Legg Mason, Inc. 2007 Annual Report
LEGG MASON
Global Asset Management
On the grOund, arOund the wOrld
Our Major Office Locations Worldwide:
Barrett Associates
New York
Bartlett & Co.
Cincinnati
Batterymarch
Financial Management
Boston
London
Brandywine Global
Investment Management
Philadelphia
Chicago
San Francisco
Singapore
ClearBridge Advisors
New York
San Francisco
Legg Mason
Capital Management
Baltimore
Legg Mason
International Equities
London
Hong Kong
Melbourne
New York
São Paulo
Singapore
Warsaw
Legg Mason
International Distribution
Baltimore
Frankfurt
Hong Kong
London
Luxembourg
Madrid
Melbourne
Miami
New York
Paris
Santiago
Singapore
Sydney
Taipei
Tokyo
Toronto
Warsaw
Waterloo
Legg Mason Investment
Counsel & Trust
Baltimore
Chicago
Cincinnati
New York
Philadelphia
Legg Mason
Investor Services
Baltimore
New York
Stamford
Legg Mason
Real Estate Investors
Los Angeles
Permal Group
London
New York
Boston
Dubai
Hong Kong
Nassau
Paris
Singapore
Private Capital
Management
Naples, FL
Royce & Associates
New York
Western Asset
Management
Pasadena
Hong Kong
London
Melbourne
New York
São Paulo
Singapore
Tokyo
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Legg Mason, Inc. is one of the largest independent asset management
firms in the world. At fiscal year end, we had $969 billion of assets under
management, of which $324 billion was managed on behalf of clients domiciled
outside the United States. We now have professional staff on-the-ground in
20 cities and 16 countries around the world, in addition to the United States.
Our aim is to be one of the best asset management firms in the world.
Achieving this aim requires that we exercise uncompromising standards
of excellence in all aspects of our business.
The central tenet of our management philosophy, which we believe has been
fundamental to our success, is that we rigorously support and protect the
investment independence of our managers. We believe this is essential to their
achievement of investment excellence over the long term. We also help our
managers stay focused on their business of investing by introducing their
expertise, through mutual funds and similar products that mirror their core
competencies, to institutional and individual investors around the world.
During the past year, we have executed one of the largest business consolida-
tions and realignments in the history of our industry. The integration of our
business is complete, and the infrastructure for our future growth is in place.
We now believe we can return to the business of growth.
Financial HigHligHts
(dollars in thousands, except per share amounts)
Years Ended March 31,
OPERATING RESULTS1
Operating revenues
Operating income
Income from continuing operations before
income tax provision and minority interest
Net income2
2003
2004
2005
2006
2007
$ 803,146
214,518
$ 1,153,076
326,248
$1,570,700
489,117
$2,645,212 $4,343,675
1,028,298
679,730
181,202
190,909
301,563
297,764
470,758
408,431
715,462
1,144,168
1,043,854
646,818
PER COMMON SHARE
Diluted income2
Income from continuing operations per diluted share
Cash income from continuing operations per diluted share3
Dividends declared
Book value
$ 1.78
1.07
1.40
0.287
12.39
$ 2.65
1.68
1.98
0.373
15.18
$ 3.53
2.56
3.17
0.550
20.97
$ 8.80 $ 4.48
4.48
5.86
0.810
45.99
3.35
4.10
0.690
41.67
FINANCIAL CONDITION
Total assets
Total stockholders’ equity
$6,067,450
1,247,957
$7,282,483
1,559,610
$8,219,472
2,293,146
$9,302,490 $9,604,488
6,541,490
5,850,116
1
Reflects results of CAM and Permal since acquisition in fiscal 2006 and except for Net income excludes discontinued private client, capital markets
and mortgage banking and servicing operations, where applicable.
2 Fiscal 2006 includes gain on sale of discontinued operations of $644,040 or $4.94 per share.
3
Cash income from continuing operations per diluted share represents a performance measure that is based on a methodology other than generally
accepted accounting principles (“non-GAAP”). For more information regarding this non-GAAP financial measure, see Management’s Discussion
and Analysis of Financial Condition and Results of Operations included in this Annual Report and the corporate website at www.leggmason.com
under the “Investor Relations—Financial Highlights” section.
Operating
reVenUes
(dollars in millions)
net incOme
(dollars in millions)
DilUteD earnings
per sHare
(dollars)
casH incOme FrOm
cOntinUing OperatiOns
per DilUteD sHare
(dollars)
stOcKHOlDers’
eQUitY
(dollars in billions)
5,000
1,200
10.00
4,000
3,000
2,000
1,000
960
720
480
240
8.00
6.00
4.00
2.00
6.00
4.80
3.60
2.40
1.20
7.00
5.60
4.20
2.80
1.40
03 04 05 06 07
03 04 05 06 07
03 04 05 06 07
03 04 05 06 07
03 04 05 06 07
The portion of the bars in light blue above represents the gain on sale of our discontinued operations of $644.0 million or $4.94 per share.
$969
$868
assets UnDer management1
(dollars in billions)
1,000
800
600
400
200
$375
$286
$192
$177
$140
$112
$89
$71
$44
97
98
99
00
01
02
03
04
05
06
07
(Fiscal Years ended march 31)
1 Includes assets under management acquired in acquisitions. The light blue portion of the 06 bar represents $408.6 billion of assets under
management acquired in the December 1, 2005 closing of our transaction with Citigroup.
raymond a. (“chip”) mason
chairman, president and chief executive Officer
tO OUr stOcKHOlDers
At Legg Mason, we just completed our first full year as a pure asset manager and one of the largest
independent asset management firms in the world.
As most of you know, at the end of calendar 2005 our firm completed two transactions that doubled
our assets under management, broadened our investment capabilities into several new currencies
and asset classes, dramatically expanded our on-the-ground presence around the world, and
introduced us to new markets and distribution channels that will be vital to our future success in
an open architecture world.
During the last 12 months, we have executed one of the largest business consolidations and
realignments in the history of our industry. Our focus this year has been on retaining our key
people, our clients and our managed assets while realigning and rationalizing our global fund
and distribution platforms, as well as integrating and building out our global technology platforms
and other key infrastructure worldwide.
I am very pleased to report that we ended this fiscal year with $968.5 billion of assets under
management, up $100.9 billion from the $867.6 billion we managed a year ago. Our managed
assets now include $324.0 billion from clients domiciled outside the United States, and our
managers now have over 725 employees on-the-ground in 20 cities in 16 countries around the
world, in addition to the United States.
In the last 12 months, we have successfully completed the realignment and rationalization of our
mutual fund families in the United States, and now have a more streamlined set of products
utilizing our best investment management capabilities.
We have also largely completed the consolidation and rationalization of our international, cross-
border funds. These funds are sold throughout Europe, Asia, the Middle East and the Americas and
have now been approved for distribution in Hong Kong, Singapore and Taiwan. In total, investors
in over 180 countries have now invested in Legg Mason’s proprietary cross-border funds.1
Our non-US fund presence now includes “local” fund families in eight countries—up from two prior
to the Citigroup transaction—that are directed only to investors in such countries. In addition to the
United Kingdom and Singapore, where we have had local fund families for several years, we now also
have local fund families in Australia, Brazil, Chile, Hong Kong, Japan and Poland. Each of these fund
families offers a range of local, regional and international or global funds, offering investors not only
the expertise of their locally based investment staffs but now also the expertise of other members of the
Legg Mason group around the world.
1
Excludes Permal funds.
Western Asset has proven—once again this year—its ability to grow without negatively affecting its investment performance.
As shown above, investment staff meetings take advantage of videoconferencing to permit participation by its investment
professionals around the world.
Most recently, Legg Mason has received the regulatory approvals necessary to permit our offering a fund
to investors in Australia that will be invested in one of Permal’s core funds. This fund will be the first
Legg Mason proprietary fund to feature Permal.
BUSINESS HIGHLIGHTS
As indicated above, Legg Mason ended the year with $968.5 billion of assets under management, an
increase of $100.9 billion from the $867.6 billion we managed a year ago. Currently, one-third of our
total assets under management, or $324.0 billion, are managed on behalf of clients domiciled outside the
United States, in more than 190 countries.
Permal, which is one of the world’s largest and oldest managers of funds of hedge funds, increased its
assets under management by 33% during the year and by almost 75% since we acquired the firm in
November 2005, reflecting continued strong net client flows and continued strong performance. Close
to 80% of Permal’s assets under management are in multi-manager funds distributed outside the United
States, to investors in more than 90 countries.
Western Asset—our legacy manager most affected by the Citigroup transaction in terms of the work-
load required to absorb over $275 billion in new assets and the related clients, and supporting staff and
systems—had an exceptional year under the circumstances, with its assets under management up 16%,
and with approximately 60% of the increase from net client flows.
Throughout its history of growth, Western Asset has retained its unique culture, including its collegiality.
ClearBridge Advisors—the new asset management company we established to absorb, consolidate and
manage most of the active US equity assets, products and personnel that came to us from Citigroup—
experienced continued outflows during the year, partially as expected due to the fund rationalization
process and partially due to investment performance.
The non-US equity assets and investment staffs acquired from Citigroup, which have largely become
part of the newly formed Legg Mason International Equities (“LMIE”) group or Legg Mason’s
International Distribution platform, saw their combined assets under management grow over 40%
during the year, thanks to their performance in the strong equity markets outside the United States.
Testament to the success of Western Asset’s integration of the former Citigroup fixed income and
liquidity assets onto its platform, our long-term fixed income assets under management ended the year
at $470.9 billion, up $60.3 billion, or 15%, from the year ago total of $410.6 billion, while our liquidity
assets under management ended the year at $159.6 billion (or 16% of our total), having increased by
$27.5 billion, or 21%, from $132.1 billion a year ago. Our equity assets under management increased by
$13.1 billion, or 4%, over the last 12 months, ending the year at $338.0 billion (35% of our total), up
from $324.9 billion a year ago.
Overall, we now have $335.5 billion invested in our proprietary funds around the world, which
represents an increase of $47.1 billion, or 16%, from $288.4 billion a year ago. Of these amounts,
$252.9 billion (versus $229.0 billion) is in funds registered in the United States, while the remaining
$82.6 billion (versus $59.4 billion) is in offshore and other non-US funds, sourced from clients in
over 180 countries.2
2 Excludes Permal’s and Legg Mason Canada’s funds sponsored by external parties, as we classify them as institutional separate accounts.
pOsitiOning legg masOn FOr tHe FUtUre
Mark Fetting
Peter Bain
Mike Abbaei
Tom Lemke
Joe Timmins
CJ Daley
Tom Hirschmann
David Penn
Amy Olmert
Terry Johnson
Don Froude
Some of our division and department heads who have been instrumental in integrating the businesses acquired from Citigroup
are shown above, as well as, immediately above, some members of our senior management team who have recently been given
new or expanded responsibilities.
In Pensions & Investments’ 2007 ranking of “The Largest Money Managers,” Legg Mason is ranked as the
4th largest institutional manager in the world, the 6th largest manager of US-client assets and the 9th largest
manager overall, based on our worldwide assets under management at the end of calendar 2006.3
In this same survey, Legg Mason is also ranked as the 4th largest hedge fund manager in the world, a
category that included fund-of-hedge-fund assets, and the 13th largest manager of absolute-return strategies.
According to this same survey, Legg Mason is ranked as the 6th largest manager of US pension fund
assets.4 Within this critical market segment, we are ranked #1 (the largest) manager of active US fixed
income and the 4th largest manager of active US equity.
Based on a separate P&I ranking of the top 200 pension funds/sponsors,5 Legg Mason manages money
on behalf of more than 60% of the largest pension funds/sponsors in the United States.
Our aim is to be one of the best asset management firms in the world. As a result, we have always aimed
to increase and broaden the scale of our asset management business without jeopardizing our goal of
delivering consistently strong investment performance over the long term. Some recently published
industry rankings and awards provide an indication of our success in this regard:
• In its 2007 Achievement Awards for institutional funds management, announced in April 2007,
AsianInvestor named Western Asset for the second consecutive year as the “Best Global Fixed Income
(hedged) Manager” for their 3-year risk-adjusted performance and also named Brandywine Global as the
“Best Global Fixed Income (unhedged) Manager,” for their 5-year risk-adjusted performance.6
• In March 2007, Bill Miller and Mary Chris Gay, as managers of Legg Mason Value Trust, were
recognized as the winner in the Large Cap Blend category of Standard & Poor’s/Business Week
“Excellence in Fund Management Awards”;7 Bill has received this Award every year since the Awards
were initiated in 2003. Also, in the April 2007 edition of Global Investor, Legg Mason Capital
Management was named winner of “The 2007 Global Investor Award” for Investment Excellence in
the US Equity category: these Awards are given for strong investment performance, a clear investment
process and stable and strong business management.
• In April 2007, Brandywine was named “Best of the Best in Global Bonds” on both a 1- and 3-year
basis by Asia Asset Management and “Bond Manager of the Year” by Money Management Letter in its
6th Annual Public Pension Awards for Excellence.8
3 Pensions & Investments, May 28, 2007. The survey ranked and profiled 784 managers of US institutional tax-exempt assets,
with rankings based on assets under management as of December 31, 2006. Pensions & Investments is a trademark of Crain
Communications Inc., which is not affiliated with Legg Mason.
4 Measured by the assets managed internally on behalf of US institutional, tax-exempt clients.
5 Pensions & Investments, “The Top 200 Pension Funds/Sponsors,” January 22, 2007.
6 AsianInvestor is owned by Haymarket Publishing, which is not affiliated with Legg Mason.
7 Standard & Poor’s is a division of The McGraw-Hill Companies, and Business Week is a trademark of The McGraw-Hill Companies,
8
none of which is affiliated with Legg Mason.
Asia Asset Management is produced by Asia-Pacific Media, Ltd., an independent publishing firm set up in Hong Kong in December 1995,
and Money Management Letter is a trademark of Institutional Investor Inc., which is a subsidiary of Euromoney Institutional Investor PLC,
neither of which is affiliated with Legg Mason.
For the period January 2000 through March 2007, Permal’s historic investment approach is evidenced in the performance of its Absolute
Return and Global Directional Strategies in comparison with the performance (including reinvested dividends) of the S&P 500 Index.
perFOrmance Vs. tHe s&p 500, bY Ye ar
permal’s absolute return strategy
permal’s global Directional strategy
s&p 500 (Dividends reinvested)
29%
21%
13%
14%
8%
8%
6%
11%
10%
12%
10% 10%
5%
16%
10%
0%
-1%
-3%
-9%
-12%
-22%
2000
2001
2002
2003
2004
2005
2006
2% 3%
1%
March 31,
2007
The performance for the Absolute Return Strategy comprises the actual returns (net of fees) of selected
Permal Multi-Manager Funds that can be categorized as absolute return portfolios, pro-rated each year
based on each Fund’s assets for that year. The performance for the Global Directional Strategy comprises
the actual returns (net of fees) of a selected Permal Multi-Manager Fund that can be categorized as a
global directional portfolio.
40%
30%
20%
10%
0%
-10%
-20%
-30%
10
• In September 2006, the Royce Funds topped the list of Forbes’ 2006 Mutual Fund Survey of fund
families; in compiling the list, Forbes ranked the performance of the 25 largest fund families based on the
average annual performance of each domestic equity fund during the six-year period.9 In January 2007,
in its 2007 Mutual Fund Survey, Forbes magazine cited Royce’s Heritage Fund (Service Class) as one of
only four “Brilliant” performing mutual funds, based on its market performance in both up and down
markets.10 In February 2007, the Heritage Fund was also one of 20 funds named by USA Today to its
2007 USA Today Mutual Fund All-Stars.
OUR NEWEST MANAGERS
The Permal Group
Permal is one of the largest fund-of-hedge fund managers in the world, with over $30 billion in assets
under management. With a performance record that extends for more than 30 years, the firm is also
one of the most longstanding managers in this rapidly growing industry.
Our acquisition of Permal, completed in November 2005, was quite typical of what we historically have
looked for in a “stand-alone” acquisition: it had the necessary scale, management depth, infrastructure
and performance record to permit its operating within the Legg Mason family as a “stand-alone”
business. When Permal was acquired by Legg Mason, the only thing that really changed was its owner-
ship structure, and the signing of a revenue sharing agreement with Legg Mason.
As indicated above, Permal increased its assets under management by 33% during the year and by almost
75% since its acquisition, reflecting the company’s continued strong net client flows and continued
strong performance. Permal offers a wide variety of investment programs covering different specific
geographic regions, investment strategies, investment structures and risk/return objectives. Close to 80%
of Permal’s assets under management are in multi-manager funds distributed outside the United States.
Permal’s products include both directional and absolute return strategies and are available through multi-
manager and single manager funds, separately managed accounts and structured products sponsored by
several of the world’s most prominent financial institutions. Permal selects from among thousands of
investment managers and firms in designing and managing its portfolios. In managing its directional
strategies, Permal’s objective is to participate significantly in strong markets, preserve capital in down or
volatile markets and outperform market indices over a full market cycle, with reduced risk and volatility.
In managing its absolute return strategies, Permal seeks to achieve positive investment returns in all market
conditions with low correlation to the overall equity markets.
9 September 18, 2006 edition. Forbes is a trademark of FORBES Management Co., Inc., which is not affiliated with Legg Mason.
10 January 29, 2007 edition. Forbes is a trademark of FORBES Management Co., Inc., which is not affiliated with Legg Mason.
11
For the period January 2000 through March 2007, Permal’s historic investment approach is
evidenced in the performance of its Absolute Return and Global Directional Strategies in com-
parison with the performance (including reinvested dividends) of the S&P 500 Index,11 shown on
page 10. The performance indicated for Permal’s Absolute Return Strategy comprises the actual
returns (net of fees) of selected Permal multi-manager funds that can be categorized as absolute
return portfolios, pro-rated each year based on each fund’s assets for that year. The performance
indicated for Permal’s Global Directional Strategy comprises the actual returns (net of fees) of a
selected Permal multi-manager fund that can be categorized as a global directional portfolio.
Permal has broadened Legg Mason’s market exposure not only in terms of its asset class but also in
regard to its client base and distribution expertise. Most of Permal’s ultimate investors are high net
worth individuals domiciled in more than 90 countries outside the United States. Permal accesses
these investors through a worldwide, open architecture distribution network that includes many
of the world’s largest banks and securities firms as well as highly regarded private banks and other
high-net-worth intermediaries that operate in more narrow geographic markets.
Since it was acquired, Permal has launched a new multi-manager fund focused on India, established an
office in Hong Kong, established its initial US product offering on several large distribution platforms
directed to US high net worth investors and strengthened its separate account marketing efforts directed
to US institutional investors. Most recently, Legg Mason has received the regulatory approvals necessary
to permit our offering a fund to investors in Australia that will be invested in one of Permal’s core funds.
This fund will be the first Legg Mason proprietary fund to feature Permal.
Permal has more than 150 employees worldwide, with its investment staff headquartered in
New York City, risk management and global distribution headquartered in London and private
equity headquartered in Boston. The company also has offices in Dubai, Hong Kong, Nassau,
Paris and Singapore to support its worldwide network of distributors and also to provide investment
research support.
Importantly, all three of Permal’s investment management operations are registered with the US
Securities & Exchange Commission, while its London operation is also an FSA-authorized and
regulated manager. Permal’s offices in Dubai, Hong Kong and Singapore are all licensed and
regulated by the government authorities in those jurisdictions. In addition, eight of Permal’s
14 core fund offerings are rated by Standard & Poor’s, and all but two of these funds—each of which
has less than $400 million under management—are either AA- or AAA-rated.12
11 The S&P Index has not been selected to represent a benchmark for the Strategies, but rather to allow for a comparison of the Strategies’
performance against that of a widely recognized investment benchmark. Past performance is not a guide to future results. This
material is not an offer or solicitation to subscribe for shares in any fund, does not constitute investment advice, and is provided to
illustrate Permal’s investment philosophy during a specified time period. Sales of shares are made on the basis of the relevant offering
circular and cannot be offered in any jurisdiction in which such offer is not authorized. The Permal Funds are not for public sale in the
US or to US persons, including US citizens and residents, and their sale is restricted in certain other jurisdictions.
12 Standard & Poor’s fund-of-hedge-fund ratings of A to AAA reflect Standard & Poor’s opinion regarding the quality of the rated
fund based on its investment process, management team’s experience, control of risks and consistency of performance relative to
the fund’s own objectives. See footnote 7.
1
ClearBridge’s mission is to deliver consistently superior investment performance, which is pursued through a combination
of research-driven, fundamental investing and the insights of its veteran portfolio managers, some of whom have been
managing the same portfolios for decades.
ClearBridge Advisors
Our business swap with Citigroup, completed in December 2005, enabled us to focus entirely on
asset management as our sole business worldwide. It also involved by far the largest acquisition in
our history, and the most complex, as it has required us to take a myriad of operating entities around
the world and re-structure them into businesses that better fit our model. The fixed income and
liquidity assets, which represented about 2/3 of the acquired assets, as well as the investment
professionals who had been responsible for managing these assets, have been integrated into
Western Asset. Management of most of the acquired active US equity assets, and the investment
teams responsible for their management, have been consolidated into a single asset management
business, which we named ClearBridge Advisors, with an independent investment operation just
like our other managers.
ClearBridge focuses exclusively on equity management, but its products cover all major market
capitalizations and a wide range of equity styles. With more than $110 billion of assets under manage-
ment,13 ClearBridge is our largest equity manager and our second largest manager overall.
Just over 40% of ClearBridge’s managed assets are in the former Smith Barney, Salomon Brothers and
Citigroup mutual funds that have since been rebranded as the Legg Mason Partners Funds, with the
remainder in separate accounts for institutions and retail investors. ClearBridge’s separate accounts
primarily include broker-distributed Separately Managed Accounts (“SMAs”), a business in which
13 Some of the assets that were managed by ClearBridge a year ago were transferred during this fiscal year to other, newly created
subsidiaries of Legg Mason.
1
On tHe grOUnD, arOUnD tHe WOrlD
Roberto Apelfeld: Brazil
Paulo Clini: Brazil
Hirohisa Tajima: Japan
Patrick Tan: Singapore
Acquico Wen: UK/Emerging Markets
Reece Birtles: Australia
Kimon Kouriyialas: Australia
Tomasz Jedrezejczak: Poland
Heinrich Lessau: Chile
1
Legg Mason is ranked as the largest manager,14 but also include Section 529 College Savings Plans, 401(k)
and other qualified retirement plans, and the underlying investment options in variable annuity and life
contracts issued by leading insurance companies.
ClearBridge now has over 180 employees, with an investment staff of 51 professionals, including 13
senior portfolio managers who offer an average of more than 23 years of investment industry experience.
The portfolio managers all follow a fundamental, bottom-up approach to investing and are encouraged
to follow their own distinct management styles, but they are now supported by a shared, sector-specific
research infrastructure that serves to find new investment possibilities and to conduct surveillance of
current portfolio holdings.
Legg Mason International Equities and Distribution
The non-US equity assets and local investment staffs acquired from Citigroup have largely become part of
the newly formed Legg Mason International Equities group or Legg Mason’s International Distribution
platform. As indicated above, the combined assets under management of these non-US equity
businesses increased over 40% during the year, primarily as a result of their investment performance in
the strong equity markets outside the United States.
These non-US equity businesses now have equity investment professionals and support staff on-the-
ground in London, Warsaw, Singapore, Hong Kong, Tokyo, Melbourne, São Paulo, Santiago and New
York, plus additional distribution and client support provided through the offices of Legg Mason
Investments throughout Europe and the Asia/Pacific region. Legg Mason Investments, headquartered
in London, is the principal mutual fund distributor for Legg Mason outside North America: it serves as
the principal distributor for our cross-border funds as well as our local funds in the United Kingdom,
Singapore and Hong Kong.
OUR GLOBAL FOOTPRINT
We believe the international marketplace presents Legg Mason with significant long-term
growth opportunity.
To support our future growth in the traditional equity and fixed income asset classes in the overseas
markets, we have believed for several years that having top investment talent “on the ground” in the
major markets would be vital. We now have—in both fixed income and equity—investment teams with
both the recognized expertise in their local markets and a requisite scale that would have taken years for
us to replicate.
Legg Mason managers now have investment teams on-the-ground around the world, including over 450
investment staff in 13 cities around the United States plus approximately 140 investment staff situated in
10 cities in 9 countries outside the United States—in Hong Kong; London; Melbourne; Santiago; São Paulo;
Singapore; Tokyo; Toronto and Waterloo; and Warsaw.
Legg Mason managers also have fund distribution and client support offices in Dubai, Frankfurt,
Luxembourg, Madrid, Nassau, Paris, Sydney, and Taipei, as well as in Miami.
14 Source: Cerulli Associates, which is not affiliated with Legg Mason.
1
Over the last year, in addition to realigning and rationalizing our mutual fund families
offered to US investors, we have also restructured our wholesaling teams to re-orient them
to focus on the open architecture world of today. Included in these efforts has been an
expanded focus on penetrating the wirehouse firms in particular but also the regional
banks and brokerage firms, insurance companies, RIAs and plan sponsors that serve as
gatekeepers to individual investors.
Outside the United States, we have completed the consolidation of our Dublin-domiciled
cross-border funds. These funds now aggregate approximately $30 billion under manage-
ment in funds managed by Batterymarch, Brandywine Global, ClearBridge, Legg Mason
Capital Management, Private Capital Management, Royce and Western Asset. Our
cross-border funds are now sold throughout Europe, Asia, the Middle East and the
Americas, and have been approved for distribution in Hong Kong, Singapore and
Taiwan. In total, investors in over 180 countries have invested in Legg Mason’s proprietary
cross-border funds.15
In addition to our cross-border funds, our non-US fund presence includes “local” fund
families in eight countries—up from two prior to the Citigroup transaction—that are
directed only to investors in such countries. In addition to the United Kingdom and
Singapore, where we have had local fund families for several years, we now also have local
fund families in Australia, Brazil, Chile, Hong Kong, Japan and Poland. Each of these fund
families offers a range of local, regional and international or global funds, offering investors
not only the expertise of their locally based investment staffs but now also the expertise of
other members of the Legg Mason group around the world.
Most recently, we have received the regulatory approvals necessary to permit our offering a
fund to investors in Australia that will be invested in one of Permal’s core funds. This fund
will be the first Legg Mason proprietary fund to feature Permal.
Going forward, we intend to continue to strengthen our global footprint and utilize it to
expand both our separate accounts and funds businesses across the greater Asia/Pacific
region as well as in Europe and Latin America. As we have stated before, we would like
greater exposure in European and Asian equities.
15 Excludes Permal funds.
1
Legg Mason Capital Management is recognized not only for its long record of performance but also its distinct value investment process.
Photo by David Shaw, LMI
IN CLOSING
At Legg Mason, our aim is to be one of the best asset management firms in the world. We are an
investment-driven culture, and we aim to deliver investment excellence, including superior client
service, to all our investors around the world.
Although much may seem new about Legg Mason, far more has remained the same:
• The central tenet of our management philosophy, which we believe has been fundamental to our
performance to date, remains the same: we rigorously support and protect the independence of the
investment process of each of our managers.
• Our focus on the long-term—the long-term interests of our clients, and through them our
stockholders and employees—also remains unchanged. We do not manage our business to the
short-term.
1
• We do not believe in growth for growth’s sake. Growth must be intelligently managed, and the
infrastructure for growth must be firmly in place before growth itself can be pursued.
• Because our business inherently exposes us to the ongoing risks of a volatile global marketplace,
we continue to believe in the importance of maintaining a conservative balance sheet, as well as
delivering the strong levels of free cash flow we need to sustain future growth.
• Last but definitely not least, our business requires trust, and to win and sustain the trust of our
many constituencies—investors, regulators, our shareholders and our highly talented cadre of
employees—we must adhere to uncompromising ethical standards at all times.
Change is inherent in our industry and our world, so the ability to manage change is crucial to our
long-term success. At Legg Mason, we believe we manage change well.
Before closing, I want to acknowledge with gratitude the contributions made to Legg Mason
by the Hon. Carl Bildt, who retired from our Board of Directors this year when he was named
Foreign Minister by Sweden’s newly elected government. Carl joined our Board in 2002 after
having served as Sweden’s Prime Minister (1991−1994) and leading its entry into the European
Union, after which he represented the United Nations as the first High Representative to Bosnia
and the UN Special Envoy to the Balkans. Carl’s unique knowledge and experience have been
particularly helpful to us as we have expanded our global presence over the last five years.
Although the last year has not been easy, and the workload imposed on our employees around the
world has been enormous, the integration and realignment of the businesses we acquired from
Citigroup are complete. Now, I am delighted to say, we feel we can return to the business of growth.
Sincerely,
Raymond A. Mason
Chairman, President and Chief Executive Officer
June 14, 2007
1
bOarD OF DirectOrs
BACK, LEft to RiGht
harold L. Adams
Chairman Emeritus,
RTKL Associates, Inc.
Roger W. Schipke
Executive in Residence, University of
Louisville, College of Business and
Public Administration (Chairman of
the Compensation Committee)
Kurt L. Schmoke
Dean, School of Law at
Howard University;
Former Mayor of Baltimore
Cheryl Gordon Krongard
Private Investor; Former CEO,
Rothschild Asset Management
James E. Ukrop
Chairman, Ukrop’s Super Markets, Inc.
Dennis R. Beresford
Professor, University of Georgia; Former
Chairman of Financial Accounting Standards
Board (Chairman of Audit Committee)
Raymond A. Mason
Chairman, President and Chief Executive
Officer, Legg Mason, Inc.
Margaret Milner Richardson
Private Consultant and Investor;
Former U.S. Commissioner of
Internal Revenue
W. Allen Reed
Private Investor; Retired CEO,
GM Asset Management Corporation
Robert Angelica
Former Chairman and CEO,
AT&T Investment
Management Corporation
Edward i. o’Brien
Private Investor; Retired President,
Securities Industry Association
on StAiRS, LEft to RiGht
John E. Koerner iii
Managing Member, Koerner Capital, LLC
nicholas J. St. George
Private Investor (Lead Independent
Director and Chairman of Nominating
& Corporate Governance Committee)
OUR NEW DIR ECTOR
Robert Angelica joined the Legg Mason Board in April 2007. Currently engaged in
private investment activities, in December 2006 he retired from AT&T, where he had
been responsible for the investment and administration of AT&T’s employee benefit plan
assets (which totaled $80 billion at the end of his tenure).
1
pUrsUing OUr gOal OF inVestment excellence
Western Asset Management
Permal
Legg Mason Capital Management
ClearBridge
ClearBridge
0
Permal
Royce & Associates
Private Capital Management
Brandywine Global
Batterymarch
Batterymarch
Brandywine Global
1
pUrsUing OUr gOal OF inVestment excellence
Western Asset is widely recognized
as one of the world’s leading fixed
income managers. It is also one of
the largest, with nearly $600 billion
in assets under management in over
38 marketed product composites in
fixed income and currency markets
across the globe. On-the-ground
asset management is provided
out of Pasadena, California, where
the company is headquartered,
New York, London, Melbourne,
São Paulo, Singapore and Tokyo. At
yearend, clients domiciled outside
the United States contributed 39%
of Western Asset’s total assets
under management.
ClearBridge Advisors is our largest
equity manager, and second largest
manager overall, with over $110 billion
in assets under management,
primarily in mutual funds and
Separately Managed Accounts
managed on behalf of individual
investors in the United States. The
company houses most of the active
US equity management operations
of the Citigroup Asset Management
businesses that we acquired. The
ClearBridge platform offers a variety
of investment styles, from small-cap
value to large-cap growth, but all
utilize a research-driven, bottom-up,
fundamental approach to security
selection. All of ClearBridge’s
employees are based in the United
States, primarily in New York and
San Francisco, and almost all of its
client base is US-domiciled.
Legg Mason Capital Management,
headquartered in Baltimore, is widely
recognized for its distinctive value
investing process and long history of
investment performance. Since its
inception in 1982 with the launch of
Legg Mason Value Trust, LMCM has
grown to $68 billion in assets under
management. Today LMCM offers
investors six equity capabilities:
Value Equity, Mid-Cap, All Cap,
Growth Equity, Opportunity, and
American Leading Companies.
These capabilities are available
through mutual funds and other
pooled accounts offered by Legg
Mason and third parties, as well
as through institutional separately
managed accounts. The same
intrinsic value investment approach
and disciplined investment process
are applied across all six mandates
with an objective of delivering
excess returns over the long-term
for investors. At yearend, 24% of
LMCM’s assets under management
were managed on behalf of non-US
domiciled clients.
Batterymarch, founded in 1969 to
manage US institutional equity
assets, was one of the first US-based
managers to invest internationally and
was also a pioneer in the use of
sophisticated quantitative models
based on the tenets of fundamental
analysis. Today, Batterymarch
manages US, international, emerging
markets, global and alternative equity
products. The firm customizes
its investment strategies to adapt to
the specific characteristics of each
region, country, sector and asset
class, as well as to meet specific
client requirements. Acquired by
Legg Mason in 1995, Batterymarch
has approximately $26 billion in
assets under management, including
roughly $6 billion for which it has
become responsible as a result of our
acquisition of CAM; more than 45% of
Batterymarch’s total assets represent
global, international or emerging
markets accounts, and nearly 20%
are managed on behalf of clients
domiciled outside the United States.
Batterymarch is located in Boston,
with an affiliated office in London.
Brandywine Global has pursued
one investment approach—value
investing—since its founding in
1986. Acquired by Legg Mason in
January 1998, Brandywine Global’s
assets under management are
close to evenly split between
equity and fixed income, including
global and international fixed
income mandates as well as US,
international and global equity
mandates, all of which are
managed on a value basis. Socially
responsible mandates are also
offered in several asset classes.
Brandywine Global’s offices are
located in the United States and
Singapore. As of yearend, more
than two-thirds of Brandywine
Global’s assets under management
were in global or international
portfolios, fixed income as well as
equity, while 30% of its assets were
managed on behalf of non-US
domiciled clients.
Permal is one of the five largest
fund-of-hedge-fund managers in
the world, with over $30 billion
in assets under management in
a variety of investment programs
covering different geographic
regions, investment strategies and
risk/return objectives. Permal’s
products include both directional
and absolute return strategies.
Permal’s ultimate investors are
primarily high-net-worth individu-
als, in 90 countries outside the US,
accessed through a worldwide
network of distributors. Permal’s
asset management offices are in
New York, London and Boston,
with offices in Paris, Dubai, Hong
Kong, Nassau and Singapore
providing client service and
investment research support. All
three of Permal’s asset manage-
ment operations are registered
with the US Securities & Exchange
Commission, while London is also
FSA-regulated. Permal’s offices in
Dubai, Hong Kong and Singapore
are all licensed and regulated
by the government authorities
in those jurisdictions.
Headquartered in Naples, Florida,
Private Capital Management
celebrated its 20th anniversary this
year. The firm was founded in 1986,
acquired by Legg Mason in August
2001, and continues to be led by the
same Portfolio Management team of
founder and Chief Executive Officer
Bruce Sherman and President Gregg
Powers who joined the firm in 1988.
The company is one of the most
highly regarded US equity managers
available today, based on its long-
term record of performance. The
company has an absolute return-
oriented, proprietary research
intensive investment process that
utilizes a bottom-up, all-cap, value
oriented approach to identify hidden
opportunities and mitigate risks.
For more than 30 years, Royce
& Associates has utilized a
disciplined value approach to
invest in smaller-cap companies.
The company, acquired by Legg
Mason in 2001, is particularly well-
known for its Royce Funds, which
have retained their franchise name
and pre-existing distribution
channels since the acquisition.
Unlike many mutual fund groups
with broad product offerings,
Royce concentrates on smaller
company investing and provides
a range of options to take full
advantage of this large and diverse
sector. Royce is located in New
York City, and almost all of Royce’s
approximately $32 billion in assets
under management is managed on
behalf of US-domiciled investors.
“ OUr missiOn…tO remain a leaDer in DiVersiFieD
FixeD incOme inVestment management WitH
integr ateD glObal Oper atiOns, e xercising
UncOmprOmising stanDarDs OF e xcellence in
all aspects OF OUr bUsiness.”
Western asset’s mission statement
Western Asset is one of the world’s largest managers of fixed income investments, with assets under management of
nearly $600 billion. With a combined staff of over 950 employees working from offices in Pasadena—where the company
is headquartered—as well as in New York, London, Tokyo, Singapore, Hong Kong, Melbourne and São Paulo, Western
Asset offers a broad range of fixed income investment services representing a global array of currencies, investment
strategies and markets.
The strategic plan that has guided the company for many years remains the model for growth today:
• Be global, with a global platform and operations;
• Be seamlessly integrated in the way it operates its business;
• Continue diversifying its product line, with the ultimate aim of providing any fixed income solution that its clients
may require, in any currency; and
• Achieve leverage within its organization through sizable, ongoing investments in technology and key support
functions, as a way to support and protect the ability of its investment professionals to focus on their jobs of
managing their clients’ money.
Over the past 10 years, under the leadership of CEO Jim Hirschmann, Western Asset has successfully executed its strategic
plan and established a long and enviable track record of managing transformation and growth, both organically and
through acquisition. During this period, Western Asset has consistently proven that it can grow while retaining its unique
culture and without impacting its investment team’s ability to provide strong long-term performance. The size and breadth
of the company has expanded dramatically as a result of the integration of the fixed income businesses acquired from
Citigroup: Western Asset now has 38 marketed product composites, managed globally, in more than a dozen currencies.
new YORk
USD
Liquidity
Municipal
sMas
LOndOn
GBP, EUR, SEK, USD
absolute Return
Broad Market
Corporate
Global
High Yield
Inflation-Linked
Limited duration
Liquidity
Long duration
non-us/International
TOkYO
JPY
absolute Return
Broad Market
Global
HOnG kOnG
sãO PauLO
BRL
Broad Market
Liquidity
sovereign
sInGaPORe
HKD, MYR, SGD, TWD
asian Bond
singapore Bond
singapore Cash
MeLBOuRne
AUD, NZD
Broad Market
Corporate
High Yield
Limited duration
Long duration
Pasadena
CAD, USD
aBs / MBs
absolute Return
Broad Market
Corporate
emerging Markets
Government Only
High Yield
Limited duration
Long duration
Portable alpha
TIPs
On May 1, 2006, we established ClearBridge Advisors to house most of the active US equity management business
acquired from Citigroup.
ClearBridge is now our largest equity manager, and our second largest manager overall, with over $110 billion in assets
under management, primarily in mutual funds and Separately Managed Accounts managed on behalf of individual
investors in the United States.
The ClearBridge platform offers a variety of investment styles, from small-cap value to large-cap growth, but all utilize a
bottom-up, fundamental approach to security selection that is primary-research driven and focuses on companies with solid
economic returns relative to their risk-adjusted valuations. In order to promote cross-fertilization among the managers and
research team, all issues related to broad investment philosophy, risk management and investment infrastructure are taken
up by a newly formed Investment Committee that includes the most seasoned and tenured portfolio managers of these
various styles. The Committee is chaired by ClearBridge’s co-chief investment officers, Brian Posner and Hersh Cohen, a
38-year industry veteran. The Committee also includes senior portfolio managers Alan Blake, Richie Freeman and John
Goode, among others.
ClearBridge intends to leverage its portfolio managers in the same way that Legg Mason Capital Management and our
other managers have been so successfully leveraged in the past: by creating new products that will be managed in the same
way as their best performing US funds, but offered to new markets—such as institutional separate accounts—and through
new distribution channels.
ClearBridge currently has approximately 130 employees, including 51 investment professionals, all of whom are based in
the United States. Its client base is predominantly US-domiciled.
assets bY strategY
international aDr 1%
convertibles 1%
small cap Value 1%
small cap growth 1%
multi cap 44%
specialty/Other 7%
large cap core 16%
large cap growth 21%
large cap Value 7%
mid cap core 1%
Legg Mason Capital Management traces its history to 1982 when our first equity mutual fund, Legg Mason Value Trust,
was launched. Since then, LMCM has added five equity mandates and grown to $68 billion in assets under management
for clients around the world. At year-end, 24% of LMCM’s assets under management were managed on behalf of non-US
domiciled clients.
While LMCM’s intrinsic value investment philosophy has remained constant, it is focused on continuously evaluating and
improving its investment process to adapt to changing markets and gain a competitive advantage. This focus on process, rather
than short-term outcomes, has led LMCM to take a multi-disciplinary approach to understanding businesses and markets.
Diversity of thought and learning agility, including critical thinking, the ability to make fresh connections, eagerness to learn
and the ability to cope with novel situations, are highly prized. In order to gain a competitive advantage, LMCM embraces
conceptual models that lie beyond the world of finance in areas like psychology, complex systems, and cognition, and applies
them to its investment decision making. LMCM strives to foster a culture that is conducive to making rational, long-term
decisions: inquisitive, supportive, humble, candid, respectful, and accountable. At the heart of LMCM is a cohesive team of
48 investment professionals with diverse talents and perspectives, who apply the same investment philosophy and disciplined
investment process across its six equity mandates.
Legg Mason Capital Management’s mission is to deliver consistent excess returns over the long-term, and the firm has
produced a strong investment record in this regard, as evidenced by the chart below. Despite the challenges of the past year,
during which each mandate underperformed its benchmark, over any trailing five-year period—calculated on a rolling basis
every month over the last 10 years—four of LMCM’s composites (Value Equity, Opportunity, Growth and All Cap) have
outperformed their respective benchmarks 100% of the time, while the Mid-Cap composite has outperformed 98% of the
time. The American Leading Companies composite has outperformed its benchmark 98% of the time during the full 10-year
period, and 100% of the time during the tenure of its current portfolio manager, which commenced in April 1998.
100%
100%
98%
100%
100%
98%
100%
OUtperFOrming FiVe-Year periODs 16,17
this chart illustrates the percentage of rolling five-year periods,
calculated as of every month-end for the last 10 years, during
which each of lmcm’s equity composites have outperformed their
respective benchmarks, net of management fees.18,19
y
t
i
u
q
E
e
u
l
a
V
Assets By Style20 ($ in billions)
48.2
y
t
i
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u
t
r
o
p
p
O
7.2
p
a
C
-
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M
i
4.3
y
t
i
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q
E
h
t
w
o
r
G
5.0
p
a
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l
l
A
1.8
s
e
i
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m
o
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g
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i
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0.8
16 Relevant benchmarks are Value Equity—S&P 500; Opportunity—Russell 3000 and S&P 500; Mid-Cap—Russell Midcap; Growth Equity—
Russell 1000 Growth; All-Cap—Russell 3000; American Leading Companies—S&P 500.
17 Over the time span covered in this analysis, there were various periods, including the most recent 12-month period, during which the various mandates
underperformed their relevant benchmarks.
18 Since 10 years of information is not available for the All-Cap and Opportunity composites, the data covered in this analysis spans the time period from
the first full calendar month after their respective inceptions through March 31, 2007 (December 1, 1999 for All-Cap composite; January 1, 2000 for
Opportunity composite).
19 The analysis for the American Leading Companies composite that appears in blue is for the full 10-year period. The second analysis, in yellow,
begins April 1, 1998, which is the beginning of the first full month since David Nelson became the portfolio manager, through March 31, 2007.
20 As of March 31, 2007.
Batterymarch, which was founded in 1969 to manage US institutional equity assets, later became one of the first US-based
managers to invest internationally. The company was also a pioneer in the use of computer-driven models based on the
tenets of fundamental analysis. Today, as a global equity manager of both institutional separate accounts and subadvised
funds, Batterymarch invests in nearly 50 countries, with products that span the full range of equity asset classes. The firm
customizes its investment strategies to adapt to the specific characteristics of each region, country, sector and asset class, as
well as to meet specific client requirements. All of Batterymarch’s investment strategies are collaborative and team-driven,
and incorporate rigorous stock selection, effective risk control and cost-efficient trading.
Batterymarch has grown from approximately $4 billion in assets under management 10 years ago to approximately
$26 billion today, including roughly $6 billion for which it has become responsible as a result of our transaction
with Citigroup. Batterymarch has achieved this growth without sacrificing its strong and consistent record of long-
term performance.
As of March 31, 2007, Batterymarch had approximately 85 employees, including an investment staff of 26 professionals at
its offices in Boston and London. Batterymarch’s clients represent a broad spectrum of investors, including corporate
pension plans, public funds, foundations and endowments, Taft-Hartley plans and investment companies. For Legg Mason,
Batterymarch subadvises seven retail funds and one institutional fund for US investors plus 15 non-US funds for investors
in the United Kingdom, Europe, Asia and Australia. More than 45% of Batterymarch’s $26 billion in assets under manage-
ment represent global, international or emerging markets accounts, and nearly 20% are managed on behalf of clients
domiciled outside the United States.
range OF inVestment strategies
us equITIes
-Large capitalization
-Core
-Value
-Mid-capitalization
-small/mid-capitalization
-small capitalization
-Core
-Growth
GLOBaL equITIes
-Core
-sector
-specialist
HedGed equITIes
-us market neutral
-130/30 us large capitalization
-Global ex-us market neutral
nOn-us deVeLOPed equITIes
-Core
-small capitalization
-Regional
-europe
-uk
eMeRGInG MaRkeT equITIes
-Global core
-Regional
-asia ex-Japan
Brandywine Global has pursued one investment approach—value investing—since its founding in 1986. Acquired by Legg
Mason in January 1998, Brandywine Global’s assets under management are close to evenly split between equity and fixed
income, including global and international fixed income mandates as well as US, international and global equity mandates, all
of which are managed on a value basis. Socially responsible mandates are also offered in several asset classes. Although its client
base is predominantly institutional, approximately 15% of Brandywine Global’s assets are managed for individual investors
through the investment programs offered by several leading banks and securities firms in the United States and Canada. As of
yearend, more than 2/3 of Brandywine Global’s assets under management were in global or international portfolios, fixed
income as well as equity, and 30% of its assets were managed on behalf of non-US domiciled clients.
Brandywine Global increased its assets under management by approximately 40% this year, to just over $42 billion, with all
of its growth organic. Despite this level of growth, Brandywine Global’s investment performance has remained strong, as
evidenced by some of the awards recently received by the firm:
• Brandywine Global was named “Best of the Best in Global Bonds” on both a 1- and 3-year basis by Asia Asset
Management in its Best of the Best Awards for 2006.21
• The firm was also named “Bond Manager of the Year” by Money Management Letter in its 6th Annual Public
Pension Plan Awards for Excellence.22
• In its 2007 Achievement Awards for institutional funds management, announced in April 2007, AsianInvestor named
Brandywine Global as the “Best Global Fixed Income (unhedged) Manager” for its 5-year risk adjusted performance.23
Today, Brandywine Global has over 150 employees, including 39 investment professionals, at its offices in Philadelphia,
Chicago, San Francisco and Singapore. Over the course of the past year, Brandywine Global has been working closely with
Legg Mason to leverage the Legg Mason technology platform for many of its key operations including trading, settlement,
cash and position reconciliation, portfolio accounting and performance measurement, quarterly fee billing, and compliance.
This extensive project management effort is expected to result in improved operational efficiencies moving forward.
assets bY strategY
assets bY client tYpe
1% balanced
15% large cap equity
Operating reserves 21%
Fixed income 46%
13% Diversified equity
5% small/smid cap equity
subadvisory 21%
international/global equity 20%
taft-Hartley 6%
endowment/Foundation 6%
12% private clients
14% erisa
19% public Funds
1% Other
21 See Footnote 8.
22 See Footnote 8.
23 See Footnote 6.
The Permal Group is one of the five largest fund-of-hedge-fund managers in the world, with over $30 billion in assets under
management. The company offers a variety of investment programs covering different geographic regions, investment strategies
and risk/return objectives. Permal’s products also include both directional and absolute return strategies. Permal’s principal
asset management offices are in New York City and London, with offices in Paris, Dubai, Hong Kong, Nassau and Singapore
providing client service and investment research support, and an office in Boston housing its private equity group. Through
its worldwide network of distributors, which includes many of the world’s largest banks and securities firms, Permal has
developed a client base that extends to more than 90 countries.
A key reason for our interest in Permal, which joined the Legg Mason family in 2005, was its strong, and very long, record
of performance. Permal’s more than 30 years of experience with hedge funds, its strong capabilities in fundamental analysis
and its highly sophisticated analytic and risk management tools have enabled it to structure and manage highly diversified
portfolios of specialized managers and distinct investment styles that have achieved a solid record of performance: Permal’s
directional strategies have participated or outperformed in strong market environments, while protecting capital in volatile
and down markets.
Permal’s entire management team has stayed with the company under long-term employment agreements, with a sizable
stake in the company’s ongoing operations. Permal’s assets under management increased by 33% during the year and by
almost 75% since its acquisition, thanks to continuing strong performance and substantial net client flows.
All three of Permal’s investment management operations are registered with the US Securities & Exchange Commission,
while its London operation is also an FSA-authorized and regulated manager. Its offices in Dubai, Hong Kong and
Singapore are all licensed and regulated by the government authorities in those jurisdictions. In addition, eight of
Permal’s 14 core fund offerings are rated by Standard & Poor’s, and all but two of these funds—each of which has less
than $400 million under management—are either AA- or AAA-rated.
mUlti-manager FUnDs’ assets bY strategY
Fixed income strategies 8%
relative Value 6%
natural resources 4%
event Driven 7%
emerging markets 2%
equity long 9%
Other long/short 5%
europe long/short 4%
3% Other
35% global macro
12% Us long/short
5% Japan long/short
Headquartered in Naples, Florida, Private Capital Management celebrated its 20th anniversary this year.
The firm was founded in 1986, acquired by Legg Mason in August 2001, and continues to be led by the
same Portfolio Management team of founder and Chief Executive Officer Bruce Sherman and President
Gregg Powers who joined the firm in 1988.
The firm has a single investment discipline—U.S. All-Cap Equity—and has attained 19% annualized
composite returns net of fees since inception and is one of the most highly regarded U.S. equity managers
available today, as evidenced by its ranking in the top 1% for performance of all U.S. equity managers over the
last 20 years based on the PSN Domestic Equity Universe.24
Private Capital Management has an absolute return-oriented investment philosophy that is grounded in
three fundamental investment objectives:
• Preserve clients’ capital. Private Capital Management’s principal objective is to preserve client
capital over the long term while investing in publicly traded equities. The firm pursues this goal
utilizing a bottom-up, all-cap, value-oriented investment approach to mitigate risk.
• Produce consistent appreciation in clients’ assets. Private Capital Management also seeks to
double its clients’ assets over five year periods.
• Focus on absolute, not relative, results. Private Capital Management focuses on individual stock
selection and does not manage against a benchmark index per se. Investment returns are
unlikely to correlate closely to any equity market index over time. The firm believes relative
return objectives may create inappropriate incentives, which can result in greater risks being
taken and longer time horizon opportunities being missed.
The foundation of Private Capital Management’s performance is a comprehensive and highly disciplined
investment strategy that relies on intensive, proprietary research to identify and capture for its clients
fundamental values that are not yet recognized in a company’s stock price. Private Capital Management
views each investment as a direct, proprietary ownership interest. This high conviction approach often
results in the firm’s being a significant shareholder of its portfolio companies.
24 The PSN Domestic Equity Universe includes all products that invest in any domestic equity style as selected by Informa Investment
Solutions. Private Capital Management’s percentile ranking is determined by Informa Investment Solutions (on a net of fees basis). Past
performance is not a guarantee of future results. Individual account performance will vary and no assurances can be given that an investor
will not lose invested capital. The standard deviation of returns for clients included in Private Capital Management’s composite for 2006
was 2.01% and the composite’s return (on a net of fee basis) for calender year 2006 was 15.35%. As of December 31, 2006, Private Capital
Management’s composite results comprised approximately 97% of its assets under management. Returns reflect the reinvestment of
dividends and other earnings.
0
For more than 30 years, Royce & Associates has utilized a disciplined value approach to invest in smaller-cap companies. The
company, which was founded by president and chief investment officer Chuck Royce and acquired by Legg Mason in October
2001, is particularly well-known for its family of mutual funds, The Royce Funds, which have retained their franchise name and
pre-existing distribution channels since the acquisition. Unlike many mutual fund groups with broad product offerings, Royce
has chosen to concentrate on smaller company investing and provides investors with a range of options to take full advantage of
this large and diverse sector.
Like Legg Mason’s other equity managers, Royce’s investment strategy is focused on achieving above-average, long-term results.
The investment team utilizes a bottom-up, value-oriented approach to investing, seeking companies with strong balance sheets,
above-average returns on capital, and that are trading at substantial discounts to their intrinsic value.
Although actual stock selection approaches employed by individual fund managers may vary, portfolio companies are selected
primarily from the small- and micro-cap universe, defined as those with market caps below $2.5 billion. Royce pays close attention
to risk and strives to maintain the same discipline, regardless of market movements and trends.
Royce & Associates is located in New York City and has approximately 100 employees, including an investment staff of 25
professionals. The firm’s approximately $32 billion of assets under management include 22 open-end mutual funds that Royce
manages, the company also offers three closed-end funds that carry its name as well as institutional accounts and limited
partnerships. Royce also manages four Legg Mason-sponsored funds offered outside the United States, which introduced Royce’s
expertise to the non-US marketplace, and utilizes our institutional funds distribution platform to expand Royce’s presence in
targeted markets.
cUrrent pOrtFOliO cHaracteristics 25
FUND NAME
Pennsylvania Mutual
Royce Micro-Cap
Royce Premier
Royce Low-Priced Stock
Royce Total Return
Royce Heritage Fund
Royce Opportunity
Royce Special Equity
Royce Value
Royce Value Plus
Portfolio Composition
Micro Small Mid
Portfolio Approach
Limited Diversified
Volatility
Low Moderate High
e
d
e
e
e
e
e
d
e
d
d
d
d
d
d
d
d
e
e
e
e
e
e
e
e
e
e
e
e
e
e
e
e
e
e
e
e
e
e
e
25 A larger d indicates where a Fund’s Weighted Average Market Capitalization falls.
1
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts or unless otherwise noted)
2007
Years Ended March 31,
2005
2006
2004
2003
OPERATING RESULTS(1)
Operating revenues
Operating expenses
Operating income
Other income (expense)
Income from continuing operations before
income tax provision and minority interests
Income tax provision
Income from continuing operations before
minority interests
Minority interests, net of tax
Income from continuing operations
Income from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Net income
PER SHARE(2)
Net income per share:
Basic
Income from continuing operations
Income from discontinued operations
Gain on sale of discontinued operations
Diluted
Income from continuing operations
Income from discontinued operations
Gain on sale of discontinued operations
Weighted average shares outstanding:(2)
Basic
Diluted
Dividends declared
BALANCE SHEET
Total assets
Long-term debt
Total stockholders’ equity
FINANCIAL RATIOS AND OTHER DATA
Profit margin:(3)
Pre-tax
After-tax
Long-term debt to equity(4)
Assets under management (in millions)
Full-time employees
$4,343,675 $2,645,212 $1,570,700 $1,153,076 $ 803,146
588,628
1,081,583
214,518
489,117
(33,316)
(18,359)
3,315,377
1,028,298
15,556
1,965,482
679,730
35,732
826,828
326,248
(24,685)
1,043,854
397,612
715,462
275,595
470,758
175,334
301,563
114,223
181,202
67,888
646,242
4
646,246
—
572
113,314
—
113,314
77,595
—
$ 646,818 $1,144,168 $ 408,431 $ 297,764 $ 190,909
439,867
(6,160)
433,707
66,421
644,040
187,340
—
187,340
103,943
6,481
295,424
—
295,424
113,007
—
$ 4.58 $ 3.60 $ 2.86 $ 1.87 $ 1.15
0.78
—
$ 4.58 $ 9.50 $ 3.95 $ 2.97 $ 1.93
0.55
5.35
1.09
—
1.04
0.06
—
—
$ 4.48 $ 3.35 $ 2.56 $ 1.68 $ 1.07
0.71
—
$ 4.48 $ 8.80 $ 3.53 $ 2.65 $ 1.78
0.97
—
0.51
4.94
0.91
0.06
—
—
141,112
144,386
99,002
109,697
$ .810 $ .690 $ .550 $ .373 $ .287
120,396
130,279
103,428
117,074
100,292
114,049
$9,604,488 $9,302,490 $8,219,472 $7,282,483 $6,067,450
786,753
1,247,957
1,112,624
6,541,490
1,202,960
5,850,116
811,164
2,293,146
794,238
1,559,610
24.0%
14.9%
17.0%
27.0%
16.6%
20.6%
30.0%
18.8%
35.4%
26.2%
16.2%
50.9%
22.6 %
14.1 %
63.0%
$ 968,510 $ 867,550 $ 374,529 $ 286,168 $ 192,224
5,290
4,030
5,580
3,820
5,250
(1) Reflects results of CAM and Permal since acquisition in fiscal 2006 and discontinued private client, capital markets and mortgage banking and servicing operations, where applicable.
(2) Adjusted to reflect September 2004 stock split, where applicable. Diluted earnings per share and weighted average diluted shares outstanding have been restated as required by
EITF 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” where applicable. The non-voting convertible preferred shares are considered
“participating securities” and therefore are included in the calculation of basic and diluted weighted average shares outstanding beginning in fiscal 2006.
(3) Calculated based on income from continuing operations before minority interests.
(4) Calculated based on long-term debt as a percentage of total stockholders’ equity as of March 31.
33
MANAgEMENT’S DISCuSSIoN AND ANALySIS oF
FINANCIAL CoNDITIoN AND RESuLTS oF opERATIoNS
EXECUTIVE OVERVIEW
Legg Mason, Inc., a holding company, with its subsidiaries
(which collectively comprise “Legg Mason”) is a global
asset management firm. Acting through our subsidiaries,
we provide investment management and related services
to institutional and individual clients, company-sponsored
mutual funds and other investment vehicles. We offer
these products and services directly and through various
financial intermediaries. We have operations principally
in the United States of America and the United Kingdom
and also have offices in Australia, Bahamas, Brazil,
Canada, Chile, China, Dubai, France, Germany, Japan,
Luxembourg, Poland, Singapore, Spain and Taiwan.
On December 1, 2005, we completed a strategic
acquisition to become a pure asset management
company in which we transferred our Private Client
and Capital Markets businesses (“PC/CM”) to Citigroup
Inc. (“Citigroup”) as a portion of the consideration in
exchange for substantially all of Citigroup’s asset
management business (“CAM”). Prior to the closing of
this transaction, we reported the PC/CM businesses as
separate business segments; however, both businesses are
now included in discontinued operations for all periods
presented. Effective November 1, 2005, we also pur-
chased Permal Group Ltd (“Permal”), a leading global
funds-of-hedge funds manager, to expand our global
asset management business. See Notes 2 and 3 of Notes
to the Consolidated Financial Statements for additional
information related to the transaction with Citigroup
and the acquisition of Permal.
As a result of the sale of our PC/CM businesses to
Citigroup, the portion of parent company interest income
and expense and general corporate overhead costs that was
previously allocated to these businesses is now included in
our continuing operations. In addition, distribution fees
earned on company-sponsored investment funds are
reported in continuing operations as distribution fee rev-
enue, of which a substantial portion is passed through to
third parties, including parties that were related prior to
the sale, as distribution and servicing expense. All periods
presented have been restated to reflect these changes.
services to institutional clients. Wealth Management is
primarily focused on providing asset management services
to high net worth individuals and families and endowments
and includes our funds-of-hedge funds business. See Note
18 of Notes to Consolidated Financial Statements for addi-
tional information regarding the aggregation of operating
segments for financial reporting purposes.
Our operating revenues primarily consist of investment
advisory fees, from separate accounts and funds, and
distribution and service fees. Investment advisory fees
are generally calculated as a percentage of the assets of
the investment portfolios that we manage. In addition,
performance fees may be earned under certain investment
advisory contracts for exceeding performance bench-
marks. Distribution and service fees are fees received
for distributing investment products and services or for
providing other support services to investment portfolios,
and are generally calculated as a percentage of the assets
in an investment portfolio or a percentage of new assets
added to an investment portfolio. Our revenues, therefore,
are dependent upon the level of our assets under manage-
ment, and thus are affected by factors such as securities
market conditions, our ability to attract and maintain
assets under management and key investment personnel,
and investment performance. The fees that we charge for
our investment services vary based upon factors such as
the type of underlying investment product, the amount
of assets under management, and the type of services (and
investment objectives) that are provided. Fees charged for
equity asset management services are generally higher than
fees charged for fixed income and liquidity asset manage-
ment services. Accordingly, our revenues will be affected
by the composition of our assets under management. In
addition, under revenue sharing agreements, our subsid-
iaries retain different percentages of revenues to cover
their costs, including compensation. As such, our net
income, profit margin and compensation as a percentage
of operating revenues are impacted based on which sub-
sidiaries generate our revenues, and a change in assets
under management at one subsidiary can have a dramati-
cally different effect on our revenues and earnings than
an equal change at another subsidiary.
We now operate in one reportable business segment,
Asset Management, with three divisions: Managed
Investments, Institutional, and Wealth Management.
Managed Investments is primarily engaged in providing
investment advisory services to proprietary investment
funds or to retail separately managed account programs.
Institutional focuses on providing asset management
The most significant component of our cost structure is
employee compensation and benefits, of which a majority
is variable in nature and includes incentive compensation
that is primarily based upon revenue levels and profits.
The next largest component of our cost structure is distri-
bution and servicing fees, which are primarily fees paid to
third party distributors for selling our asset management
34
products and services and are largely variable in nature.
Certain other operating costs are fixed in nature, such as
occupancy, depreciation and amortization, and fixed con-
tract commitments for market data, communication and
technology services, and usually do not decline with
reduced levels of business activity or, conversely, usually do
not rise proportionately with increased business activity.
Our financial position and results of operations are materially
affected by the overall trends and conditions of the financial
markets, particularly in the United States, but increasingly
in the other countries in which we operate. Results of any
individual period should not be considered representative
of future results. Our profitability is sensitive to a variety
of factors, including the amount and composition of our
assets under management, and the volatility and general
level of securities prices and interest rates, among other
things. Sustained periods of unfavorable market condi-
tions are likely to affect our profitability adversely. In
addition, the diversification of services and products
offered, investment performance, access to distribution
channels, reputation in the market, attracting and retain-
ing key employees and client relations are significant
factors in determining whether we are successful in
attracting and retaining clients. In the past decade, we
have experienced substantial expansion due to internal
growth and the strategic acquisition of asset management
firms that provided, among other things, a broader range
of investment expertise, additional product diversification
and increased assets under management.
The financial services business in which we are engaged is
extremely competitive. Our competition includes numerous
global, national, regional and local asset management firms,
broker-dealers and commercial banks. The industry has
been affected by the consolidation of financial services firms
through mergers and acquisitions. The industry in which we
operate is also subject to extensive regulation under federal,
state, and foreign laws. Like most firms, we have been
impacted by the regulatory and legislative changes in the
post-Enron era. In addition, the financial services industry
has been the subject of a number of regulatory proceedings
and requirements over the last few years, including proceed-
ings regarding a number of mutual funds sales practices. The
Sarbanes-Oxley Act continues to require us to review existing
policies with respect to corporate governance, auditor inde-
pendence and internal controls over financial reporting.
Responding to these changes has required us to incur costs
that continue to impact our profitability.
Discontinued Operations
As a result of the sale of the PC/CM businesses in fiscal
2006, the results of Private Client and Capital Markets
segments are reflected in discontinued operations.
Private Client distributed 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. The
primary sources of net revenues for Private Client were
commissions and principal credits earned on equity
and fixed income transactions in customer brokerage
accounts, distribution fees earned from mutual funds,
fee-based account fees and net interest from customers’
margin loan and credit account balances. Sales credits
associated with underwritten offerings initiated in the
Capital Markets segment were reported in Private Client
when sold through its branch distribution network.
Capital Markets consisted of our equity and fixed income
institutional sales and trading and corporate and public
finance. The primary sources of revenue for equity and
fixed income institutional sales and trading included
commissions and principal credits on transactions in
both corporate and municipal products. We maintained
proprietary fixed income and equity securities inventories
primarily to facilitate customer transactions and as a
result recognized trading profits and losses from our
trading activities. Corporate finance revenues included
underwriting fees and advisory fees from private
placements and mergers and acquisitions. Sales credits
associated with underwritten offerings were reported in
Capital Markets when sold through institutional distri-
bution channels. The results of this business segment also
included realized and unrealized gains and losses on
investments acquired in connection with merchant and
investment banking activities.
All references to fiscal 2007, 2006 or 2005 refer to our
fiscal year ended March 31 of that year. Terms such as
“we,” “us,” “our,” and “company” refer to Legg Mason.
BUSINESS ENVIRONMENT AND RESULTS
OF OPERATIONS
The financial environment in the United States during
fiscal 2007 was mixed and, despite investor concerns
about rising interest rates, high fuel prices, a downturn in
housing markets, turbulence in the Middle East, and the
weakening of the U.S. dollar against other major curren-
cies, all three major market indexes rose during the fiscal
35
year. The Dow Jones Industrial Average(1), Nasdaq
Composite Index(2) and the S&P 500(3) were up 11%,
3% and 10%, respectively, for the fiscal year. During fiscal
2007, the U.S. Federal Reserve raised the federal funds rate
by 0.25% two times to bring the federal funds rate to 5.25%.
The following table sets forth, for the periods indicated,
items in the Consolidated Statements of Income as a
percentage of operating revenues and the increase
(decrease) by item as a percentage of the amount for
the previous period:
Percentage of Operating Revenues
Years Ended
March 31,
2006
2007
2005
Operating Revenues
Investment advisory fees
Separate accounts
Funds
Performance fees
Distribution and service fees
Other
Total operating revenues
Operating Expenses
Compensation and benefits
Transaction-related compensation
Total compensation and benefits
Distribution and servicing
Communications and technology
Occupancy
Amortization of intangible assets
Litigation award settlement
Other
Total operating expenses
Operating Income
Other Income (Expense)
Interest income
Interest expense
Other
Total other income (expense)
Income from Continuing Operations before
Income Tax Provision and Minority Interests
Income tax provision
Income from Continuing Operations
before Minority Interests
Minority interests, net of tax
Income from Continuing Operations
Income from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Net Income
33.3%
46.5
3.3
16.5
0.4
100.0
41.6%
37.6
3.8
16.1
0.9
100.0
49.2%
29.3
3.1
16.7
1.7
100.0
35.8
0.3
36.1
27.5
4.0
2.3
1.6
—
4.8
76.3
23.7
1.4
(1.6)
0.5
0.3
24.0
9.1
40.6
2.0
42.6
21.2
3.4
1.9
1.5
(0.3)
4.0
74.3
25.7
1.8
(2.0)
1.5
1.3
27.0
10.4
42.1
—
42.1
16.1
3.0
1.8
1.4
—
4.5
68.9
31.1
1.3
(2.8)
0.4
(1.1)
30.0
11.2
14.9
—
14.9
—
—
14.9%
16.6
(0.2)
16.4
2.5
24.4
43.3%
18.8
—
18.8
7.2
—
26.0%
n/m – not meaningful
*Calculated based on the change in actual amounts between fiscal years as a percentage of the prior year amount.
(1) Dow Jones Industrial Average is a trademark of Dow Jones & Company, which is not affiliated with Legg Mason.
(2) Nasdaq is a trademark of the Nasdaq Stock Market, Inc., which is not affiliated with Legg Mason.
(3) S&P is a trademark of Standard & Poor’s, a division of the McGraw-Hill Companies, Inc., which is not affiliated with Legg Mason.
36
Period to Period Change*
2006
2007
Compared Compared
to 2006
to 2005
31.3%
103.5
40.0
68.3
(28.7)
64.2
44.9
(77.1)
39.2
112.9
95.2
96.7
77.9
n/m
96.2
68.7
51.3
22.8
35.8
(30.4)
(56.5)
45.9
44.3
46.9
n/m
49.0
n/m
n/m
(43.5)
42.6%
115.8
107.8
62.7
(17.8)
68.4
62.3
n/m
70.3
121.7
92.7
85.3
80.7
n/m
48.6
81.7
39.0
139.3
17.6
536.3
294.6
52.0
57.2
48.9
n/m
46.8
(41.2)
n/m
180.1
FISCAL 2007 COMPARED WITH FISCAL 2006
Financial Overview
Since our strategic transaction with Citigroup was com-
pleted on December 1, 2005, in which we acquired the
CAM business and sold the PC/CM businesses, we have
retroactively reflected the results of operations of the PC/
CM businesses as discontinued operations for fiscal 2006
and 2005. Effective November 1, 2005, we completed the
acquisition of Permal. As a result of the acquisitions, the
results of our continuing operations for the fiscal year
ended March 31, 2007 include a full year of results from
CAM and Permal, while the results of continuing opera-
tions for the fiscal year ended March 31, 2006 include
four months of results from CAM and five months of
results from Permal.
For the fiscal year, net income and diluted earnings per
share declined 43%, to $646.8 million, and 49%, to
$4.48, respectively, from the prior year as a result of the
after-tax gain on the sale of the PC/CM businesses of
$644.0 million, or $4.94 per diluted share, recognized in
the prior year. Income from continuing operations totaled
$646.2 million, up 49% from the prior year and income
from continuing operations per diluted share increased
34% to $4.48 despite an 11% increase in weighted average
diluted shares outstanding. Operating revenues increased
to $4.3 billion from $2.6 billion, an increase of 64%. The
Company’s revenues, expenses and income from continu-
ing operations increased primarily as a result of the
addition of a full year’s results of CAM and Permal. The
pre-tax profit margin from continuing operations declined
to 24.0% from 27.0% in the prior year, primarily as a
result of the addition of a full year’s results of CAM and
Permal. Increases in distribution revenues, of which a sub-
stantial portion is passed through to third parties as
distribution and servicing expense, and an increase in
other non-compensation related expenses were offset in
part by decreases in compensation and benefits as a per-
cent of revenue, due in part to higher revenue share-based
incentive expense on higher revenues at certain of our
subsidiaries which retain a lower percentage of revenues as
compensation, transaction-related compensation, and
other non-operating income. The pre-tax profit margin
from continuing operations, as adjusted (see Supplemental
Non-GAAP Financial Information), declined to 33.2%
from 34.3% in the prior year, primarily as a result of an
increase in other non-compensation related expenses and
a decrease in non-operating income, offset in part by
reduced compensation and benefits, as a percent of total
revenue, and transaction-related compensation. In the
prior year, income from discontinued operations, net of
tax, totaled $66.4 million; diluted earnings per share from
discontinued operations were $0.51 in the prior year.
Assets Under Management
Assets under management (“AUM”) at March 31, 2007
were $968.5 billion, up $100.9 billion or 12% from
March 31, 2006. Net client cash flows for the fiscal year
were $44.2 billion, representing 5% of our AUM at
March 31, 2006, and were driven by approximately
$27 billion in each of fixed income and liquidity flows,
while negative client cash flows in equity assets resulting,
in part, from lower relative investment performance, were
approximately $10 billion. We generally earn higher fees
and profit margins on equity AUM and outflows in this
asset class will disproportionately impact our revenues
and net income.
The components of the changes in our AUM (in billions)
for the years ended March 31 were as follows:
Beginning of period
Net client cash flows
Market performance and other
Acquisitions (dispositions), net
End of period
2007
$867.6
44.2
57.5
(0.8)
$968.5
2006
$374.5
35.6
36.9
420.6
$867.6
Average AUM for the years ended March 31, 2007 and
2006 were $905.8 billion and $546.9 billion, respectively.
Our AUM by asset class (in billions) as of March 31 were
as follows:
2007
Equity
$338.0
Fixed Income 470.9
Liquidity
159.6
Total
% of
Total
34.9
48.6
16.5
$968.5 100.0
% of
2006 Total Change
%
$324.9 37.5
410.6 47.3
132.1 15.2
$867.6 100.0
4.0
14.7
20.8
11.6
37
AUM by Division
FY 2007
FY 2006
The following discussion separately addresses the results of
our continuing operations and our discontinued operations.
Wealth
Management
Wealth
Management
Managed
Investments
Managed
Investments
Institutional
Institutional
Our AUM by division (in billions) as of March 31 were
as follows:
2007
% of
Total
2006
% of
Total Change
%
Managed
Investments $403.2
Institutional
496.3
Wealth
Management 69.0
Total
41.6
51.3
$356.5 41.1
444.8 51.3
7.1
$968.5 100.0
66.3
7.6
$867.6 100.0
13.1
11.6
4.1
11.6
The components of the changes in our AUM by division (in
billions) for the year ended March 31, 2007 were as follows:
Managed
Wealth Total
Investments Institutional Management AUM
$66.3 $867.6
$444.8
21.7
(1.0)
44.2
RESULTS OF CONTINUING OPERATIONS
Operating Revenues
Revenues from continuing operations for the year ended
March 31, 2007 were $4.3 billion, up 64% from $2.6 bil-
lion in the prior year primarily as a result of including a
full year’s results of CAM and Permal, including Permal’s
growth since acquisition, which combined accounted for
approximately 90% of the increase in revenues. Higher
average AUM, reflecting favorable market conditions and
net client cash flows, also contributed to the increase.
Investment advisory fees from separate accounts increased
31% to $1.4 billion, primarily as a result of the acquisition
of CAM, which accounted for approximately 80% of
the increase, as well as higher AUM at Western Asset
Management Company (“Western Asset”), Brandywine
Global Investment Management, LLC (“Brandywine”)
and Legg Mason Capital Management, Inc. (“LMCM”),
offset in part by a decline in advisory fees due to lower
average assets managed by Private Capital Management,
LP (“PCM”).
Investment advisory fees from funds increased 103%
to $2.0 billion, with approximately 90% of the increase
attributable to the acquisitions of CAM and Permal,
including Permal’s growth since acquisition. Performance
fees increased 40% to $142.2 million during fiscal 2007,
primarily as a result of $31.9 million of increased fees
earned by Permal.
30.2
4.0
57.5
(0.4)
$496.3
(0.3)
(0.8)
$69.0 $968.5
Distribution and service fees increased 68% to
$716.4 million with approximately 75% of the increase
due to the addition of fees earned by CAM. In addition,
distribution and service fees from Permal contributed
approximately 10% of the increase.
Assets managed for U.S. domiciled clients accounted
for 67% and 68% of total assets managed and non-U.S.
domiciled clients represented 33% and 32% of total assets
managed as of March 31, 2007 and 2006, respectively. Assets
managed for non-U.S. domiciled clients as of March 31, 2006
have been revised to include $19.3 billion of assets previ-
ously included as assets managed for U.S. domiciled
clients, principally non-U.S. domiciled feeder funds.
Revenues by Division
FY 2007
FY 2006
Wealth
Management
Managed
Investments
Wealth
Management
Managed
Investments
Institutional
Institutional
38
23.5
March 31, 2006 $356.5
Net client
cash flows
Market
performance
and other
Acquisitions
(dispositions), net
(0.1)
March 31, 2007 $403.2
23.3
Our operating revenues by division (in millions) for the
years ended March 31 were as follows:
Managed Investments
Institutional
Wealth Management
Total
2007
$2,444.4
970.0
929.3
$4,343.7
2006(1)
$1,364.0
717.6
563.6
$2,645.2
(1) Fiscal year 2006 includes a reclassification of approximately $29.4 million and
$4.6 million from the Institutional and Wealth Management divisions, respec-
tively, to the Managed Investments division to reflect a change whereby the rev-
enues generated by all proprietary funds, except those managed by Permal, are
included in the Managed Investments division.
The increase in operating revenues in the Managed
Investments and Institutional divisions was primarily due
to including a full year’s results of CAM. The increase in
the operating revenues in the Wealth Management divi-
sion was primarily due to including a full year’s results of
Permal, including growth since acquisition, offset in part
by decreases at PCM.
Operating Expenses
Compensation and benefits increased 39% to $1.6 billion,
primarily as a result of the addition of compensation costs
from the acquired businesses and increased revenue
share-based incentive expense on higher revenues at certain
of our other subsidiaries. Compensation as a percentage of
operating revenues was 36.1% for the year ended March 31,
2007, down from 42.6%, primarily as a result of higher
revenues at revenue share entities, including revenues
transferred from acquired entities, which retain a lower
percentage of revenues as compensation, and a decrease
in transaction-related compensation. Transaction-related
compensation costs primarily include recognition of
previously deferred compensation for CAM employees
under prior Citigroup plans and accruals for retention
compensation for transitional CAM employees. Costs
for severance at CAM are included in the purchase price
allocation and are not reflected in our results of operations.
Compensation as a percentage of revenues also decreased
as a result of the significant increase in fund revenues, of
which a substantial portion is passed through to third
parties as distribution and servicing expense.
Distribution and servicing expenses increased 113% to
$1.2 billion, with approximately 80% of the increase
resulting from the addition of the acquired businesses.
The majority of distribution and servicing expenses are
paid to Citigroup, who is our primary distributor.
Communications and technology, occupancy, amortization
of intangible assets and other expenses all increased primar-
ily as a result of a full year of expenses related to the CAM
operations. The increase in other expenses was primarily
from travel, professional fees and advertising costs.
The litigation award settlement during fiscal 2006 reflects
the reversal of $8.2 million of charges recorded in fiscal
2004 as a result of the settlement of a civil copyright
infringement lawsuit.
Other Income (Expense)
Interest income increased $10.9 million to $58.9 million,
primarily as a result of higher average interest rates earned
on higher average firm investment account balances.
Interest expense increased $18.8 million to $71.5 million
primarily due to the impact of a full year of interest
expense on a $700 million term loan issued to finance the
acquisition of CAM, offset in part by the repayment at
maturity of $100 million in senior notes during fiscal
2006 and the conversion of our zero-coupon contingent
convertible senior notes to common stock. Other income
decreased $12.3 million to $28.1 million as a result of
investments held by variable interest entities (“VIEs”) that
are no longer consolidated, offset in part by correspond-
ing minority interests.
Provision for Income Taxes
The provision for income taxes increased 44.3% to
$397.6 million, primarily as a result of the increase in
income from continuing operations. The effective tax rate
decreased to 38.1% from 38.5% in the prior year primar-
ily reflecting increased revenues and earnings in foreign
jurisdictions with lower effective tax rates.
Supplemental Non-GAAP Financial Information
Cash income from continuing operations rose 59% for
the fiscal year to $845.4 million or $5.86 per diluted share
from $532.1 million or $4.10 per diluted share primarily
due to including a full year’s results of CAM and Permal.
The pre-tax profit margin from continuing operations as
adjusted for distribution and servicing expense for fiscal
years 2007 and 2006 was 33.2% and 34.3%, respectively.
Cash Income from Continuing Operations
As supplemental information, we are providing a perfor-
mance measure that is based on a methodology other than
generally accepted accounting principles (“non-GAAP”)
for “cash income from continuing operations” that
management uses as a benchmark in evaluating and
39
comparing the period-to-period operating performance of
Legg Mason, Inc. and its subsidiaries. We define “cash
income from continuing operations” as income from con-
tinuing operations, plus amortization and deferred taxes
related to intangible assets. We believe that cash income
from continuing operations provides a good representa-
tion of our operating performance adjusted for non-cash
acquisition related items and it facilitates comparison of
our results to the results of other asset management firms
that have not engaged in significant acquisitions. We also
believe that cash income from continuing operations is an
important metric in estimating the value of an asset man-
agement business. In considering acquisitions, we often
calculate a target firm’s cash earnings as a metric in esti-
mating its value. This measure is provided in addition to
income from continuing operations, but is not a substitute
for income from continuing operations and may not be
comparable to non-GAAP performance measures, includ-
ing measures of cash earnings or cash income, of other
companies. Further, cash income from operations is not a
liquidity measure and should not be used in place of cash
flow measures determined under GAAP. Legg Mason
considers cash income from continuing operations to be
useful to investors because it is an important metric in
measuring the economic performance of asset manage-
ment companies, as an indicator of value and because it
facilitates comparisons of Legg Mason’s operating results
with the results of other asset management firms that have
not engaged in significant acquisitions.
In calculating cash income from continuing operations,
we add the impact of the amortization of intangible assets
from acquisitions, such as management contracts, to
income from continuing operations to reflect the fact that
this non-cash expense does not represent an actual decline
in the value of the intangible assets. Deferred taxes on
intangible assets, including goodwill, represent actual tax
Income from Continuing Operations
Plus:
Amortization of intangible assets
Deferred income taxes on intangible assets(1)
Cash Income from Continuing Operations
Cash Income per Diluted Share
benefits that are not realized under GAAP absent an
impairment charge or the disposition of the related busi-
ness. Because we actually receive these tax benefits, we
add them to income in the calculation of cash income
from continuing operations. Should a disposition or
impairment charge occur, its impact on cash income from
continuing operations may distort actual changes in the
operating performance or value of our firm. Accordingly,
we monitor changes in intangible assets and goodwill and
the related impact on cash income from continuing opera-
tions for distorting effects and ensure appropriate
explanations accompany disclosures of cash income from
continuing operations.
Although depreciation and amortization on fixed assets
are non-cash expenses, we do not add these charges in
calculating cash income from continuing operations
because these charges are related to assets that will ulti-
mately require replacement.
We have revised our definition of cash income from con-
tinuing operations. The changes relate to the treatment of
stock-based compensation expense and the timing of tax
effects associated with the amortization of intangibles. In
calculating cash income from continuing operations, we no
longer adjust for stock-based compensation expense. In
addition, to more consistently reflect the timing of tax
effects on our non-GAAP adjustments, we now add back to
income from continuing operations amortization expense
for intangible assets before taxes, rather than adding such
expense net of taxes. We have applied these changes to all
periods presented. However, the adjustments do not have a
significant aggregate impact on the amount of cash income
from continuing operations for the periods presented.
A reconciliation of income from continuing operations to
cash income from continuing operations (in thousands
except per share) is as follows:
For the Years Ended March 31,
2006
2007
$433,707
$646,246
Period to
Period Change
49.0%
68,410
130,758
$845,414
38,460
59,940
$532,107
Income from continuing operations per diluted share
Amortization of intangible assets
Deferred income taxes on intangible assets
$ 3.35
0.29
0.46
Cash Income per Diluted Share
$ 4.10
(1) Increase from prior year primarily relates to deferred income taxes on intangible assets and goodwill on acquired entities for a full fiscal year.
$ 4.48
0.47
0.91
$ 5.86
40
77.9
118.1
58.9
33.7
62.1
97.8
42.9
Pre-tax Profit Margin from Continuing Operations,
as Adjusted
We believe that pre-tax profit margin from continuing
operations adjusted for distribution and servicing expense is
a useful measure of our performance because it indicates
what our margins would have been without the distribution
revenues that are passed through to third parties as a direct
cost of selling our products, and thus shows the effect of
these revenues on our margins. This measure is provided in
addition to the Company’s pre-tax profit margin from
continuing operations calculated under GAAP, but is not a
substitute for calculations of margin under GAAP and may
not be comparable to non-GAAP performance measures,
including measures of adjusted margins, of other companies.
A reconciliation of pre-tax profit margin from continuing
operations adjusted for distribution and servicing expense
(in thousands) is as follows:
Operating Revenues, GAAP basis
Less:
Distribution and servicing expense
Operating Revenues, as adjusted
Income from Continuing Operations before
Income Tax Provision and Minority Interests
Pre-tax profit margin, GAAP basis
Pre-tax profit margin, as adjusted
For the Years Ended March 31,
2007
$4,343,675
2006
$2,645,212
1,196,019
$3,147,656
561,788
$2,083,424
$1,043,854
$ 715,462
24.0%
33.2
27.0%
34.3
RESULTS OF DISCONTINUED OPERATIONS
Income from discontinued operations, net of tax, for
the year ended March 31, 2006, was $66.4 million, or
$0.51 per diluted share. Gain on sale of discontinued
operations, net of tax, for fiscal 2007 and 2006 was
$0.6 million and $644.0 million, respectively. Gain on
sale of discontinued operations had no impact on our
earnings per share in fiscal 2007 and was responsible
for $4.94 per diluted share in fiscal 2006.
FISCAL 2006 COMPARED WITH FISCAL 2005
Financial Overview
As a result of the acquisitions of Permal and CAM, the
results of our continuing operations for fiscal 2006
include five months of results from Permal and four
months of results from CAM.
Operating revenues increased 68% to $2.6 billion as a
result of higher revenues from significantly increased
levels of AUM primarily from the CAM and Permal
acquisitions. Net income and diluted earnings per share
for the year ended March 31, 2006 also increased signifi-
cantly compared to the prior year. Net income increased
to $1.1 billion from $408.4 million, or 180%, and diluted
earnings per share increased to $8.80 from $3.53, up
149%, primarily due to a net gain on the sale of discon-
tinued operations of $644.0 million, or $4.94 per share.
Income from continuing operations totaled $433.7 million,
up 47% from the prior year, primarily due to the acquisi-
tions of CAM and Permal. Higher levels of AUM at
Western Asset and LMCM also contributed to the increase.
The pre-tax profit margin from continuing operations was
27%, down from 30% in fiscal 2005. The decrease in the
pre-tax profit margin was primarily due to a significant
increase in fund revenues, of which a substantial portion
is passed through to third parties as distribution and servicing
expense, and to transaction-related compensation costs
related to the CAM acquisition. The pre-tax profit margin
from continuing operations, as adjusted (see Supplemental
Non-GAAP Financial Information), declined to 34.3%
from 35.7% in fiscal 2005, primarily as a result of
transaction-related compensation costs related to the
CAM acquisition. Diluted earnings per share from
continuing operations were $3.35, an increase of 31%
from $2.56. Weighted average diluted shares increased
11% to 130.3 million due primarily to the issuance of
common and non-voting convertible preferred shares in
connection with the acquisition of CAM. Income from
discontinued operations, net of tax, totaled $66.4 million,
down 41% from the prior year primarily due to the sale of
the PC/CM businesses on December 1, 2005. Diluted
earnings per share from discontinued operations were
$0.51, a decrease of 47% from $0.97 for the prior year.
All share and earnings per share numbers have been
restated for fiscal 2005, where appropriate, for a 3 for 2
stock split effective September 24, 2004.
41
Assets Under Management
AUM at March 31, 2006 were $867.6 billion, up $493.1 billion
or 132% from March 31, 2005. The acquisitions of CAM
and Permal were responsible for approximately $426.1 billion
or 86% of the net increase. Net client cash flows were respon-
sible for $35.6 billion or 7% of the increase.
CAM’s fixed income and international equity separate
accounts are included in our Institutional division, while
its U.S. equity separate accounts and all mutual and other
proprietary fund AUM are included in our Managed
Investments division. Permal’s AUM are included in our
Wealth Management division.
The components of the changes in our AUM (in billions)
for the years ended March 31 were as follows:
The components of the changes in our AUM by division (in
billions) for the years ended March 31, 2006 were as follows:
Beginning of period
Net client cash flows
Market performance and other
Acquisitions (dispositions), net
End of period
2006
$374.5
35.6
36.9
420.6
$867.6
2005
$286.2
65.3
16.8
6.2
$374.5
Our AUM by asset class (in billions) as of March 31 were
as follows:
Equity
Fixed Income
Liquidity
Total
2006
$324.9
410.6
132.1
$867.6
%
% of
Total
37.5 $144.7
220.9
47.3
8.9
15.2
100.0
% of
2005(1) Total Change
124.5
38.6
59.0
85.9
2.4 1,384.3
131.7
$374.5 100.0
(1) Certain accounts totaling $12.5 billion with average maturities in excess of 90
days are included in Fixed Income, rather than Liquidity, to conform to the cur-
rent period presentation.
AUM by Division
FY 2006
FY 2005
Wealth
Management
Managed
Investments
Wealth
Management
Managed
Investments
Institutional
Institutional
Our AUM by division (in billions) as of March 31 were
as follows:
2006
% of
Total
% of
2005(1) Total Change
%
41.1 $ 71.4
254.1
51.3
19.1 399.3
75.0
67.8
Managed
Investments $356.5
Institutional
444.8
Wealth
Management
Total
66.3
35.3
$867.6 100.0 $374.5 100.0 131.7
49.0
13.1
7.6
(1) $6.5 billion in managed assets have been reclassified from Managed Investments
to Institutional.
42
Wealth Total
Managed
Investments Institutional Management AUM
$374.5
$254.1
$ 71.4
$49.0
(8.9)
March 31, 2005
Net client
cash flows
Market
performance
and other
Acquisitions
(dispositions), net 276.2
$356.5
March 31, 2006
17.8
45.9
(1.4)
35.6
13.3
5.8
36.9
131.5
$444.8
12.9
$66.3
420.6
$867.6
Assets managed for U.S.-domiciled clients accounted for
68% and 75% of total assets managed and non-U.S.
domiciled clients represented 32% and 25% of total assets
managed as of March 31, 2006 and 2005, respectively.
The following discussion separately addresses the results
of continuing operations and the results of our discontin-
ued operations.
RESULTS OF CONTINUING OPERATIONS
Operating Revenues
Revenues from continuing operations for the year
ended March 31, 2006 were $2.6 billion, up 68% from
$1.6 billion in the prior year as a result of growth in
AUM, including increases from acquisitions. The CAM
and Permal acquisitions accounted for 70% of the increase
in revenues. Strong growth in aggregate AUM experi-
enced by Western Asset and LMCM also contributed
to the increase.
Investment advisory fees from separate accounts increased
43% to $1.1 billion, primarily as a result of the acquisition
of CAM and growth in assets managed at Western Asset.
CAM and Western Asset accounted for 41% and 28% of
the increase, respectively. Collectively PCM, Brandywine,
and LMCM accounted for 23% of the increased invest-
ment advisory fees from separate accounts.
Investment advisory fees from funds increased 116% to
$1.0 billion, primarily as a result of the acquisitions of
CAM and Permal. CAM and Permal accounted for 86%
of the increase in investment advisory fees from funds.
Increases in fund assets managed by Royce and Associates,
LLC (“Royce”) and LMCM accounted for 7% of
the increase.
Performance fees rose $52.7 million to $101.6 million
during fiscal 2006, primarily attributable to the acquisi-
tion of Permal. Distribution and service fees increased
63% to $425.6 million, with $120.5 million, or 73% of
the increase, due to the addition of CAM.
Other operating revenues decreased by 18% to
$22.6 million, primarily as a result of declines in
commissions earned by PCM’s related broker-dealer.
Revenues by Division
FY 2006
FY 2005
Wealth
Management
Wealth
Management
Managed
Investments
Managed
Investments
Institutional
Institutional
Our operating revenues by division (in millions) for the
years ended March 31 were as follows:
Managed Investments
Institutional
Wealth Management
Total
2006(1)
$1,364.0
717.6
563.6
$2,645.2
2005(1)
$ 740.5
501.8
328.4
$1,570.7
(1) Fiscal years 2006 and 2005 include reclassifications of approximately $29.4 million
and $13.6 million, respectively, from the Institutional division, and $4.6 million
and $2.9 million, respectively, from the Wealth Management division, to the
Managed Investments division to reflect a change whereby the revenues generated
by all proprietary funds, except those managed by Permal, are included in the
Managed Investments division.
The increases in operating revenues in the Managed
Investments and Institutional divisions were primarily
due to the acquisition of CAM. The increase in the oper-
ating revenues of the Wealth Management division is
primarily due to the inclusion of Permal’s revenues.
Operating Expenses
Compensation and benefits increased 70% to $1.1 billion,
primarily as a result of the addition of transaction-related
compensation costs from the acquired businesses, includ-
ing compensation related to the CAM acquisition, and
increased revenue share-based incentive expense on higher
revenues at certain of our other subsidiaries. Compensation
as a percentage of operating revenues was 42.6% for the
year ended March 31, 2006, up from 42.1%, resulting
from the transaction-related compensation discussed
above, offset in part by the significant increase in fund
revenues, of which a substantial portion is passed through
to third parties as distribution and servicing expense.
Distribution and servicing expenses increased 122% to
$561.8 million, primarily as a result of the addition of
$183.4 million in distribution and service fee expense at
CAM. Permal also contributed to the increase.
Communications and technology, occupancy, and
amortization of intangible assets expense all increased
primarily as a result of the addition of expenses related
to the CAM acquisition.
The litigation award settlement reflects the reversal of
$8.2 million of charges recorded in fiscal 2004 as a result
of the settlement of a civil copyright infringement lawsuit
in the current period.
Other expenses increased 49% to $106.0 million,
primarily due to increased promotional costs at CAM
and professional fees. In connection with the acquisition
of CAM and sale of the PC/CM businesses, Legg Mason
and Citigroup entered into mutual transition services
agreements to provide certain administrative services
(other than investment advisory services) provided by
the seller to the transferred business in the ordinary
course prior to the date of sale. Under each agreement,
the respective services are to be provided for up to eigh-
teen months with a provision for an additional six-month
renewal. The service recipient may terminate the services
on an individual basis with notice. For the four months
ended March 31, 2006, Other expenses include approxi-
mately $14.9 million of costs for services provided to the
CAM operations by Citigroup and $16.8 million of
expense reductions for cost of services provided to
Citigroup for support of sold businesses.
43
Other Income (Expense)
Interest income increased $27.9 million to $48.0 million,
primarily as a result of higher average interest rates on
higher average firm investment account balances. Interest
expense increased $7.9 million to $52.6 million due to
additional debt incurred in connection with the CAM
acquisition, offset in part by the conversion of $479.9 mil-
lion principal amount at maturity of zero-coupon
contingent convertible senior notes to common stock.
Other income increased $34.0 million to $40.4 million as
a result of net gains on firm investments and gains from
trading investments held by consolidated VIEs as a result
of the Permal acquisition, which are offset in part by a
corresponding minority interests allocation.
Provision for Income Taxes
The provision for income taxes increased 57% to
$275.6 million, primarily as a result of the increase in
income from continuing operations. The effective tax rate
increased to 38.5% from 37.2% in the prior year’s period
primarily due to a higher provision for state income taxes
as a result of the acquisition of CAM, which operates in
state and local jurisdictions with higher tax rates.
Supplemental Non-GAAP Financial Information
Cash income from continuing operations rose 45% for the
fiscal year to $532.1 million or $4.10 per diluted share
from $367.0 million or $3.17 per diluted share, primarily
from the increase in income from continuing operations
due to the acquisitions of CAM and Permal. The pre-tax
profit margin from continuing operations, as adjusted for
distribution and servicing expense, for fiscal years 2006
and 2005 was 34.3% and 35.7%, respectively. See
Supplemental Non-GAAP Financial Information in
Fiscal 2007 Compared with Fiscal 2006 section regarding
these non-GAAP disclosures.
A reconciliation of income from continuing operations to
cash income from continuing operations (in thousands
except per share) is as follows:
Income from Continuing Operations
Plus:
Amortization of intangible assets
Deferred income taxes on intangible assets
Cash Income from Continuing Operations
Cash Income per Diluted Share
Income from continuing operations per diluted share
Amortization of intangible assets
Deferred income taxes on intangible assets
Cash Income per Diluted Share
For the Years Ended March 31,
2006
$433,707
2005
$295,424
Period to
Period Change
46.8%
38,460
59,940
$532,107
$ 3.35
0.29
0.46
$ 4.10
21,286
50,291
$367,001
$ 2.56
0.18
0.43
$ 3.17
80.7
19.2
45.0
30.9
61.1
7.0
29.3
44
A reconciliation of pre-tax profit margin from continuing operations adjusted for distribution and servicing expense
(in thousands) is as follows:
Operating Revenues, GAAP basis
Less:
Distribution and servicing expense
Operating Revenues, as adjusted
Income from Continuing Operations before
Income Tax Provision and Minority Interests
Pre-tax profit margin, GAAP basis
Pre-tax profit margin, as adjusted
For the Years Ended March 31,
2006
$2,645,212
561,788
$2,083,424
2005
$1,570,700
253,394
$1,317,306
$ 715,462
$ 470,758
27.0%
34.3
30.0%
35.7
RESULTS OF DISCONTINUED OPERATIONS
Since the announcement of the transaction to sell
the PC/CM businesses in June 2005, these businesses
have been reflected as discontinued operations for all
periods presented. See Notes 2 and 3 of Notes to the
Consolidated Financial Statements for additional infor-
mation related to the transaction with Citigroup. Prior
to the sale on December 1, 2005, the PC/CM businesses
were business segments.
to twelve months in fiscal 2005. The results of discontin-
ued operations for fiscal 2006 were also negatively affected
by the announcement of the transaction. As a result, net
revenues from discontinued operations for the year ended
March 31, 2006 decreased $310.7 million, or 36%, to
$545.7 million. Income from discontinued operations
before income tax decreased $78.5 million, or 42%.
Diluted earnings per share from discontinued operations
were $0.51, a decrease of 47% from $0.97 in the prior year.
Due to the sale of the PC/CM businesses on December 1,
2005, fiscal 2006 reflects results for eight months compared
Financial results of discontinued operations by business
segment (in thousands) were as follows:
NET REVENUES
Private Client
Capital Markets
Reclassification(1)
Total
INCOME BEFORE
INCOME TAX PROVISION
Private Client
Capital Markets
Total
2006
2005
$ 502,400
168,751
671,151
(125,436)
$ 545,715
$ 727,888
306,653
1,034,541
(178,175)
$ 856,366
$ 100,289
9,115
$ 109,404
$ 132,785
55,164
$ 187,949
(1) Represents distribution fees from proprietary mutual funds, historically reported in Private Client, that have been reclassified to Asset Management as distribution fee
revenue, with a corresponding distribution expense, to reflect Legg Mason’s continuing role as funds’ distributor.
45
LIQUIDITY AND CAPITAL RESOURCES
The primary objective of our capital structure and fund-
ing practices is to appropriately support Legg Mason’s
business strategies and to provide needed liquidity at all
times, including maintaining required capital in certain
subsidiaries. Liquidity and the access to liquidity is
important to the success of our ongoing operations. Our
overall funding needs and capital base are continually
reviewed to determine if the capital base meets the
expected needs of our businesses. We intend to continue
to explore potential acquisition opportunities as a means
of diversifying and strengthening our asset management
business. These opportunities may from time to time
involve acquisitions that are material in size and may
require, among other things, the raising of additional
equity capital and/or the issuance of additional debt.
On December 1, 2005, we completed the acquisition of
CAM in exchange for (i) all outstanding stock of Legg
Mason subsidiaries that constituted our PC/CM busi-
nesses; (ii) 5,393,545 shares of common stock and
13.346632 shares of non-voting Legg Mason convertible
preferred stock, which is convertible, upon transfer, into
13,346,632 shares of common stock; and (iii) $512 million
in cash borrowed under a $700 million five-year
syndicated term loan facility. Under the terms of the
agreement, we paid a post-closing purchase price adjust-
ment of $84.7 million to Citigroup in September 2006,
based on the retention of certain AUM nine months after
the closing. Since this contingent payment was paid from
available cash, an unsecured 5-year, $300 million float-
ing-rate credit agreement that we had entered to fund
this obligation terminated in accordance with its terms.
During fiscal 2006, Legg Mason issued approximately
4.96 million common shares upon conversion of approxi-
mately 4.96 shares of the convertible preferred stock that
was issued in the CAM acquisition.
The following table summarizes the credit facilities that
were executed in connection with the CAM acquisition.
The credit facilities include agreements to fund working
capital needs and for general corporate purposes, includ-
ing acquisitions. The facilities have restrictive covenants
that require us, among other things, to maintain specific
leverage ratios. We have maintained compliance with the
applicable covenants of these borrowing facilities.
Type
5-Year Term Loan
Available
Amount
$700,000
Outstanding Outstanding
at March 31, at March 31,
2007
$650,000
2006
Interest Rate
Maturity
$700,000 LIBOR + 0.35% October 2010
5-Year Credit Agreement(1)
$300,000 $ —
3-Year Term Loan(2)
$ 16,000 $ 8,543
Promissory Note(3)
$ 83,227 $ —
Revolving Credit Agreement
$500,000 $ —
Revolving Credit Agreement(1) $130,000 $ —
$ — LIBOR + 0.35% November 2010
$ 15,776 Floating + 0.35% November 2008 Purchase price
$ 83,227 LIBOR + 0.35% November 2006 Purchase price
$ — LIBOR + 0.35% October 2010 Working capital
$ — LIBOR + 0.27% November 2006 Working capital
(1) Terminated in fiscal 2007. There were no borrowings during fiscal 2007.
(2) Loan denominated in Chilean Pesos. Floating rate linked to Bank of Chile offering rate.
(3) Matured in fiscal 2007.
On October 14, 2005, Legg Mason entered into a syndi-
cated five-year $700 million unsecured floating-rate term
loan agreement to primarily fund the cash portion of the
purchase price of the Citigroup transaction. At closing,
we borrowed $600 million, of which $512 million was
used to fund the cash portion of the purchase and the
remainder was used to fund acquisition-related expenses.
The remaining $100 million of the $700 million loan
facility was drawn down in February 2006 for additional
acquisition related costs; $650 million remains outstand-
ing as of March 31, 2007. Effective with the closing of
the Citigroup transaction, we entered into a $400 million
three-year amortizing interest rate swap (“Swap”) to hedge
a portion of the $700 million floating rate term loan at a
fixed rate of 4.9%. During the March 2007 quarter, this
Swap began to unwind and we repaid a corresponding
$50 million of the debt. We currently intend to repay a
minimum of $50 million per quarter of the current
46
Purpose
Purchase price
Contingent
Acquisition costs
$650 million outstanding balance on this loan in order to
match the amortization of the Swap.
Also in connection with the Citigroup transaction, one of
our subsidiaries was the borrower under a 364-day prom-
issory note of $83.2 million. During the fiscal year ended
March 31, 2007, we paid from available cash the balance
outstanding on this note.
Effective November 1, 2005, we acquired 80% of the
outstanding equity of Permal. Concurrent with the
acquisition, Permal completed a reorganization in which
the residual 20% of outstanding equity was converted to
preference shares, resulting in Legg Mason owning 100%
of the outstanding voting common stock of Permal. We
have the right to purchase the preference shares over the
four years subsequent to the closing and, if that right is
not exercised, the holders of those equity interests have
the right to require Legg Mason to purchase the interests
in the same general time frame for approximately the
same consideration. The aggregate consideration paid
by Legg Mason at closing was $800 million, of which
$200 million was in the form of 1,889,322 newly issued
shares of Legg Mason common stock and the remainder
was cash. We funded the cash portion of the acquisition
from existing cash. It is anticipated that we will acquire the
remaining 20% ownership interest in Permal, and we will
do so in purchases that will be made two and four years
after the initial closing at prices based on Permal’s revenues.
The maximum aggregate price, including earnout payments
related to each purchase and based upon future revenue
levels, for all equity interests in Permal is $1.386 billion,
with a $961 million minimum price, excluding acquisition
costs and dividends. Based upon current performance levels,
as of March 31, 2007, $130 million of the $161 million
difference between the minimum purchase price and
consideration paid at closing is classified as Contractual
acquisition payable, a current liability. We may elect to
deliver up to 25% of each of the future payments in the
form of shares of our common stock. In addition, during
fiscal 2007 we paid approximately $12 million in dividends
on the preference shares, and we will pay a minimum of
$27 million in dividends on the preference shares over the
next 3 years.
Our assets consist primarily of intangible assets, goodwill,
cash and cash equivalents and investment advisory
and related fees receivables. Our assets are principally
funded by equity capital and long-term debt. The invest-
ment advisory fee receivables are short-term in nature and
collectibility is reasonably certain. Excess cash is generally
invested in institutional money market funds and
commercial paper. The highly liquid nature of our
current assets provides us with flexibility in financing
and managing our anticipated operating needs.
At March 31, 2007, our total assets and stockholders’
equity were $9.6 billion and $6.5 billion, respectively.
During fiscal 2007, stockholders’ equity increased approxi-
mately $691.4 million, primarily due to the net income
for the year. During the year ended March 31, 2007,
cash and cash equivalents increased by $160.1 million
from $1.02 billion at March 31, 2006 to $1.18 billion at
March 31, 2007. Cash flows from operating activities pro-
vided $905.5 million, primarily attributable to net income.
Cash flows from investing activities used $542.1 million,
primarily attributable to a contingent earnout payment to
the previous owners of PCM, payments for fixed assets and
the purchase price adjustment paid to Citigroup. Financing
activities used $209.4 million, primarily due to payment of
cash dividends and repayment of short-term and long-term
borrowings. We expect that cash flows provided by operat-
ing activities will be the primary source of working capital
for the next year.
As of March 31, 2007, our outstanding debt balance was
$1.1 billion. In addition to the $650.0 million five-year
term loan discussed previously, included in the outstand-
ing debt is $425.0 million principal amount of senior
notes due July 2, 2008, which bear interest at 6.75%.
The notes were issued at a discount to yield 6.80%. The
accreted balance at March 31, 2007 was $424.8 million.
During fiscal 2006, holders of zero-coupon contingent
convertible notes aggregating $479.9 million principal
amount at maturity converted the notes into approxi-
mately 5.5 million shares of common stock. During fiscal
2007, all remaining outstanding zero-coupon contingent
convertible senior notes were converted into 756 thousand
shares of common stock. Proceeds from our long-term
debt have been primarily used to fund the acquisition
of asset management entities.
On September 21, 2006, Moody’s Investor Service, Inc.
upgraded the rating on our senior, unsecured debt from
A3 to A2. Our debt ratings at March 31, 2007 for
Standard and Poor’s Rating Services and Fitch Ratings
were BBB+ and A-, respectively.
On August 1, 2001, Legg Mason purchased PCM for cash
of approximately $682.0 million, excluding acquisition
costs. The transaction included two contingent payments
47
based on PCM’s revenue growth for the years ending on
the third and fifth anniversaries of closing, with the
aggregate purchase price to be no more than $1.382 bil-
lion. During fiscal 2005, we made the maximum third
anniversary payment of $400.0 million to the former
owners of PCM. During the quarter ended September 30,
2006, we paid from available cash the maximum fifth
anniversary payment of $300.0 million, which was
accrued as a liability with a corresponding increase to
goodwill at March 31, 2006. This payment is subject to
certain limited claw-back provisions.
We maintain an unsecured revolving credit facility of
$500 million that matures on October 1, 2010, to fund
working capital needs and for general corporate purposes.
There were no borrowings outstanding under this facility
as of March 31, 2007 or 2006.
We have available under a shelf registration statement
approximately $1.25 billion for the issuance of additional
debt or equity securities. A shelf filing permits us to regis-
ter securities in advance and then sell them when
financing needs arise or market conditions are favorable.
We intend to use the shelf registration for general corpo-
rate purposes, including the expansion of our business.
There are no assurances as to the terms of any securities
that may be issued pursuant to the shelf registration since
they are dependent on market conditions and interest
rates at the time of issuance.
The Board of Directors previously authorized us, at our
discretion, to purchase up to 3.0 million shares of our
common stock. There were no repurchases during fiscal
2007 and 2006. During fiscal 2005 we repurchased
734,700 shares for $40.7 million. As of March 31, 2007,
the maximum amount of shares that may yet be pur-
chased under the program is 666,200. In fiscal 2007,
2006 and 2005, we paid cash dividends of $109.9 million,
$78.6 million, and $51.7 million, respectively. We antici-
pate that we will continue to pay quarterly dividends and
to repurchase shares on a discretionary basis.
Certain of our asset management subsidiaries maintain
various credit facilities for general operating purposes. See
Notes 7 and 8 of Notes to Consolidated Financial
Statements for additional information. Certain subsidiar-
ies are also subject to the capital requirements of various
regulatory agencies. All such subsidiaries met their respec-
tive capital adequacy requirements.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements, as defined by the
Securities and Exchange Commission (“SEC”), include
certain contractual arrangements pursuant to which a
company has an obligation, such as certain contingent
obligations, certain guarantee contracts, retained or contin-
gent interest in assets transferred to an unconsolidated
entity, certain derivative instruments classified as equity
or material variable interests in unconsolidated entities
that provide financing, liquidity, market risk or credit risk
support. Disclosure is required for any off-balance sheet
arrangements that have, or are reasonably likely to have, a
material current or future effect on our financial condition,
results of operations, liquidity or capital resources. We
generally do not enter into off-balance sheet arrange-
ments, as defined, other than those described in the
Contractual Obligations and Contingent Payments
section that follows and Special Purpose and Variable
Interest Entities in Notes 1 and 17 of Notes to the
Consolidated Financial Statements.
Contractual Obligations and Contingent Payments
Legg Mason has contractual obligations to make future
payments in connection with our long-term debt and
non-cancelable lease agreements. In addition, as described
in Liquidity and Capital Resources above, we have made
or expect to make contingent payments under business
purchase agreements. See Notes 7, 8, and 10 of Notes to
Consolidated Financial Statements for additional disclo-
sures related to our commitments.
48
The following table sets forth these contractual and contingent obligations by fiscal year:
Contractual and Contingent Obligations at March 31, 2007
(In millions)
Contractual Obligations
Long-term borrowings by contract maturity
Coupon interest on long-term borrowings(1)
Minimum rental commitments
Total Contractual Obligations
Contingent Obligations
Contingent payments related
to business acquisitions(2)
Total Contractual and
Contingent Obligations(3)
2008
2009
2010
2011
2012 Thereafter Total
$ 5.1
65.2
97.2
167.5
$438.8
48.4
108.8
596.0
$ 5.5
33.2
104.1
142.8
$654.0
24.9
82.7
761.6
$ 0.8
0.5
76.2
77.5
$ 8.6
1.6
630.9
641.1
$1,112.8
173.8
1,099.9
2,386.5
252.0
7.5
293.5
—
60.0
—
613.0
$419.5
$603.5
$436.3
$761.6
$137.5
$641.1
$2,999.5
(1) Coupon interest on floating rate long-term debt is based on rates outstanding at March 31, 2007.
(2) 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.
(3) The table above does not include approximately $39.3 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 fiscal 2008 to 2011.
Restructuring Charges
Prior to consummation of the CAM transaction,
senior management assessed and formulated plans for
restructuring the business of the combined entities,
which included reductions in the acquired workforce,
rationalization and realignment of the acquired mutual
funds, and an evaluation of office lease obligations
assumed in the transaction in several geographic regions.
Costs associated with reductions of the acquired work
force were accrued at acquisition date, at which time
specific plans and the communication of those plans were
finalized. Costs associated with mutual fund realignment
and office space rationalization were accrued during fiscal
2007, as management finalized plans and amounts could
be reasonably estimated. As part of the fund realignment,
certain domestic funds have been or are being merged
with funds of similar strategy and certain funds have
been or are being re-domiciled or liquidated, as approved
by the Boards of Directors of the funds or fund
shareholders. The fund realignment costs were not associ-
ated with or incurred to generate revenues of the combined
entity after the consummation date, were incremental to
other costs incurred in the conduct of activities prior to the
transaction date, and were incurred as a direct result of the
plan to exit certain CAM activities. The determination of
excess office space in several geographic regions resulted
from staff reductions and business integrations. Excess
office space costs include both amounts incurred under
existing contractual obligations of CAM that will continue
with no economic benefit and penalties incurred to cancel
contractual obligations of the acquired business.
The costs for workforce reductions, mutual fund realign-
ment and excess office space aggregating $85.4 million
are associated with integration of the acquired CAM
business and such costs are reflected as additional
goodwill and only impact future earnings to the
extent recorded goodwill becomes impaired.
A summary of all accrued restructuring costs (in millions) follows:
Accrued at acquisition
Payments
Accrual at March 31, 2006
Accruals
Payments
Accrual at March 31, 2007
Acquired
Workforce
Reductions
$ 27.5
(19.5)
8.0
1.2
(9.0)
$ 0.2
Fund
Realignment
Office Leases
$ —
—
—
42.4
(37.2)
$ 5.2
$ —
—
—
14.3
(3.3)
$11.0
Total
$ 27.5
(19.5)
8.0
57.9
(49.5)
$ 16.4
49
The purchase price allocation was completed during fiscal
2007, and we expect the remaining accrued costs to be paid
as incurred or over their contractual terms in future years.
MARKET RISK
The following describes certain aspects of our business
that are sensitive to market risk.
Revenues and Net Income
The majority of our revenue is based on the market value
of our AUM. Accordingly, a decline in the prices of secu-
rities generally may cause our AUM to decrease. In
addition, our fixed income and liquidity AUM are subject
to the impact of interest rate fluctuations, as rising interest
rates may tend to reduce the market value of bonds held
in various mutual fund portfolios or separately managed
accounts. Performance fees may be earned on certain
investment advisory contracts for exceeding performance
benchmarks. Declines in market values of AUM and
underperformance of advisory contracts versus the appli-
cable performance benchmarks will result in reduced fee
revenues and net income.
Investments
Legg Mason invests in sponsored mutual funds, limited
partnerships, limited liability companies and certain other
investment products. No investments were classified as
held-to-maturity at March 31, 2007. Legg Mason has also
made certain available-for-sale investments of $8.3 mil-
lion at March 31, 2007. Declines in market values of these
investments may negatively impact Legg Mason’s reve-
nues, net income and comprehensive income.
Trading Assets
Of our securities owned, $273.2 million and $142.2 mil-
lion as of March 31, 2007 and 2006, respectively, are
classified as trading assets. Approximately $153.7 million of
these assets as of March 31, 2007 and substantially all of
these assets as of March 31, 2006 are related to long-term
incentive compensation plans of subsidiaries that have cor-
responding liabilities. Accordingly, fluctuation in the
market value of these assets and the related liabilities will
have no impact on our operating revenues and will not have
a material effect on our net income or liquidity. However,
it may have an impact on our compensation expense with
a corresponding offset in other non-operating income.
Approximately $35.3 million of these assets are seed capital
investments that are economically hedged. Fluctuations in
the market value of these assets will not have a material
impact on our net income. Approximately $84.2 million of
these assets, including approximately $37.9 million related
to long-term incentive compensation, represent investments
in which fluctuations in market value may impact our non-
operating income and net income.
Foreign Exchange Sensitivity
Legg Mason operates primarily in the United States, but
provides services, earns revenues and incurs expenses out-
side the United States. Accordingly, fluctuations in foreign
exchange rates for currencies, principally in the United
Kingdom, Canada, Brazil and Australia, may impact our
comprehensive and net income. Certain of our subsidiaries
have entered into forward contracts to manage the impact
of fluctuations in foreign exchange rates on their results of
operations. We do not expect foreign currency fluctuations
to have a material effect on our comprehensive or net
income or liquidity.
Interest Rate Risk
Exposure to interest rate changes on our outstanding debt
is not material as a substantial portion of our debt is at
fixed interest rates. In addition, a significant portion of our
outstanding floating rate debt is hedged through an inter-
est rate swap that reduces our exposure in a rising interest
rate environment. Gains and losses in the market value of
the swap will be recorded as a component of other compre-
hensive income as long as the hedge is effective as a cash
flow hedge. See Note 8 of Notes to Consolidated Financial
Statements for additional disclosures regarding debt.
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 our reported results of operations
and financial position. See Note 1 of Notes to Consolidated
Financial Statements for a discussion of our significant
accounting policies and other information. Certain critical
accounting policies require us to make estimates and
assumptions that affect the amounts of assets, liabilities,
revenues and expenses reported in the financial statements.
Due to their nature, estimates involve judgment based upon
available information. Therefore, actual results or amounts
could differ from estimates and the difference could have a
material impact on the consolidated financial statements.
We consider the following to be among our current account-
ing policies that involve significant estimates or judgments.
50
Intangible Assets and Goodwill
Our identifiable intangible assets consist primarily of asset
management contracts, contracts to manage proprietary
mutual funds or funds-of-hedge funds and trade names
resulting from acquisitions. Management contracts are
amortizable intangible assets that are capitalized at acqui-
sition and amortized over the expected life of the contract.
Contracts to manage proprietary mutual funds or funds-
of-hedge funds are indefinite-life intangible assets because
we assume that there is no foreseeable limit on the con-
tract period due to the likelihood of continued renewal at
little or no cost. Similarly, trade names are considered
indefinite-life intangible assets because they are expected
to generate cash flows indefinitely.
Goodwill represents the residual amount of acquisition
cost in excess of identified tangible and intangible assets
and assumed liabilities.
In allocating the purchase price of an acquisition to
intangible assets, we must determine the fair value of the
assets acquired. We determine fair values of intangible
assets acquired based upon certain estimates and assump-
tions including projected future cash flows, growth or
attrition rates for acquired contracts based upon historical
experience, estimated contract lives, discount rates and
investment performance. The determination of estimated
contract lives requires judgment based upon historical
client turnover and attrition rates and the probability
that contracts with termination dates will be renewed.
As of March 31, 2007, we had approximately $2.4 billion
in goodwill, $3.9 billion in indefinite-life intangible assets
and $553.5 million in net amortizable intangible assets.
The estimated useful lives of amortizable intangible assets
currently range from 5 to 20 years. As of March 31, 2007,
amortizable intangible assets are being amortized over a
remaining weighted-average life of 11 years.
Goodwill is evaluated quarterly at the reporting unit level
and is considered impaired when the carrying amount of
the reporting unit exceeds the implied fair value of the
reporting unit. In estimating the implied fair value of the
reporting unit, we use valuation techniques based on dis-
counted cash flows, similar to techniques employed in
analyzing the purchase price of an acquisition target.
We have defined the reporting units to be the Managed
Investments, Institutional and Wealth Management
divisions, which are the same as our operating segments.
Allocations of goodwill to our divisions for acquisitions
and dispositions are based on relative fair values of the
businesses added to or sold from the divisions. See Note
18 of Notes to Consolidated Financial Statements for
additional information related to business segments.
Significant assumptions used in assessing the implied fair
value of goodwill under the discounted cash flow method
include the projected cash flows generated by the report-
ing unit, the growth rate used in projecting the cash
flows, and the discount rate used to determine the present
value of the cash flows. Annual cash flow growth rates are
based on historical growth rates.
The Wealth Management and Managed Investments
reporting units represent approximately 51% and 44%,
respectively, of our goodwill. Wealth Management good-
will is principally attributable to PCM and Managed
Investments goodwill is principally attributable to CAM.
Projected cash flows for these divisions are assumed to
grow 10% annually over the next five years, with a long-
term annual growth rate of 5%. The projected cash flows
are discounted at 16% to determine the present value.
The discount rate is based on risk-adjusted estimated
weighted average cost of capital. For the Wealth
Management reporting unit, annual cash flows would
have to decline by more than 35% or the discount rate
increase to more than 20% for the goodwill to be deemed
impaired. For the Managed Investments reporting unit,
annual cash flows would have to decline by more than
50% or the discount rate increase to more than 25% for
the goodwill to be deemed impaired.
We review the fair value of our intangible assets on a
quarterly basis, considering projected cash flows, to
determine whether the assets are impaired and the amor-
tization periods are appropriate. If an asset is determined
to be impaired, the difference between the value of the
asset reflected on the financial statements and its current
implied fair value is recognized as an expense in the
period in which the impairment is determined to be
other than temporary. If the amortization periods are
not appropriate, the expected lives are adjusted and the
impact on the fair value is assessed.
The implied fair values of intangible assets subject to
amortization are determined at each reporting period
using an undiscounted cash flow analysis. Significant
assumptions used in assessing the implied fair value of
management contract intangible assets include projected
cash flows generated by the contracts, and attrition rates
and the remaining lives of the contracts. Projected cash
flows are based on fees generated by current AUM for the
51
applicable contracts. Contracts are assumed to turnover
evenly throughout the life of the intangible asset. The
expected life of the asset is based upon factors such as
average client retention and client turnover rates.
Management contract intangible assets related to the
retail separately managed accounts acquired in the CAM
acquisition and client contracts acquired with PCM repre-
sent approximately 48% and 37%, respectively, of our
total amortizable intangible assets. This CAM intangible
asset has an expected life of 12 years (which represents an
annual contract turnover rate of 8%). For CAM contracts
to be impaired, contract cash flows would have to decline
by approximately 70% or client attrition would have to
accelerate to a rate such that the estimated life decreases
by more than 65%.
The PCM intangible asset related to client contracts had
an original expected life of 18 years (which represents an
annual contract turnover rate of 6%), with an expected
remaining life of 12 years at March 31, 2007. At current
expected client attrition rates, the cash flows generated
by the underlying management contracts held by PCM
would have to decline by approximately 50% for the asset
to become impaired. Similarly, with no change to the
profitability of the contracts, client attrition would have
to accelerate to a rate such that our estimated useful life
would decline by approximately 35% before the asset
would be deemed impaired.
For intangible assets with lives that are indeterminable or
indefinite, fair value is determined based on anticipated
discounted cash flows. We have two primary types of
indefinite-life intangible assets: proprietary fund contracts
and to a lesser extent, trade names.
Significant assumptions used in assessing the fair value of
proprietary fund contracts include the projected cash
flows generated by those contracts and the discount rate
used to determine the present value of the cash flows.
Projected cash flows are based on annualized cash flows
for the applicable contracts projected forward forty years,
assuming annual cash flow growth approximating market
returns. Contracts within the same family of funds are
reviewed in aggregate and are considered interchangeable
because investors can transfer between funds with limited
restrictions. Similarly, cash flows generated by new funds
added to the fund family are included when determining
the fair value of the intangible asset.
The domestic mutual fund contracts acquired in the CAM
acquisition and the Permal funds-of-hedge funds contracts
account for approximately 65% and 25%, respectively, of
our indefinite life intangible assets. Cash flows from the
CAM and Permal contracts are assumed to grow at long-
term annual rates of 5% and 8%, respectively, which
approximates the expected average market returns. The
projected cash flows from the CAM and Permal funds are
discounted at 13% and 14%, respectively, based on the esti-
mated weighted average cost of capital of the respective
businesses. Changes in assumptions, such as an increased
discount rate or declining cash flows, could result in an
impairment. At current profitability levels, cash flows gen-
erated by the CAM mutual fund contracts would have to
fall approximately 13% or the discount rate used in the test
would have to be raised to 14% for the asset to be deemed
impaired. Likewise, cash flows generated by the Permal
funds-of-hedge funds contracts would have to decline by
approximately 36% or the discount rate raised to 20% for
the asset to be deemed impaired.
Some of our business acquisitions, such as PCM, Royce
and Permal involved closely held companies in which cer-
tain key employees were also owners of those companies.
In establishing the purchase price, we may include contin-
gent consideration whereby only a portion of the purchase
price is paid on the acquisition date. The determination of
these contingent payments is consistent with our methods
of valuing and establishing the purchase price, and we
record these payments as additional purchase price and
not compensation when the contingencies are met.
Historically, contingent payments have been recorded as
additional goodwill. See Note 6 of Notes to Consolidated
Financial Statements for additional information regarding
intangible assets and goodwill.
Loss Contingencies
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 is also involved in governmen-
tal and self-regulatory agency inquiries, investigations and
proceedings. With the sale of our private client and capi-
tal markets businesses, we agreed to indemnify Citigroup
for most customer complaints, litigation and regulatory
liabilities that result from pre-closing events. Similarly,
Citigroup has agreed to be liable to Legg Mason for most
52
customer complaints litigation and regulatory liabilities of
the CAM business that result from pre-closing events. In
accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 5, “Accounting for Contingencies,”
we have established liabilities for potential losses from
complaints, legal actions, investigations and proceedings,
exclusive of legal fees. In establishing these liabilities,
we use our judgment to determine the probability that
losses have been incurred and a reasonable estimate of the
amount of the losses. In making these decisions, we base
our judgments on our knowledge of the situations, con-
sultations with legal counsel and our historical experience
in resolving similar matters. In many lawsuits, arbitrations
and regulatory proceedings, it is not possible to determine
whether a liability has been incurred or to estimate
the amount of that liability until the matter is close to
resolution. However, accruals are reviewed monthly and
are adjusted to reflect our estimates of the impact of
developments, rulings, advice of counsel and any other
information pertinent to a particular matter. Because of
the inherent difficulty in predicting the ultimate outcome
of legal and regulatory actions, we cannot predict with
certainty the eventual loss or range of loss related to such
matters. If our judgments prove to be incorrect, our liabil-
ity for losses and contingencies may not accurately reflect
actual losses that result from these actions, which could
materially affect results in the period the expenses are
ultimately determined. As of March 31, 2007 and 2006,
our liability for losses and contingencies was $2.6 million
and $4.3 million, respectively. See Note 10 of Notes to
Consolidated Financial Statements for additional disclo-
sures regarding contingencies.
Stock-Based Compensation
Our stock-based compensation plans include stock
options, employee stock purchase plans, restricted stock
awards and deferred compensation payable in stock.
Under our stock compensation plans, we issue stock
options to officers, key employees and non-employee
members of our Board of Directors.
During fiscal year 2007, Legg Mason adopted SFAS No.
123 (R), “Share-Based Payment” and related pronounce-
ments using the modified-prospective method and the
related transition election. Under this method, compensa-
tion expense for the year ended March 31, 2007 includes
compensation cost for all non-vested share-based awards
at their grant-date fair value amortized over the respective
vesting periods on the straight-line method. As further
described below, Legg Mason determines the fair value
of stock-based compensation using the Black-Scholes
option pricing model, with the exception of market-based
performance grants, which are valued with a Monte Carlo
option-pricing model. Prior to fiscal 2007, awards were
also accounted for at grant-date fair value, except for
awards granted prior to April 1, 2003, that were recorded
at their intrinsic value. As a result, prior to the adoption of
SFAS No. 123 (R), no related compensation expense was
recognized for the awards granted prior to April 1, 2003,
and the expense related to stock-based employee compen-
sation included in the determination of net income for
fiscal years 2006 and 2005 is less than that which would
have been included if the fair value method had been
applied to all awards. Under the modified-prospective
method, the results for the years ended March 31, 2006
and 2005 have not been restated. Additionally, unamortized
deferred compensation previously classified as a separate
component of stockholders’ equity has been reclassified as a
reduction of additional paid-in capital. Also under SFAS No.
123 (R), cash flows related to income tax deductions in excess
of stock-based compensation expense are classified as financ-
ing cash flows for the year ended March 31, 2007. For the
years ended March 31, 2006 and 2005, such amount was
$92,376 and $18,972, respectively, and continues to be
classified as operating cash inflows.
In accordance with the provisions of SFAS No. 123 (R),
we provide disclosure in Note 13 of Notes to Consolidated
Financial Statements of our pro forma results if compensa-
tion expense associated with all stock option grants had
been recognized at grant-date fair value over their respec-
tive vesting period. If we accounted for prior years’ stock
option grants at grant-date fair value, net income from
continuing operations would have been reduced by
$3.2 million and $7.9 million in fiscal 2006 and 2005,
respectively. Net income from discontinued operations
would have been reduced by $4.0 million and $6.1 million
in fiscal 2006 and 2005, respectively. These reductions are
the result of including additional expenses for grants made
prior to April 2003.
We granted 1,037,380, 1,101,105 and 579,104 stock
options, including those to non-employee directors, in
fiscal 2007, 2006 and 2005, respectively. For additional
information on share-based compensation, see Note 13
of Notes to Consolidated Financial Statements.
We determine the fair value of each option grant using the
Black-Scholes option-pricing model, except for performance
or market-based grants, for which we use a Monte Carlo
53
option-pricing model. Both models require management
to develop estimates regarding certain input variables. The
inputs for the Black-Scholes model include: stock price on
the date of grant, exercise price of the option, dividend
yield, volatility, expected life and the risk-free interest rate,
all of which except the grant date stock price and the exer-
cise price require estimates or assumptions. We calculate
the dividend yield based upon the average of the historical
quarterly dividend payments over a term equal to the vest-
ing period of the options. We estimate volatility in part
based upon the historical prices of our stock over a period
equal to the expected life of the option and in part upon
the implied volatility of market-listed options at the date
of grant. The expected life is the estimated length of time
an option is held before it is either exercised or canceled,
based upon our historical option exercise experience. The
risk-free interest rate is the rate available for zero-coupon
U.S. Government issues with a remaining term equal to the
expected life of the options being valued. For market-based
(performance) option grants, we use a Monte Carlo option-
pricing model to estimate the fair value. If we used different
methods to estimate our variables for the Black-Scholes
and Monte Carlo models, or if we used a different type of
option-pricing model, the fair value of our option grants
might be different.
Income Taxes
Legg Mason and its subsidiaries are subject to the income
tax laws of the Federal, state and local jurisdictions of the
U.S. and numerous foreign jurisdictions in which we oper-
ate. We file income tax returns representing our filing
positions with each jurisdiction. Due to the inherent com-
plexities arising from conducting business and being taxed
in a substantial number of jurisdictions, we must make cer-
tain estimates and judgments in determining our income
tax provision for financial statement purposes. These esti-
mates and judgments are used in determining the tax basis
of assets and liabilities, and in the calculation of certain tax
assets and liabilities that arise from differences in the tim-
ing of revenue and expense recognition for tax and financial
statement purposes. Management assesses the likelihood
that Legg Mason will be able to realize its deferred tax
assets. If it is more likely than not that the deferred tax asset
will not be realized, then a valuation allowance is estab-
lished with a corresponding increase to deferred tax
provision. The calculation of our tax liabilities involves
uncertainties in the application of complex tax regulations.
We recognize liabilities for anticipated tax uncertainties in
the U.S. and other tax jurisdictions based on our estimate
of whether, and the extent to which, additional taxes will
be due. If we determine that our estimates have changed,
the income tax provision will be adjusted in the period in
which that determination is made. See Note 9 of Notes to
Consolidated Financial Statements for additional disclo-
sures regarding income taxes.
In July 2006, the Financial Accounting Standards Board
(“FASB”) issued FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes,” (“FIN 48”) to prescribe
recognition and measurement thresholds in financial
statements for tax positions. As noted below, this new
accounting pronouncement is not expected to have a
material impact on our consolidated financial statements.
RECENT ACCOUNTING DEVELOPMENTS
The following relevant accounting pronouncements were
recently issued.
The FASB issued FIN 48 in July 2006. FIN 48 clarifies
previously issued FASB Statement No. 109, “Accounting
for Income Taxes,” by prescribing a recognition threshold
and a measurement attribute in financial statements for
tax positions taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, interim accounting,
disclosure and transition and will be effective for fiscal
year 2008. We have substantially completed an analysis of
adopting the provisions of FIN 48 and, based on that
analysis, do not currently expect an adjustment to open-
ing retained earnings or existing income tax reserves as of
April 1, 2007, that will be material to our consolidated
financial statements.
In September 2006, the FASB issued Statement No. 157, “Fair
Value Measurements” (“SFAS 157”), to provide a consistent
definition of fair value and establish a framework for measur-
ing fair value in generally accepted accounting principles.
SFAS 157 has additional disclosure requirements and will be
effective for fiscal year 2009. We are evaluating the adoption
of SFAS 157 and cannot estimate the impact, if any, on our
consolidated financial statements at this time.
In September 2006, the FASB issued Statement No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans—an amendment of FASB
Statements No. 87, 88, 106 and 132 (R)” (“SFAS 158”).
SFAS 158 requires an employer that is a business entity that
sponsors one or more single-employer defined benefit plans
to recognize the funded status of its plans on its balance
54
sheet as of the balance sheet date. SFAS 158 also requires
gains or losses and prior service costs or credits that are
not components of net periodic benefit costs to be cycled
through other comprehensive income until recognized as
net periodic benefit cost. SFAS 158 has additional disclo-
sure requirements and is effective as of March 31, 2007.
The adoption of SFAS 158 did not have a material impact
on our consolidated financial statements.
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB 108”), to elim-
inate diversity in how registrants quantify financial
statement misstatements. Prior to SAB 108, registrants
have used one of two widely recognized methods to quan-
tify financial statement misstatements: the “rollover”
method or the “iron curtain” method. The iron curtain
method quantifies uncorrected misstatements based on
the effects of correcting the misstatements existing in the
balance sheet in the current year, irrespective of the year
of origination of the misstatement. The rollover method
quantifies uncorrected misstatements based on the
amount of misstatements originating in the current year
income statement and ignores the effects of correcting the
portion relating to balance sheet misstatements from prior
years. SAB 108 requires that a registrant consider both the
iron curtain and rollover methods when evaluating uncor-
rected misstatements. As such, uncorrected misstatements
previously deemed to be immaterial under one method,
may now be material under the new “dual approach” and
require correction in the current year financial statements.
SAB 108 has additional disclosure requirements. SAB 108
has been adopted as of March 31, 2007 and did not
impact our consolidated financial statements.
In February 2007, the FASB issued Statement No. 159,
“The Fair Value Option for Financial Assets and
Financial Liabilities—Including an Amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits com-
panies to measure many financial instruments and
certain other items at fair value. The provisions of SFAS
159 are not mandatory and we have the option to adopt
SFAS 159 for fiscal 2008 or fiscal 2009. We are in the
process of evaluating the potential future effect of SFAS
159 on our consolidated financial statements.
FORWARD-LOOKING STATEMENTS
We have made in this 2007 Annual Report, and from time
to time may otherwise make in our public filings, press
releases and statements by our management, “forward-
looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, including infor-
mation relating to anticipated growth in revenues or
earnings per share, anticipated changes in our businesses or
in the amount of our client AUM, anticipated future per-
formance of our business, anticipated future investment
performance of our subsidiaries, our expected future net
client cash flows, anticipated expense levels, changes in
expenses, the expected effects of acquisitions and expecta-
tions regarding financial market conditions. The words or
phrases “can be,” “may be,” “expects,” “may affect,” “may
depend,” “believes,” “estimate,” “project,” “anticipate” and
similar words and phrases are intended to identify such
forward-looking statements. Such forward-looking state-
ments are subject to various known and unknown risks
and uncertainties and we caution readers that any forward-
looking information provided by or on behalf of Legg
Mason is not a guarantee of future performance.
Actual results may differ materially from those in forward-
looking information as a result of various factors, some
of which are beyond our control, including but not lim-
ited to those discussed below and those discussed under
the heading “Risk Factors” and elsewhere in our 2007
Annual Report on Form 10-K and our other public fil-
ings, press releases and statements by our management.
Due to such risks, uncertainties and other factors, we
caution each person receiving such forward-looking infor-
mation not to place undue reliance on such statements.
Further, such forward-looking statements speak only as of
the date on which such statements are made, and we
undertake no obligations to update any forward-looking
statement to reflect events or circumstances after the date
on which such statement is made or to reflect the occur-
rence of unanticipated events.
Our future revenues may fluctuate due to numerous factors,
such as: the total value and composition of AUM; the volatil-
ity and general level of securities prices and interest rates; the
relative investment performance of company-sponsored
investment funds and other asset management products
compared with competing offerings and market indices;
investor sentiment and confidence; general economic condi-
tions; our ability to maintain investment management and
administrative fees at current levels; competitive conditions
in our business; the ability to attract and retain key personnel
and the effects of acquisitions, including prior acquisitions.
Our future operating results are also dependent upon the
level of operating expenses, which are subject to fluctuation
55
for the following or other reasons: variations in the level of
compensation expense incurred as a result of changes in the
number of total employees, competitive factors, changes in
the percentages of revenues paid as compensation or other
reasons; variations in expenses and capital costs, including
depreciation, amortization and other non-cash charges
incurred by us to maintain our administrative infrastructure;
unanticipated costs that may be incurred by Legg Mason
from time to time to protect client goodwill or in connection
with litigation or regulatory proceedings; and the effects of
acquisitions and dispositions.
Our business is also subject to substantial governmental regu-
lation and changes in legal, regulatory, accounting, tax and
compliance requirements that may have a substantial effect on
our business and results of operations.
EFFECTS OF INFLATION
The rate of inflation can directly affect various expenses,
including employee compensation, communications and
technology and occupancy, which may not be readily recov-
erable in charges for services provided by us. Further, to the
extent inflation adversely affects the securities markets, it
may impact revenues and recorded intangible and goodwill
values. See discussion of “Market Risks—Revenues and Net
Income” and “Critical Accounting Policies—Intangibles
and Goodwill” previously discussed.
56
REpoRT oF MANAgEMENT oN
INTERNAL CoNTRoL oVER FINANCIAL REpoRTINg
The management of Legg Mason, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting.
Legg Mason’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. Legg Mason’s internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reason-
able detail, accurately and fairly reflect the transactions and dispositions of the assets of Legg Mason; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accor-
dance with accounting principles generally accepted in the United States of America, and that receipts and expenditures
of Legg Mason are being made only in accordance with authorizations of management and directors of Legg Mason;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or dis-
position of Legg Mason’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Legg Mason’s internal control over financial reporting as of March 31, 2007,
based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control—Integrated Framework. Based on that assessment, management concluded that, as of
March 31, 2007, Legg Mason’s internal control over financial reporting is effective based on the criteria established in
the COSO framework.
Management’s assessment of the effectiveness of Legg Mason’s internal control over financial reporting as of March 31,
2007, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in
their report appearing herein, which expresses unqualified opinions on management’s assessment and on the effective-
ness of Legg Mason’s internal control over financial reporting as of March 31, 2007.
Raymond A. Mason
Chairman and Chief Executive Officer
Charles J. Daley, Jr.
Senior Vice President, Chief Financial Officer and Treasurer
57
REpoRT oF INDEpENDENT
REgISTERED pubLIC ACCouNTINg FIRM
To the Board of Directors
and Stockholders of Legg Mason, Inc.:
We have completed integrated audits of Legg Mason, Inc.’s consolidated financial statements and of its internal control over financial
reporting as of March 31, 2007, in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive
income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Legg Mason, Inc. and its
subsidiaries at March 31, 2007 and March 31, 2006, and the results of their operations and their cash flows for each of the three years
in the period ended March 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain rea-
sonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in the accompanying Report of Management on Internal Control Over
Financial Reporting, that the Company maintained effective internal control over financial reporting as of March 31, 2007 based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of March 31, 2007, based on criteria estab-
lished in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over
financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all mate-
rial respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the mainte-
nance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accor-
dance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding pre-
vention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Baltimore, Maryland
May 30, 2007
58
CoNSoLIDATED STATEMENTS oF INCoME
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Investment advisory fees
Investment advisory fees
Separate accounts
Separate accounts
Funds
Funds
Performance fees
Performance fees
Distribution and service fees
Distribution and service fees
OtherOther
Total operating revenues
OPERATING EXPENSES
Compensation and benefits
Compensation and benefits
Transaction-related compensation
Transaction-related compensation
Total compensation and benefits
Total compensation and benefits
Distribution and servicing
Distribution and servicing
Communications and technology
Communications and technology
Occupancy
Occupancy
Amortization of intangible assets
Amortization of intangible assets
Litigation award settlement
Litigation award settlement
OtherOther
Total operating expenses
OPERATING INCOME
OTHER INCOME (EXPENSE)
Interest income
Interest income
Interest expense
Interest expense
OtherOther
Total other income (expense)
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAX PROVISION AND MINORITY INTERESTS
Income tax provision
Income tax provision
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTERESTS
Minority interests, net of tax
Minority interests, net of tax
INCOME FROM CONTINUING OPERATIONS
Income from discontinued operations, net of tax
Income from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
NET INCOME
NET INCOME PER SHARE
Basic:
Basic:
Income from continuing operations
Income from continuing operations
Income from discontinued operations
Income from discontinued operations
Gain on sale of discontinued operations
Gain on sale of discontinued operations
Diluted:
Diluted:
Income from continuing operations
Income from continuing operations
Income from discontinued operations
Income from discontinued operations
Gain on sale of discontinued operations
Gain on sale of discontinued operations
See notes to consolidated financial statements.
Years Ended March 31,
2006
2007
2005
$1,445,796
2,023,140
142,245
716,402
16,092
4,343,675
1,556,397
12,171
1,568,568
1,196,019
174,160
100,180
68,410
—
—
208,040
3,315,377
$1,101,249
994,232
101,605
425,554
22,572
2,645,212
1,074,120
53,063
1,127,183
561,788
89,234
50,919
38,460
(8,150)
(8,150)
106,048
1,965,482
$ 772,103
460,629
48,906
261,587
27,475
1,570,700
661,785
—
661,785
253,394
46,299
27,472
21,286
—
—
71,347
1,081,583
1,028,298
679,730
489,117
58,916
(71,474)
28,114
15,556
1,043,854
397,612
646,242
4
646,246
—
—
572
$ 646,818
$
$
$
$
4.58
4.584.58
—
—
—
—
4.584.58
4.58
4.48
4.484.48
—
—
—
—
4.484.48
4.48
47,992
(52,648)
40,388
35,732
715,462
275,595
439,867
(6,160)
433,707
66,421
66,421
644,040
$1,144,168
$
$
$
$
3.60
3.60
3.60
0.55
0.55
5.35
5.35
9.50
9.50
9.50
3.35
3.35
3.35
0.51
0.51
4.94
4.94
8.80
8.80
8.80
20,059
(44,765)
6,347
(18,359)
470,758
175,334
295,424
—
295,424
113,007
113,007
—
$ 408,431
$
$
$
$
$
$
$
$
$
$
$
$
2.86
2.862.86
2.86
2.86
1.09
1.09
—
—
3.953.95
3.95
3.95
3.95
2.56
2.562.56
2.56
2.56
0.97
0.97
—
—
3.533.53
3.53
3.53
3.53
59
CoNSoLIDATED bALANCE ShEETS
(Dollars in thousands)
ASSETS
Current Assets
Cash and cash equivalents
Receivables:
Investment advisory and related fees
Other
Investment securities
Deferred income taxes
Other
Total current assets
Investment securities
Fixed assets, net
Intangible assets, net
Goodwill
Other
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Current Liabilities
Accrued compensation
Short-term borrowings
Current portion of long-term debt
Contractual acquisition payable
Payables for distribution and servicing
Other
Total current liabilities
Deferred compensation
Deferred income taxes
Other
Long-term debt
Total Liabilities
Commitments and Contingencies (Note 10)
Stockholders’ Equity
Common stock, par value $.10; authorized 500,000,000 shares;
issued 131,776,500 shares in 2007 and 129,709,847 shares in 2006
Convertible preferred stock, par value $10; authorized 4,000,000 shares;
8.39 shares outstanding in 2007 and 2006
Shares exchangeable into common stock
Additional paid-in capital
Employee stock trust
Deferred compensation employee stock trust
Retained earnings
Accumulated other comprehensive income, net
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
60
March 31,
2007
2006
$1,183,617
$1,023,470
585,857
266,128
273,166
33,873
48,866
2,391,507
9,595
219,437
4,425,409
2,432,840
125,700
$9,604,488
$ 559,390
—
5,117
130,000
160,656
456,898
1,312,061
136,013
444,218
63,199
1,107,507
3,062,998
560,407
289,433
142,206
60,135
51,080
2,126,731
26,272
182,609
4,493,316
2,303,799
169,763
$9,302,490
$ 586,899
83,227
36,883
300,000
135,607
455,090
1,597,706
97,101
392,009
199,481
1,166,077
3,452,374
13,178
12,971
—
5,188
3,372,385
(31,839)
31,839
3,112,844
37,895
6,541,490
$9,604,488
—
5,720
3,235,583
(45,924)
45,924
2,580,898
14,944
5,850,116
$9,302,490
CoNSoLIDATED STATEMENTS oF
ChANgES IN SToCkhoLDERS’ EquITy
(Dollars in thousands)
COMMON STOCK
Beginning balance
Stock options and other stock-based compensation
Deferred compensation employee stock trust
Deferred compensation, net
Conversion of debt
Exchangeable shares
Business acquisitions
Public offering
Shares repurchased and retired
Stock split
Ending balance
SHARES EXCHANGEABLE INTO COMMON STOCK
Beginning balance
Exchanges
Ending balance
ADDITIONAL PAID-IN CAPITAL
Beginning balance
Stock options and other stock-based compensation
Deferred compensation employee stock trust
Deferred compensation, net and officer note receivable
Conversion of debt
Exchangeable shares
Business acquisitions
Public issuance of stock
Shares repurchased and retired
Stock split
Ending balance
EMPLOYEE STOCK TRUST
Beginning balance
Shares issued to plans
Distributions and forfeitures
Ending balance
DEFERRED COMPENSATION EMPLOYEE STOCK TRUST
Beginning balance
Shares issued to plans
Distributions and forfeitures
Ending balance
RETAINED EARNINGS
Beginning balance
Net income
Dividends declared
Ending balance
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET
Beginning balance
Realized and unrealized holding gains (losses) on investment securities,
2007
Years Ended March 31,
2006
2005
$ 12,971
86
5
19
76
21
—
—
—
—
13,178
5,720
(532)
5,188
3,235,583
80,514
5,228
17,675
32,874
511
—
—
—
—
3,372,385
(45,924)
(772)
14,857
(31,839)
45,924
772
(14,857)
31,839
2,580,898
646,818
(114,872)
3,112,844
$ 10,668
469
13
3
555
39
1,224
—
—
—
12,971
6,697
(977)
5,720
736,196
306,637
11,714
19,203
237,086
938
1,923,809
—
—
—
3,235,583
(127,780)
(13,355)
95,211
(45,924)
127,780
13,355
(95,211)
45,924
1,523,875
1,144,168
(87,145)
2,580,898
$ 6,655
204
24
20
25
26
—
460
(73)
3,327
10,668
7,351
(654)
6,697
361,373
65,300
14,674
15,053
10,712
628
—
312,439
(40,656)
(3,327)
736,196
(117,331)
(20,365)
9,916
(127,780)
117,331
20,365
(9,916)
127,780
1,173,282
408,431
(57,838)
1,523,875
14,944
15,710
10,949
net of tax
Unrealized and realized gains (losses) on cash flow hedges, net of tax
Foreign currency translation adjustment
Ending balance
TOTAL STOCKHOLDERS’ EQUITY
97
(738)
23,592
37,895
$6,541,490
(124)
1,323
(1,965)
14,944
$5,850,116
(44)
—
4,805
15,710
$2,293,146
See notes to consolidated financial statements.
61
Years Ended March 31,
2006
$1,144,168
2007
$646,818
2005
$408,431
23,592
(1,965)
4,805
37
60
97
(216)
92
(124)
(54)
10
(44)
(738)
22,951
$669,769
1,323
(766)
$1,143,402
—
4,761
$413,192
CoNSoLIDATED STATEMENTS
oF CoMpREhENSIVE INCoME
(Dollars in thousands)
NET INCOME
Other comprehensive income gains (losses):
Other comprehensive income gains (losses):
Foreign currency translation adjustment
Foreign currency translation adjustment
Unrealized gains (losses) on investment securities:
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses), net of tax (provision) benefit
Unrealized holding gains (losses), net of tax (provision) benefit
of $(24), $144 and $53, respectively
Reclassification adjustment for losses included in net income
Reclassification adjustment for losses included in net income
Net unrealized gains (losses) on investment securities
Net unrealized gains (losses) on investment securities
Unrealized and realized gains (losses) on cash flow hedge,
Unrealized and realized gains (losses) on cash flow hedge,
net of tax (provision) benefit of $524 and $(938), respectively
Total other comprehensive income (loss)
Total other comprehensive income (loss)
COMPREHENSIVE INCOME
See notes to consolidated financial statements.
62
CoNSoLIDATED STATEMENTS
oF CASh FLowS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Income from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Non-cash items included in net income:
Depreciation and amortization
Amortization of deferred sales commissions
Accretion and amortization of securities discounts and premiums, net
Stock-based compensation
Unrealized (gains) losses on investments
Deferred income taxes
Other
Decrease (increase) in assets excluding acquisitions:
Investment advisory and related fees receivable
Net purchases of trading investments
Other receivables
Restricted cash
Other current assets
Other non-current assets
Increase (decrease) in liabilities excluding acquisitions:
Accrued compensation
Deferred compensation
Payables for distribution and servicing
Income taxes payable
Other current liabilities
Other non-current liabilities
Net cash provided by (used for) operating activities of discontinued operations
CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for:
Fixed assets
Business acquisitions and related costs, net of cash acquired in 2006
Contractual acquisition earnouts
Purchases of investment securities
Proceeds from sales and maturities of investment securities
Net cash used for investing activities of discontinued operations
CASH USED FOR INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in short-term borrowings
Proceeds from issuance of long-term debt
Third party distribution financing
Repayment of principal on long-term debt
Issuance of common stock
Repurchase of common stock
Dividends paid
Excess tax benefit associated with stock-based compensation
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE CHANGES ON CASH
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTARY DISCLOSURE
Cash paid for:
Income taxes
Interest
See notes to consolidated financial statements.
2007
Years Ended March 31,
2006
2005
$ 646,818
—
(572)
$ 1,144,168
(66,421)
(644,040)
$ 408,431
(113,007)
—
137,852
64,265
1,295
40,654
(7,141)
128,801
8,854
(23,797)
(138,167)
30,354
—
(2,947)
(916)
(25,803)
38,912
25,049
(24,863)
126,757
(120,506)
572
905,471
(112,026)
(60,330)
(384,748)
(20,787)
35,788
—
(542,103)
(83,227)
—
3,617
(61,096)
26,728
—
(109,919)
14,466
(209,431)
6,210
160,147
1,023,470
$1,183,617
73,768
29,873
4,889
35,465
8,360
(17,233)
161
(161,570)
(93,261)
61,216
20,658
(39,643)
71,896
(143,617)
31,291
135,607
(1,163)
(403,814)
(32,009)
530,180
544,761
(85,204)
(880,008)
(16,300)
(25,551)
8,074
(4,592)
(1,003,581)
—
728,580
—
(103,113)
140,454
—
(78,626)
—
687,295
(126)
228,349
795,121
$ 1,023,470
40,604
4,232
8,201
9,921
2,564
39,266
1,265
(71,739)
(30,701)
(10,352)
(20,658)
14,752
(26,639)
72,434
54,508
—
(5,094)
6,815
9,153
(28,201)
365,755
(26,557)
(57,404)
(502,500)
(10,654)
10,827
(9,477)
(595,765)
—
20,000
—
—
370,336
(40,729)
(51,728)
—
297,879
1,681
69,550
725,571
$ 795,121
$ 260,015
71,226
$ 654,118
105,258
$ 191,708
70,815
63
NoTES To CoNSoLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts or unless otherwise noted)
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
Legg Mason, Inc. (“Parent”) and its subsidiaries
(collectively, “Legg Mason”) are principally engaged in
providing asset management and related financial services
to individuals, institutions, corporations and municipali-
ties. On December 1, 2005, Legg Mason acquired
substantially all of Citigroup Inc.’s (“Citigroup”) world-
wide asset management business (“CAM”) in exchange
for Legg Mason’s Private Client and Capital Markets
(“PC/CM”) businesses, common and preferred stock and
cash. Also, effective November 1, 2005, Legg Mason
acquired Permal Group Ltd (“Permal”). See Notes 2
and 3 for additional information.
The consolidated financial statements include the accounts
of the Parent and its subsidiaries in which it has a control-
ling financial interest, including CAM and Permal from
the dates of acquisition. Generally, an entity is considered
to have a controlling financial interest when it owns a
majority of the voting interest in an entity. Legg Mason
is also required to consolidate any variable interest entity
(“VIE”) in which it is considered to be the primary benefi-
ciary. See discussion of Special Purpose and Variable
Interest Entities that follows for a further discussion of
VIEs. All material intercompany balances and transactions
have been eliminated. Where appropriate, prior years’
financial statements reflect reclassifications to conform to
the current year presentation, including the current period
breakout of performance fees as a separate component of
investment advisory fees and deferred income tax assets
and liabilities from other current assets and other non-
current liabilities, respectively.
Unless otherwise noted, all per share amounts include
common shares of Legg Mason, shares issued in connection
with the acquisition of Legg Mason Canada Inc., which
are exchangeable into common shares of Legg Mason on a
one-for-one basis at any time, and non-voting convertible
preferred stock, which is convertible upon sale into shares
of Legg Mason common stock. These non-voting convert-
ible preferred shares are considered “participating securities”
and therefore are included in the calculation of basic earn-
ings per common share. During July 2006, the number of
authorized common shares was increased from 250 million
to 500 million.
In connection with the sale of Legg Mason’s PC/CM
businesses, Legg Mason reflected the related results of
operations of PC/CM businesses as Income from discon-
tinued operations on the Consolidated Statements
of Income. Operating and investing cash flows from
discontinued operations are shown separately in the
Consolidated Statements of Cash Flows. There were no
financing cash flows from discontinued operations. All
references to fiscal 2007, 2006 or 2005 refer to Legg
Mason’s fiscal year ended March 31 of that year.
Use of Estimates
The consolidated financial statements are prepared in
accordance with accounting principles generally accepted
in the United States of America, which require manage-
ment to make assumptions and estimates that affect the
amounts reported in the financial statements and accompa-
nying notes, including intangible assets and goodwill,
liabilities for losses and contingencies, stock-based
compensation and income taxes. Management believes
that the estimates used are reasonable, although actual
amounts could differ from the estimates and the differ-
ences could have a material impact on the consolidated
financial statements.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with
original maturities of 90 days or less.
Financial Instruments
Substantially all financial instruments are reflected in the
financial statements at fair value or amounts that approxi-
mate fair value.
Legg Mason holds debt and marketable equity investments
which are classified as available-for-sale, held-to-maturity
or trading. Debt and marketable equity securities classi-
fied as available-for-sale are reported at fair value and
resulting unrealized gains and losses are reflected in
stockholders’ equity and comprehensive income, net of
applicable income taxes. Debt securities, for which there is
positive intent and ability to hold to maturity, are classified
as held-to-maturity and are recorded at amortized cost.
Amortization of discount or premium is recorded under
the interest method and is included in interest income.
Certain investment securities are classified as trading
securities. These investments are recorded at fair value
and unrealized gains and losses are included in current
period earnings. Realized gains and losses for all invest-
ments are included in current period earnings.
64
Legg Mason evaluates its non-trading investment securi-
ties for “other than temporary” impairment. Impairment
may exist when the fair value of an investment security
has been below the adjusted cost for an extended period of
time. If an “other than temporary” impairment is deter-
mined to exist, the difference between the value of the
investment security recorded on the financial statements
and its fair value is recognized as a charge to income in
the period the impairment is determined to be other than
temporary. As of March 31, 2007 and 2006, the amount
of unrealized losses for investment securities not recog-
nized in income was not material.
For investments in illiquid and privately-held securities
for which market prices or quotations are not readily
available, management must estimate the value of the
security based upon available information in order to
determine fair value. As of March 31, 2007 and 2006, Legg
Mason had approximately $1,298 and $1,503 respectively, of
non-trading financial instruments which were valued based
upon management’s assumptions or estimates, taking into
consideration available financial information of the company
and industry. At March 31, 2007 and 2006, Legg Mason
had approximately $58,265 and $64,026, respectively,
of investments in partnerships and limited liability
corporations. These investments are reflected in Other
non-current assets on the Consolidated Balance Sheets
and are accounted for under the cost or equity method.
In addition to the financial instruments described above,
other financial instruments that are carried at fair value or
amounts that approximate fair value include Cash and
cash equivalents and Short-term borrowings. The fair
value of Long-term debt at March 31, 2007 and 2006 was
$1,120,253 and $1,277,508 respectively. These fair values
were estimated using current market prices.
Fixed Assets
Fixed assets consist of equipment, software and leasehold
improvements. Equipment consists primarily of commu-
nications and technology hardware and furniture and
fixtures. Software includes both purchased software and
internally developed software. Fixed assets are reported at
cost, net of accumulated depreciation and amortization.
Depreciation and amortization are determined by use of
the straight-line method. Equipment is depreciated over
the estimated useful lives of the assets, generally ranging
from three to eight years. Software is amortized over the
estimated useful lives of the assets, which are generally
three years. Leasehold improvements are amortized over
the initial term of the lease unless options to extend are
likely to be exercised. Maintenance and repair costs are
expensed as incurred. Internally developed software is
reviewed periodically to determine if there is a change in
the useful life, or if an impairment in value may exist. If
impairment is deemed to exist, the asset is written down
to its fair value or is written off if the asset is determined
to no longer have any value.
Intangible Assets and Goodwill
Intangible assets consist principally of asset management
contracts, contracts to manage proprietary funds and
trade names resulting from acquisitions. Intangible assets
are amortized over their estimated useful lives, using the
straight-line method, unless the asset is determined to
have an indefinite useful life. Asset management contracts
are amortizable intangible assets that are capitalized at
acquisition and amortized over the expected life of the
contract. The value of contracts to manage assets in pro-
prietary funds and the value of trade names are classified
as indefinite-life intangible assets. The assignment of
indefinite lives to proprietary fund contracts is based
upon the assumption that there is no foreseeable limit on
the contract period to manage proprietary funds due to
the likelihood of continued renewal at little or no cost.
The assignment of indefinite lives to trade names is based
on the assumption that they are expected to generate cash
flows indefinitely.
Goodwill represents the excess cost of a business
acquisition over the fair value of the net assets acquired.
Indefinite-life intangible assets and goodwill are not
amortized. Legg Mason evaluates its intangible assets and
goodwill on a quarterly basis, considering factors such as
projected cash flows and revenue multiples, to determine
whether the value of the assets is impaired and the amor-
tization periods are appropriate. If an asset is impaired,
the difference between the value of the asset reflected on
the financial statements and its current fair value is
recognized as an expense in the period in which the
impairment is determined. The fair values of intangible
assets subject to amortization are reviewed at each report-
ing period using an undiscounted cash flow analysis.
For intangible assets with indefinite lives, fair value is
determined based on anticipated discounted cash flows.
Goodwill is evaluated at the reporting unit level, and is
deemed to be impaired if the carrying amount of the
reporting unit exceeds its implied fair value. In estimating
the fair value of the reporting unit, Legg Mason uses valu-
ation techniques based on discounted cash flows similar
65
to models employed in analyzing the purchase price of an
acquisition target. Legg Mason defines the reporting units
to be its Managed Investments, Institutional and Wealth
Management divisions, which are the same as its operating
segments. Allocations of goodwill to Legg Mason’s divisions
for acquisitions and dispositions are based on relative fair
values of the businesses added to or sold from the divisions.
See Note 6 for additional information regarding intangible
assets and goodwill and Note 18 for additional information
regarding business segments.
Translation of Foreign Currencies
Assets and liabilities of foreign subsidiaries that are
denominated in non-U.S. dollar functional currencies are
translated at exchange rates as of the Consolidated Balance
Sheet dates. Revenues and expenses are translated at aver-
age exchange rates during the period. The gains or losses
resulting from translating foreign currency financial state-
ments into U.S. dollars are included in stockholders’ equity
and comprehensive income. Gains or losses resulting from
foreign currency transactions are included in earnings.
Investment Advisory Fees
Legg Mason earns investment advisory fees on assets in
separately managed accounts, investment funds, and
other products managed for Legg Mason’s clients. These
fees are primarily based on predetermined percentages
of the market value of the assets under management
(“AUM”), are recognized over the period in which services
are performed and may be billed in advance of the period
earned. Performance fees may be earned on certain invest-
ment advisory contracts for exceeding performance
benchmarks and are generally recognized at the end
of the performance measurement period or when they
are determined to be realizable.
Distribution and Service Fees Revenue and Expense
Distribution and service fees represent fees earned from
funds to reimburse the distributor for the costs of market-
ing and selling fund shares and servicing proprietary
funds and are generally determined as a percentage of
client assets. Reported amounts also include fees earned
from providing client or shareholder servicing, including
record keeping or administrative services to proprietary
funds. Distribution fees earned on company-sponsored
investment funds are reported as revenue. When Legg
Mason enters into arrangements with broker-dealers or
other third parties to sell or market proprietary fund
shares, distribution and service fee expense is accrued for
the amounts owed to third parties, including finders’ fees
and referral fees paid to unaffiliated broker-dealers or
introducing parties. Distribution and servicing expense
also includes payments to third parties for certain share-
holder administrative services and sub-advisory fees paid
to unaffiliated asset managers.
Deferred Sales Commissions
Commissions paid to financial intermediaries in connec-
tion with sales of certain classes of company-sponsored
mutual funds are capitalized as deferred sales commis-
sions. The asset is amortized over periods not exceeding
six years, which represent the periods during which com-
missions are generally recovered from distribution and
service fee revenues and from contingent deferred sales
charges (“CDSC”) received from shareholders of those
funds upon redemption of their shares. CDSC receipts
are recorded as distribution and servicing revenue when
received, with a corresponding expense and a reduction of
the unamortized balance of deferred sales commissions.
Management periodically tests the deferred sales commis-
sion asset for impairment by reviewing the changes in
value of the related shares, the relevant market conditions
and other events and circumstances that may indicate an
impairment in value has occurred. If these factors indicate
an impairment in value, management compares the carry-
ing value to the estimated undiscounted cash flows
expected to be generated by the asset over its remaining
life. If management determines that the deferred sales
commission asset is not fully recoverable, the asset will
be deemed impaired and a loss will be recorded in the
amount by which the recorded amount of the asset
exceeds its estimated fair value. For the years ended
March 31, 2007, 2006, and 2005, no impairment charges
were recorded. Deferred sales commissions, included in
Other non-current assets in the Consolidated Balance
Sheets, were $44.9 million and $78.9 million at
March 31, 2007 and 2006, respectively.
Income Taxes
Deferred income taxes are provided for the effects of
temporary differences between the tax basis of an asset
or liability and its reported amount in the financial
statements. Deferred income tax assets are subject to a
valuation allowance if, in management’s opinion, it is more
likely than not that these benefits may not be realized. Legg
Mason’s deferred income taxes principally relate to business
combinations, amortization and accrued compensation.
66
Loss Contingencies
Legg Mason accrues estimates for loss contingencies
related to legal actions, investigations, and proceedings,
exclusive of legal fees, when it is probable that a liability
has been incurred and the amount of loss can be reason-
ably estimated.
Stock-Based Compensation
Legg Mason’s stock-based compensation includes stock
options, employee stock purchase plans, restricted stock
awards and deferred compensation payable in stock.
Under its stock compensation plans, Legg Mason issues
stock options to officers, key employees and non-employee
members of the Board of Directors.
During fiscal year 2007, Legg Mason adopted SFAS No.
123 (R), “Share-Based Payment” and related pronounce-
ments using the modified-prospective method and the
related transition election. Under this method, compensa-
tion expense for the year ended March 31, 2007 includes
compensation cost for all non-vested share-based awards
at their grant-date fair value amortized over the respective
vesting periods on the straight-line method. Legg Mason
determines the fair value of stock-based compensation
using the Black-Scholes option pricing model, with the
exception of market-based performance grants, which are
valued with a Monte Carlo option-pricing model. Prior to
fiscal 2007, awards were also accounted for at grant-date
fair value, except for awards granted prior to April 1,
2003, that were recorded at their intrinsic value. As a
result, prior to the adoption of SFAS No. 123 (R), no
related compensation expense was recognized for the
awards granted prior to April 1, 2003, and the expense
related to stock-based employee compensation included in
the determination of net income for fiscal years 2006 and
2005 is less than that which would have been included if
the fair value method had been applied to all awards.
Under the modified-prospective method, the results for
the years ended March 31, 2006 and 2005 have not been
restated. Additionally, unamortized deferred compensa-
tion previously classified as a separate component of
stockholders’ equity has been reclassified as a reduction of
additional paid-in capital. Also under SFAS No. 123 (R),
cash flows related to income tax deductions in excess of
stock-based compensation expense of $14,466 are classi-
fied as financing cash flows for the year ended March 31,
2007. For the years ended March 31, 2006 and 2005,
these cash flows were $92,376 and $18,972, respectively,
and continue to be classified as operating cash inflows.
See Note 13 for additional discussion of stock-
based compensation.
Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing
net income by the weighted average number of shares
outstanding. The calculation of weighted average shares
includes common shares, shares exchangeable into common
stock and convertible preferred shares that are considered
participating securities. Diluted EPS is similar to basic EPS,
but adjusts for the effect of potential common shares. All
share and per share information have been retroactively
restated to reflect the September 2004 three-for-two split.
See Note 15 for additional discussion of EPS.
Special Purpose and Variable Interest Entities
Special purpose entities (“SPEs”) are trusts, partnerships,
corporations or other vehicles that are established for a
limited business purpose. SPEs generally involve the
transfer of assets and liabilities in which the transferor
may or may not have continued involvement, derive
continued benefit, exhibit control or have recourse. Legg
Mason does not utilize SPEs as a form of financing or to
provide liquidity, nor has Legg Mason recognized any
gains or losses from the sale of assets to SPEs.
In accordance with Financial Accounting Standards
Board (“FASB”) Interpretation No. (“FIN”) 46 (R),
“Consolidation of Variable Interest Entities—an interpre-
tation of ARB No. 51,” all SPEs are designated as either
a voting interest entity or a VIE, with VIEs subject to
consolidation by the party deemed to be the primary
beneficiary, if any. A VIE is an entity that does not have
sufficient equity at risk to finance its activities without
additional subordinated financial support or in which
the equity investors do not have the characteristics of a
controlling financial interest. The primary beneficiary
is the entity that will absorb a majority of the VIE’s
expected losses, or if there is no such entity, the entity
that will receive a majority of the VIE’s expected residual
returns, if any. In accordance with FIN 46 (R), Legg
Mason’s determination of expected residual returns
excludes gross fees paid to a decision maker. It is unlikely
that Legg Mason will be the primary beneficiary for VIEs
created to manage assets for clients unless its ownership
interest, including interests of related parties, in a VIE is
substantial, or unless Legg Mason may earn significant
performance fees from the VIE.
67
FIN 46 (R) also requires the disclosure of VIEs in which
Legg Mason is considered to have a significant variable
interest. In determining whether a variable interest is sig-
nificant, Legg Mason considers the same factors used for
determination of the primary beneficiary. In determining
whether it is the primary beneficiary of these VIEs, Legg
Mason considers both qualitative and quantitative factors
such as the voting rights of the equity holders, economic
participation of all parties, including how fees are earned
by and paid to Legg Mason, related party ownership and
guarantees. In determining the primary beneficiary, Legg
Mason must make assumptions and estimates about,
among other things, the future performance of the underlying
assets held by the VIE, including investment returns, cash
flows and credit risks. These assumptions and estimates
have a significant bearing on the determination of the pri-
mary beneficiary. If Legg Mason’s assumptions or estimates
were to be materially incorrect, Legg Mason might be
required to consolidate additional VIEs. Consolidation
of these VIEs would result in an increase to assets with
a corresponding increase in Minority Interests on the
Consolidated Balance Sheets and an increase in revenues
with a corresponding increase in Minority Interests on the
Consolidated Statements of Income.
Supplemental Cash Flow Information
The following non-cash activities are excluded from the
Consolidated Statements of Cash Flows. As described in
Note 8, during fiscal 2007 and 2006, the holders of the
$76 million and $480 million in zero-coupon contingent
convertible senior notes converted the notes into 756 thou-
sand and 5.5 million shares of common stock, respectively.
There were no zero-coupon contingent convertible senior
notes outstanding after the conversion in fiscal 2007.
As described in Note 2, during fiscal 2006, Legg Mason issued
5.4 million shares of common stock and 13.346632 shares of
non-voting convertible preferred stock to Citigroup in the
acquisition of CAM. During March 2006, Citigroup sold,
and thus converted, approximately 4.96 shares of non-voting
convertible preferred stock into 4.96 million shares of com-
mon stock. In addition, an $83.2 million promissory note,
as described in Note 7, was executed as a result of the final
purchase price at closing. As also described in Note 2, during
fiscal 2006, Legg Mason issued 1.9 million shares of common
stock valued at $200 million to acquire Permal. As described
in Note 3, during fiscal 2006, Legg Mason recognized a gain
on the sale of its PC/CM businesses to Citigroup, based on
a value of $1.65 billion for the businesses, as a portion of
the consideration to acquire CAM. Assets and liabilities of
the PC/CM businesses transferred to Citigroup as part
of the transaction were approximately $4.2 billion and
$3.7 billion, respectively.
The amounts reflected in the supplementary disclosure on
the Consolidated Statements of Cash Flows as cash paid for
income taxes and interest represent amounts for both con-
tinuing and discontinued operations, where applicable.
Derivative Instruments
The fair values of derivative instruments are recorded as
assets or liabilities on the Consolidated Balance Sheets.
Legg Mason generally does not engage in derivative or
hedging activities, except to hedge interest rate risk on
debt, as described in Note 8. In addition, Legg Mason
uses currency and other hedges to hedge the risk of move-
ment in exchange rates or interest rates on financial assets.
Legg Mason applies hedge accounting as defined in SFAS
No. 133, “Accounting For Derivative Instruments and
Hedging Activities,” to the aforementioned debt interest
rate risk hedge. Adjustment of this cash flow hedge is
recorded in Other comprehensive income. The gain or loss
on other derivative instruments not designated for hedge
accounting are included as Other income (expense) in the
Consolidated Statements of Income and are not material.
Recent Accounting Developments
The following relevant accounting pronouncements were
recently issued.
The FASB issued FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes” (“FIN 48”), in July
2006. FIN 48 clarifies previously issued FASB Statement
No. 109, “Accounting for Income Taxes,” by prescribing a
recognition threshold and a measurement attribute in
financial statements for tax positions taken or expected to
be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, interim
accounting, disclosure and transition and will be effective
for fiscal year 2008. Legg Mason has substantially com-
pleted an analysis of adopting the provisions of FIN 48
and, based on that analysis, does not currently expect an
adjustment to opening retained earnings or existing income
tax reserves as of April 1, 2007, that will be material to the
consolidated financial statements.
In September 2006, the FASB issued Statement No. 157,
“Fair Value Measurements” (“SFAS 157”), to provide a con-
sistent definition of fair value and establish a framework for
68
measuring fair value in generally accepted accounting
principles. SFAS 157 has additional disclosure require-
ments and will be effective for fiscal year 2009. Legg
Mason is evaluating the adoption of SFAS 157 and cannot
estimate the impact, if any, on its consolidated financial
statements at this time.
In September 2006, the FASB issued Statement No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans—an amendment of FASB
Statements No. 87, 88, 106 and 132 (R)” (“SFAS 158”).
SFAS 158 requires an employer that is a business entity that
sponsors one or more single-employer defined benefit plans
to recognize the funded status of its plans on its balance
sheet as of the balance sheet date. SFAS 158 also requires
gains or losses and prior service costs or credits that are not
components of net periodic benefit costs to be cycled
through other comprehensive income until recognized as
net periodic benefit cost. SFAS 158 has additional disclosure
requirements and is effective as of March 31, 2007. The
adoption of SFAS 158 did not have a material impact on
Legg Mason’s consolidated financial statements.
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements” (“SAB 108”), to
eliminate diversity in how registrants quantify financial
statement misstatements. Prior to SAB 108, registrants
have used one of two widely recognized methods to quan-
tify financial statement misstatements: the “rollover”
method or the “iron curtain” method. The iron curtain
method quantifies uncorrected misstatements based on
the effects of correcting the misstatements existing in the
balance sheet in the current year, irrespective of the year
of origination of the misstatement. The rollover method
quantifies uncorrected misstatements based on the
amount of misstatements originating in the current year
income statement and ignores the effects of correcting the
portion relating to balance sheet misstatements from prior
years. SAB 108 requires that a registrant consider both the
iron curtain and rollover methods when evaluating uncor-
rected misstatements. As such, uncorrected misstatements
previously deemed to be immaterial under one method,
may now be material under the new “dual approach” and
require correction in the current year financial statements.
SAB 108 has additional disclosure requirements. SAB 108
has been adopted as of March 31, 2007 and did not
impact Legg Mason’s consolidated financial statements.
In February 2007, the FASB issued Statement No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities—Including an Amendment of FASB Statement
No. 115” (“SFAS 159”). SFAS 159 permits companies to
measure many financial instruments and certain other
items at fair value. The provisions of SFAS 159 are not
mandatory and Legg Mason has the option to adopt SFAS
159 for fiscal 2008 or fiscal 2009. Legg Mason is in the
process of evaluating the potential future effect of SFAS
159 on its consolidated financial statements.
2. ACQUISITIONS
On December 1, 2005, Legg Mason completed the acqui-
sition of CAM in exchange for (i) all outstanding stock
of Legg Mason subsidiaries that constituted its PC/CM
businesses (see Note 3 for a discussion of discontinued
operations); (ii) approximately 5.39 million shares of com-
mon stock and 13.346632 shares, $10 par value per share,
of non-voting Legg Mason convertible preferred stock, which
is convertible, upon transfer, into approximately 13.35 mil-
lion shares of common stock; and (iii) $512 million in cash
borrowed under a $700 million five-year syndicated term
loan facility.
The CAM acquisition price initially aggregated $3.96 billion,
including $1.73 billion of Legg Mason stock (5.39 million
shares of common stock and 13.35 million shares of
common stock issuable upon conversion of convertible
preferred stock, all at $92.05 per share); $1.65 billion for
the PC/CM business; $512 million of cash; and related
costs of $68 million. In accordance with EITF 99-12,
“Determination of the Measurement Date for the Market
Price of Acquirer Securities Issued in a Purchase Business
Combination,” the common stock and convertible stock
issued in the transaction were valued based on the average
closing price of Legg Mason common stock immediately
before and following June 24, 2005, the date on which
the terms of the transaction were agreed by both parties
and announced. The convertible preferred stock was val-
ued on the same basis as the common stock because both
classes have the same economic rights. The value assigned
to the PC/CM business was based on negotiations
between the buyer (Citigroup) and seller (Legg Mason)
using market metrics, such as revenue, book value and
earnings multiples, and was developed in conjunction
with independent third-party advisors.
At the time of the acquisition, CAM managed assets of
approximately $408.6 billion, which excluded certain
assets that were not expected to be retained by CAM.
69
The determination of the purchase price was made on the
basis of, among other things, the revenues, profitability and
growth rates of CAM. The acquisition of CAM fits one of
Legg Mason’s strategic objectives to become a pure global
asset management company.
A summary of the fair values of the net assets acquired is
as follows:
Cash
Receivables
Deferred sales commissions
Fixed assets, net
Other assets
Amortizable asset management contracts
Indefinite-life mutual fund contracts
Goodwill
Current liabilities
Deferred tax liability
Total purchase price,
including acquisition costs
$ 109,106
389,517
87,994
35,217
17,152
356,677
2,702,376
854,367
(579,220)
(12,522)
$3,960,664
Amortizable asset management contracts are being
amortized over periods ranging from six to twelve years,
excluding certain contracts of approximately $11 million,
which were amortized over 16 months. The value of the
indefinite-life mutual fund contracts is not subject to
amortization but is evaluated quarterly for impairment.
Approximately $739 million of the goodwill is deduct-
ible over 15 years for tax purposes.
In accordance with the terms of the acquisition agreement
for CAM, a post-closing purchase price adjustment of
$84.7 million was paid to Citigroup in the September
2006 quarter based on the retention of certain acquired
AUM. This payment was recorded as additional goodwill
and therefore will only impact future earnings to the
extent recorded goodwill becomes impaired.
Prior to consummation of the CAM transaction, senior
management began to assess and formulate plans for
restructuring the business of the combined entities, which
included reductions in the acquired workforce, rational-
ization and realignment of the acquired mutual funds,
and an evaluation of office lease obligations assumed in
the transaction in several geographic regions. Costs asso-
ciated with reductions of the acquired workforce were
accrued at acquisition date, at which time specific plans
70
and the communication of those plans were finalized.
Costs associated with mutual fund realignment and office
space rationalization were accrued during fiscal 2007,
as management finalized plans and amounts could be
reasonably estimated. As part of the fund realignment,
certain domestic funds have been or are being merged
with funds of similar strategy and certain funds have been
or are being re-domiciled or liquidated, as approved by
the Boards of Directors of the funds or fund shareholders.
The fund realignment costs were not associated with or
incurred to generate revenues of the combined entity after
the consummation date, were incremental to other costs
incurred in the conduct of activities prior to the transac-
tion date, and were incurred as a direct result of the plan
to exit certain CAM activities. The evaluation of excess
office space in several geographic regions resulted from
staff reductions and business integrations. Excess office
space costs include both amounts incurred under existing
contractual obligations of CAM that will continue with
no economic benefit and penalties incurred to cancel con-
tractual obligations of the acquired business.
The costs for workforce reductions, mutual fund realign-
ment and excess office space aggregating $85.4 million
are associated with integration of the acquired CAM
business and, for the reasons described above, such costs are
reflected as additional goodwill and will only impact future
earnings to the extent recorded goodwill becomes impaired.
A summary of all accrued restructuring costs follows:
Acquired
Workforce
Fund
Reductions Realignment Leases Total
Office
$ 27.5
(19.5)
Accrued at
acquisition
Payments
Accrual at
March 31, 2006
Accruals
Payments
Accrual at
March 31, 2007 $ 0.2
8.0
1.2
(9.0)
$ —
—
$ — $ 27.5
(19.5)
—
—
42.4
(37.2)
—
14.3
(3.3)
8.0
57.9
(49.5)
$ 5.2
$11.0 $16.4
The purchase price allocation was completed during fiscal
2007, and Legg Mason expects the remaining accrued
costs to be paid as incurred or over their contractual terms
in future years.
In connection with the acquisition of CAM, effective
October 3, 2005, Legg Mason entered into a three-year
Global Distribution Agreement with Citigroup pursuant
to which Legg Mason intends to distribute the asset man-
agement products and services of CAM and its other
subsidiaries, including the Legg Mason Funds family of
mutual funds, through Citigroup’s various distribution
businesses. These businesses include Citigroup’s retail
securities brokerage, retail and institutional banks and life
and variable annuity representatives. Citigroup’s retail
securities brokerage will be the exclusive retail distributor
of the Legg Mason Funds that are managed by Legg
Mason Capital Management, subject to a few exceptions.
The term of this exclusivity is for up to three years, sub-
ject to certain conditions.
Prior to the acquisition of CAM and in conjunction with a
Citigroup entity, Smith Barney Fund Management LLC
(“SBFM”), one of the entities acquired from Citigroup,
completed a settlement with the U.S. Securities and
Exchange Commission (“SEC”) resolving an investigation
by the SEC into matters relating to arrangements between
certain Smith Barney mutual funds, a Citigroup affiliated
transfer agent, and an unaffiliated sub-transfer agent.
Under the terms of the settlement, SBFM paid $184 million
to the U.S. Treasury, which will be distributed pursuant to
a distribution plan that is subject to approval by the SEC.
Although the transfer agency business was not included in
the acquisition of CAM, the liabilities of SBFM assumed
in the acquisition include approximately $184 million for
amounts to be paid pursuant to the plan of distribution,
when approved. In addition, the assets acquired include a
receivable of approximately $184 million for the amount
that will be returned to Legg Mason by the U.S. Treasury
for distribution pursuant to the plan. This settlement has
still not been disbursed and as such, the receivable balance
is included in Other receivables and the related liability is
included in Other current liabilities as of March 31, 2007
and 2006.
Effective November 1, 2005, Legg Mason acquired 80% of
the outstanding equity of Permal, a leading global funds-
of-hedge funds manager. Concurrent with the acquisition,
Permal completed a reorganization in which the residual
20% of outstanding equity was converted to preference
shares, resulting in Legg Mason owning 100% of the out-
standing voting common stock of Permal. Legg Mason has
the right to purchase the preference shares over the next
four years and, if that right is not exercised, the holders
of those shares have the right to require Legg Mason to
purchase the interests in the same general time frame for
approximately the same consideration. The aggregate con-
sideration paid by Legg Mason at closing was $800 million,
excluding $8.5 million of acquisition-related costs, of which
$200 million was in the form of approximately 1,889 newly
issued shares of Legg Mason common stock and the
remainder was cash. It is anticipated that Legg Mason will
acquire the remaining 20% ownership interest in Permal
represented by the preference shares, and Legg Mason will
do so in purchases that will be made two and four years
after the initial closing at prices based on Permal’s revenues.
The additional payments are treated as contingent
consideration. The maximum aggregate price, including
earnout payments related to each purchase and based upon
future revenue levels, for all equity interests in Permal is
$1.386 billion, with a $969.5 million minimum price,
including acquisition costs. Legg Mason may elect to
deliver up to 25% of each of the future payments in the
form of shares of its common stock. All payments for the
preference shares, including dividends, and other contingent
earnouts exceeding the $969.5 million minimum purchase
price will be recognized as additional goodwill. During
fiscal 2007, Legg Mason paid approximately $12 million
in dividends on the preference shares. Based upon current
performance levels, as of March 31, 2007, $130 million of
the $161 million difference between the minimum price
and the consideration paid at closing, including acquisition
costs, is classified as Contractual acquisition payable, a
current liability. As of March 31, 2006, the $161 million
difference was included in Other non-current liabilities.
At the time of acquisition, Permal managed assets of
approximately $17.5 billion (excluding approximately
$2.0 billion of assets cross-invested among its managed
funds and $2.7 billion of assets that Permal did not
expect to retain). The acquisition of Permal fits one of
Legg Mason’s strategic objectives to expand its global
asset management business.
71
A summary of the fair values of the net assets acquired is
as follows:
Cash
Receivables
Investments (primarily investments of VIEs)(1)
Other current assets
Other non-current assets
Amortizable asset management contracts
Indefinite-life funds-of-hedge funds contracts
Indefinite-life trade name
Goodwill
Current liabilities
(primarily accrued compensation)
Deferred tax liability
Other non-current liabilities
Minority interests in VIEs(1)
Total minimum purchase price,
including acquisition costs
$ 181,406
48,252
242,802
9,183
58,537
9,960
947,000
62,100
126,704
(220,759)
(275,700)
(8,838)
(211,178)
$ 969,469
(1) Subsequent to acquisition, adjustments to certain contractual agreements
occurred and the VIEs are no longer required to be consolidated.
The fair value of the amortizable asset management con-
tracts of approximately $10.0 million is being amortized
over periods ranging from two to nine years. The values
of the indefinite-life trade name and funds-of-hedge funds
contracts are not subject to amortization but are evaluated
quarterly for impairment.
The following unaudited pro forma consolidated results
are presented as though the acquisitions of CAM and
Permal had occurred as of the beginning of each period
presented and excludes the results of discontinued
operations (including the gain on sale of the PC/CM
businesses). The pro forma results include adjustments
to exclude certain non-transferred CAM businesses in
accordance with the terms of the transaction agreement,
to conform accounting policies of the acquired entities,
and to adjust for the effect of acquisition related expenses.
Years Ended March 31,
2006
$3,988,526
2005
$3,636,289
$ 589,820
$ 544,983
Revenues
Income from continuing
operations
Income from continuing
operations per common share:
Basic
Diluted
$ 4.39
$ 4.10
$ 4.37
$ 3.98
The former owners of Private Capital Management
(“PCM”) earned the maximum fifth anniversary payment
of $300.0 million, which was accrued as of March 31,
2006 and paid during fiscal 2007. This payment is
recorded as additional goodwill and is subject to certain
limited claw-back provisions.
On December 31, 2004, Legg Mason Investment Counsel,
LLC, a wholly owned subsidiary of Legg Mason, acquired
from Deutsche Investment Management Americas the New
York City, Philadelphia, Cincinnati and Chicago offices
of Scudder Private Investment Counsel (the “Acquired
Offices”) for cash of $55.0 million. The acquisition of these
offices fits Legg Mason’s strategic objective to grow its asset
management business. The transaction included a contin-
gent payment based on the revenues of the Acquired
Offices on the first anniversary of closing, which resulted
in a payment of approximately $16.3 million in March
2006 that was recorded as additional goodwill. The
Acquired Offices had $6.2 billion of AUM at December 31,
2004. The allocation of the purchase price resulted in
approximately $20.0 million of goodwill and $34.0 million
of amortizable asset management contracts. The fair value
of the asset management contracts of $34.0 million is being
amortized over an estimated life of 12 years.
3. DISCONTINUED OPERATIONS
On December 1, 2005, Legg Mason sold the entities that
comprised its PC/CM businesses to Citigroup as a portion
of the consideration in the purchase of Citigroup’s global
asset management businesses. In accordance with SFAS
No. 144, “Accounting for the Impairment or Disposal of
Long-Life Assets,” the after-tax results of operations of
PC/CM are reflected as Income from discontinued opera-
tions on the Consolidated Income Statements for the
fiscal years ended March 31, 2006 and 2005.
As a result of the sale, Legg Mason recognized a gain of
$1.09 billion, net of $97.2 million in costs related to the
sale, including $78.7 million for accelerated vesting of
employee stock option and other deferred compensation
awards. As required by SFAS No. 123, a modification of
the terms of an option award that makes it more valuable
shall be treated as an exchange of the original award for a
new award and the incremental value shall be measured
by the difference between (a) the fair value of the modi-
fied option determined in accordance with the provisions
of SFAS No. 123 and (b) the value of the old option
immediately before its terms are modified, determined
based on the shorter of (1) its remaining expected life or
72
(2) the expected life of the modified option. There were
864 thousand unvested options as of the transaction date
that were not exercisable under their original contractual
provisions and therefore had no value. The terms of these
options were modified such that their vesting periods were
shortened to the December 1, 2005 transaction date,
with ninety days thereafter to exercise. As modified, all
options were expected to be exercised immediately, and
therefore the fair value of these options had no time value
component and was equal to the aggregate of the transac-
tion date market price less the respective strike prices for
each modified option.
The sale resulted in an after-tax gain of $641.3 million.
During fiscal 2007, the Company completed the filing of
its income tax return related to the sale and also adjusted
the liabilities related to the sale. These actions resulted in
an adjustment to the after-tax gain from the sale of $572.
Results of operations for discontinued operations are sum-
marized as follows:
Total revenues,
net of interest expense(1)
Income from
discontinued operations
Provision for income taxes
Income from
discontinued operations, net
Years Ended March 31,
2006
2005
$545,715
$856,366
$109,404
42,983
$187,949
74,942
$ 66,421
$113,007
(1) See Note 18 for additional information on net revenues.
On March 31, 2006, Legg Mason sold the operations of
its subsidiary, Legg Mason Real Estate Services
(“LMRES”). The sales price for the net assets was approx-
imately $8,093 received in cash subsequent to closing.
Legg Mason recognized a pre-tax gain, net of transaction
costs, of $4,698 ($2,739, net of taxes of $1,959). The gain
on this sale is reflected as Gain on sale of discontinued
operations on the Consolidated Statements of Income.
The sale of LMRES was a result of Legg Mason’s long-
term strategic objective to focus on its core asset
management business.
4. INVESTMENTS
Legg Mason has investments in debt and equity securities
that are generally classified as available-for-sale, held-to-
maturity and trading as described in Note 1. Investments
as of March 31, 2007 and 2006 are as follows:
Investment securities:
Trading(1)
Held to maturity
Available-for-sale
Other(2)
Total
2007
2006
$273,166
—
8,297
1,298
$282,761
$142,206
17,255
7,514
1,503
$168,478
(1) Includes assets of deferred compensation plans of $191,684 and $106,170,
respectively. The remainder is seed capital and investments in VIEs.
(2) Includes investments in private equity and debt securities that do not have readily
determinable fair values.
Legg Mason uses the specific identification method to
determine the cost of a security sold and the amount
reclassified from accumulated other comprehensive
income into earnings. The proceeds and gross realized
gains and losses from sales and maturities of available-
for-sale investments are as follows:
Years Ended March 31,
2005
2006
2007
AVAILABLE-FOR-SALE
Proceeds
Gross realized gains
Gross realized losses
$21,745 $8,074 $10,827
6
(21)
259
(117)
169
(8)
The net unrealized gain for investment securities classi-
fied as trading was $7,141 for 2007. Net unrealized losses
for investment securities classified as trading were $8,360,
and $2,564 for 2006 and 2005, respectively.
Legg Mason’s available-for-sale investments consist of
mortgage-backed securities, U.S. government and agency
securities, and equity securities. The fair value of invest-
ments classified as available-for-sale was $8,297 and
$7,514, as of March 31, 2007 and 2006, respectively.
Gross unrealized gains and losses for investments classi-
fied as available-for-sale were $407 and $303, respectively,
as of March 31, 2007, and $342 and $383, respectively,
as of March 31, 2006.
Legg Mason had no investments classified as held-to-maturity
as of March 31, 2007. As of March 31, 2006, the amor-
tized cost of investments classified as held-to-maturity was
$17,255. Gross unrealized gains and losses for investment
securities classified as held-to-maturity were $72 and $292,
respectively, as of March 31, 2006.
5. FIXED ASSETS
The following table reflects the components of fixed assets
as of the dates shown.
73
Equipment
Software
Leasehold improvements
Total cost
Less: accumulated depreciation
and amortization
Fixed assets, net
March 31, March 31,
2007
2006
$ 146,234 $ 116,967
101,698
107,634
326,299
135,690
137,259
419,183
(199,746)
(143,690)
$ 219,437 $ 182,609
Depreciation and amortization expense was $69,442,
$35,308, and $19,318 for fiscal 2007, 2006, and 2005,
respectively, net of $4,243 and $3,728 for fiscal 2006 and
2005, respectively, which was allocated to discontinued
operations to reflect the use of certain fixed assets by dis-
continued operations prior to the sale.
6. INTANGIBLE ASSETS AND GOODWILL
Goodwill and indefinite life intangible assets are not
amortized and the values of identifiable intangible assets
are amortized over their useful lives, unless the assets are
determined to have indefinite useful lives. Goodwill and
indefinite-life intangible assets are analyzed to determine
if the fair market value of the assets exceed the book
value. If the fair value is less than the book value, Legg
Mason will record an impairment charge. During fiscal
2007, Legg Mason recognized, as other operating expense,
impairment charges of approximately $2.0 million for
certain amortizable asset management contracts. There
were no impairment charges during fiscal 2006 and 2005.
The following tables reflect the components of intangible
assets in continuing operations as of March 31:
2007
2006
AMORTIZABLE ASSET
MANAGEMENT CONTRACTS
Cost
Accumulated amortization
Net
$ 737,673 $ 739,789
(117,585)
$ 553,488 $ 622,204
(184,185)
INDEFINITE-LIFE
INTANGIBLE ASSETS
Fund management contracts $3,755,121 $3,754,312
116,800
Trade names
$3,871,921 $3,871,112
$4,425,409 $4,493,316
Intangible Assets, net
116,800
Estimated amortization expense for each of the next five
fiscal years is as follows:
2008
2009
2010
2011
2012
Thereafter
Total
$ 56,886
54,714
54,367
54,360
51,066
282,095
$553,488
The decrease in amortizable cost is primarily due to the
previously described impairment charge and the increase
in indefinite-life intangible assets is primarily attributable
to the impact of foreign currency translation.
The increase in the carrying value of goodwill since
April 1, 2006 is summarized below:
2007
2006
$2,303,799 $ 992,800
Balance, beginning of year
Business acquisitions and
related costs (see Note 2)
Contractual acquisition
earnouts (see Note 2)
Impact of excess tax basis
amortization on CAM acquisition
Other, including changes in
foreign exchange rates
Balance, end of year
72,354
996,716
84,748
316,300
(28,969)
—
908
(2,017)
$2,432,840 $2,303,799
The increase in goodwill due to business acquisition costs
and contractual acquisition earnouts in fiscal 2007 and
2006 is primarily attributable to CAM and Permal as dis-
cussed in Note 2 and the accrual of the $300.0 million
final contingent payment for PCM in fiscal 2006.
During fiscal 2007, Legg Mason began recognizing the
tax benefit of the amortization of excess tax basis related
to the CAM acquisition. In accordance with SFAS No.
109, “Accounting for Income Taxes,” the tax benefit
is recorded as a reduction of goodwill and deferred tax
liabilities. In addition, a contingent payment of approxi-
mately $16,300 was made in fiscal 2006 in connection
with the acquisition of the Acquired Offices and was
recorded as additional goodwill.
As of March 31, 2007, management contracts are being
amortized over a weighted-average life of 11 years.
7. SHORT-TERM BORROWINGS
On October 14, 2005, Legg Mason entered into an unse-
cured 5-year $500 million revolving credit agreement. Legg
74
Mason expects to use this revolving credit facility to fund
working capital needs and for general corporate purposes.
This facility replaced Legg Mason’s previous $100 million
revolving credit facility and will be payable in full at matu-
rity in five years. There were no borrowings outstanding
under this facility as of March 31, 2007 and 2006.
Legg Mason maintains two additional borrowing facili-
ties, a $50 million, 3-year revolving credit agreement and
a $40 million credit line. Both facilities are for general
operating purposes. There were no borrowings outstand-
ing under these facilities as of March 31, 2007 and 2006.
Legg Mason has maintained compliance with the appli-
cable covenants of these facilities.
In connection with the acquisition of CAM, Legg Mason
entered into two 364-day borrowing arrangements: one
was a $130 million revolving credit facility at an interest
rate, including commitment fees, of LIBOR plus 27 basis
points; the other was a $83.2 million promissory note at
an interest rate, including commitment fees, of LIBOR
plus 35 basis points. The average effective interest rate for
the $83.2 million credit facility was 5.6% and 4.8% for
the periods ended March 31, 2007 and 2006, respectively.
During the fiscal year ended March 31, 2007, we paid
from available cash the $83.2 million balance outstanding
on this short-term promissory note with Citigroup. Legg
Mason did not borrow under the $130 million credit
facility before it expired in November 2006.
8. LONG-TERM DEBT
Long-term debt as of March 31, 2007 and 2006 consists
of the following:
Current
Accreted
Value
$ 424,796
—
650,000
8,543
3,617
25,668
1,112,624
5,117
$1,107,507
2007
Unamortized
Discount
$204
—
—
—
—
—
204
—
$204
Maturity
Amount
$ 425,000
—
650,000
8,543
3,617
25,668
1,112,828
5,117
$1,107,711
2006
Current
Accreted
Value
$ 424,632
32,861
700,000
15,776
—
29,691
1,202,960
36,883
$1,166,077
6.75% senior notes
Zero-coupon contingent
convertible senior notes
5-year term loan
3-year term loan
Third party distribution
Other term loans
Subtotal
Less: current portion
Total
On July 2, 2001, Legg Mason issued $425,000 principal
amount of senior notes due July 2, 2008, which bear inter-
est at 6.75%. The notes were sold at a discount to yield
6.80%. The net proceeds of the notes were approximately
$421,000, after payment of debt issuance costs.
Legg Mason repaid the $100,000 principal amount of its
6.5% senior notes that matured on February 15, 2006.
During the fiscal year ended March 31, 2006, Legg Mason
entered into the following long-term debt agreements:
On June 6, 2001, Legg Mason issued $567,285 principal
amount at maturity of zero-coupon contingent convertible
senior notes due on June 6, 2031. During the year ended
March 31, 2006, zero-coupon contingent convertible senior
notes aggregating $479,918 principal amount at maturity
were converted into 5.5 million shares of common stock.
During fiscal 2007, all remaining outstanding zero-coupon
contingent convertible senior notes were converted into
756 thousand shares of common stock.
5-Year Term Loan
On October 14, 2005, Legg Mason entered into an unsecured
term loan agreement for an amount not to exceed $700 million.
Legg Mason used this term loan to pay a portion of the
purchase price, including acquisition related costs, in the acqui-
sition of CAM. The term loan facility will be payable in full at
maturity in calendar year 2010 and bears interest at LIBOR
plus 35 basis points. During fiscal 2007, we repaid $50 million,
resulting in an outstanding balance at March 31, 2007 of
$650 million, which currently bears interest at a rate of 5.7%.
75
3-Year Term Loan
In connection with the CAM acquisition, on December 1,
2005, Legg Mason entered into a $16 million, 3-year term
loan. The loan is payable at maturity, with interest, includ-
ing commitment fees, paid semi-annually at a floating rate
linked to the Bank of Chile offering rate plus 35 basis
points. At March 31, 2007, the outstanding balance of this
loan facility was $8.5 million at an interest rate of 6.4%.
All credit facilities entered into in connection with the
Citigroup transaction contain standard covenants includ-
ing leverage and interest coverage ratios. Legg Mason has
maintained compliance with the applicable covenants of
these borrowing facilities.
Third Party Distribution Financing
On July 31, 2006, Legg Mason entered into a four-year
agreement with a financial institution to finance, on a non-
recourse basis, up to $90.7 million for commissions paid to
financial intermediaries in connection with sales of certain
share classes of proprietary funds. The outstanding balance
at March 31, 2007 was $3,617. Distribution fee revenues,
which are used to repay distribution financing, are based on
the average AUM of the respective funds. Interest has been
imputed at an average rate of 5.4%.
Other Term Loans
Legg Mason entered into a loan in fiscal 2005 to finance
leasehold improvements. The outstanding balance at
March 31, 2007 was $13.6 million, which bears interest at
4.2% and is due October 31, 2010. In fiscal 2006, Legg
Mason entered into a $12.8 million term loan agreement
to finance the acquisition of an aircraft. The loan bears
interest at 5.9%, is secured by the aircraft, and has a
maturity date of January 1, 2016. The outstanding bal-
ance at March 31, 2007 was $12.1 million.
5-Year Credit Agreement
On November 23, 2005, Legg Mason entered into an
unsecured 5-year floating-rate credit agreement in an
amount not to exceed $300 million. Legg Mason bor-
rowed $100 million under this agreement to fund a
portion of the purchase price in the CAM transaction
that was payable outside the U.S. This borrowing, which
was payable in full at maturity five business days after the
transaction closing date, was made November 25, 2005
and repaid on December 2, 2005. The entire amount of
the credit facility (including repaid amounts of the initial
loan) became available after December 2, 2005 to fund
any additional purchase price payable in the CAM
76
transaction. As a result of the final post-closing payment
being made from available cash (see Note 2), this agree-
ment was not drawn upon and terminated in accordance
with its terms in fiscal 2007.
As of March 31, 2007, the aggregate maturities of long-
term debt (current accreted value of $1,112,624), based on
their contractual terms, are as follows:
2008
2009
2010
2011
2012
Thereafter
Total
$ 5,117
438,845
5,504
654,001
794
8,567
$1,112,828
At March 31, 2007, Legg Mason had $1.25 billion avail-
able for the issuance of additional debt or equity securities
pursuant to a shelf registration statement.
Interest Rate Swap
Effective December 1, 2005, Legg Mason executed a
3-year amortizing interest rate swap (“Swap”) with a large
financial institution to hedge interest rate risk on a por-
tion of its $700 million, 5-year floating-rate term loan.
Under the terms of the Swap, Legg Mason will pay a fixed
interest rate of 4.9% on a notional amount of $400 million.
Quarterly payments or receipts under the Swap are
matched to exactly offset changes in the floating rate
interest payments on $400 million in principal of the
term loan. Since the terms and conditions of the hedge
are not expected to be changed, then as long as at least the
unamortized balance of the Swap is outstanding on the
5-year floating-rate term loan, the Swap will continue to be
an effective cash flow hedge. As a result, changes in the
market value of the Swap are recorded as a component of
Other comprehensive income. During the March 2007 quar-
ter, this Swap began to unwind and we repaid $50 million
of the debt. As of March 31, 2007, an unrealized gain
of $584, net of tax of $414, on the market value of the
$350 million Swap has been reflected in Other compre-
hensive income. All of the estimated unrealized gain
included in Other comprehensive income as of March 31,
2007 is expected to be reclassified to income within the
next twelve months. The actual amount will vary as a
result of changes in market conditions. On a quarterly
basis, Legg Mason assesses the effectiveness of this cash
flow hedge by confirming that payments and the balance
of the liability hedged match the Swap.
9. INCOME TAXES
The components of income tax expense from continuing operations are as follows:
Federal
Foreign
State and local
Total income tax expense
Current
Deferred
Total income tax expense
2007
$285,219
57,976
54,417
$397,612
$268,811
128,801
$397,612
2006
$202,839
33,684
39,072
$275,595
$292,828
(17,233)
$275,595
2005
$149,726
8,612
16,996
$175,334
$136,068
39,266
$175,334
A reconciliation of the difference between the effective income tax rate and the statutory federal income tax rate for
continuing operations is as follows:
Tax at statutory U.S. federal income tax rate
State income taxes, net of federal income tax benefit
Foreign losses with no tax benefit
Differences in tax rates applicable to non-U.S. earnings
Other non-deductible expenses
Other, net
Total income tax expense
2007
$365,349
34,306
—
(11,602)
1,757
7,802
$397,612
2006
$250,412
25,397
29
(4,810)
1,249
3,318
$275,595
2005
$164,765
11,046
383
(1,579)
528
191
$175,334
Deferred income taxes are provided for the effects of
temporary differences between the tax basis of an asset
or liability and its reported amount in the Consolidated
Balance Sheets. These temporary differences result in
taxable or deductible amounts in future years. Details
of Legg Mason’s deferred tax assets and liabilities are
as follows:
DEFERRED TAX ASSETS
Accrued compensation
and benefits
Accrued expenses
Operating loss carryforwards
Capital loss carryforwards
Other
Gross deferred tax assets
Valuation allowance
Deferred tax assets
after valuation allowance
2007
2006
$136,624 $112,269
15,901
48,240
11,621
8,745
196,776
(36,847)
13,160
26,198
11,621
474
188,077
(37,709)
$150,368 $159,929
DEFERRED TAX LIABILITIES
Depreciation
Deferred income
Basis differences for
intangibles on acquisitions
Amortization
Imputed interest
Other
Gross deferred tax liability
Net deferred tax liability
2007
2006
$ 8,073
2,700
$ 4,870
150
281,525
260,108
—
8,307
$560,713
$410,345
310,285
149,210
21,039
6,248
$491,802
$331,873
Certain tax benefits associated with Legg Mason’s employee
stock plans are recorded directly in Stockholders’ equity.
Stockholders’ equity increased by $14,466, $92,376 and
$18,972 in 2007, 2006 and 2005, respectively, as a result
of these tax benefits.
The acquisitions of Permal and certain non-U.S. CAM
entities were stock acquisitions and were not afforded any
tax basis write-up for intangibles exclusive of goodwill,
thereby creating a deferred tax liability equal to the tax
effect of the differences between the book basis for financial
reporting purposes and the related tax cost basis. The
change in the deferred tax liability related to book and tax
basis differences for intangibles on acquisitions for the year
77
ended March 31, 2006 primarily relates to an increase of
$275,700 and $12,522 for Permal and CAM, respectively.
At March 31, 2007 and 2006, Legg Mason recorded a
deferred tax asset of $2,047 and $5,495, respectively, for
U.S. state net operating loss carryforwards expiring in
various years after March 31, 2009. Also at March 31,
2007 and 2006, Legg Mason recorded a deferred tax asset
of $24,151 and $21,575, respectively, for non-U.S. net
operating loss carryforwards and $11,621 in both years
for non-U.S. capital loss carryforwards, portions of which
expire in various years beginning after March 31, 2008.
U.S. subsidiaries of Permal file separate federal income
tax returns, apart from Legg Mason Inc.’s consolidated
federal income tax return, due to the Permal acquisition
structure, and separate state income tax returns. At
March 31, 2006, the U.S. subsidiaries of Permal recorded a
deferred tax asset of $15,964 for U.S. federal net operating
and capital loss carryforwards and $5,206 for U.S. state
operating and capital loss carryforwards. All such carry-
forwards expired or were utilized by March 31, 2007.
At March 31, 2007 and 2006, Legg Mason recorded a val-
uation allowance for deferred tax assets of $916 and $1,751,
respectively, for U.S. state net operating loss carryforwards.
Also at March 31, 2007 and 2006, Legg Mason recorded a
valuation allowance for deferred tax assets of $22,818 and
$21,453, respectively, relating to non-U.S. net operating
loss carryforwards, $11,621 in both years relating to non-
U.S. capital loss carryforwards, and $2,354 and $2,022,
respectively, relating to other deferred tax assets. These val-
uation allowances are established in accordance with the
SFAS No. 109, “Accounting for Income Taxes,” as it is
management’s opinion that it is more likely than not that
these benefits may not be realized. At March 31, 2007 and
2006, the valuation allowances for these deferred tax assets
are $37,709 and $36,847, respectively. The valuation
allowance relating to the non-U.S. net operating loss car-
ryforwards acquired in the CAM acquisition totaling
$14,244 will reduce goodwill if Legg Mason subsequently
recognizes the deferred tax asset.
Legg Mason intends to permanently reinvest cumulative
undistributed earnings of its non-U.S. subsidiaries in non-
U.S. operations. Accordingly, no U.S. federal income
taxes have been provided for the undistributed earnings to
the extent that they are permanently reinvested in Legg
Mason’s non-U.S. operations. It is not practical at this
time to determine the income tax liability that would
result upon repatriation of the earnings.
78
10. COMMITMENTS AND CONTINGENCIES
Legg Mason leases office facilities and equipment under
non-cancelable operating leases and also has multi-year
agreements for certain services. These leases and service
agreements expire on varying dates through fiscal 2025.
Certain leases provide for renewal options and contain
escalation clauses providing for increased rentals based
upon maintenance, utility and tax increases.
During the year ended March 31, 2007, Legg Mason entered
into a lease agreement for office space located in New York,
to be used primarily by ClearBridge Advisors and Western
Asset. The lease has an annual base rent of approximately
$18.1 million per year. The agreement provides for an initial
term of 16 years with the right to renew for either an addi-
tional 10-year term or for two 5-year terms.
On February 12, 2007, Legg Mason entered into an
agreement to lease new office space in Baltimore as a
replacement for our current headquarters when the lease
expires in fiscal 2010. The lease has an annual base rent
of approximately $11.1 million. The building is currently
under construction and Legg Mason anticipates taking
possession of the space in the summer of 2009. The
initial lease term will expire in April 2024, with two
renewal options of 10 and five years.
As of March 31, 2007, the minimum annual aggregate
rentals under operating leases and servicing agreements
are as follows:
2008
2009
2010
2011
2012
Thereafter
Total
$ 97,199
108,814
104,065
82,682
76,197
630,915
$1,099,872
The minimum rental commitments shown above have not
been reduced by $95,420 for minimum sublease rentals to
be received in the future under non-cancelable subleases.
The table above also does not include aggregate rental
commitments of $155 for furniture and equipment under
capital leases.
The following table reflects rental expense under all
operating leases and servicing agreements.
Rental expense
Less: sublease income
Net rent expense
Continuing Operations
2006
$51,302
3,395
$47,907
2005
$27,767
56
$27,711
2007
$107,710
10,561
$ 97,149
Discontinued Operations
2006
$31,449
560
$30,889
2005
$44,643
910
$43,733
Legg Mason recognizes rent expense ratably over the lease
period based upon the aggregate lease payments. The lease
period is determined as the original lease term without
renewals, unless and until the exercise of lease renewal
options is reasonably assured, and also includes any period
provided by the landlord as a “free rent” period. Aggregate
lease payments include all rental payments specified in the
contract, including contractual rent increases, and are
reduced by any lease incentives received from the land-
lord, including those used for tenant improvements.
As of March 31, 2007 and 2006, Legg Mason had com-
mitments to invest approximately $39,300 and $42,100,
respectively, in limited partnerships that make private
investments. These commitments will be funded as
required through the end of the respective investment
periods ranging from fiscal 2008 to 2011.
As of March 31, 2007, Legg Mason has contingent payment
obligations related to acquisitions. These payments are pay-
able through fiscal 2012 and will not exceed $613,046.
In the normal course of business, Legg Mason enters into
contracts that contain a variety of representations and war-
ranties and which provide general indemnifications. Legg
Mason’s maximum exposure under these arrangements is
unknown, as this would involve future claims that may be
made against Legg Mason that have not yet occurred.
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 is also involved in governmen-
tal and self-regulatory agency inquiries, investigations and
proceedings. In the Citigroup transaction, Legg Mason
transferred to Citigroup the subsidiaries that constituted
its PC/CM businesses, thus transferring the entities that
would have primary liability for most of the customer
complaint, litigation and regulatory liabilities and pro-
ceedings arising from those businesses. However, as part
of that transaction, Legg Mason agreed to indemnify
Citigroup for most customer complaint, litigation and
regulatory liabilities of Legg Mason’s former PC/CM
businesses that result from pre-closing events. Similarly,
although Citigroup transferred to Legg Mason the entities
that would be primarily liable for most customer com-
plaint, litigation and regulatory liabilities and proceedings
of the CAM business, Citigroup has agreed to indemnify
Legg Mason for most customer complaint, litigation and
regulatory liabilities of the CAM business that result from
pre-closing events. In accordance with SFAS No. 5
“Accounting for Contingencies,” Legg Mason has
established provisions for estimated losses from pending
complaints, legal actions, investigations and proceedings.
While the ultimate resolution of these matters cannot be
currently determined, in the opinion of management,
after consultation with legal counsel, Legg Mason does
not believe that the resolution of these actions will have
a material adverse effect on Legg Mason’s financial
condition. However, the results of operations could be
materially affected during any period if liabilities in that
period differ from Legg Mason’s prior estimates, and Legg
Mason’s cash flows could be materially affected during
any period in which these matters are resolved. In addi-
tion, 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.
Legg Mason and two of its officers are named as defen-
dants in a consolidated legal action. The action alleges
that the defendants violated the Securities Exchange Act
of 1934 and the Securities Act of 1933 by making mis-
leading statements to the public and omitting certain
material facts with respect to the acquisition of the CAM
business in public statements and in a prospectus used in
a secondary stock offering in order to artificially inflate
the price of Legg Mason common stock. The action seeks
certification of a class of shareholders who purchased Legg
Mason common stock either between February 1, 2006
and October 10, 2006 or in a secondary public offering on
or about March 9, 2006 and seeks unspecified damages.
79
Legg Mason intends to defend the action vigorously. Legg
Mason cannot accurately predict the eventual outcome of
the action at this point, or whether it will have a material
adverse effect on Legg Mason.
As of March 31, 2007 and 2006, Legg Mason’s liability for
losses and contingencies was $2,600 and $4,300, respec-
tively. During fiscal 2007, 2006 and 2005, Legg Mason
recorded litigation-related charges for continuing opera-
tions of approximately $100, $100 and $2,500, respectively
(net of recoveries of $5,300 in fiscal 2005). During fiscal
2006 and 2005, Legg Mason recorded litigation-related
charges for discontinued operations of approximately
$5,900 and $5,500, respectively (net of recoveries of $800
and $600 in fiscal 2006 and 2005, respectively). During
fiscal 2007, 2006, and 2005, the liability was reduced for
settlement payments of approximately $1,800, $21,500
and $18,700, respectively, and the reversal of accruals in
fiscal 2006 primarily related to the civil copyright lawsuit
of $8,300.
11. EMPLOYEE BENEFITS
Legg Mason, through its subsidiaries, maintains various
defined contribution plans covering substantially all
employees. Through its primary plan, Legg Mason can
make two types of discretionary contributions. One is a
profit sharing contribution to eligible Plan participants
based on a percentage of qualified compensation and the
other is a 50% match of employee 401(k) contributions up
to 6% of employee compensation with a maximum of five
thousand dollars per year. Contributions charged to con-
tinuing operations amounted to $40,686, $22,670 and
$11,538 in fiscal 2007, 2006 and 2005, respectively.
Contributions charged to discontinued operations were
$20,295 and $29,629 in fiscal 2006 and 2005, respec-
tively. In addition, employees can make voluntary
contributions under certain plans.
12. CAPITAL STOCK
At March 31, 2007, the authorized numbers of common,
preferred and exchangeable shares were 500 million,
4 million and an unlimited number, respectively. In
addition, at March 31, 2007 and 2006, there were
10.3 million and 12.1 million shares of common stock,
respectively, reserved for issuance under Legg Mason’s
equity plans and 2.1 million and 2.3 million common
shares, respectively, reserved for exchangeable shares
issued in connection with the acquisition of Legg Mason
Canada Inc. Exchangeable shares are exchangeable at any
80
time by the holder on a one-for-one basis into shares of
Legg Mason’s common stock and are included in basic
shares outstanding. In connection with the acquisition
of CAM, Legg Mason issued 13.35 shares, $10 par
value per share, of non-voting Legg Mason convertible
preferred stock, which are convertible, upon transfer
into 13.35 million shares of common stock. During fiscal
2006, Legg Mason issued approximately 4.96 million
common shares upon conversion of approximately
4.96 shares of convertible preferred. At March 31, 2007,
there were approximately 8.39 shares of convertible
preferred stock outstanding.
Changes in common stock and shares exchangeable into
common stock for the three years ended March 31, 2007
are as follows:
COMMON STOCK
Beginning balance
Shares issued for:
Stock option exercises
and other stock based
compensation
Deferred
compensation trust
Deferred compensation
Conversion of debt
Exchangeable shares
Shares repurchased
and retired
Stock split
Public offering
Conversion of non-
voting preferred stock
Acquisitions of
CAM and Permal
Ending balance
SHARES EXCHANGEABLE
INTO COMMON STOCK
Beginning balance
Exchanges
Stock split
Ending balance
Years Ended March 31,
2005
2006
2007
129,710 106,683 66,549
863
4,692
2,040
53
183
756
212
—
—
—
126
33
5,548
389
244
197
254
260
—
(735)
— 33,274
4,600
—
—
4,956
—
—
—
131,777 129,710 106,683
7,283
2,277
(212)
—
2,065
2,666
(389)
—
2,277
1,951
(260)
975
2,666
Dividends declared per share were $0.81, $0.69 and $0.55
for fiscal 2007, 2006 and 2005, respectively. Dividends
declared but not paid at March 31, 2007, 2006 and 2005
were $29,430, $24,912 and $16,398, respectively and are
included in Other current liabilities.
During the fiscal year ended March 31, 2002, the Board
of Directors approved a stock repurchase plan. Under
this plan, Legg Mason is authorized to repurchase up
to 3 million shares on the open market at its discretion.
During the fiscal years ended March 31, 2007 and 2006,
no shares were repurchased. In the fiscal year ended
March 31, 2005, Legg Mason repurchased and retired
735 shares for $40,729.
On July 20, 2004, Legg Mason declared a three-for-
two stock split, paid as a dividend on September 24,
2004 to stockholders of record on September 8, 2004.
Accordingly, all share and per share information prior to
that date has been retroactively restated to reflect the
stock split, except for the common stock and additional
paid-in capital presented in the Consolidated Statements
of Changes in Stockholders’ Equity and the table above
for fiscal 2005.
On December 15, 2004, Legg Mason sold 4.6 million
shares of common stock at $70.30 per share, less under-
writing fees, for net proceeds of approximately $311,000.
On November 1, 2005, in connection with the acquisition
of Permal as described in Note 2, Legg Mason issued
1,889 shares of common stock as a portion of the consid-
eration paid. On December 1, 2005, in connection with
the acquisition of CAM as described in Note 2, Legg
Mason issued 5,394 shares of common stock as a portion
of the purchase price.
13. STOCK-BASED COMPENSATION
Legg Mason’s stock-based compensation includes stock
options, employee stock purchase plans, restricted stock
awards and deferred compensation payable in stock. At
March 31, 2007, 24 million shares were authorized to be
issued under Legg Mason’s equity incentive stock plans,
with 3.2 million remaining shares available for issuance.
Options under Legg Mason’s employee stock plans have
been granted at prices not less than 100% of the fair
market value. Options are generally exercisable in equal
increments over 3 to 5 years and expire within 5 to 10
years from the date of grant. See Note 1 for a further dis-
cussion of stock-based compensation.
Compensation expense for continuing operations relating
to stock options, the stock purchase plan and deferred
compensation for the years ended March 31, 2007, 2006
and 2005 was $23,817, $11,877, and $3,810, respectively.
The related income tax benefit for the years ended March 31,
2007, 2006 and 2005 was $8,452, $4,255 and $976,
respectively. The effect of adopting SFAS No. 123 (R)
on net income for the year ended March 31, 2007 was a
reduction of $1,872, net of tax.
The following tables reflect pro forma results as if com-
pensation expense associated with all option grants
(regardless of grant date) and the stock purchase plan were
recognized over the vesting period:
Continuing Operations
Income from
continuing operations
Add: stock-based compensation
included in reported
net income, net of tax
Less: stock-based compensation
determined under fair value
based method, net of tax
Pro forma net income from
continuing operations
Earnings per share:
As reported:
Basic
Diluted
Pro forma:
Basic
Diluted
Discontinued Operations
Income from discontinued
operations, net of taxes
Add: stock-based compensation
included in reported
net income, net of tax
Less: stock-based compensation
determined under fair value
based method, net of tax
Pro forma net income from
discontinued operations
Earnings per share:
As reported:
Basic
Diluted
Pro forma:
Basic
Diluted
2006
2005
$433,707
$295,424
7,458
2,404
(10,660)
(10,313)
$430,505
$287,515
$ 3.60
3.35
$ 2.86
2.56
$ 3.57
3.32
$ 2.78
2.50
2006
2005
$ 66,421
$113,007
1,102
2,630
(5,117)
(8,717)
$ 62,406
$106,920
$ 0.55
0.51
$ 1.09
0.97
$ 0.52
0.48
$ 1.03
0.91
As discussed in Note 3, in connection with the sale of its
PC/CM businesses, Legg Mason accelerated the vesting
81
The total intrinsic value of options exercised during
the years ended March 31, 2007, 2006 and 2005 were
$55,046, $384,153 and $84,072, respectively. At March 31,
2007, the aggregate intrinsic value of options outstanding
was $346,439.
The following information summarizes Legg Mason’s
stock options outstanding at March 31, 2007:
Exercise
Price Range
$19.17–$ 25.00
25.01– 35.00
35.01– 94.00
94.01– 132.18
Weighted- Weighted-
Average
Exercise Remaining
Average
Option
Shares
Price
Outstanding Per Share
1,332 $ 20.12
30.10
1,864
43.35
1,295
1,987
104.32
6,478
Life
(in years)
1.5
2.1
3.1
6.8
At March 31, 2007, 2006 and 2005, options were exercis-
able on 4,156, 4,123, and 6,292 shares, respectively, and
the weighted average exercise prices were $33.88, $28.02
and $27.33, respectively. Stock options exercisable at
March 31, 2007 have a weighted-average remaining con-
tractual life of 2.2 years. At March 31, 2007, the
aggregate intrinsic value of options exercisable was
$140,804. The following information summarizes Legg
Mason’s stock options exercisable at March 31, 2007:
Exercise Price Range
$19.17– $ 25.00
25.01– 35.00
35.01– 94.00
94.01– 132.18
Option Weighted-Average
Shares
Exercisable
1,332
1,666
917
241
4,156
Exercise Price
Per Share
$ 20.12
30.52
39.56
111.27
of stock option and other equity-based deferred compensa-
tion awards previously granted to employees of the PC/CM
businesses. The accelerated vesting of stock options reduced
the gain on sale by $73.7 million ($61.7 million after tax)
reflecting the increase in the fair value of the awards as of
the vesting date from the original grant date. Approximately
$43.1 million of this charge related to incentive stock options
for which there is no tax benefit in the Consolidated State-
ments of Income.
Consolidated Operations
Net income, as reported
Add: stock-based compensation
included in reported
net income, net of tax
Less: stock-based compensation
determined under fair value
based method, net of tax
Pro forma net income
Earnings per share:
As reported:
Basic
Diluted
Pro forma:
Basic
Diluted
2006
$1,144,168
2005
$408,431
70,372
5,034
(77,589)
$1,136,951
(19,030)
$394,435
$ 9.50
8.80
$ 3.95
3.53
$ 9.44
8.74
$ 3.81
3.41
Stock option transactions under Legg Mason’s option
plans during the three years ended March 31, 2007 are
summarized below:
Number
of Shares(1)
Weighted-Average
Exercise Price
Per Share
Options outstanding
at March 31, 2004
Granted
Exercised
Canceled
Options outstanding
at March 31, 2005
Granted
Exercised
Canceled
Options outstanding
at March 31, 2006
Granted
Exercised
Canceled
Options outstanding
at March 31, 2007
11,836
530
(2,085)
(168)
10,113
1,075
(4,724)
(94)
6,370
1,006
(820)
(78)
$ 28.09
53.01
22.67
33.71
$ 30.42
110.14
30.70
38.15
$ 43.56
96.60
28.17
65.39
6,478
$ 53.48
(1) Adjusted to reflect stock split, where appropriate.
82
The following information summarizes unvested stock
options under Legg Mason’s equity incentive plans for the
year ended March 31, 2007:
Number
of Shares
Weighted-Average
Grant Date
Fair Value
2,247
1,006
(856)
(75)
$29.12
33.17
22.80
22.28
2,322
$33.42
Shares unvested
at March 31, 2006
Granted
Vested(1)
Canceled/forfeited
Shares unvested
at March 31, 2007
(1) Generally, vesting occurs in July of each year.
Unamortized compensation cost related to unvested
options at March 31, 2007 was $59,237 and is expected to
be recognized over a weighted-average period of 2.2 years.
Legg Mason also has an equity plan for non-employee
directors that replaced its stock option plan for non-
employee directors during fiscal 2006. Under the equity
plan, directors may elect to receive shares of stock,
options to acquire shares of stock or restricted stock units.
Options granted under either plan are immediately exer-
cisable at a price equal to the market value of the shares
on the date of grant and have a term of not more than ten
years. Shares, options, and restricted stock units issuable
under the equity plan are limited to 625 shares in aggre-
gate, of which 69 shares were issued under the plan during
fiscal 2007. At March 31, 2007, there are 447 stock options
and 7 restricted stock units outstanding under both plans.
Cash received from exercises of stock options under Legg
Mason’s equity incentive plans was $20,690, $128,728
and $64,088 for the years ended March 31, 2007, 2006
and 2005, respectively. The tax benefit expected to be
realized for the tax deductions from these option exercises
totaled $13,965, $104,807 and $18,342 for the years
ended March 31, 2007, 2006 and 2005, respectively. The
2006 and 2005 amounts include amounts attributable to
discontinued operations.
The weighted average fair value of stock options granted
in fiscal 2007, 2006 and 2005, using the Black-Scholes
option pricing model, was $33.17, $40.90 and $22.53 per
share, respectively.
The following weighted average assumptions were used in
the model for grants in fiscal 2007, 2006, and 2005.
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected lives (in years)
2007
0.79%
4.68%
2006
0.80%
4.29%
31.43% 33.86%
5.37
5.65
2005
0.79%
4.03%
40.99%
6.13
During fiscal 2006, Legg Mason determined that using a
combination of both implied and historical volatility is a
more accurate measure of expected volatility for calculat-
ing Black-Scholes option values. Effective with stock
option grants made in the quarter ended December 31,
2005, Legg Mason began estimating expected volatility
with equal weighting to both implied and historical mea-
sures. This change in accounting estimate did not have a
material impact on net income.
Legg Mason has a qualified Employee Stock Purchase
Plan covering substantially all U.S. employees. Shares
of common stock are purchased in the open market on
behalf of participating employees, subject to a 4.5 million
total share limit under the plan. Purchases are made
through payroll deductions and Legg Mason provides a
10% contribution towards purchases, which is charged to
earnings. During the fiscal year ended March 31, 2007,
2006 and 2005, approximately 43, 91 and 147 shares,
respectively, have been purchased in the open market on
behalf of participating employees.
On October 17, 2005, the Compensation Committee of
Legg Mason approved grants to senior officers of options to
acquire 300 shares of Legg Mason common stock at an
exercise price of $104.00 per share, subject to certain condi-
tions. The grants will vest ratably on July 17 of each of the
four years following the grant date. The options are exercis-
able only if, by July 17, 2009, Legg Mason common stock
has closed at or above $127.50 per share for 30 consecutive
trading days. This condition was met during fiscal 2006.
The options expire on July 17, 2013. The weighted average
fair value of $37.19 per share for these options, included in
the pro forma net income shown above, was estimated as of
the grant date using a Monte Carlo option-pricing model
with the following assumptions:
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected life (in years)
0.69%
4.37%
31.83%
6.53
83
On July 19, 2005, the independent directors of Legg Mason
approved a grant to Legg Mason’s Chairman and Chief
Executive Officer of options to acquire 500 shares of Legg
Mason common stock at an exercise price of $111.53 per
share, subject to certain conditions. The grant will vest rat-
ably over four years starting on the effective grant date,
July 19, 2005, subject to him continuing as Legg Mason’s
Chairman and Chief Executive Officer for at least two years
and continuing to provide agreed-upon ongoing services to
Legg Mason for two years thereafter. The options are exercis-
able only if, within four years after the grant date, Legg
Mason common stock has closed at or above $127.50 per
share for 30 consecutive trading days. This condition was
met during fiscal 2006. The options expire on the eighth
anniversary of the grant date. The fair value of $42.33 per
share for these options granted, included in the pro forma
net income shown above, is estimated as of the date of grant
using a Monte Carlo option-pricing model with the follow-
ing assumptions:
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected life (in years)
0.57%
4.07%
30.47%
7.25
A Monte Carlo option-pricing model was used to value
these option grants in order to properly factor the impact
of both the performance and market conditions specified
in the grant.
During fiscal 2007, 2006 and 2005, Legg Mason granted
289, 547 and 138 shares of restricted common stock, respec-
tively, at a weighted average market value of $107.08, $117.62
and $60.36, respectively, per share. The restricted stock
awards were non-cash transactions. In fiscal 2007, 2006 and
2005, Legg Mason recognized $17,039, $6,049 and $708,
respectively, in compensation expense for restricted stock
awards related to continuing operations. In fiscal 2006 and
2005, Legg Mason recognized $3,408 and $2,517, respec-
tively, in compensation expense for restricted stock awards
related to discontinued operations. The tax benefit expected
to be realized for the tax deductions from the vesting of
restricted stock totaled $5,320, $1,722 and $865 for years
ended March 31, 2007, 2006 and 2005, respectively.
Unamortized compensation cost related to unvested
restricted stock awards for 563 shares not yet recognized at
March 31, 2007 was $52,031 and is expected to be recog-
nized over a weighted-average period of 2.0 years.
Deferred compensation payable in shares of Legg Mason
common stock has been granted to certain employees in
mandatory and elective plans and programs under Legg
Mason’s equity incentive plan. The vesting in the plans and
programs ranges from immediate to periods up to six years.
The plans and programs provide for discounts of up to
10% on contributions and dividends. There is no limit on
the number of shares authorized to be issued under the
one remaining active deferred plan. All other plans were
replaced by similar programs under Legg Mason’s equity
incentive plan during fiscal 2005. In fiscal 2007, 2006 and
2005, Legg Mason recognized $247, $6,635 and $12,032,
respectively, in compensation expense, principally related
to discontinued operations, for deferred compensation
arrangements payable in shares of common stock. During
fiscal 2007, 2006 and 2005, Legg Mason issued 46, 112
and 308 shares, respectively, under deferred compensation
arrangements with a weighted-average fair value per share at
grant date of $87.26, $83.69 and $68.03, respectively.
14. DEFERRED COMPENSATION STOCK TRUST
Legg Mason has issued shares in connection with certain
deferred compensation plans that are held in rabbi trusts.
Assets of rabbi trusts are consolidated with those of the
employer, and the value of the employer’s stock held in the
rabbi trusts is classified in stockholders’ equity and accounted
for in a manner similar to treasury stock. Therefore, the
shares Legg Mason has issued to its rabbi trust and the cor-
responding liability related to the deferred compensation
plans are presented as components of stockholders’ equity as
Employee stock trust and Deferred compensation employee
stock trust, respectively. Shares held by the trust at March 31,
2007 and 2006 were 1,417 and 1,933, respectively.
15. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is calculated by dividing
net income by the weighted average number of shares out-
standing. The calculation of weighted average shares includes
common shares, shares exchangeable into common stock and
convertible preferred shares that are considered participating
securities. Diluted EPS is similar to basic EPS, but adjusts for
the effect of potential common shares.
As a result of the acquisition of CAM during the quarter
ended December 31, 2005, Legg Mason issued 13.346632
shares of non-voting convertible preferred stock, which con-
vert, upon transfer, into an aggregate of 13.3 million shares
of Legg Mason common stock. These non-voting convertible
preferred shares are considered “participating securities” and
therefore are included in the calculation of weighted average
shares outstanding.
84
The following table presents the computations of basic and diluted EPS:
Weighted average basic shares outstanding
Potential common shares:
Employee stock options
Shares related to deferred compensation
Shares issuable upon conversion of senior notes
Shares issuable upon payment of contingent consideration
Total weighted average diluted shares
Income from continuing operations
Interest expense on convertible senior notes, net of tax
Income from continuing operations
Income from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Net income
Net Income per Share:
Basic
Income from continuing operations
Income from discontinued operations
Gain on sale of discontinued operations
Diluted
Income from continuing operations
Income from discontinued operations
Gain on sale of discontinued operations
2007
141,112
Years Ended March 31,
2006
120,396
2005
103,428
2,646
87
134
407
144,386
$646,246
84
$646,330
—
572
$646,902
$ 4.58
—
—
$ 4.58
$ 4.48
—
—
$ 4.48
6,022
57
3,431
373
130,279
$ 433,707
2,334
$ 436,041
66,421
644,040
$1,146,502
$ 3.60
0.55
5.35
$ 9.50
$ 3.35
0.51
4.94
$ 8.80
6,192
918
6,536
—
117,074
$295,424
4,620
$300,044
113,007
—
$413,051
$ 2.86
1.09
—
$ 3.95
$ 2.56
0.97
—
$ 3.53
At March 31, 2007, 2006 and 2005, options to purchase
1,086, 741 and 1 shares, respectively, were not included in
the computation of diluted earnings per share because the
presumed proceeds from exercising such options, includ-
ing related income tax benefits, exceed the average price of
the common shares for the period and therefore the
options are deemed antidilutive.
Basic and diluted earnings per share for the fiscal years
ended March 31, 2007, 2006 and 2005 include all vested
shares of phantom stock related to Legg Mason’s deferred
compensation plans. Diluted earnings per share for the
same periods also include unvested shares of phantom
stock related to those plans unless the shares are deemed
antidilutive. At March 31, 2007, 2006 and 2005, 526,
429 and 464 unvested shares of phantom stock, respec-
tively, were deemed antidilutive and therefore excluded
from the computation of diluted earnings per share.
All share and per share information have been retroac-
tively restated, where appropriate, to reflect the September
2004 three-for-two stock split.
16. ACCUMULATED OTHER
COMPREHENSIVE INCOME
Accumulated other comprehensive income includes
cumulative foreign currency translation adjustments, net
of tax gain on interest rate swap, and net of tax gains and
losses on investment securities. The change in the accu-
mulated translation adjustments for fiscal 2007 and 2006
primarily resulted from the impact of changes in the
British pound and the Brazilian real in relation to the U.S.
dollar on the net assets of Legg Mason’s United Kingdom
and Brazilian subsidiaries, for which the pound and the
real are the functional currencies, respectively. A sum-
mary of Legg Mason’s accumulated other comprehensive
income as of March 31, 2007 and 2006 is as follows:
85
Foreign currency
translation adjustments
Unrealized holding gain on
interest rate swap, net of tax
provision of ($414) and
($938), respectively
Unrealized gains (losses) on
investment securities, net of tax
(provision) benefit of ($38)
and $10, respectively
Total
2007
2006
$37,245
$13,651
585
1,323
65
$37,895
(30)
$14,944
17. SPECIAL PURPOSE AND VARIABLE
INTEREST ENTITIES
In the normal course of its business, Legg Mason is the
manager of various types of investment vehicles that are
considered VIEs. For its services, Legg Mason is entitled
to receive management fees and may be eligible, under
certain circumstances, to receive additional subordinate
management fees or other incentive fees. Legg Mason
did not sell or transfer assets to any of the VIEs. Legg
Mason’s exposure to risk in these entities is generally limited
to any equity investment it has made or is required to
make and any earned but uncollected management fees.
Uncollected management fees from these VIEs were not
material at March 31, 2007 and 2006. Legg Mason has
not issued any investment performance guarantees to
these VIEs or their investors. As of March 31, 2007
and 2006, Legg Mason was not required to consolidate
any VIEs that are material to its consolidated financial
statements. In addition, as of March 31, 2007 and 2006,
there were no VIEs in which Legg Mason had a significant
variable interest.
18. BUSINESS SEGMENT INFORMATION
Legg Mason is a global asset management company that
provides investment management and related services
to a wide array of clients. Legg Mason operates in three
divisions (operating segments): Managed Investments,
Institutional and Wealth Management. The economic
characteristics, products and services offered, production
process, distribution methods, and regulatory aspects of
each division are similar and, accordingly, Legg Mason
aggregates the three divisions into one reportable business
segment, Asset Management.
Continuing Operations
Asset Management provides investment advisory services
to institutional and individual clients and to company-
sponsored investment funds. The primary sources of
revenue in Asset Management are investment advisory,
distribution and administrative fees, which typically are
calculated as a percentage of the AUM and vary based
upon factors such as the type of underlying investment
product and the type of services that are provided. In
addition, performance fees may be earned on certain
investment advisory contracts for exceeding performance
benchmarks. Distribution fees on company-sponsored
investment funds are included in Asset Management,
along with a corresponding expense representing fees paid
to unaffiliated distributors of those funds, including par-
ties that were related parties prior to the sale.
Legg Mason principally operates in the United States and
the United Kingdom. Revenues and expenses for geo-
graphical purposes are generally allocated based on the
location of the office providing the services.
Results by geographic region are as follows:
2007
2006
2005
OPERATING
REVENUES
United States
United Kingdom
Other
Total
$3,272,938 $2,206,644 $1,444,688
103,354
22,658
$4,343,675 $2,645,212 $1,570,700
829,368
241,369
356,783
81,785
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
PROVISION AND MINORITY INTERESTS
United States
United Kingdom
Other
243,477
24,478
$ 775,899 $ 604,313 $ 441,358
33,362
(3,962)
$1,043,854 $ 715,462 $ 470,758
106,104
5,045
Total
Intangible assets, net and goodwill by geographic region are
as follows:
2007
2006
2005
INTANGIBLE
ASSETS, NET
AND GOODWILL
United States
United Kingdom 1,243,053
201,580
Other
$5,413,616 $5,364,786 $1,357,111
71,735
17,877
$6,858,249 $6,797,115 $1,446,723
1,232,697
199,632
Total
86
Private Client distributed a wide range of financial prod-
ucts through its branch distribution network, including
equity and fixed income securities, proprietary and non-
affiliated mutual funds and annuities. The primary
sources of net revenues for Private Client were commis-
sions and principal credits earned on equity and fixed
income transactions in customer brokerage accounts,
distribution fees earned from mutual funds, fee-based
account fees and net interest from customers’ margin loan
and credit account balances. Sales credits associated with
underwritten offerings initiated in the Capital Markets
segment were reported in Private Client when sold
through its branch distribution network.
Capital Markets consisted of Legg Mason’s equity and
fixed income institutional sales and trading and corporate
and public finance. The primary sources of revenue for
equity and fixed income institutional sales and trading
included commissions and principal credits on transac-
tions in both corporate and municipal products. Legg
Mason maintained proprietary fixed income and equity
securities inventory primarily to facilitate customer trans-
actions and as a result recognized trading profits and
losses from Legg Mason’s trading activities. Corporate
finance revenues included underwriting fees and advisory
fees from private placements and mergers and acquisi-
tions. Sales credits associated with underwritten offerings
were reported in Capital Markets when sold through
institutional distribution channels. The results of this
business segment also included realized and unrealized
gains and losses on investments acquired in connection
with merchant and investment banking activities.
Discontinued Operations
Financial results of discontinued operations’ business seg-
ments were as follows:
NET REVENUES
Private Client
Capital Markets
Reclassification(1)
Total
2006
2005
$ 502,400
168,751
671,151
(125,436)
$ 545,715
$ 727,888
306,653
1,034,541
(178,175)
$ 856,366
INCOME BEFORE
INCOME TAX PROVISION
Private Client
Capital Markets
Total
$ 100,289
9,115
$ 109,404
$ 132,785
55,164
$ 187,949
(1) Represents distribution fees from proprietary mutual funds, historically reported
in Private Client, that have been reclassified to Asset Management as distribution
fee revenue, with a corresponding distribution expense, to reflect Legg Mason’s
continuing role as funds’ distributor.
For the fiscal year ended March 31, 2006, the net reve-
nues and net income of Legg Mason’s Private Client and
Capital Markets businesses reflect activity only for the
eight months Legg Mason owned the businesses.
Results of discontinued operations by geographic region
are as follows:
NET REVENUES
United States
United Kingdom
Other
Total
INCOME BEFORE
INCOME TAX PROVISION
United States
United Kingdom
Other
Total
2006
2005
$530,257
5,952
9,506
$545,715
$833,950
5,449
16,967
$856,366
$107,726
362
1,316
$109,404
$186,462
437
1,050
$187,949
87
quARTERLy FINANCIAL DATA(1)
(Dollars in thousands, except per share amounts)
(Unaudited)
Fiscal 2007
Operating Revenues
Operating Expenses
Operating Income
Other Income (Expense)
Income from Continuing Operations before
Income Tax Provision and Minority Interests
Income tax provision
Income from Continuing Operations before Minority Interests
Minority interests, net of tax
Income from Continuing Operations
Gain on sale of discontinued operations, net of tax
Net Income
Net Income per Share:
Basic:
Quarter Ended
Dec. 31
Mar. 31
Sept. 30
Jun. 30
$1,141,797 $1,132,973 $1,030,685 $1,038,220
780,786
257,434
(4,451)
795,669
235,016
3,726
869,343
272,454
1,841
869,579
263,394
14,440
274,295
102,046
172,249
225
172,474
—
252,983
96,895
156,088
(53)
156,035
—
$ 172,474 $ 174,633 $ 143,676 $ 156,035
277,834
103,652
174,182
(121)
174,061
572
238,742
95,019
143,723
(47)
143,676
—
Income from continuing operations
$ 1.22 $ 1.23 $ 1.02 $ 1.11
Diluted:
Income from continuing operations
Cash dividend per share
Stock price range:
High
Low
As of May 21, 2007, the closing price of Legg Mason’s common stock was $100.05.
Fiscal 2006
Operating Revenues
Operating Expenses
Operating Income
Other Income (Expense)
Income from Continuing Operations before
Income Tax Provision and Minority Interests
Income tax provision
Income from Continuing Operations before Minority Interests
Minority interests, net of tax
Income from Continuing Operations
Income (loss) from discontinued operations, net of taxes
Gain on sale of discontinued operations, net of tax
Net Income
Net Income per Share:
Basic:
1.19
0.21
1.21
0.21
1.00
0.21
1.08
0.18
110.17
93.16
105.88
84.40
102.73
81.05
127.47
92.07
Quarter Ended
Mar. 31
$1,052,149
805,467
246,682
10,307
Dec. 31
$688,989
534,756
154,233
14,422
256,989
102,171
154,818
(3,171)
151,647
(2,191)
598
$ 150,054
168,655
64,881
103,774
(2,989)
100,785
16,076
643,442
$760,303
Sept. 30
$466,388
327,819
138,569
9,138
147,707
55,572
92,135
—
92,135
28,901
—
$121,036
Jun. 30
$437,686
297,439
140,247
1,864
142,111
52,971
89,140
—
89,140
23,635
—
$112,775
Income from continuing operations
Income (loss) from discontinued operations
Gain on sale of discontinued operations
$ 1.09
(0.02)
.01
$ 0.83
0.13
5.27
$ 0.82
0.26
—
$ 0.82
0.22
—
Diluted:
Income from continuing operations
Income (loss) from discontinued operations
Gain on sale of discontinued operations
Cash dividend per share
Stock price range:
High
Low
1.04
(0.01)
—
0.18
0.77
0.12
4.91
0.18
0.75
0.24
—
0.18
0.74
0.19
—
0.15
139.00
116.60
126.33
100.00
118.02
99.75
108.14
69.82
(1) Due to rounding of quarterly results, total amounts for each fiscal year may differ immaterially from the annual results.
88
This page inTenTionally lefT bl ank
89
ExECuTIVE oFFICERS
Raymond A. Mason
Chairman, President and
Chief Executive Officer
Peter L. Bain
Senior Executive Vice President
Mark R. Fetting
Senior Executive Vice President
CoRpoRATE DATA
Executive Offices
100 Light Street
Baltimore, Maryland 21202
(410) 539-0000
www.leggmason.com
SEC Certifications
The certifications by the Chief Executive
Officer and the Chief Financial Officer
of Legg Mason, Inc., required under
Section 302 of the Sarbanes-Oxley Act
of 2002, have been filed as exhibits to
Legg Mason’s Annual Report on Form
10-K for fiscal 2007.
NYSE Certification
In 2006, the Chief Executive Officer of
Legg Mason, Inc. submitted an unquali-
fied annual certification to the NYSE
regarding the Company’s compliance
with the NYSE corporate governance
listing standards.
Timothy C. Scheve
Senior Executive Vice President
F. Barry Bilson
Senior Vice President
Deepak Chowdhury
Senior Vice President
Charles J. Daley, Jr.
Senior Vice President,
Chief Financial Officer
and Treasurer
Elisabeth N. Spector
Senior Vice President
Form 10-K
Legg Mason’s Annual Report on Form
10-K for fiscal 2007, filed with the
Securities and Exchange Commission
and containing audited financial
statements, is available upon request
without charge by writing to the
Executive Offices of the Company.
Copies can also be obtained by accessing
our website at www.leggmason.com
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
100 E. Pratt Street
Baltimore, Maryland 21202
(410) 783-7600
www.pwc.com
Transfer Agent
American Stock Transfer &
Trust Company
59 Maiden Lane
New York, New York 10038
(866) 668-6550
www.amstock.com
Common Stock
Shares of Legg Mason, Inc. common
stock are listed and traded on the
New York Stock Exchange (symbol: LM).
As of March 31, 2007, there were 1,911
shareholders of record of the Company’s
common stock.
ToTAL RETuRN pERFoRMANCE
The graph below compares the cumulative total stockholder return on Legg Mason’s common stock for the last five fiscal years
with the cumulative total return of the S&P 500 Stock Index and the SNL Asset Manager Index over the same period (assuming
the investment of $100 in each on March 31, 2001). The SNL Asset Manager Index consists of 23 asset management firms.
The graph also shows the stockholder return over the period of the SNL Securities and Investments Index. Legg Mason believes
that the SNL Securities and Investments Index, which consists of 86 broker dealer and asset management firms, is no longer an
appropriate index to compare to its common stock performance because Legg Mason is now solely an asset management firm and
has sold its broker dealer business.
Legg Mason, Inc.
S&p 500 Stock Index
SNL Securities & Investments Index
SNL Asset Manager Index
e
u
l
a
V
x
e
d
n
I
400
350
300
250
200
150
100
50
03/31/02
03/31/03
03/31/04
03/31/05
03/31/06
03/31/07
p E R I o D E N D I N g
Index
03/31/02 03/31/03 03/31/04 03/31/05 03/31/06 03/31/07
Legg Mason, Inc.
100.00
92.64
177.65 226.33 365.31 276.86
S&p 500 Stock Index
100.00
75.24
101.66 108.46 121.18 135.52
SNL Securities & Investments Index
100.00
69.85
112.44 117.59 169.11 194.58
SNL Asset Manager Index
100.00
69.40
110.25 128.71 181.22 203.19
Source: SNL Financial LC, Charlottesville, VA
Source: S&P 500 Stock Index return rates obtained from www.standardandpoors.com
9090
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100 Light Street
Baltimore, MD 21202
www.leggmason.com