increased 31% to $58.2 million, from $44.6 million in the prior year's period, primarily as a result of the increase in pre-tax earnings. The effective tax rate declined to 38.1% in the six months ended September 30, 2002 from 40.4% in the prior year's period due to lower effective state income tax rates, $2.0 million in one-time net state income tax refunds and a reduced effective foreign tax rate. Business Segments We allocate certain common income and expense items among its business segments based upon various methodologies and factors. These methodologies are by their nature subjective and are reviewed periodically by management. Business segment results in the future may reflect reallocations of revenues and expenses that result from changes in methodologies, but such reallocations will have no effect on our consolidated results of operations. 23 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 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 to finance a compensating balance arrangement described below, and the increase in stockholder's equity from the results of operations for the quarter and six months ended September 30, 2002, there has been no material change in our financial condition since March 31, 2002. Excess cash is typically invested primarily in institutional money market funds or securities purchased under agreements to resell. At September 30, 2002, Legg Mason had an outstanding borrowing of $118.5 million under a compensating balance arrangement. The proceeds of the borrowing were used to purchase short-term, highly liquid securities. These securities are pledged as collateral for the credit facility and, due to their characteristics, are classified as cash equivalents on our September 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, from time to time, we may borrow from our committed, unsecured revolving credit facility for short-term general corporate purposes. 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 September 30, 2002, Legg Mason's total assets and stockholders' equity were $6.0 billion and $1.2 billion, respectively. During the six months ended September 30, 2002, cash and cash equivalents increased $91.5 million. Cash flows from operating activities provided approximately $64.5 million, primarily attributable to net cash earnings and a decrease in net customer receivables, offset in part by an increase in cash and securities segregated for regulatory purposes and higher levels of firm securities inventory. Cash flows from investing activities used $66.1 million, which included securities purchased under agreements to resell and payments for equipment and leasehold improvements, offset in part by proceeds from sales and maturities of investment securities. Financing activities provided $92.6 million, including $115.0 million, net of repayments, that resulted from the increase in short-term borrowings described above. During the six months ended September 30, 2002, we repurchased 24 484,000 shares of our stock for $22.3 million and we paid cash dividends of $13.4 million. 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 September 30, 2002, the broker-dealer subsidiaries had aggregate net capital of $326.6 million, which exceeded minimum net capital requirements by $306.6 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. The following table sets forth these contractual and contingent obligations by fiscal year:
Remaining There- (in millions) 2003 2004 2005 2006 2007 after Total Contractual Obligations: Short-term borrowings by contract maturity $118.5 $ - $ - $ - $ - $ - $ 118.5 Long-term borrowings by contract maturity (a) 109.0 264.0 - 100.0 - 425.0 898.0 Coupon interest on long- term borrowings 17.6 35.2 35.2 35.2 31.9 43.0 198.1 Minimum rental commitments 33.8 58.5 48.0 40.1 35.4 108.3 324.1 Total Contractual Obligations 278.9 357.7 83.2 175.3 67.3 576.3 1,538.7 Contingent Obligations: Contingent payments related to business acquisitions(b) 0.1 1.0 500.0 13.8 300.0 - 814.9 Total Contractual and Contingent Obligations (c)$279.0 $358.7 $583.2 $189.1 $367.3 $576.3 $2,353.6
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 are available for sale in 2003. Payments in 2004 reflect amounts that may be due to holders of the zero coupon 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 has the option to pay the purchase price in cash, shares of 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. 25 c) The table above does not include approximately $10.0 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. 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 six months ended September 30, 2002, except for the Collateralized Debt Obligation ("CDO") described below, 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. During the period, one of our asset management subsidiaries established a CDO special purpose entity ("SPE") as an investment vehicle for clients with assets of approximately $500 million. Legg Mason did not sell any assets to the CDO and does not own an equity interest in the entity. We are the collateral manager and may be removed as collateral manager under certain conditions. As such, in accordance with accounting principles, we do not consolidate this entity. 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 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 26 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, including, without limitation, the duration and severity of the current difficult conditions in the equity markets, (iii) the effect of federal, state and foreign regulation on Legg Mason's business, including, without limitation, the effects that the current regulatory proceedings and investigations into research analyst conflicts in the financial services industry may have on Legg Mason's investment banking, institutional sales or retail brokerage businesses, all of which have historically received support from Legg Mason's equity research department, (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. Recent Accounting Developments The following pronouncements have been issued by the Financial Accounting Standards Board ("FASB"). 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 No. 121, including developing a single accounting model for long-lived assets to be disposed of by sale. 27 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 No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces the existing guidance provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. During the six months ended September 30, 2002, SFAS Nos. 143, 144 and 145 became effective and did not impact our consolidated financial statements at September 30, 2002. Legg Mason has not yet determined the impact of adoption of SFAS No. 146. Item 3. Quantitative and Qualitative Disclosures About Market Risk During the six months ended September 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. Item 4. Controls and Procedures As of a date within 90 days of the filing of this Form 10-Q, an evaluation of the effectiveness of the design and operation of Legg Mason's disclosure controls and procedures was performed under the supervision and with the participation of Legg Mason's management, including the Chief Executive Officer and the Principal Financial Officer. Based on that evaluation, Legg Mason's management, including its Chief Executive Officer and its Principal Financial Officer, concluded that Legg Mason's disclosure controls and procedures were effective in timely alerting management, including the Chief Executive Officer and the Principal Financial Officer, of material information about Legg Mason required to be included in periodic Securities and Exchange Commission filings. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. There have been no significant changes in Legg Mason's internal controls or in other factors that could significantly affect its internal controls subsequent to the date of the evaluation. 28 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. Registrant's annual meeting of stockholders was held July 23, 2002. In the election of directors, the five director nominees were elected with the following votes: Votes Cast For Withhold Nicholas J. St. George 62,530,051 61,443,649 1,086,402 Richard J. Himelfarb 62,530,051 54,237,339 8,292,712 Roger W. Schipke 62,530,051 61,394,181 1,135,870 Edward I. O'Brien 62,530,051 61,448,752 1,081,299 Kurt L. Schmoke 62,530,051 61,300,313 1,229,738 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) A report on Form 8-K was filed on August 9, 2002 reporting under Item 9. 29 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: November 13, 2002 /s/Timothy C. Scheve Timothy C. Scheve Senior Executive Vice President DATE: November 13, 2002 /s/Charles J. Daley, Jr. Charles J. Daley, Jr. Senior Vice President and Treasurer 30 CERTIFICATIONS I, Raymond A. Mason, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Legg Mason, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 31 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATE: November 13, 2002 /s/Raymond A. Mason Raymond A. Mason Chairman, President and Chief Executive Officer 32 I, Charles J. Daley, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Legg Mason, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 33 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. DATE: November 13, 2002 /s/Charles J. Daley, Jr. Charles J. Daley, Jr. Principal Financial Officer 34 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