2010 AnnuAl report
Legg M aso n is a di v er si fied, gLo ba L gr o u p o f Le a din g asse t M a n ageM en t a f fi Liat es w h o a r e r eco gnized fo r
t h ei r in v est M en t e x per tise a n d Lo n g -t er M per f o r M a n ce. Legg M aso n a f fi Liat es o per at e w it h in v est M en t
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its ow n in v est M en t cu Lt u r e. Legg M aso n co M p LeM en ts t h e in v est M en t e x per t ise o f its a f fi Liat es by p r ov idin g
r e tai L dist r i b u ti o n a n d by in v estin g in a n d w it h a f fi Liat es, en a b Lin g t h eM to acc ess n e w M a r k e ts, n e w
c Lien ts a n d n e w o p p o r t u nities M o r e ef fi cien t Ly o n a gLo ba L sca Le.
FIN A NC I A L HIGHL IGH T S
(dollars in thousands, except per share amounts)
Years Ended March 31,
2006(1)
2007
2008
2009
2010
Operating Results
Operating revenues
Operating income (loss)
Income (loss) from continuing operations before
income tax provision (benefit) and noncontrolling interests
Net income (loss) attributable to Legg Mason, Inc.(2)
Per Common Share
Diluted income(2)
Income (loss) from continuing operations per diluted share
Cash income (loss) from continuing operations,
as adjusted, per diluted share(3)
Dividends declared
Book Value
Financial Condition
Total assets
Total stockholders’ equity
$2,645,212
679,730
$4,343,675 $ 4,634,086
1,050,176
1,028,298
$3,357,367
(669,180)
$2,634,879
321,183
715,462
1,144,168
1,043,854
646,818
437,327
263,565
(3,188,197)
(1,967,918)
329,656
204,357
$ 8.80
3.35
$ 4.48 $ 1.83
1.83
4.48
$ (13.99)
(13.99)
$ 1.32
1.32
4.10
0.69
41.67
5.86
0.81
45.99
6.11
0.96
48.15
(8.47)
0.96
31.87
2.45
0.12
35.94
$9,302,490
5,850,116
$9,604,488 $11,830,352
6,784,641
6,541,490
$9,232,299
4,598,625
$8,613,711
5,841,724
(1) Reflects results of Citigroup Asset Management business and Permal since acquisition in fiscal 2006 and 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. Fiscal 2008 includes impairment charges related to intangible assets, net of income
tax benefits, of $94,813 or $0.66 per share. Fiscal 2009 includes losses related to the elimination of exposure to Structured Investment Vehicles, net of income tax benefits and
compensation related adjustments, of $1,376,579 or $9.79 per share and impairment charges related to goodwill and intangible assets, net of income tax benefits, of $863,352
or $6.14 per share.
(3) Cash income (loss) from continuing operations, as adjusted, 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.
Dear Fellow Shareholder,
Mark R. Fetting, Chairman and Chief Executive Officer
When I wrote to you last year, I discussed our strategic plan
As of March 31, 2010, Legg Mason’s assets under management
to move the company forward and position it for renewed
were $684.5 billion, an increase of 8% from $632.4 billion as
growth and profitability following one of the most difficult
of March 31, 2009. For the fiscal year ended March 31, 2010, we
economic periods in modern financial history. While the
recorded revenues of $2.6 billion compared to $3.4 billion in
impact of the global market decline will undoubtedly be felt
fiscal 2009. Net income for the same period was $204.4 million,
for many years to come, conditions in the financial markets
or $1.32 per diluted share, compared to a net loss of $2.0 billion,
have improved since March 2009. At Legg Mason, our
or $13.99 per diluted share for the prior year, which included
affiliates have always approached investing from a long-term
money market fund support and goodwill and intangible asset
perspective. We remain highly energized by the positive
impairment charges. Our cash income, as adjusted,1 was
economic fundamentals and confident in the market
$381.3 million, or $2.45 per diluted share for fiscal year 2010,
opportunities that exist for active long-term managers like
compared to a cash loss, as adjusted,1 of $1.2 billion, or $8.47 per
us. The economy remains fragile and unemployment is high
diluted share for the prior year. Legg Mason’s stock price increased
relative to historic norms. Investors are cautious around
by 80.3% versus a 79.5% increase in the SNL Asset Manager
improvements in earnings and positive economic data and
Index for the fiscal year ended March 31, 2010 and by 91.6%
vulnerable to downward market momentum following
versus 50.0%, respectively, from March 31, 2009 to June 8, 2010.
negative news, with increased volatility further challenging
the strength and sustainability of any recovery. Nonetheless,
we believe strongly in the fundamentals of our business and
are confident that the opportunities for investing in the next
decade will greatly exceed those of the past decade.
IMpROvING OuR COMpETITIvE pOSITIONING
Between October 2008 and June 2009, amidst the cyclical
global market downturn, we completed a series of significant
cost cutting initiatives. As we continued to evaluate the
overall capabilities and effectiveness of our business model,
For the fiscal year ended March 31, 2010, Legg Mason delivered
we recognized that additional actions were needed to meet
against each of the five key strategic priorities we highlighted
the realities of our business and address the persistent
last year. We achieved four quarters of strong cash income,
challenge of depressed operating margins. We worked
experienced improved performance at key managers,
closely with our affiliates to find the most effective
delivered growth through distribution and product
solution to grow our franchise and achieve a meaningful
innovation, and restored strength to our balance sheet, most
improvement in margins while protecting the investment
recently announcing Board approval for a $1 billion share
independence of our managers and proven multi-affiliate
buyback and strong dividend increase. And importantly, in
structure. The result of this comprehensive review is a
partnership with our affiliates, we took deliberate actions to
recently announced streamlined business model that will
streamline our business model which will result in a direct
significantly reduce our cost structure and drive considerable
increase in operating efficiency and overall profitability.
margin improvement and profitability.
1 Cash income and cash loss, as adjusted, 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.
LEGG MASON 2010 ANNuAL R EpORT 1
STREAMLINEd BuSINESS MOdEL
Affiliates
Investing
Strategic
Services
Client &
Shareholder
Value
Retail Distribution
Capital Allocation
Business Development
Legg Mason’s streamlined business model is built upon our
investment affiliates delivering customized solutions to investors.
Our affiliates then leverage strategic corporate services including
retail distribution and capital allocation and investing to better serve
their clients and, ultimately, deliver value to our shareholders.
The key elements of our streamlined model are as follows:
• Certain shared services, particularly in areas that support
our investment operations, that were previously handled
at the corporate level, will transition to our investment
affiliates where they will be closer to the client relationship
and can be delivered with greater effectiveness;
• Strategic services, such as retail distribution, enterprise
risk management, capital allocation, and investing in and
with investment affiliates, will remain at the corporate level,
and our shareholders will realize greater benefit from Legg
Mason-sourced domestic retail assets; and,
We expect that these initiatives will result in cost savings of
approximately $130 to $150 million on a run rate basis by
the fourth quarter of fiscal year 2012 and we anticipate that
the net result of these actions should be an improvement
in adjusted operating margins on a pro forma basis of 6%
to 8%. Our actions will have no impact on our managers’
investment processes or our multi-affiliate structure and we
are confident that the resulting increase in capital available
for deployment will create more opportunities to enhance
value for Legg Mason shareholders over the long term, a
win-win for our clients, shareholders, and affiliates.
OuR AFFILIATES AT WORk
Investment performance at our managers improved during
the fiscal year. The percentage of our long-term mutual fund
assets outperforming their Lipper category average increased
from 43% to 62% for the one year, 52% to 68% for the three
years, 47% to 70% for the five years, and 75% to 80% for the ten
years ended March 31, 2010 as compared to March 31, 2009.
Our affiliate businesses have stabilized and are growing or
poised for growth in the coming quarters. Legg Mason Capital
Management, Western Asset, and Brandywine experienced
meaningful improvement in investment performance this
fiscal year and Permal, Royce & Associates, and ClearBridge
Advisors experienced continued strong long-term
performance. Importantly, our affiliates continue to bring
innovative products to market to meet the growing needs of
our clients. Western Asset announced a strategic partnership
for an actively-managed exchange traded fund in May 2010.
Since April 2009, in addition to its first U.S. mutual fund,
• Fiscal year 2011 growth initiatives will include a greater
the Legg Mason Permal Tactical Allocation Fund, Permal
focus on distribution and international growth, the pursuit
launched three funds with a focus on global absolute returns,
of additional lift-out and bolt-on transactions, and the
secondary market hedge fund opportunities, and China. And
expansion of capital available to seed products.
in February 2010, we launched the Legg Mason Strategic Real
In November 2009, we launched the Western Asset Global
Corporate defined Opportunity Fund (NYSE: GdO), a new
closed-end fund that raised $302.0 million. Since the beginning
of calendar year 2009, Legg Mason has launched four closed-
end fund offerings, raising nearly $1 billion.
2 LEGG MASON 2010 ANNuAL R EpORT
Royce & Associates focuses primarily on domestic and
international small-cap value portfolios by paying close attention
to risk and striving to maintain consistency and discipline,
regardless of market movements and trends. Members of
the company’s investment team include Chuck Royce (far right),
(left to right) Whitney George, Buzz Zaino and Charlie dreifus.
Return Fund, an inflation-aware tactical asset allocation fund
list of “Category Kings” based on one-year total returns
that targets the retirement sector.
ending March 31, 2010; and,
Among the individual accolades received and achievements
• Western Asset’s Global Inflation-Linked composite won the
by our firm during the year are the following:
2010 Investment Performance Award from AsianInvestor
• In the annual Barron’s ranking of best mutual fund
families, Legg Mason ranked #6 out of 61 for the one year,
#46 out of 54 for the five years, and #13 out of 48 for the
ten years ending December 31, 2009;
magazine in the Global Fixed Income, Inflation-Linked
category for institutional funds management,2 and the
Department of the Treasury selected the firm as one of the
managers of the Public-Private Investment Partnership via a
newly created joint venture between Western Asset and The
• Six Western Asset funds, two Royce & Associates funds and
RLJ Companies in July 2009.
one Legg Mason Investment Counsel fund received 2010
Lipper Awards based on consistently strong risk-adjusted
performance relative to their peers;
• ClearBridge Advisors was selected by Pax World and
Morningstar to serve as a subadvisor in their new
ESG (Environmental, Social, and Governance) asset
allocation offering in four strategies: Aggressive Growth,
Growth, Moderate, and Conservative;
LEvERAGING OuR dISTRIBuTION FOOTpRINT
We know that in order to stay competitive, we will need to
focus on opportunities to deliver top line growth. Our retail
distribution platform is organized into two distinct teams:
Americas and International. On the Americas side, we are
beginning to see important results from our refocused
strategy that places greater emphasis on certain channels,
product innovation, and cross-selling opportunities, all in a
• Four Legg Mason Capital Management funds and one
more streamlined organization. In the last quarter of fiscal
Royce & Associates fund ranked in The Wall Street Journal’s
year 2010, Americas Distribution realized their first quarter
Legg Mason Japan, headed by Hirohisa Tajima, received the
Best Group award in the Mixed Assets Category over three years
at the Japan Lipper Fund Awards 2010. The Lipper group awards
recognize investment fund groups with the highest average scores
for all funds within a particular category.
2 AsianInvestor is owned by Haymarket Publishing, which is not affiliated with Legg Mason.
LEGG MASON 2010 ANNuAL R EpORT 3
Our largest equity manager, ClearBridge Advisors, pursues its
goal of delivering consistently superior investment performance
through a combination of research-driven, fundamental investing
and the insights of veteran portfolio managers. Evan Bauman
and Richie Freeman (left to right) manage several of ClearBridge
Advisors’ growth portfolios, including the Legg Mason
ClearBridge Aggressive Growth Fund which has been in existence
since 1983.
in three years of net inflows. We raised nearly $1 billion in
the December 2009 quarter. In January 2010, we lowered our
four Western Asset closed-end funds since the beginning
debt further by paying down a $550 million term loan with a
of calendar year 2009 and over $700 million in Brandywine
tax refund and cash on hand.
large-cap value subadvised accounts. And in fiscal year
2010, we established over 13,000 new relationships with
financial advisors and continued to gain product placement
on distribution platforms.
In our International business, we continue to build
momentum across our key markets and product areas,
growing assets by 45% or $12.5 billion this fiscal year. Our
International Distribution group has posted five consecutive
quarters of net long-term inflows through March of 2010, and
we believe that a tremendous opportunity exists to leverage
our established global footprint and client base.
With meaningful sales improvements in both Americas and
International, we feel that we are well positioned and focusing
on the right products in the right channels. We remain hard at
work and, importantly, believe that the infrastructure we have
in place is capable of supporting substantially greater
distribution volume. As of March 31, 2010, $238.4 billion or
35% of our assets under management were from clients
domiciled outside of the United States and we believe that
percentage will continue to grow.
STRENGTHENING OuR BALANCE SHEET
From a capital perspective, we made significant strides in
restoring our balance sheet after weathering the credit crisis
in 2008, first, by completing an exchange offer for equity
units in August 2009, effectively converting approximately
$1 billion of debt to shareholder equity and reducing
related interest expense. As a result of this transaction,
And most recently, with over $1 billion of excess cash on our
balance sheet and sustained cash generation, our Board
authorized the repurchase of up to $1 billion of common
stock, which we believe is a very compelling use of our capital
given our expectations for the future of Legg Mason. An
initial $300 million will be repurchased by September of
WINNER
FIXeD IncoMe
& creDIt
FunD oF HeDge FunDs
MultI strAtegy over $1Bn
A permal diversified multi-manager fixed income fund won both
the Fixed Income & Credit Award from InvestHedge at their 2010
Fund of Hedge Funds Awards in New York and the HFM Week
“Fund of Hedge Funds Multi Strategy Over $1 Billion” award at
their 2010 European performance Awards in London. Funds
we dramatically improved our interest coverage ratios and
managed by the permal Group were also shortlisted in seven
realized GAAP and cash earnings accretion beginning in
InvestHedge award categories.
4 LEGG MASON 2010 ANNuAL R EpORT
Legg Mason’s 2010 Singapore Investment Forum, attended
by more than 500 clients in the Asia region, included a panel
discussion showcasing some of our diverse managers:
(left to right) Bo kratz from permal, Julia Ho from Western
Asset, patrick Tan from Congruix Investment Management,
and Bill Miller from Legg Mason Capital Management.
2010 and we expect subsequent shares to be repurchased
goal of sustained investment excellence, execute on our
as appropriate. We will continue to take a conservative
streamlined business model to achieve meaningful margin
approach to capital management, with a strategic desire
enhancement, and continue to invest in our affiliates
to maintain flexibility to invest in other areas of our business
through the addition of new product capabilities, our
as the need arises.
LOOkING AHEAd
distribution platform, and our people for future growth.
Our philosophy remains that our clients’ interests come
first and that by focusing on our clients, our shareholders
A key element of our efficient, streamlined business model
will be rewarded.
will be a greater availability of capital to invest in growing
our affiliates and driving shareholder value. In the near
term, we will accomplish this through investments in
bolt-on or lift-out transactions, such as Legg Mason’s bolt-on
acquisition of Wyper Capital Management in March 2010
that brings global all-cap investment expertise to Royce
& Associates. Furthermore, during the past twelve months
alone, Legg Mason provided approximately $150 million
AppRECIATION ANd CLOSING
Before closing, I want to acknowledge with sincere gratitude
the commitment and contributions of Roger Schipke, who
will be retiring from our Board of Directors later this year
after twenty years of dedicated service. Roger has been an
invaluable member of our Board and we wish him continued
future success.
of seed capital to our managers, and we have made
We remain encouraged by the improving economic
meaningful additions to investment teams at several other
fundamentals and are confident that even with the ongoing
affiliates and anticipate these types of additive transactions
market volatility, the future is promising. Legg Mason is
to continue under our streamlined business model.
making strong progress in delivering results to our clients
Our rate of outflows declined substantially from last fiscal
year, but we know that we must do better. We are encouraged
by the results of fiscal 2010 and our improved performance.
Given the lag that often exists between improved
performance and a pickup in flows, we recognize that we
must now work on maintaining our investment results.
We believe in our investment-centric, multi-manager
structure. We believe that it is an attractive model that
provides the right environment for our managers to deliver
world-class, long-term investment results and that
combined with the above-described actions, Legg Mason
will emerge stronger and more competitive. Our priorities
in fiscal year 2011 are clear: deliver on our fundamental
and our shareholders, but we are not resting here—we know
that there is more work to be done as we continue to evolve
and adapt our business for long-term success.
Mark R. Fetting
Chairman and Chief Executive Officer
June 10, 2010
LEGG MASON 2010 ANNuAL R EpORT 5
SAN FRANCISCO
PASADENA
MONTREAL
TORONTO
kITCHENER
PHILADELPHIA
BOSTON
STAMFORD
NEw YORk
CINCINNATI
BALTIMORE
wILMINGTON
EASTON
NAPLES
MIAMI
NASSAu
LONDON
PARIS
FRANkF uRT
LuxEMBOuRG
MILAN
MADRID
On the ground worldwide
Our managed assets now include $238.4 billion from clients domiciled outside the united States. We have a presence
on the ground around the world, including nearly 520 investment professionals, 110 of whom are located outside the
united States. Our affiliates offer a full spectrum of asset classes and investment mandates to a broad range of clients
in diverse geographies and in multiple currencies.
SãO PAuLO
SANTIAGO
Western Asset is one of the world’s largest managers of fixed income investments, offering a broad range of fixed income
services representing a global array of currencies, investment strategies and markets. Western Asset has an integrated global
investment platform and offers over 100 products, managed globally, in 17 currencies. At year end, clients domiciled outside
the United States represented over 30% of Western Asset’s total assets under management.
Permal is one of the oldest and largest fund-of-hedge-fund managers in the world, with over 30 years of experience in the
hedge fund industry. In addition to providing investment opportunities in directional and absolute return strategies, the
firm offers multiple investment programs covering a variety of geographic regions, investment strategies and risk/return
objectives to a client base that extends to more than 50 countries.
ClearBridge Advisors offers a range of investment styles, from small-cap value to large-cap growth, all utilizing a bottom-up,
fundamental approach to security selection that is primarily research driven with a focus on companies with solid economic
returns relative to their risk-adjusted valuations. The firm’s portfolio managers have strong track records, with an average of
23 years of industry experience.
For more than 30 years, Royce & Associates has concentrated on investing in smaller companies. Royce’s investment team
uses a bottom-up, value-oriented approach, seeking companies with strong balance sheets, above-average returns on
capital and trading at substantial discounts to their intrinsic value. The firm is particularly well-known for its family of
mutual funds, The Royce Funds.
Founded in 1986, Brandywine Global has pursued a singular investment approach—value investing. Brandywine Global
works consistently to strengthen its fundamental and quantitative research capabilities and broaden their application to
new securities and new markets. The firm offers an array of fixed income, equity and balanced portfolios that invest in U.S.,
international and global markets.
6 LEGG MASON 2010 ANNuAL R EpORT
wARSAw
TOkYO
DuBAI
TAIPEI
HONG kONG
SINGAPORE
SYDNEY
MELBOuRNE
Founded in 1969, Batterymarch pioneered the use of equity strategies that use quantitative tools to apply traditional
fundamental investment principles. The firm was one of the first U.S. institutional managers to invest in international and
emerging markets. Today, Batterymarch uses proprietary strategies grounded in time-tested fundamental analysis to invest
in approximately 50 countries on behalf of clients around the globe. Each of Batterymarch’s products is defined by rigorous
bottom-up stock selection, integrated risk control and cost-efficient trading.
Established in 1982, Legg Mason Capital Management specializes in fundamental, valuation-based investment management
for its clients around the world. The firm’s investment team of more than 45 professionals offers a range of strategies by
capitalization (small, mid, large, all) and style (value, growth, total return) and is recognized for its distinct culture and
process, which applies lessons learned from the study of complex systems and behavioral finance.
A collection of speciality firms, the Legg Mason Global Equities Group includes Esemplia Emerging Markets, Congruix
Investment Management and managers largely dedicated to local equities based in Australia, Hong Kong and Poland.
Legg Mason Investment Counsel provides investment management, trust and advisory services for affluent individuals,
families, trusts, foundations, endowments and institutions. Portfolio managers and trust officers work directly with clients
to tailor highly customized solutions that build, preserve and transfer wealth. The firm is also nationally recognized for its
expertise in socially responsive investing.
Headquartered in Naples, Florida, Private Capital Management was founded in 1986. The firm is focused on a single
investment discipline—U.S. Value Equity. Private Capital Management pursues an absolute return-oriented investment
philosophy by utilizing a bottom-up, all-cap, value-oriented investment approach.
Global Currents is an investment boutique serving institutional clients, subadvisory relationships and high net worth
individuals. The firm’s global equity investment team focuses on classic value investing and the firm also offers an
international value equity strategy and socially responsible portfolios.
LEGG MASON 2010 ANNuAL R EpORT 7
BOARD OF DIRECTORS
(LEFT TO RIGHT )
Roger w. Schipke
private investor
kurt L. Schmoke
dean, school of Law at howard university;
former Mayor of baltimore
Harold L. Adams
chairman emeritus, rtkL associates, inc.
(chairman of compensation committee)
Nicholas J. St. George
private investor
Nelson Peltz
chief executive officer and founding partner,
trian fund Management, L.p.
John E. koerner III
Managing Member, koerner capital, LLc
Mark R. Fetting
chairman and chief executive officer, Legg Mason, inc.
Barry Huff
retired vice chairman, deloitte
(chairman of risk committee)
Margaret Milner Richardson
private consultant and investor;
former u.s. commissioner of internal revenue
Dennis R. Beresford
professor, university of georgia;
former chairman of financial accounting standards board
(chairman of audit committee)
John T. Cahill
industrial partner, ripplewood holdings, LLc
Scott C. Nuttall
Member, kohlberg kravis roberts & co.
Cheryl Gordon krongard
private investor;
former ceo, rothschild asset Management
w. Allen Reed
private investor; retired ceo, gM asset Management
corporation (Lead independent director and chairman
of nominating & corporate governance committee)
not pictured: robert e. angelica, private investor; former chairman and ceo, at&t investment Management corporation
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts or unless otherwise noted)
OPERATING RESULTS
Operating revenues
Operating expenses, excluding impairment
Impairment of goodwill and intangible assets
Operating income (loss)
Other non-operating income (expense)
Fund support
Income (loss) from continuing operations before
income tax provision (benefit)
Income tax provision (benefit)
Income (loss) from continuing operations
Income from discontinued operations, net of tax(2)
Gain on sale of discontinued operations, net of tax(2)
Net income (loss)
Less: Net income (loss) attributable
to noncontrolling interests
Net income (loss) attributable to Legg Mason, Inc.
Net income (loss) from continuing operations
Years Ended March 31,
2008
2009
2007
2006(1)
2010
$2,634,879
2,313,696
—
321,183
(14,698)
23,171
$ 3,357,367
2,718,577
1,307,970
(669,180)
(235,781)
(2,283,236)
$ 4,634,086
3,432,910
151,000
1,050,176
(5,573)
(607,276)
$4,343,675
3,315,377
—
1,028,298
15,556
—
329,656
118,676
210,980
—
—
210,980
(3,188,197)
(1,223,203)
(1,964,994)
—
—
(1,964,994)
437,327
173,496
263,831
—
—
263,831
1,043,854
397,612
646,242
—
572
646,814
6,623
$ 204,357
2,924
$(1,967,918)
266
263,565
$
(4)
$ 646,818
6,160
$1,144,168
$2,645,212
1,965,482
—
679,730
35,732
—
715,462
275,595
439,867
66,421
644,040
1,150,328
attributable to Legg Mason, Inc.
$ 204,357
$(1,967,918)
$
263,565
$ 646,246
$ 433,707
PER SHARE
Net income (loss) per share attributable to
Legg Mason, Inc. common shareholders:
Basic
Income (loss) from continuing operations
Income from discontinued operations(2)
Gain on sale of discontinued operations(2)
Diluted
Income (loss) from continuing operations
Income from discontinued operations(2)
Gain on sale of discontinued operations(2)
Weighted-average shares outstanding:
Basic
Diluted(3)
Dividends declared
BALANCE SHEET
Total assets
Long-term debt
Total stockholders’ equity
FINANCIAL RATIOS AND OTHER DATA
Cash income (loss) from continuing operations
attributable to Legg Mason, Inc., as adjusted,
per diluted share (non-GAAP)(4)
Operating margin
Operating margin, as adjusted (non-GAAP)(5)
Total debt to total capital(6)
Assets under management (in millions)
Full-time employees
$
$
$
$
$
1.33
—
—
1.33
1.32
—
—
1.32
153,715
155,362
.120
$
$
$
$
$
(13.99)
—
—
(13.99)
(13.99)
—
—
(13.99)
140,669
140,669
.960
$
$
$
$
$
1.86
—
—
1.86
1.83
—
—
1.83
142,018
143,976
.960
$
$
$
$
$
4.58
—
—
4.58
4.48
—
—
4.48
141,112
144,386
.810
$
$
$
$
$
3.60
0.55
5.35
9.50
3.35
0.51
4.94
8.80
120,396
130,279
.690
$8,613,711
1,170,334
5,841,724
$ 9,232,299
2,740,190
4,598,625
$11,830,352
1,992,231
6,784,641
$9,604,488
1,112,624
6,541,490
$9,302,490
1,202,960
5,850,116
$
$
2.45
12.2%
20.6%
19.6%
(8.47)
(19.9)%
23.8%
39.4%
$
6.11
$
22.7%
35.5%
26.9%
$
5.86
23.7%
33.1%
14.5%
4.10
25.7%
33.3%
18.0%
$ 684,549
3,550
$ 632,404
3,890
$
950,122
4,220
$ 968,510
4,030
$ 867,550
3,820
(1) Includes results of Citigroup’s asset management business (“CAM”) and Permal Group Ltd (“Permal”) since acquisition in fiscal 2006 and discontinued private client,
capital markets and mortgage banking and servicing operations.
(2) All attributable to Legg Mason, Inc.
(3) Basic shares and diluted shares are the same for periods with a net loss.
(4) Cash income (loss) from continuing operations, as adjusted, is a non-GAAP performance measure. We define cash income (loss) as income from continuing operations
attributable to Legg Mason, Inc., plus amortization and deferred taxes related to intangible assets and goodwill, and imputed interest and tax benefits on contingent
convertible debt less deferred income taxes on goodwill and indefinite-life intangible asset impairments. We define cash income (loss), as adjusted as cash income plus
(less) net money market fund support losses (gains) and impairment charges less net losses on the sale of the underlying structured investment vehicle securities. See
Supplemental Non-GAAP Information in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(5) Operating margin, as adjusted, is a non-GAAP performance measure we calculate by dividing (i) operating income, adjusted to exclude the impact on compensation
expense of gains or losses on investments made to fund deferred compensation plans, the impact on compensation expense of gains or losses on seed capital investments
by our affiliates under revenue sharing agreements and, impairment charges by (ii) our operating revenues less distribution and servicing expenses that are passed through
to third-party distributors, which we refer to as “adjusted operating revenues.” See Supplemental Non-GAAP Information in Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
(6) Calculated based on total debt as a percentage of total capital (total stockholders’ equity plus total debt) as of March 31.
9
MANAgEMENT’S DISCuSSIoN AND ANALySIS oF
FINANCIAL CoNDITIoN AND R ESuLTS oF o pERATIoNS
EXECUTIVE OVERVIEW
Legg Mason, Inc., a holding company, with its subsid-
iaries (which collectively comprise “Legg Mason”) is a
global asset management firm. Acting through our sub-
sidiaries, 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 opera-
tions 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, Italy, Japan, Luxembourg, Poland, Singapore,
Spain and Taiwan.
We operate in one reportable business segment, Asset
Management. We manage our business in two divi-
sions or operating segments, Americas and International,
which are primarily based on the geographic location of
the advisor or the domicile of fund families we manage.
Our division management reports directly to our Chief
Executive Officer. The Americas division consists of
our U.S.-domiciled fund families, the separate account
businesses of our U.S.-based investment affiliates and
the domestic distribution organization. Similarly, the
International Division consists of our fund complexes,
distribution teams and investment affiliates located out-
side the U.S. We believe this structure provides greater
focus and allows us to maximize distribution efforts and
more efficiently take advantage of growth opportunities
locally and abroad.
Our operating revenues primarily consist of investment
advisory fees, from separate accounts and funds, and dis-
tribution and service fees. Investment advisory fees are
generally calculated as a percentage of the assets of the
investment portfolios that we manage. In addition, per-
formance 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 portfo-
lios, and are generally calculated as a percentage of the
assets in an investment portfolio or as a percentage of
new assets added to an investment portfolio. Our rev-
enues, therefore, are dependent upon the level of our
assets under management, and thus are affected by fac-
tors such as securities market conditions, our ability to
attract and maintain assets under management and key
investment personnel, and investment performance. Our
assets under management primarily vary from period
to period due to inflows and outflows of client assets
and market performance. Client decisions to increase or
decrease their assets under our management, and deci-
sions by potential clients to utilize our services, may
be based on one or more of a number of factors. These
factors include our reputation in the marketplace, the
investment performance, both absolute and relative to
benchmarks or competitive products, of our products
and services, the fees we charge for our investment ser-
vices, the client or potential client’s situation, including
investment objectives, liquidity needs, investment hori-
zon and amount of assets managed, our relationships
with distributors and the external economic environ-
ment, including market conditions.
The fees that we charge for our investment services vary
based upon factors such as the type of underlying invest-
ment product, the amount of assets under management,
and the type of services (and investment objectives) that
are provided. Fees charged for equity asset manage-
ment services are generally higher than fees charged for
fixed income and liquidity asset management services.
Accordingly, our revenues will be affected by the compo-
sition of our assets under management. In addition, in the
ordinary course of our business, we may reduce or waive
investment management fees, or limit total expenses, on
certain products or services for particular time periods to
manage fund expenses, or for other reasons, and to help
retain or increase managed assets. Under revenue sharing
agreements, certain of our subsidiaries retain different
percentages of revenues to cover their costs, including
compensation. As such, our Net income attributable to
Legg Mason, Inc., operating margin and compensation
as a percentage of operating revenues are impacted based
on which subsidiaries generate our revenues, and a change
in assets under management at one subsidiary can have a
dramatically different effect on our revenues and earnings
than an equal change at another subsidiary.
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 lev-
els and profits. The next largest component of our cost
structure is distribution and servicing fees, which are
primarily fees paid to third-party distributors for sell-
ing our asset management products and services and are
largely variable in nature. Certain other operating costs
are fixed in nature, such as occupancy, depreciation and
10
amortization, and fixed contract commitments for mar-
ket data, communication and technology services, and
usually do not decline with reduced levels of business
activity or, conversely, usually do not rise proportion-
ately with increased business activity.
Our financial position and results of operations are mate-
rially 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 sensi-
tive 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 unfavor-
able market conditions are likely to affect our profitability
adversely. In addition, the diversification of services and
products offered, investment performance, access to dis-
tribution channels, reputation in the market, attracting
and retaining key employees and client relations are sig-
nificant factors in determining whether we are successful
in attracting and retaining clients. The recent economic
downturn contributed to a significant contraction in our
business, although we have experienced improvement over
the past year.
The financial services business in which we are engaged is
extremely competitive. Our competition includes numer-
ous global, national, regional and local asset management
firms, broker-dealers and commercial banks. The industry
has been dramatically impacted by the recent economic
downturn, and in prior years by the consolidation of
financial services firms through mergers and acquisitions.
During the fiscal years ended March 31, 2009 and 2008,
the fixed income markets endured substantial turmoil.
One effect of this turmoil was that liquidity in the mar-
kets for many types of asset backed commercial paper
and medium term notes issued by structured investment
vehicles (“SIVs”) became substantially reduced. As a
result, and to protect our clients, we entered into several
arrangements during fiscal 2009 and 2008 to provide sup-
port to liquidity funds, managed by a subsidiary, that had
invested in SIV securities. There were no arrangements
remaining as of March 31, 2010.
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. Responding to these
changes has required us to incur costs that continue to
impact our profitability.
All references to fiscal 2010, 2009 or 2008 refer to our fis-
cal 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 globally and in the United
States rebounded during fiscal 2010, but challenging
market conditions persisted throughout most of our
fiscal year due to uncertainties surrounding regulatory
reform and mixed economic data. The equity markets
increased due to steady improvement in consumer confi-
dence, stabilization of still elevated unemployment rates,
and improved performance in corporate earnings across
many sectors. During fiscal 2010, the Federal Reserve
Board held the discount rate at 0.25%, the lowest in
history. Our results were positively impacted by many
of these factors and the cost saving measures that began
last fiscal year. The financial environment in which we
operate continues to be challenging moving into fiscal
2011. We cannot predict how these uncertainties will
impact the Company’s results.
All three major U.S. equity market indices, as well
as the Barclays Capital U.S. Aggregate Bond Index
and Barclays Capital Global Aggregate Bond Index,
increased significantly during the fiscal year as illus-
trated in the table below:
Indices
Dow Jones Industrial Average(1)
S&P 500(2)
NASDAQ Composite Index(3)
Barclays Capital U.S. Aggregate
Bond Index(4)
Barclays Capital Global Aggregate
Bond Index(4)
% Change for
the year ended
March 31, 2010
42.68%
46.57%
56.87%
7.69%
10.23%
(1) Dow Jones Industrial Average is a trademark of Dow Jones & Company, which
is not affiliated with Legg Mason.
(2) S&P is a trademark of Standard & Poor’s, a division of the McGraw-Hill
Companies, Inc., which is not affiliated with Legg Mason.
(3) NASDAQ is a trademark of the NASDAQ Stock Market, Inc., which is not
affiliated with Legg Mason.
(4) Barclays Capital U.S. Aggregate Bond Index and Barclays Capital Global
Aggregate Bond Index are trademarks of Barclays Capital, which is not affiliated
with Legg Mason.
11
The following table sets forth, for the periods indicated, amounts in the Consolidated Statements of Operations as a per-
centage 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,
2009
2010
2008
Period to Period Change(1)
2010
2009
Compared Compared
to 2009
to 2008
Operating Revenues
Investment advisory fees
Separate accounts
Funds
Performance fees
Distribution and service fees
Other
Total operating revenues
Operating Expenses
Compensation and benefits
Distribution and servicing
Communications and technology
Occupancy
Amortization of intangible assets
Impairment of goodwill and intangible assets
Other
Total operating expenses
Operating Income (Loss)
Other Income (Expense)
Interest income
Interest expense
Fund support
Other
Total other income (expense)
Income (Loss) before Income Tax
Provision (Benefit)
Income tax provision (benefit)
Net Income (Loss)
Less: Net income (loss) attributable to
noncontrolling interest
Net Income (Loss) Attributable
to Legg Mason, Inc.
30.9%
51.9
2.7
14.3
0.2
100.0
30.3%
54.7
0.5
14.2
0.3
100.0
31.6%
50.1
2.9
14.9
0.5
100.0
(19.9)%
(25.5)
310.0
(21.0)
(47.6)
(21.5)
(30.5)%
(20.8)
(86.9)
(31.4)
(54.0)
(27.6)
42.2
26.3
6.2
6.0
0.8
—
6.3
87.8
12.2
0.3
(4.8)
0.9
3.9
0.3
12.5
4.5
8.0
0.2
33.7
28.9
5.6
6.2
1.1
39.0
5.4
119.9
(19.9)
1.7
(5.5)
(68.0)
(3.3)
(75.1)
(95.0)
(36.5)
(58.5)
0.1
33.9
27.5
4.2
2.8
1.2
3.3
4.4
77.3
22.7
1.7
(2.0)
(13.1)
0.1
(13.3)
9.4
3.7
5.7
—
(1.8)
(28.7)
(13.4)
(25.1)
(37.6)
n/m
(7.9)
(42.5)
n/m
(86.9)
(30.9)
n/m
n/m
n/m
n/m
n/m
n/m
n/m
7.8%
(58.6)%
5.7%
n/m
(27.9)
(23.9)
(2.3)
61.9
(36.3)
n/m
(13.3)
12.4
n/m
(26.8)
104.9
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m
n/m—not meaningful
(1) Calculated based on the change in actual amounts between fiscal years as a percentage of the prior year amount.
12
FISCAL 2010 COMPARED WITH FISCAL 2009
Financial Overview
Net income attributable to Legg Mason, Inc. for the
year ended March 31, 2010 totaled $204.4 million, or
$1.32 per diluted share, compared to Net loss attribut-
able to Legg Mason, Inc. of $1.97 billion, or $13.99
per diluted share, in the prior year. This increase was
primarily due to the impact of $1.4 billion of losses, net
of income tax benefits and compensation related adjust-
ments, related to the elimination of the exposure to SIVs
in liquidity funds managed by a subsidiary in the prior
fiscal year. The impact of impairment charges related to
goodwill and intangible assets, primarily in our former
Wealth Management division (see Note 5 of Notes to
Consolidated Financial Statements), $863.4 million, net
of income tax benefits, recorded in the prior fiscal year
also contributed to the increase. Cash income, as adjusted
(see Supplemental Non-GAAP Financial Information)
was $381.3 million, or $2.45 per diluted share, com-
pared to cash loss, as adjusted, of $1.2 billion, or $8.47
per diluted share, in the prior year. This increase was
primarily due to the impact of $1.7 billion of net realized
losses on the sale of SIV securities in the prior fiscal year.
Operating margin increased to 12.2% from (19.9)% in
the prior year, primarily due to the impact of impairment
charges related to goodwill and intangible assets recorded
in the prior fiscal year. Operating margin, as adjusted
(see Supplemental Non-GAAP Financial Information)
decreased to 20.6% from 23.8% in the prior year.
Assets Under Management
The components of the changes in our assets under
management (“AUM”) (in billions) for the years ended
March 31 were as follows:
Beginning of period
Investment funds, excluding
liquidity funds(1)
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other(2)
Dispositions
End of period
(1) Subscriptions and redemptions reflect the gross activity in the funds and include
assets transferred between funds and between share classes.
(2) Includes impact of foreign exchange.
2010
$632.4
2009
$ 950.1
38.8
(40.2)
(76.5)
(4.1)
(82.0)
134.1
—
$684.5
43.7
(78.6)
(109.0)
(15.0)
(158.9)
(157.7)
(1.1)
$ 632.4
AUM at March 31, 2010 were $685 billion, an increase
of $52 billion or 8% from March 31, 2009. The increase
in AUM was attributable to market appreciation of
$134 billion, of which approximately 6% resulted from
the impact of foreign currency exchange fluctuation,
which was partially offset by net client outflows of $82 bil-
lion. The majority of outflows were in fixed income
with $64 billion, or 78% of the outflows, followed
by equity outflows and liquidity outflows of $15 bil-
lion and $3 billion, respectively. The majority of fixed
income outflows were in products managed by Western
Asset Management Company (“Western Asset”) and
Brandywine Global Investment Management, LLC
(“Brandywine”) that had experienced past investment
underperformance, although their performance improved
significantly during fiscal 2010. We have experienced
outflows in our fixed income asset class since fiscal
2008. Equity outflows were primarily experienced
by products managed at ClearBridge Advisors LLC
(“ClearBridge”), Batterymarch Financial Management,
Inc. (“Batterymarch”), The Permal Group, Ltd. (“Permal”)
and Legg Mason Capital Management, Inc. (“LMCM”).
Due in part to investment performance issues, we have
experienced net equity outflows since fiscal 2007, although
recent performance improved significantly during fiscal
2010 and the rate of outflows in this asset class has gen-
erally been lower in recent quarters. We generally earn
higher fees and profits on equity AUM, and outflows in
this asset class will more negatively impact our revenues
and net income than would outflows in other asset classes.
Our investment advisory and administrative contracts are
generally terminable at will or upon relatively short notice,
and investors in the mutual funds that we manage may
redeem their investments in the funds at any time with-
out prior notice. Institutional and individual clients can
terminate their relationships with us, reduce the aggregate
amount of assets under management, or shift their funds
to other types of accounts with different rate structures
for any number of reasons, including investment perfor-
mance, changes in prevailing interest rates, changes in our
reputation in the marketplace, changes in management or
control of clients or third-party distributors with whom
we have relationships, loss of key investment management
personnel or financial market performance.
Effective fiscal 2010, our alternative investment products
are classified as investment funds for reporting purposes.
Prior period amounts have been reclassified to conform to
the current period presentation.
13
AUM by Asset Class
AUM by asset class (in billions) as of March 31 were as follows:
Equity
Fixed income
Liquidity
Total
2010
$173.8
364.3
146.4
$684.5
% of
Total
25.4
53.2
21.4
100.0
2009
$126.9
357.6
147.9
$632.4
% of
Total
20.1
56.5
23.4
100.0
%
Change
37.0
1.9
(1.0)
8.2
The component changes in our AUM by asset class (in billions) for the fiscal year ended March 31, 2010 were as follows:
Fixed Income
$357.6
Liquidity
$147.9
March 31, 2009
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other
March 31, 2010
Equity
$126.9
18.7
(23.4)
(10.7)
—
(15.4)
62.3
$173.8
20.1
(16.8)
(67.3)
—
(64.0)
70.7
$364.3
Average AUM by asset class (in billions) for the year ended March 31 were as follows:
Equity
Fixed income
Liquidity
Total
2010
$155.7
370.7
149.1
$675.5
% of
Total
23.0
54.9
22.1
100.0
AUM by Division
AUM by division (in billions) as of March 31 were as follows:
Americas
International
Total
2010
$475.8
208.7
$684.5
% of
Total
69.5
30.5
100.0
2009
$203.2
438.0
169.2
$810.4
2009
$446.7
185.7
$632.4
Total
$632.4
38.8
(40.2)
(76.5)
(4.1)
(82.0)
134.1
$684.5
%
Change
(23.4)
(15.4)
(11.9)
(16.6)
%
Change
6.5
12.4
8.2
—
—
1.5
(4.1)
(2.6)
1.1
$146.4
% of
Total
25.1
54.0
20.9
100.0
% of
Total
70.6
29.4
100.0
The component changes in our AUM by division (in billions) for the year ended March 31, 2010 were as follows:
March 31, 2009
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other
March 31, 2010
Americas
$446.7
24.4
(26.2)
(50.7)
(18.6)
(71.1)
100.2
$475.8
International
$185.7
14.4
(14.0)
(25.8)
14.5
(10.9)
33.9
$208.7
Total
$632.4
38.8
(40.2)
(76.5)
(4.1)
(82.0)
134.1
$684.5
14
Investment Performance(1)
Investment performance of our assets under management
in the year ended March 31, 2010 improved compared to
relevant benchmarks from the prior year.
fixed income sector was Government bonds as mea-
sured by the Barclays U.S. Government Bond return-
ing (3.70)%, in contrast to High Yield Bonds which
returned 58.21% for 2009.
Although the unemployment rate remains high, the U.S.
economy continues to slowly show signs of recovery. A
strong rebound in corporate earnings, improvements in
existing home sales and consumer spending, and stabiliza-
tion in the financial services industry helped to restore
some level of investor confidence. However, uncertainty
in the markets remains, as best evidenced by the May 6,
2010 intraday sell-off and subsequent rebound. With
concerns regarding the credit quality of certain European
nations, and as government stimulus initiatives continue
globally, debates about inflation and deflation loom.
As of March 31, 2010, for the trailing 1-year, 3-year,
5-year, and 10-year periods approximately 49%, 61%,
72%, and 86%, respectively, of our marketed equity
composite(2) assets outpaced their benchmarks. As of
March 31, 2009, for the trailing 1-year, 3-year, 5-year,
and 10-year periods approximately 49%, 53%, 58%,
and 88%, respectively, of our marketed equity composite
assets outpaced their benchmarks.
In the fixed income markets, government yields contin-
ued to rise as investors grew concerned about the need
to finance the growing federal deficit and demand for
government bonds decreased due to investors’ return-
ing appetite for risk. Most sector spreads declined in the
past year as investors returned to riskier securities such
as high-yield bonds and emerging market debt securities.
Investment grade corporate bonds delivered their stron-
gest performance on record with 2000 basis points in
excess returns over treasuries in 2009.
For the 1-year period, the Treasury yield curve remains
historically steep as the Federal Reserve continues to
keep federal funds at close to 0%. The worst performing
As of March 31, 2010, for the trailing 1-year, 3-year,
5-year, and 10-year periods approximately 88%, 40%,
50%, and 88%, respectively, of our marketed fixed
income composite assets outpaced their benchmarks. As
of March 31, 2009, for the trailing 1-year, 3-year, 5-year,
and 10-year periods approximately 31%, 12%, 32%, and
17%, respectively, of our marketed fixed income compos-
ite assets outpaced their benchmarks.
As of March 31, 2010, for the trailing 1-year, 3-year,
5-year, and 10-year periods 62%, 68%, 70%, and 80%,
respectively, of our U.S. long-term mutual fund(3) assets
outpaced their Lipper category average. As of March 31,
2009, for the trailing 1-year, 3-year, 5-year, and 10-year
periods 43%, 52%, 47%, and 75%, respectively, of our
U.S. long-term mutual fund(3) assets outpaced their Lipper
category average.
As of March 31, 2010, for the trailing 1-year, 3-year,
5-year, and 10-year periods 51%, 63%, 65%, and 78%,
respectively, of our U.S. equity mutual fund(3) assets
outpaced their Lipper category average. As of March 31,
2009, for the trailing 1-year, 3-year, 5-year, and 10-year
periods 47%, 60%, 49%, and 76%, respectively, of our
U.S. equity mutual fund(3) assets outpaced their Lipper
category average.
As of March 31, 2010, for the trailing 1-year, 3-year,
5-year, and 10-year periods 81%, 78%, 83%, and 87%,
respectively, of our U.S. fixed income mutual fund(3) assets
outpaced their Lipper category average. As of March 31,
2009, for the trailing 1-year, 3-year, 5-year, and 10-year
periods 38%, 41%, 45%, and 72%, respectively, of our
U.S. fixed income mutual fund(3) assets outpaced their
Lipper category average.
(1) Index performance in this section includes reinvestment of dividends and capital gains.
(2) A composite is an aggregation of discretionary portfolios (separate accounts and investment funds) into a single group that represents a particular investment objective or
strategy. Each of our asset managers has its own specific guidelines for including portfolios in its marketed composites. Assets under management that are not managed in
accordance with the guidelines are not included in a composite. As of March 31, 2010 and 2009, 87% and 85% of our equity assets under management, respectively, in
each period, and 82% and 84%, of our fixed income assets under management, respectively, were in marketed composites.
(3) Source: Lipper Inc. includes open-end, closed-end, and variable annuity funds. As of March 31, 2010 and 2009, the U.S. long-term mutual fund assets represented in
the data accounted for 16% and 12%, respectively, of our total assets under management. The performance of our U.S. long-term mutual fund assets is included in the
marketed composites.
15
Revenue by Division
Operating revenues by division (in millions) for the years ended March 31 were as follows:
Americas
International
Total
2010
$1,866.9
768.0
$2,634.9
% of
Total
70.9
29.1
100.0
2009
$2,290.5
1,066.9
$3,357.4
% of
Total
68.2
31.8
100.0
%
Change
(18.5)
(28.0)
(21.5)
The decrease in operating revenues in the Americas divi-
sion was primarily due to decreased mutual fund advisory
fees on assets managed by Western Asset, LMCM, and
ClearBridge, decreased separate account advisory fees on
assets managed by Western Asset and ClearBridge and
decreased distribution and service fee revenues from U.S.
retail equity funds. The decrease in operating revenues in
the International division was primarily due to decreased
fund revenues at Permal.
RESULTS OF OPERATIONS
Operating Revenues
Total operating revenues for the year ended March 31,
2010 were $2.6 billion, down 22% from $3.4 billion
in the prior year primarily as a result of a 17% decrease
in average AUM. The shift in the mix of average AUM
from higher fee equity assets to a greater percentage of
liquidity and fixed income assets also contributed to the
revenue decline.
Investment advisory fees from separate accounts decreased
$202.4 million, or 20%, to $814.8 million. Of this
decrease, $104.3 million was the result of lower average
equity assets at ClearBridge, Private Capital Management,
LP (“PCM”), LMCM and Brandywine, and $95.5 million
was the result of lower average fixed income assets man-
aged at Western Asset.
Investment advisory fees from funds decreased $469.1 mil-
lion, or 26%, to $1.4 billion. Of this decrease, $309.2 mil-
lion was the result of lower average equity assets managed
primarily at Permal, LMCM, and ClearBridge, $73.1 mil-
lion was the result of fee waivers related to liquidity funds
managed by Western Asset primarily to maintain certain
yields to investors, and $66.9 million was the result of
lower average liquidity assets managed at Western Asset.
Performance fees increased 310%, or $54.0 million, to
$71.5 million during fiscal 2010, driven by fees earned on
assets managed at Western Asset and Permal.
Distribution and service fees decreased 21% to $375.3 mil-
lion, primarily as a result of a decline in average mutual
fund AUM and the impact of increased fee waivers related
to liquidity funds managed by Western Asset.
Operating Expenses
As a result of substantial declines in revenues during fiscal
2009 due to challenging market conditions, actions were
taken to reduce our corporate cost structure. These cost-
saving measures primarily included reductions in full-
time employees and discretionary incentive compensation
in business support functions, significant reductions in
the utilization of consultants for technology projects, and
substantial curtailment of promotional costs.
Operating expenses in fiscal 2010 continued to benefit
from the cost reduction initiatives implemented in fiscal
2009, with many of the more significant actions imple-
mented in the December 2008 quarter. The discussion
below for each of our operating expenses identifies the
amount of variance attributable to cost savings achieved
in fiscal 2010 and 2009, where applicable.
Compensation and benefits decreased 2% to $1.1 billion.
This decrease was driven by a $139.1 million decrease
in revenue share-based compensation, primarily result-
ing from lower revenues in fiscal 2010, the impact of
which was offset in part by reductions in other operating
expenses at revenue share-based affiliates. The net
impact of workforce reductions lowered compensation
by approximately $27.5 million. These reductions were
substantially offset by an increase in deferred compensa-
tion and revenue share-based incentive obligations of
$150.3 million resulting from market gains on assets
invested for deferred compensation plans and seed
capital investments, which are offset by gains in other
non-operating income (expense). Compensation as a
percentage of operating revenues increased to 42.2%
from 33.7% in the prior fiscal year primarily as a result
of compensation increases related to unrealized market
gains on assets invested for deferred compensation plans
16
and investments in proprietary fund products and the
impact of fixed compensation costs which do not directly
vary with revenues.
Distribution and servicing expenses decreased 29% to
$691.9 million, primarily as a result of a decrease in aver-
age AUM in certain products for which we pay fees to
third-party distributors and the impact of liquidity fund
fee waivers that reduce amounts paid to our distributors.
Communications and technology expense decreased 13%
to $163.1 million, primarily as a result of cost savings
initiatives that contributed to a $13.6 million reduction in
technology consulting fees, telecommunications and mar-
ket data services. Reductions in printing costs and lower
technology depreciation expense, which resulted from the
full depreciation of certain assets prior to or during fiscal
2010, of $7.7 million and $4.5 million, respectively, also
contributed to the decrease.
Occupancy expense decreased 25% to $157.0 million,
primarily due to the recognition of $70.1 million of lease
charges related to office vacancies recorded in the prior
year, offset in part by a $19.3 million charge primarily
resulting from the subleasing of space in our corporate
headquarters in fiscal 2010.
Amortization of intangible assets decreased 38% to
$22.8 million, primarily due to the impact of intangible
asset impairments during fiscal 2009, which reduced
amortization expense by $13.5 million.
Impairment charges were $1.3 billion in fiscal 2009.
Approximately $1.2 billion of the total impairment
charges related to goodwill and intangible assets in our
former Wealth Management division as a result of signifi-
cant declines in the AUM and projected cash flows within
that division. The remaining $146 million related to cer-
tain acquired management contracts, as a result of a more
accelerated rate of client attrition, and the impairment
of a trade name. See Note 5 of Notes to Consolidated
Financial Statements for further discussion of the impair-
ment charges.
Other expenses decreased $14.4 million to $167.6 million,
primarily as a result of cost savings initiatives that con-
tributed to reductions in travel and entertainment costs of
$15.6 million, and advertising costs of $7.7 million. These
decreases were partially offset by an increase of $11.5 mil-
lion in charges related to the impact of an investor settle-
ment and trading errors.
In May 2010, we announced a plan to streamline our
business model to drive increased profitability and growth
that includes: 1) transitioning certain shared services to
our investment affiliates where they are closer to the actual
client relationships and can be delivered with greater effec-
tiveness; and 2) our Americas distribution group sharing in
revenue on retail-based AUM growth. This plan involves
headcount reductions in operations, technology and other
administrative areas at the corporate location, which may
be partially offset by headcount increases at the affiliates,
and will ultimately enable us to eliminate a portion of our
corporate office space that was dedicated to our operations
and technology employees. We project that the initiative
will result in annual cost savings of approximately $130 to
$150 million, and expect to achieve the savings on a run
rate basis by the fourth quarter of fiscal 2012. The initia-
tive is projected to involve restructuring- and transition-
related costs that will primarily include transition payments
to affiliates (primarily compensation) to temporarily offset
the cost of absorbing the services, charges for severance
and retention incentives, and may also include costs for
early contract terminations and asset disposals. The total
expected costs are in the range of $190 to $210 million and
will be incurred over the next two fiscal years. However,
the achievement of all projected cost savings and margin
improvements, as well as the amount of restructuring- and
transition-related costs, will be subject to many factors,
including market conditions and other factors affecting the
financial results of the Company and our affiliates and the
rate of AUM growth. In addition, our business is dynamic
and may require us to incur incremental expenses from
time-to-time to grow and better support the business.
Non-Operating Income (Expense)
Interest income decreased 87% to $7.4 million, primarily as
a result of a decline in average interest rates and lower aver-
age investment balances, which reduced interest income by
$36.2 million and $12.9 million, respectively.
Interest expense decreased 31% to $126.3 million, primarily
as a result of the exchange of our Equity Units in August
2009, which reduced interest expense by $36.5 million,
and a $24.6 million decrease due to the repayment of
$250 million of the outstanding borrowings under our
revolving credit facility in March 2009, the repayment of
our 6.75% senior notes in July 2008, the repayment of the
$550 million outstanding balance on our $700 million
term loan in January 2010, as well as lower interest rates
paid on this term loan during fiscal 2010. These decreases
were partially offset by an increase of $5.0 million in
17
amortization of debt issuance costs, primarily related to the
early repayment of our $700 million term loan.
Due to increases in the net asset values of previously sup-
ported liquidity funds, in fiscal 2010 we reversed unreal-
ized, non-cash losses recorded in fiscal 2009 of $20.6 mil-
lion related to liquidity fund support arrangements for
our offshore funds that did not involve SIVs. During fiscal
2009, fund support losses were $1.7 billion, primarily as a
result of SIV price deterioration and our elimination of SIV
exposure. See Note 17 of Notes to Consolidated Financial
Statements for additional information on fund support.
Other non-operating income (expense) increased $213.5 mil-
lion to income of $104.3 million, primarily as a result of an
increase of $133.7 million in unrealized market gains on
assets invested for deferred compensation plans, which are
substantially offset by corresponding compensation increases
discussed above, and $91.1 million in unrealized market
gains on investments in proprietary fund products, which
are partially offset by corresponding compensation increases
discussed above. These increases were offset in part by the
impact of $22.0 million in charges related to the exchange
of substantially all of our Equity Units in fiscal 2010.
Income Tax Benefit
The provision for income taxes was $118.7 million com-
pared to a benefit of $1.2 billion in the prior year, primarily
as a result of increased earnings due to the absence of losses
related to liquidity fund support and goodwill impairment
charges. The effective tax rate was 36.0% compared to a
benefit rate of 38.4% in the prior year. The current year
rate was beneficially impacted by lower effective tax rates
in foreign jurisdictions. The prior year’s benefit rate was
driven by the impact of the SIV-related charges with lower
state tax benefits and the impact of a non-deductible por-
tion of the goodwill impairment charge, offset by tax bene-
fits associated with the restructuring of a foreign subsidiary.
Supplemental Non-GAAP Financial Information
As supplemental information, we are providing performance
measures that are based on methodologies other than gener-
ally accepted accounting principles (“non-GAAP”) for “cash
income,” “cash income, as adjusted,” and “operating margin,
as adjusted” that management uses as benchmarks in evalu-
ating and comparing the period-to-period operating perfor-
mance of Legg Mason, Inc. and its subsidiaries.
Cash Income (Loss), as Adjusted
We define “cash income” as net income (loss) attributable
to Legg Mason, Inc. plus amortization and deferred taxes
related to intangible assets and goodwill, and imputed
interest and tax benefits on contingent convertible debt
less deferred income taxes on goodwill and intangible
asset impairment. We define “cash income, as adjusted”
as cash income plus (less) net money market fund support
losses (gains) and impairment charges less net losses on
the sale of the underlying SIV securities.
We believe that cash income and cash income, as
adjusted, provide good representations of our operating
performance adjusted for non-cash acquisition related
items and other items as indicators of value that facilitate
comparison of our results to the results of other asset
management firms that have not engaged in money mar-
ket fund support transactions, issued contingent convert-
ible debt or made significant acquisitions, including any
related goodwill or intangible asset impairments.
We also believe that cash income and cash income, as
adjusted, are important metrics in estimating the value of
an asset management business. These measures are pro-
vided in addition to net income, but are not a substitute
for net income and may not be comparable to non-GAAP
performance measures, including measures of cash earn-
ings or cash income, of other companies. Further, cash
income and cash income, as adjusted, are not liquidity
measures and should not be used in place of cash flow
measures determined under GAAP. Legg Mason considers
cash income and cash income, as adjusted, to be useful to
investors because they are important metrics in measuring
the economic performance of asset management compa-
nies, as indicators of value that facilitate comparisons of
Legg Mason’s operating results with the results of other
asset management firms that have not engaged in money
market fund support transactions, significant acquisitions,
or issued contingent convertible debt.
In calculating cash income, we add the impact of the
amortization of intangible assets from acquisitions, such
as management contracts, to net income to reflect the fact
that these non-cash expenses distort comparisons of Legg
Mason’s operating results with the results of other asset
management firms that have not engaged in significant
acquisitions. Deferred taxes on indefinite-life intangible
assets and goodwill represent actual tax benefits that are
not realized under GAAP absent an impairment charge or
the disposition of the related business. Because we actu-
ally receive these tax benefits on indefinite-life intangibles
and goodwill over time, we add them to net income in
the calculation of cash income. Conversely, we subtract
18
the realized income tax benefits on impairment charges
that have been recognized under GAAP. We also add back
imputed interest on contingent convertible debt, which is
a non-cash expense, as well as the actual tax benefits on
the related contingent convertible debt that are not real-
ized under GAAP. In calculating cash income, as adjusted,
we add (subtract) net money market fund support losses
(gains) (net of losses on the sale of the underlying SIV
securities, if applicable) and impairment charges to cash
income to reflect that these charges distort comparisons
of Legg Mason’s operating results to prior periods and
the results of other asset management firms that have not
engaged in money market fund support transactions or
significant acquisitions, including any related impairments.
Should a disposition or impairment charge for indefinite-life
intangibles or goodwill occur, its impact on cash income
and cash income, as adjusted, may distort actual changes in
the operating performance or value of our firm. Also, real-
ized losses on money market fund support transactions are
reflective of changes in the operating performance and value
of our firm. Accordingly, we monitor these items and their
related impact, including taxes, on cash income and cash
income, as adjusted, to ensure that appropriate adjustments
and explanations accompany such disclosures.
Although depreciation and amortization of fixed assets are
non-cash expenses, we do not add these charges in calculating
cash income or cash income, as adjusted, because these charges
are related to assets that will ultimately require replacement.
A reconciliation of net income (loss) attributable to Legg Mason, Inc. to cash income (loss), as adjusted (in thousands
except per share amounts) is as follows:
Net Income (Loss) Attributable to Legg Mason, Inc.
Plus (Less):
Amortization of intangible assets
Deferred income taxes on intangible assets
Deferred income taxes on impairment charges
Imputed interest on convertible debt
Cash Income (Loss)
Plus (Less):
Net money market fund support (gains) losses(1)
Impairment charges
Net loss on sale of SIV securities(1)
Cash Income (Loss), as adjusted
Net Income (Loss) per Diluted Share attributable
to Legg Mason, Inc. common shareholders
Plus (Less):
Amortization of intangible assets
Deferred income taxes on intangible assets
Deferred income taxes on impairment charges
Imputed interest on convertible debt
Cash Income (Loss) per Diluted Share
Plus (Less):
Net money market fund support (gains) losses(1)
Impairment charges
Net loss on sale of SIV securities(1)
Cash Income (Loss) per Diluted Share, as adjusted
(1) Includes related adjustments to operating expenses, if applicable, and income tax provision (benefit).
For the Years Ended March 31,
2010
$204,357
2009
$(1,967,918)
22,769
136,252
—
34,445
397,823
(16,565)
—
—
$381,258
36,488
142,494
(444,618)
32,340
(2,201,214)
1,376,579
1,307,970
(1,674,724)
$(1,191,389)
$
1.32
$
(13.99)
0.14
0.88
—
0.22
2.56
0.26
1.01
(3.16)
0.23
(15.65)
(0.11)
—
—
2.45
$
9.79
9.30
(11.91)
(8.47)
$
The increase in cash income (loss), as adjusted, was primarily due to the impact of net realized losses of $1.7 billion on
the sale of SIV securities in the prior fiscal year.
19
Operating Margin, as Adjusted
We calculate “operating margin, as adjusted,” by dividing
(i) operating income, adjusted to exclude the impact on
compensation expense of gains or losses on investments
made to fund deferred compensation plans, the impact
on compensation expense of gains or losses on seed capi-
tal investments by our affiliates under revenue sharing
agreements and, impairment charges by (ii) our operating
revenues less distribution and servicing expenses that are
passed through to third-party distributors, which we refer
to as “adjusted operating revenues.” The compensation
items are removed from operating income in the calcula-
tion because they are offset by an equal amount in Other
non-operating income (expense), and thus have no impact
on net income. We use adjusted operating revenues in the
calculation to show the operating margin without distri-
bution revenues that are passed through to third parties as
a direct cost of selling our products. Legg Mason believes
that operating margin, as adjusted, is a useful measure of
our performance because it provides a measure of our core
business activities excluding items that have no impact on
net income and because it indicates what Legg Mason’s
operating margin would have been without the distribu-
tion revenues that are passed through to third parties
as a direct cost of selling our products. This measure is
provided in addition to the Company’s operating margin
calculated under GAAP, but is not a substitute for cal-
culations of margins under GAAP and may not be com-
parable to non-GAAP performance measures, including
measures of adjusted margins, of other companies.
Operating Revenues, GAAP basis
Less:
Distribution and servicing expense
Operating Revenues, as adjusted
Operating Income (Loss)
Add (Less):
Gains (losses) on deferred compensation and seed investments
Impairment charges
Operating Income, as adjusted
Operating margin, GAAP basis
Operating margin, as adjusted
For the Years Ended March 31,
2010
$2,634,879
2009
$3,357,367
691,931
$1,942,948
$ 321,183
79,316
—
$ 400,499
969,964
$2,387,403
$ (669,180)
(70,950)
1,307,970
$ 567,840
12.2%
20.6
(19.9)%
23.8
Because operating margin, as adjusted, is a more relevant
indicator of operating performance that management uti-
lizes, we no longer present pre-tax profit margin, as adjusted.
FISCAL 2009 COMPARED WITH FISCAL 2008
Financial Overview
Net loss attributable to Legg Mason, Inc. for the year ended
March 31, 2009 totaled $1.97 billion, or $13.99 per diluted
share, compared to net income attributable to Legg Mason,
Inc. of $263.6 million, or $1.83 per diluted share in the
prior year. During fiscal 2009, we eliminated the exposure
to SIVs of all liquidity funds managed by a subsidiary by
purchasing and subsequently selling, or reimbursing the
funds for a portion of the losses they incurred in selling,
all securities issued by SIVs held in our liquidity funds and
held by us. The majority of these SIV securities were sup-
ported under capital support arrangements, letters of credit
or a total return swap (“TRS”) prior to the purchase. These
transactions, along with charges related to remaining capi-
tal support arrangements that support securities other than
SIVs, resulted in aggregate charges during the fiscal year of
$2.3 billion. Also, during fiscal 2009, impairment charges
of $1.3 billion were recorded, related to goodwill and intan-
gible assets, primarily in our former Wealth Management
division, as a result of declines in the AUM and projected
cash flows of affiliates in that division, and a reduction in
the value of certain acquired management contract intan-
gible assets and a related trade name. Cash loss, as adjusted
(see Supplemental Non-GAAP Financial Information)
was $1.2 billion, or $8.47 per diluted share, compared to
cash income, as adjusted, of $879.5 million, or $6.11 per
diluted share, in the prior year. This decrease was primar-
ily due to net realized losses on the sale of SIV securities of
$1.7 billion in fiscal 2009. The operating margin declined
to (19.9%) from 22.7% in fiscal 2008, primarily due to
20
impairment charges related to goodwill and intangible
assets recorded in fiscal 2009. The operating margin, as
adjusted, declined to 23.8% from 35.5% in fiscal 2008.
Assets Under Management
The components of the changes in our AUM (in billions)
for the years ended March 31 were as follows:
Beginning of period
Investment funds, excluding
liquidity funds(1)
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other(2)
Dispositions
End of period
(1) Subscriptions and redemptions reflect the gross activity in the funds and include
assets transferred between funds and between share classes.
(2) Includes impact of foreign exchange.
2009
$ 950.1
2008
$968.5
43.7
(78.6)
(109.0)
(15.0)
(158.9)
(157.7)
(1.1)
$ 632.4
54.2
(66.1)
(20.1)
5.7
(26.3)
9.9
(2.0)
$950.1
AUM at March 31, 2009 were $632.4 billion, a
decrease of $317.7 billion or 33% from March 31,
2008. The decrease in AUM was attributable to net
client outflows of $159 billion and market deprecia-
tion of $158 billion, of which approximately 10% was
related to the impact of foreign currency exchange
fluctuation. There were net client outflows in all asset
classes. The majority of outflows were in fixed income
with $89 billion, or 56% of the outflows, followed by
equity outflows and liquidity outflows of $47 billion
and $23 billion, respectively. The majority of fixed
income outflows were in products managed by Western
Asset that experienced investment performance issues,
particularly in fiscal 2009. Equity outflows were pri-
marily experienced by key equity products managed at
ClearBridge, LMCM and Permal.
Effective fiscal 2010, our alternative investment products
are classified as investment funds for reporting purposes.
Prior period amounts have been reclassified to conform to
the current period presentation.
AUM by Asset Class
AUM by asset class (in billions) as of March 31 were as follows:
Equity
Fixed Income
Liquidity
Total
2009
$126.9
357.6
147.9
$632.4
% of
Total
20.1
56.5
23.4
100.0
2008
$271.6
508.2
170.3
$950.1
% of
Total
28.6
53.5
17.9
100.0
%
Change
(53.3)
(29.6)
(13.2)
(33.4)
The component changes in our AUM by asset class (in billions) for the fiscal year ended March 31, 2009 were as follows:
March 31, 2008
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other
Dispositions
March 31, 2009
Equity
$271.6
26.5
(46.4)
(26.7)
—
(46.6)
(97.0)
(1.1)
$126.9
Fixed
Income
$508.2
17.2
(32.2)
(74.1)
—
(89.1)
(61.5)
—
$357.6
Liquidity
$170.3
—
—
(8.2)
(15.0)
(23.2)
0.8
—
$147.9
Total
$ 950.1
43.7
(78.6)
(109.0)
(15.0)
(158.9)
(157.7)
(1.1)
$ 632.4
21
Average AUM by asset class (in billions) for the year ended March 31 were as follows:
Equity
Fixed Income
Liquidity
Total
2009
$203.2
438.0
169.2
$810.4
% of
Total
25.1
54.0
20.9
100.0
AUM by Division
AUM by division (in billions) as of March 31 were as follows:
Americas
International
Total
2009
$446.7
185.7
$632.4
% of
Total
70.6
29.4
100.0
2008
$327.6
498.6
163.9
$990.1
2008
$672.2
277.9
$950.1
% of
Total
33.1
50.3
16.6
100.0
% of
Total
70.8
29.2
100.0
%
Change
(38.0)
(12.2)
3.2
(18.1)
%
Change
(33.5)
(33.2)
(33.4)
The component changes in our AUM by division (in billions) for the year ended March 31, 2009 were as follows:
March 31, 2008
Investment funds, excluding liquidity funds
Subscriptions
Redemptions
Separate account flows, net
Liquidity fund flows, net
Net client cash flows
Market performance and other
Dispositions
March 31, 2009
Americas
$ 672.2
28.4
(47.3)
(84.5)
(6.7)
(110.1)
(114.3)
(1.1)
$ 446.7
International
$277.9
15.3
(31.3)
(24.5)
(8.3)
(48.8)
(43.4)
—
$185.7
Total
$ 950.1
43.7
(78.6)
(109.0)
(15.0)
(158.9)
(157.7)
(1.1)
$ 632.4
Investment Performance(4)
Fiscal 2009 was characterized by significant volatility with
erratic, unprecedented price movements across a variety
of markets. The markets were significantly impacted by
the failure of major financial institutions, the freeze in the
credit markets and unprecedented government interven-
tion. In addition, the downturn in housing that led the
U.S. into a broader slowdown set off financial turmoil. As
a result, financial stocks led the equity markets lower, with
the S&P 500 Financials Index down 63%, compared to
the broader S&P 500 Index, which dropped 38%. As of
March 31, 2009, for the trailing 1-year, 3-year, 5-year, and
10-year periods approximately 49%, 53%, 58%, and 88%
of our marketed equity composite(5) assets outpaced their
benchmarks, respectively. As of March 31, 2008, for the
trailing 1-year, 3-year, 5-year, and 10-year periods approxi-
mately 53%, 53%, 49%, and 94% of our marketed equity
composite assets outpaced their benchmarks, respectively.
In the fixed income markets, the economic crisis deep-
ened, but the government’s numerous actions laid the
foundation for a recovery, causing investor confidence to
improve modestly late in the March 2009 quarter. The
fiscal stimulus package designed to aid the economy, and
the government’s intention to issue more public debt for
financing, caused yields to rise during the quarter.
(4) Index performance in this section includes reinvestment of dividends and capital gains.
(5) A composite is an aggregation of discretionary portfolios (separate accounts and investment funds) into a single group that represents a particular investment objective or
strategy. Each of our asset managers has its own specific guidelines for including portfolios in its marketed composites. Assets under management that are not managed in
accordance with the guidelines are not included in a composite. As of March 31, 2009, 85% of our equity assets under management and 84% of our fixed income assets under
management were in marketed composites. As of March 31, 2008, 86% of our equity assets under management and 83% of our fixed income assets under management were
in marketed composites.
22
For the 1-year period, Treasury yields decreased signifi-
cantly while long-term rates increased resulting in a steeper
yield curve. In addition, the worst performing sectors
were home equity asset-backed securities and investment
grade corporate securities as measured by the Barclays ABS
Home Equity Index returning (35)% and the Barclays U.S.
Corporate Investment Grade Index returning (7)% for
the 1-year period. As of March 31, 2009, for the trailing
1-year, 3-year, 5-year, and 10-year periods approximately
31%, 12%, 32%, and 17% of our marketed fixed income
composite assets outpaced their benchmarks, respectively.
As of March 31, 2008, for the trailing 1-year, 3-year,
5-year, and 10-year periods approximately 4%, 21%, 54%,
and 74% of our marketed fixed income composite assets
outpaced their benchmarks, respectively.
As of March 31, 2009, for the trailing 1-year, 3-year,
5-year, and 10-year periods 43%, 52%, 47%, and 75% of
our U.S. long-term mutual fund(6) assets outpaced their
Lipper category average, respectively. As of March 31,
2008, for the trailing 1-year, 3-year, 5-year, and 10-year
periods 41%, 45%, 57%, and 85% of our U.S. long-term
mutual fund(6) assets outpaced their Lipper category aver-
age, respectively.
As of March 31, 2009, for the trailing 1-year, 3-year,
5-year, and 10-year periods 47%, 60%, 49%, and 76%
of our U.S. equity mutual fund(6) assets outpaced their
Lipper category average, respectively. As of March 31,
2008, for the trailing 1-year, 3-year, 5-year, and 10-year
periods 45%, 50%, 50%, and 91% of our U.S. equity
mutual fund(6) assets outpaced their Lipper category aver-
age, respectively.
As of March 31, 2009, for the trailing 1-year, 3-year,
5-year, and 10-year periods 38%, 41%, 45%, and 72% of
our U.S. fixed income mutual fund(6) assets outpaced their
Lipper category average, respectively. As of March 31,
2008, for the trailing 1-year, 3-year, 5-year, and 10-year
periods 33%, 34%, 67%, and 68% of our U.S. fixed
income mutual fund(6) assets outpaced their Lipper cat-
egory average, respectively.
Revenue by Division
Operating revenues by division (in millions) for the years ended March 31 were as follows:
Americas
International
Total
2009
$2,290.5
1,066.9
$3,357.4
% of
Total
68.2
31.8
100.0
2008
$3,217.2
1,416.9
$4,634.1
% of
Total
69.4
30.6
100.0
%
Change
(28.8)
(24.7)
(27.6)
The decrease in operating revenues in the Americas divi-
sion was primarily due to decreased mutual fund advi-
sory fees on assets managed by LMCM, ClearBridge,
and Royce, decreased separate account advisory fees on
assets managed by PCM, ClearBridge and LMCM, and
decreased distribution and service fee revenues from U.S.
retail equity funds. The decrease in operating revenues in
the International division was primarily due to a decline in
fund revenues and performance fees at Permal, lower sepa-
rate account advisory fees on assets managed by Western
Asset and decreased distribution and service fee revenues
from International balanced and fixed income funds.
RESULTS OF OPERATIONS
Operating Revenues
Total operating revenues for the year ended March 31,
2009 were $3.4 billion, down 28% from $4.6 billion in the
prior year primarily as a result of an 18% decrease in average
AUM, due to a decline in average equity assets of approxi-
mately 38% and fixed income assets of approximately 12%.
The shift in the mix of AUM from higher fee equity
assets to a greater percentage of fixed income and liquidity
assets also contributed to the revenue decline. Operating
revenues were also negatively impacted by a decline in perfor-
mance fees of approximately $115.3 million, or 87%.
(6) Source: Lipper Inc. includes open-end, closed-end, and variable annuity funds. As of March 31, 2009 and 2008, the U.S. long-term mutual fund assets represented in
the data accounted for 12% and 14%, respectively, of our total assets under management. The performance of our U.S. long-term mutual fund assets is included in the
marketed composites.
23
Investment advisory fees from separate accounts decreased
$447.3 million, or 31%, to $1.0 billion. Of this decrease,
$273.1 million was the result of lower average equity
assets at PCM, ClearBridge, LMCM and Brandywine,
$80.9 million was the result of lower average fixed income
assets managed at Western Asset, and $43.9 million was
the result of the sale of the Legg Mason Private Portfolio
Group (“LMPPG”) business. See Note 2 of Notes to
Consolidated Financial Statements for a description of
the sale.
Investment advisory fees from funds decreased $483.4 mil-
lion, or 21%, to $1.8 billion. Of this decrease, approxi-
mately $450 million was the result of lower average
equity assets managed primarily at LMCM, ClearBridge,
Permal, and Royce, approximately $76 million was the
result of lower average fixed income assets managed at
Western Asset, offset by approximately $42 million which
was the result of increased liquidity assets managed, pri-
marily at Western Asset.
Performance fees decreased 87%, or $115.3 million, to
$17.4 million during fiscal 2009, primarily as a result of a
decrease in performance fees earned on alternative invest-
ment products at Permal.
Distribution and service fees decreased 31% to $475.0 mil-
lion primarily as a result of a decline in average AUM of the
retail share classes of our domestic and international equity
funds, which resulted in a decrease of $176.7 million.
Operating Expenses
Compensation and benefits decreased 28% to $1.1 bil-
lion. This decrease was primarily driven by a $341 million
decrease in revenue share-based compensation related to
lower revenues in fiscal 2009; the impact of cost savings
initiatives, such as reductions in headcount, discretion-
ary incentives and other discretionary compensation that
lowered compensation by approximately $86 million
and a decrease in deferred compensation obligations of
approximately $59 million resulting from market losses
on invested assets of deferred compensation plans, which
are largely offset by losses in other non-operating income
(expense). These decreases were offset in part by lower
incentive compensation reductions of $40 million related
to charges to provide support for certain liquidity funds
that held SIV-issued securities. Compensation as a per-
centage of operating revenues decreased slightly to 33.7%
from 33.9% in the prior fiscal year as compensation
reductions related to unrealized market losses on deferred
compensation plans were substantially offset by fixed
compensation costs of administrative and sales personnel
which do not vary with revenues.
Distribution and servicing expenses decreased 24% to
$970.0 million, primarily as a result of a decrease in aver-
age AUM in certain products for which we pay fees to
third-party distributors.
Communications and technology expense decreased 2% to
$188.3 million, primarily as a result of cost savings initia-
tives that led to an $11.3 million decrease in technology
consulting fees, offset in part by a $4.1 million increase in
market data costs for services previously included in Other
expenses, and a $3.2 million increase in depreciation
expense related to investment management infrastructure.
Occupancy expense increased 62% to $209.5 million, pri-
marily as a result of lease reserves related to office vacan-
cies totaling $70.1 million and accelerated depreciation of
assets in vacated space of $9.0 million.
Amortization of intangible assets decreased 36% to
$36.5 million, primarily as a result of the sale of the
LMPPG business, which reduced amortization expense
by $10.6 million, and the impact of the impairment of
intangible assets in fiscal year 2008, which reduced amor-
tization expense by $6.6 million.
Impairment charges increased to $1.3 billion. Approximately
$1.2 billion of the total impairment charges relate to
goodwill and intangible assets in our former Wealth
Management division as a result of significant declines in
the AUM and a reduction in projected cash flows of the
division. The remaining $146 million relates to certain
acquired management contracts, as a result of a more accel-
erated rate of client attrition, and a related trade name. See
Note 5 of Notes to Consolidated Financial Statements for
further discussion of the impairment charges.
Other expenses decreased $27.8 million to $182.1 million,
primarily as a result of cost savings initiatives that resulted
in reduced travel and entertainment costs of $11.4 mil-
lion, lower professional fees of $7.2 million and lower
advertising costs of $5.4 million. In addition, the sale of
the LMPPG overlay and implementation business elimi-
nated support costs of approximately $5 million.
Non-Operating Income (Expense)
Interest income decreased 27% to $56.3 million primarily
as a result of a decline in average interest rates earned on
investment balances, which decreased interest income by
24
$42.1 million, offset in part by higher average investment
account balances due to proceeds from the issuance of
debt, which increased interest income by $25.3 million.
Interest expense increased 105% to $182.8 million as a
result of higher debt levels. We raised $1.15 billion in
May 2008 by issuing Equity Units, and $1.25 billion in
January 2008 by issuing 2.5% convertible senior notes
which resulted in an increase of approximately $108.9 mil-
lion in interest expense, of which $25.8 million relates
to the impact of a full year of imputed interest on our
2.5% convertible senior notes. These increases were offset
in part by the impact of the repayment of $425 million
principal amount of 6.75% senior notes in July 2008 and
lower interest rates paid on our term loan, which together
resulted in a decrease of $28.6 million.
Fund support losses increased $1.7 billion, primarily as a
result of continued SIV price deterioration and our elimina-
tion of SIV exposure. See Note 17 of Notes to Consolidated
Financial Statements for additional information.
Other non-operating income (expense) decreased
$116.0 million to a loss of $109.2 million, primarily as a
result of an increase of $58.3 million in unrealized market
losses on assets held in deferred compensation plans, which
are offset by corresponding compensation reductions
discussed above, and $33.1 million in unrealized market
losses on investments in proprietary fund products.
Income Tax Benefit
The income tax benefit was $1.2 billion compared to
income tax expense of $173.5 million in the prior year,
primarily as a result of the losses related to liquidity fund
support and charges for impairment of goodwill and intan-
gible assets. The effective tax rate was a benefit of 38.4% in
the current year compared to a 39.7% provision in the prior
year. The current year benefit rate is primarily driven by the
impact of the SIV-related charges with lower state tax ben-
efits. In addition, the current year includes approximately
$80 million in tax benefits associated with the restructur-
ing of a foreign subsidiary, offset by the impact of a non-
deductible portion of the goodwill impairment charge.
25
Supplemental Non-GAAP Financial Information
Cash Income, As Adjusted
A reconciliation of net income (loss) attributable to Legg Mason, Inc. to cash income (loss), as adjusted (in thousands
except per share) is as follows:
Net Income (Loss) Attributable to Legg Mason, Inc.
Plus (Less):
Amortization of intangible assets
Deferred income taxes on intangible assets
Deferred income taxes on impairment charges
Imputed interest on convertible debt
Cash Income (Loss)
Plus (Less):
Net money market fund support losses(1)
Impairment charges
Net loss on sale of SIV securities(1)
Cash Income (Loss), as adjusted
Net Income (Loss) per Diluted Share attributable to
Legg Mason, Inc. common shareholders
Plus (Less):
Amortization of intangible assets
Deferred income taxes on intangible assets
Deferred income taxes on impairment charges
Imputed interest on convertible debt
Cash Income (Loss) per Diluted Share
Plus (Less):
Net money market fund support losses(1)
Impairment charges
Net loss on sale of SIV securities(1)
For the Years Ended March 31,
2009
$(1,967,918)
2008
$263,565
36,488
142,494
(444,618)
32,340
(2,201,214)
1,376,579
1,307,970
(1,674,724)
$(1,191,389)
57,271
143,600
(56,187)
6,544
414,793
313,726
151,000
—
$879,519
$
(13.99)
$
1.83
0.26
1.01
(3.16)
0.23
(15.65)
9.79
9.30
(11.91)
(8.47)
0.40
0.99
(0.39)
0.05
2.88
2.18
1.05
—
6.11
$
Cash Income (Loss) per Diluted Share, as adjusted
(1) Includes related adjustments to operating expenses, if applicable, and income tax provision (benefit).
$
The decrease in cash income, as adjusted, was primarily due to net realized losses on the sale of SIV securities during
fiscal 2009.
26
Operating Margin, as Adjusted
Operating Revenues, GAAP basis
Less:
Distribution and servicing expense
Operating Revenues, as adjusted
Operating Income (Loss)
Add (Less):
Gains (losses) on deferred compensation and seed investments
Impairment charges
Operating Income, as adjusted
Operating margin, GAAP basis
Operating margin, as adjusted
For the Years Ended March 31,
2009
$3,357,367
2008
$4,634,086
969,964
$2,387,403
$ (669,180)
(70,950)
1,307,970
$ 567,840
1,273,986
$3,360,100
$1,050,176
(8,798)
151,000
$1,192,378
(19.9)%
23.8
22.7%
35.5
LIQUIDITY AND CAPITAL RESOURCES
The primary objective of our capital structure is to appro-
priately support our 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 ongo-
ing 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 oppor-
tunities 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, and, subject to
existing covenants, the raising of additional equity capital
and/or the issuance of additional debt.
Our assets consist primarily of intangible assets, cash and
cash equivalents, goodwill, investment securities, and
investment advisory and related fee receivables. Our assets
have been principally funded by equity capital, long-term
debt and the results of operations. At March 31, 2010, our
cash, total assets, long-term debt and stockholders’ equity
were $1.5 billion, $8.6 billion, $1.2 billion and $5.8 bil-
lion, respectively.
The following table summarizes our consolidated statements of cash flows for the years ended March 31 (in millions):
Cash flows from operating activities
Cash flows used for investing activities
Cash flows (used for) from financing activities
Effect of exchange rate changes
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2010
$1,427.7
(276.7)
(746.7)
19.5
423.8
1,084.5
$1,508.3
2009
$ 409.8
(1,090.9)
329.2
(27.2)
(379.1)
1,463.6
$ 1,084.5
2008
$ 1,144.9
(2,103.3)
1,220.0
18.4
280.0
1,183.6
$ 1,463.6
27
Cash flows from operating activities were $1,427.7 million
during fiscal 2010 compared to cash flows of $409.8 mil-
lion for the prior fiscal year. The increase in operating
cash flows is primarily attributable to approximately
$1.04 billion of income tax refunds received during
fiscal 2010.
Cash outflows for investing activities during fiscal 2010
were $276.7 million, primarily attributable to cash pay-
ments of $180 million made in connection with the
acquisition of Permal, and payments for fixed assets of
$84.1 million, principally associated with the relocation
of our corporate headquarters, partially offset by fund
support collateral received of $38.9 million due to the
amendment, termination and expiration of certain capital
support agreements.
Cash outflows for financing activities were $746.7 mil-
lion, primarily due to the repayment in January 2010 of
the remaining $550 million outstanding balance on our
$700 million 5-year term loan and $135.0 million of cash
consideration paid in the Equity Units exchange offer, as
described below, and the payment of cash dividends.
We expect that over the next twelve months our operat-
ing activities will be adequate to support our operating
cash needs. We received approximately $580 million
in tax refunds during the June 2009 quarter, primarily
attributable to tax benefits from the utilization of $1.6 bil-
lion of realized losses incurred in fiscal 2009 on the sale
of securities issued by SIVs. Federal legislation, enacted
in November 2009 to extend the net operating loss car-
ryback period from two to five years, enabled us to utilize
an additional $1.3 billion of net operating loss deductions,
and as a result, we received an additional $459 million
in tax refunds in January 2010. Federal net operating
loss carryforwards of $359 million and future deductions
for purchased goodwill and intangible assets aggregat-
ing approximately $3.5 billion will reduce future taxable
income and related U.S. federal tax payments. We may
elect to utilize our available resources for any number of
activities, including share repurchases, seed capital invest-
ments in new products, repayment of outstanding debt,
or acquisitions.
During fiscal 2008, we initiated a plan to repatriate
accumulated earnings of approximately $225 million.
It had been anticipated that these earnings would be used
for the contingent acquisition payment in the U.S. to the
former owners of Permal. We repatriated approximately
$36 million of these funds during fiscal 2008. We intend
to repatriate these remaining earnings in order to create
lower-taxed foreign source income to utilize foreign tax
credits that may otherwise expire unutilized. No further
repatriation beyond the $225 million of foreign earnings
is contemplated.
As described above, we currently project that our avail-
able cash and cash flows from operating activities will
be sufficient to fund our liquidity needs. We also cur-
rently have approximately $1 billion in free cash in
excess of our working capital requirements, a portion
of which we intend to utilize to repurchase common
stock. Accordingly, we do not currently expect to raise
additional debt or equity financing over the next twelve
months. However, there can be no assurances of these
expectations as our projections could prove to be incor-
rect, currently unexpected events may occur that require
additional liquidity, such as an acquisition opportunity,
or market conditions might significantly worsen, affecting
our results of operations and generation of available cash.
If this were to occur, we would likely seek to manage our
available resources by taking actions such as additional
cost-cutting, reducing our expected expenditures on
investments, selling assets (such as investment securities),
repatriating earnings from foreign subsidiaries, or modify-
ing arrangements with our affiliates and/or employees.
Should these types of actions prove insufficient, we may
seek to raise additional equity or debt.
In connection with the announced plan to streamline our
business model, we expect to incur restructuring- and
transition-related costs in the range of $190 to $210 mil-
lion over the next two fiscal years. A portion of the restruc-
turing- and transition-related costs, approximately 15%,
will be paid in shares of restricted stock or the acceleration
of other equity awards. We expect that, approximately
60% of these costs will be incurred by the end of fiscal
2011 and the remainder in fiscal 2012. We project that
the initiative will result in annual cost savings of approxi-
mately $130 to $150 million, and expect to achieve the
savings on a run rate basis by the fourth quarter of fiscal
2012, excluding costs incurred to achieve these savings.
28
Financing Transactions
The table below reflects our primary sources of financing (in thousands) as of March 31, 2010:
Type
2.5% Convertible Senior Notes
5.6% Senior Notes from Equity Units
Revolving Credit Agreement
5-year term loan
Face Amount Amount Outstanding
at March 31,
2010
at March 31,
2010
2009
Interest Rate
$1,250,000 $1,051,243 $1,016,798 2.50%
1,150,000 5.60%
103,039
500,000
700,000
103,039
250,000
—
250,000 LIBOR + 2.625% February 2013
550,000 LIBOR + 2.50% Repaid January 2010
Maturity
January 2015
June 2021
In May 2008, we issued 23 million Equity Units for
$1.15 billion, of which $50 million was used to pay issu-
ance costs. Each unit consists of a 5% interest in $1,000
principal amount of 5.6% senior notes due June 30, 2021
and a purchase contract to purchase a varying number
of shares of our common stock by June 30, 2011. The
notes and purchase contracts are separate and distinct
instruments, but their terms are structured to simulate a
conversion of debt to equity and potentially remarketed
debt approximately three years after issuance. The hold-
ers also receive a quarterly contract adjustment payment
on the purchase contract at an annual rate of 1.4% of the
commitment amount and are required to pledge their
interests in the senior notes to us as collateral on their
purchase commitment. The net proceeds from the Equity
Units offering of approximately $1.11 billion have been
used for general corporate purposes, primarily the pur-
chase of SIV securities from liquidity funds managed by
a subsidiary and repayment of outstanding debt.
During the September 2009 quarter, we completed
an exchange offer for our Equity Units in the form of
Corporate Units in order to increase our equity capital
levels and reduce the amount of our outstanding debt and
related interest expense. We exchanged 91% of our out-
standing Corporate Units, each for 0.8881 of a share of
our common stock and $6.25 in cash per Corporate Unit,
equating to 18.6 million shares of Legg Mason common
stock and $135.0 million of cash, including cash paid in
lieu of fractional shares and transaction costs. The transac-
tion increased the interest coverage ratio under our bank
credit facilities as a result of lower interest expense. In
connection with this transaction, we incurred transaction
costs of approximately $22 million, of which $15.7 million
was in cash.
During January 2008, we increased our capital base by
$1.25 billion through the sale of 2.5% convertible senior
notes. The proceeds strengthened our balance sheet and
provided additional liquidity that has been used for gen-
eral corporate purposes, including the purchase of SIV
securities from our liquidity funds. The senior notes bear
interest at 2.5%, payable semi-annually in cash. We are
accreting the carrying value to the principal amount at
maturity using an imputed interest rate of 6.5% (the effec-
tive borrowing rate for non-convertible debt at the time
of issuance) over its expected life of seven years, resulting
in additional interest expense for fiscal 2010 and 2009 of
approximately $34.4 million and $32.3 million, respec-
tively. In connection with this financing, we entered into
economic hedging transactions that increase the effective
conversion price of the notes. These hedging transactions
had a net cost to us of $83 million, which we paid from
the proceeds of the notes. These transactions closed on
January 31, 2008.
During November 2007, we borrowed an aggregate
of $500 million under our unsecured revolving credit
facility for general corporate purposes. The facility was
scheduled to mature on October 14, 2010; however, in
fiscal 2010, the credit agreement was amended to extend
the maturity date to February 11, 2013. The facility
may be prepaid at any time and contains customary
covenants and default provisions. During January 2008,
we amended the credit agreement to increase the maxi-
mum amount that we may borrow from $500 million
to $1 billion. In March 2009, we repaid $250 million
of the outstanding borrowings under this credit facil-
ity and amended the credit agreement to decrease the
maximum amount that we may borrow from $1 bil-
lion to $500 million and further modified covenants.
In February 2010, we amended the credit agreement to
extend the expiration of the commitments and the matu-
rity date of the loans, as discussed above, and further
modified covenants, as discussed below.
29
During fiscal 2009 and 2008, we issued approximately
0.36 million and 5.53 million common shares, respec-
tively, upon conversion of approximately 0.36 and 5.53
shares, respectively, of the convertible preferred stock that
was issued in the acquisition of Citigroup’s asset manage-
ment business in fiscal 2006. During the fourth quarter
of fiscal 2008, we repurchased 2.5 shares (convertible into
2.5 million common shares) of the convertible preferred
stock for approximately $180 million in cash, using capi-
tal raised through the sale of the 2.5% convertible senior
notes discussed above.
In October 2005, we borrowed $700 million through
a syndicated five-year unsecured floating-rate term loan
agreement to primarily fund the cash portion of the pur-
chase price of the Citigroup transaction. 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 in accordance
with its terms and we repaid a corresponding $50 million
of the debt. During fiscal 2008, we repaid $100 million
of the debt. The swap fully matured in December 2008.
During fiscal 2010, we repaid the remaining $550 million
outstanding balance of the debt.
The agreements entered into as part of our January
2008 issuance of $1.25 billion in 2.5% convertible
senior notes prevent us from incurring additional debt,
with a few exceptions, if our debt to EBITDA ratio (as
defined in the documents) exceeds 2.5. In order to com-
plete the May 2008 issuance of the Equity Units, we
received a waiver of the covenant that prevents us from
issuing more than $250 million in additional debt at
any time when our debt to EBITDA ratio exceeds
2.5. We may not, subject to a few limited exceptions,
incur more than $250 million in new indebtedness
until we have substantially reduced our outstanding
indebtedness or we experience an increase in our trailing
twelve month EBITDA.
At March 31, 2010, our financial covenants under our
bank agreements include: maximum debt to EBITDA
ratio of 2.5 and minimum EBITDA to interest expense
ratio of 4.0. The maximum debt to EBITDA ratio was
decreased from 3.0 to 2.5 in a February 2010 amend-
ment. In February 2010, the maximum debt to EBITDA
ratio was also revised to reduce the minimum amount of
unrestricted cash that is not deducted from outstanding
debt in calculating the ratio under the covenant from
$500 million to $375 million. Debt is defined to include
all obligations for borrowed money, excluding the debt
incurred in the equity units offering and non-recourse
debt, and under capital leases. Under these net debt
covenants, our debt is reduced by the amount of our
unrestricted cash in excess of $375 million, as discussed
above. EBITDA is defined as consolidated net income
plus/minus tax expense, interest expense, depreciation and
amortization, amortization of intangibles, any extraordi-
nary expenses or losses, any non-cash charges and up to
$3.0 billion in realized losses resulting from liquidity fund
support. As of March 31, 2010, our debt to EBITDA ratio
was 0.9 and EBITDA to interest expense ratio was 7.4.
We have maintained compliance with our covenants at all
times during fiscal 2010.
If our net income significantly declines, or if we spend
our available cash, it may impact our ability to maintain
compliance with these covenants. If we determine
that our compliance with these covenants may be under
pressure, we may elect to take a number of actions,
including reducing our expenses in order to increase our
EBITDA, use available cash to repay all or a portion of
our $250 million outstanding debt subject to these cov-
enants or seek to negotiate with our lenders to modify
the terms or to restructure our debt. We anticipate that
we will have available cash to repay our bank debt,
should it be necessary. Using available cash to repay
indebtedness would make the cash unavailable for other
uses and might affect the liquidity discussions and con-
clusions above. Entering into any modification or restruc-
turing of our debt would likely result in additional fees
or interest payments.
Our outstanding debt is currently rated investment
grade by three rating agencies: Moody’s Investor Services
(“Moody’s”), Standard and Poor’s Rating Services
(“Standard and Poor’s”), and Fitch Ratings. Our current
Moody’s rating is Baa1 with a stable outlook. Our cur-
rent Standard and Poor’s rating is BBB+ with a negative
outlook and our current Fitch rating is BBB+ with a stable
outlook. In the event of downgrades by Moody’s and/or
Standard and Poor’s, the interest rate on our revolving line
of credit may increase.
Effective November 1, 2005, we acquired 80% of the out-
standing equity of Permal. Concurrent with the acquisition,
Permal completed a reorganization in which the residual
20% of outstanding equity was converted to preference
30
shares, resulting in Legg Mason owning 100% of the
outstanding voting common stock of Permal. We had the
right to purchase the preference shares over the four years
subsequent to the closing and, if that right was not exer-
cised, the holders of those equity interests had the right to
require us to purchase the interests in the same general time
frame for approximately the same consideration. The maxi-
mum 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, exclud-
ing acquisition costs and dividends. During fiscal 2008,
payments of $240 million were made to the former own-
ers of Permal, representing earnout payments based upon
Permal’s revenues through the second anniversary date and
the purchase of 37.5% of the preference shares, of which
$208 million was paid in cash and the balance was in our
common stock. During fiscal 2010, we paid an aggregate of
$171 million in cash to acquire the remaining 62.5% of the
outstanding preference shares. We also elected to purchase,
for $9 million, the rights of the sellers of the preference
shares to receive an earn-out payment of up to $149 million
in two years. As a result of this transaction, there will be no
further payments for the Permal acquisition. In addition,
during fiscal 2010, 2009, and 2008, we paid an aggregate
amount of $27.0 million in dividends on the preference
shares. All payments for preference shares, including divi-
dends, were recognized as additional goodwill.
On August 1, 2001, we purchased PCM for cash of
approximately $682 million, excluding acquisition costs.
The transaction included two contingent payments based
on PCM’s revenue growth for the years ending on the third
and fifth anniversaries of closing, with the aggregate pur-
chase price to be no more than $1.382 billion. During fiscal
2005, we made the maximum third anniversary payment
of $400 million to the former owners of PCM. During fis-
cal 2007, we paid from available cash into escrow the maxi-
mum fifth anniversary payment of $300 million of which
$150 million remained in escrow subject to certain limited
claw-back provisions until July 2009. During fiscal 2009,
the contingency was settled at which time $30 million was
released from escrow to the sellers and $120 million was
returned to us and recorded as a reduction of goodwill.
In April 2008, we completed a sale in which Citigroup
Global Markets Inc., an affiliate of Citigroup, acquired
a majority of the overlay and implementation business
of LMPPG, including its managed account trading and
technology platform. The sale produced cash proceeds of
approximately $181 million.
In fiscal 2002, the Board of Directors authorized us, at
our discretion, to purchase up to 3.0 million shares of our
common stock. During the June 2007 quarter, we repur-
chased 40,150 shares for $4.0 million. In July 2007, the
Board of Directors authorized us to repurchase, from time
to time, up to 5.0 million shares of our common stock to
replace the previous share repurchase authorization. In
January 2008, the Board of Directors also authorized us
to repurchase non-voting convertible preferred stock rep-
resenting up to 4.0 million shares of common stock from
the proceeds of the convertible senior notes discussed
above. In February 2008, we repurchased and retired
preferred stock convertible into 2.5 million shares of com-
mon stock for $180 million. Also, during fiscal 2008, we
repurchased 1.1 million shares of common stock for $94
million under the new authorization, in addition to the
40,150 shares discussed above. There were no repurchases
during fiscal 2010 and 2009.
On May 10, 2010, we announced that our Board of
Directors had replaced the July 2007 share repurchase
authorization with a new authorization to purchase up to
$1 billion of our common stock. On May 24, 2010, we
announced that we entered into agreements to repurchase
$300 million of our outstanding common stock in accel-
erated share repurchase transactions, which were funded
with our available cash. We currently intend to use a
portion of our available cash to purchase an additional
approximately $100 million of our common stock by the
end of fiscal 2011. See Note 11 of Notes to Consolidated
Financial Statements for additional information.
During fiscal 2010, we announced a plan to terminate the
exchangeable share arrangement related to the acquisition
of Legg Mason Canada Inc., in accordance with its terms.
In May 2010, all remaining outstanding exchangeable
shares were exchanged for shares of our common stock.
On April 27, 2010, the Board of Directors approved a
regular quarterly cash dividend in the amount of $0.04
per share, representing an increase of $0.01 per share over
the prior four quarters. The dividend in fiscal 2010 was
reduced significantly from fiscal 2009 in order to improve
our flexibility to respond to cash needs and potential busi-
ness opportunities requiring cash outflows.
Certain of our asset management subsidiaries maintain
various credit facilities for general operating purposes.
See Notes 6 and 7 of Notes to Consolidated Financial
Statements for additional information. Certain subsidiar-
ies are also subject to the capital requirements of various
31
regulatory agencies. All such subsidiaries met their respec-
tive capital adequacy requirements.
Liquidity Fund Support
During fiscal 2009 and 2008, we entered into a series
of arrangements to provide financial support to certain
liquidity funds. During fiscal 2009, we purchased and
subsequently sold, or reimbursed the funds for a portion
of their losses incurred in selling, all outstanding securi-
ties issued by SIVs held in various liquidity funds man-
aged by one of our subsidiaries, the majority of which
were previously supported under these arrangements.
During fiscal 2009, we also sold Canadian conduit securi-
ties purchased from one of our liquidity funds during fis-
cal 2008. In fiscal 2009, we provided additional support
to liquidity funds that was not related to SIV securities.
As of March 31, 2010 all support arrangements were terminated or expired. As of March 31, 2009, the support amounts
and related cash collateral (in thousands) were as follows:
Description
Capital Support Agreements(2)
Capital Support Agreements(3)
Total
(1) Included in restricted cash on the Consolidated Balance Sheet.
(2) Pertains to Western Asset Institutional Money Market Fund, Western (formerly Citi) Institutional Liquidity Fund P.L.C. (Euro Fund) and Western (formerly Citi)
Support
Amount
$34,500
7,000
$41,500
2009
Cash
Collateral(1)
$34,500
7,000
$41,500
Earliest
Transaction
Date
September 2008
October 2008
Institutional Liquidity Fund P.L.C. (Sterling Fund).
(3) Pertains to Western (formerly Citi) Institutional Liquidity Fund P.L.C. (USD Fund).
During fiscal 2008, we entered into arrangements
with two third-party banks to provide letters of credit
(“LOCs”) for an aggregate amount of approximately
$485 million for the benefit of three liquidity funds man-
aged by one of our subsidiaries as discussed in Note 17
of Notes to Consolidated Financial Statements. As part
of the LOC arrangements, we agreed to reimburse to the
banks any amounts that may be drawn on the LOCs and,
to support four of these agreements, we provided approx-
imately $286 million in cash collateral as of March 31,
2008. Additionally, one of the arrangements was sup-
ported with $150 million in excess capacity on our revolv-
ing credit facility. In fiscal 2009, these LOCs terminated
in accordance with their terms upon the purchase of the
underlying securities from the funds, as described below,
and $286 million in collateral was returned.
During fiscal 2008, we entered into six capital support
agreements (“CSAs”). Under the terms of the CSAs, we
agreed to provide up to a maximum of $415 million in
support to two liquidity funds in certain circumstances
upon the funds realizing a loss from specific underlying
securities. We provided $415 million in collateral to sup-
port each CSA up to the maximum contribution amount.
During fiscal 2009, $200 million in principal amount
of securities supported by one of these CSAs matured
and were paid in full. The related CSA terminated in
accordance with its terms and collateral of $15 million
was returned. The remaining CSAs terminated in accor-
dance with their terms upon the purchase of the underly-
ing securities from the funds, as described below, and the
remaining $400 million in collateral was returned.
Also during fiscal year 2008, we entered into a TRS
arrangement with a major bank (the “Bank”) pursuant to
which the Bank purchased securities issued by three SIVs
from a Dublin-domiciled liquidity fund managed by one
of our subsidiaries. The $890 million in face amount of
commercial paper was purchased by the Bank for cash at
an aggregate amount of $832 million, which represents
an estimate of value determined for collateral purposes.
In addition, we reimbursed the fund for the $59.5 million
difference between the fund’s carrying value, includ-
ing accrued interest, and the amount paid and provided
$139.5 million in cash collateral, which under the terms
of the agreements could be increased or decreased based
on changes in the value, or upon maturities, of the under-
lying securities.
During fiscal 2009, we provided additional support to
two liquidity funds in the form of two standby letters of
credit in the total amount of approximately $257 million.
We provided collateral equal to the total support amount
under the LOCs. These LOCs terminated in accordance
32
with their terms upon the purchase of the underlying
securities from the funds, as described below, and the
$257 million of collateral was returned.
During fiscal 2009, we entered into and amended various
capital support agreements. Under the terms of the new
and amended CSAs, we agreed to provide up to a maxi-
mum of $1.07 billion in support to particular liquidity
funds in certain circumstances upon the funds realizing
a loss from specific underlying securities. We provided
$1.07 billion in collateral to support each CSA up to
the maximum contribution amount. CSAs aggregating
$1.03 billion terminated in accordance with their terms
upon the purchase of the underlying securities from the
funds, as described below, and $1.03 billion of collateral
was returned.
During fiscal 2009, $440 million in principal amount of
securities previously supported under the TRS arrange-
ment matured and were paid in full and an additional
$95 million in principal amount of securities under the
TRS arrangement was repaid. Also during fiscal 2009,
non-bank sponsored SIV securities purchased from a
Dublin-domiciled liquidity fund in fiscal 2008 matured
and $82 million in principal amount and interest was
paid in full.
During fiscal 2009, we paid $2.9 billion for an aggregate
$3.0 billion in principal amount (plus $24 million of
accrued interest) of non-bank sponsored SIV securities
from six liquidity funds that were previously supported
under twelve CSAs and seven LOCs. Upon the purchase
of these securities, the twelve CSAs aggregating $1.4 bil-
lion and seven LOCs aggregating $742 million were ter-
minated in accordance with their terms. Collateral of
$2.0 billion was returned, which includes the return of
$1.03 billion and $257 million of collateral provided dur-
ing the current fiscal year to support new or amended
CSAs and LOCs, respectively.
During fiscal 2009, the $3.0 billion of purchased securi-
ties were sold along with $355 million of securities previ-
ously supported by the TRS and $76 million of Canadian
conduit securities held on our balance sheet, to third par-
ties for $627.3 million, net of transaction costs. The TRS
terminated in accordance with its terms upon the sale of
the securities and $209 million of collateral was returned.
During fiscal 2009, we also paid $181.2 million to reim-
burse two funds for a portion of losses they incurred in
selling SIV securities.
During fiscal 2010, the four remaining CSAs to provide
up to $42 million in support to two liquidity funds were
terminated or expired in accordance with their terms. No
amounts were drawn thereunder and $42 million of col-
lateral was returned.
Credit and Liquidity Risk
Cash and cash equivalent deposits involve certain credit
and liquidity risks. We maintain our cash and cash equiv-
alents with a limited number of high quality financial
institutions and from time to time may have concentra-
tions with one or more of these institutions. The balances
with these financial institutions and their credit quality
are monitored on an ongoing basis.
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 con-
tingent 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 condi-
tion, 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 section that follows and Variable
Interest Entities and Liquidity Fund Support discussed
in Critical Accounting Policies and Notes 1, 16 and 17 of
Notes to Consolidated Financial Statements.
As previously discussed, during fiscal 2009 and 2008,
we entered into various off-balance sheet arrangements
to provide support to certain of our liquidity funds.
These arrangements, all of which were terminated or
expired prior to March 31, 2010, included letters of
credit, capital support agreements and a TRS, which
are fully described above and in Note 17 of Notes to
Consolidated Financial Statements.
In January 2008, we entered into hedge and warrant
transactions on the convertible notes with certain financial
institution counterparties to increase the effective conver-
sion price of the convertible senior notes. See Note 7 of
Notes to Consolidated Financial Statements.
33
Contractual and Contingent Obligations
We have contractual obligations to make future payments,
principally in connection with our long-term debt and
non-cancelable lease agreements. See Notes 6, 7, and 9 of
Notes to Consolidated Financial Statements for additional
disclosures related to our commitments.
The following table sets forth these contractual obligations (in millions) by fiscal year:
Contractual Obligations
Short-term borrowings(1)
Long-term borrowings
by contract maturity
Interest on short-term and
long-term borrowings(2)
Minimum rental and
service commitments
Minimum commitments
under capital leases(3)
Total Contractual Obligations
Contingent Obligations
Contingent payments related
to business acquisitions(4)
Total Contractual and
2011
2012
2013
2014
2015
Thereafter
Total
$250.0
$
—
$
—
$
—
$
—
$
—
$ 250.0
5.2
2.3
0.9
0.9
1,250.9
108.9
1,369.1
46.4
39.0
38.9
38.9
38.8
45.4
247.4
139.2
121.8
107.2
88.6
80.4
593.1
1,130.3
31.8
472.6
1.9
165.0
—
147.0
—
128.4
—
1,370.1
—
747.4
33.7
3,030.5
—
—
2.2
—
—
—
2.2
Contingent Obligations(5,6)
$3,032.7
(1) Represents borrowing under our revolving line of credit which does not expire until February 2013. However, we may elect to repay this debt sooner if we have sufficient
$1,370.1
$149.2
$472.6
$128.4
$747.4
$165.0
available cash that management elects to utilize for this purpose.
(2) Interest on floating rate long-term debt is based on rates at March 31, 2010.
(3) The amount of commitments reflected for any year represents the maximum amount that could be payable at the earliest possible date under the terms of the agreements.
Fiscal 2011 includes $29.0 million related to a put/purchase option agreement with the owner of land and a building. We currently do not intend to purchase this land
and building, which could result in the forfeiture of our $4 million escrow deposit.
(4) The amount of contingent payments represents the fair value of the expected payment determined on the closing date of the acquisition, March 31, 2010. The maximum
contingent payment that could be due in this fiscal year is $7.0 million.
(5) The table above does not include approximately $45.7 million in capital commitments to investment partnerships in which Legg Mason is a general or limited partner.
These obligations will be funded, as required, through the end of the commitment periods that range through fiscal 2018.
(6) The table above does not include amounts for uncertain tax positions of $42.1 million (net of the federal benefit for state tax liabilities) because the timing of any related
cash outflows cannot be reliably estimated.
MARKET RISK
The Company maintains an enterprise risk management
program to oversee and coordinate risk management
activities of Legg Mason and its subsidiaries. Under the
program, certain risk activities are managed at the subsid-
iary level. The following describes certain aspects of our
business that are sensitive to market risk.
Revenues and Net Income
The majority of our revenue is calculated from the
market value of our AUM. Accordingly, a decline in
the value of securities will cause our AUM to decrease.
In addition, our fixed income and liquidity AUM are
subject to the impact of interest rate fluctuations, as ris-
ing interest rates may tend to reduce the market value
of bonds held in various mutual fund portfolios or
separately managed accounts. In the ordinary course of
our business we may also reduce or waive investment
management fees, or limit total expenses, on certain
products or services for particular time periods to man-
age fund expenses, or for other reasons, and to help
retain or increase managed assets. Performance fees may
be earned on certain investment advisory contracts for
exceeding performance benchmarks. Declines in market
values of AUM will result in reduced fee revenues and
net income. We generally earn higher fees on equity
assets than fees charged for fixed income and liquidity
assets. Declines in market values of AUM in this asset
class will disproportionately impact our revenues. In
addition, under revenue sharing agreements, certain of
our subsidiaries retain different percentages of revenues
to cover their costs, including compensation. Our net
34
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 AUM at
one subsidiary can have a dramatically different effect
on our revenues and earnings than an equal change at
another subsidiary.
Trading and Non-Trading Assets and Liabilities
Our trading and non-trading assets and liabilities are
comprised of investment securities, including seed capi-
tal in sponsored mutual funds and products, derivative
instruments, limited partnerships, limited liability com-
panies and certain other investment products, and previ-
ously also included securities issued by SIVs and other
conduit investments prior to March 31, 2009.
Trading investments at March 31, 2010 and 2009 subject
to risk of security price fluctuations are summarized (in
thousands) below.
Investment securities:
Investments relating to long-term
incentive compensation plans
Proprietary fund products and
2010
2009
$167,127 $128,785
other investments
Total trading investments
204,933
207,307
$372,060 $336,092
Approximately $149.8 million and $119.0 million of
trading investments related to long-term incentive com-
pensation plans as of March 31, 2010 and 2009, respec-
tively, have offsetting liabilities such that fluctuation in
the market value of these assets and the related liabilities
will not have a material effect on our net income or
liquidity. However, it may have an impact on our com-
pensation expense with a corresponding offset in other
non-operating income (expense). Trading investments of
$17.3 million and $9.8 million at March 31, 2010 and
2009, respectively, relate to other long-term incentive
plans and the related liabilities do not completely offset
due to vesting provisions. Therefore, fluctuations in the
market value of these trading investments will impact
our compensation expense, non-operating income and
net income.
Approximately $204.9 million and $207.3 million of trad-
ing assets at March 31, 2010 and 2009, respectively, are
investments in proprietary fund products and other invest-
ments for which fluctuations in market value will impact
our non-operating income. Of these amounts, the fluctua-
tions in market value of approximately $33.0 million and
$46.3 million of proprietary fund products as of March 31,
2010 and 2009, respectively, have offsetting compensation
expense under revenue share agreements. The fluctua-
tions in market value of approximately $17.7 million and
$16.6 million of proprietary fund products as of March 31,
2010 and 2009, respectively, are allocated to noncon-
trolling interests of consolidated investment funds, and
therefore do not impact Net Income attributable to Legg
Mason, Inc. The fluctuations in market value of approxi-
mately $19.3 million in proprietary fund products as of
March 31, 2010 are substantially offset by gains (losses)
on market hedges and therefore do not materially impact
Net Income attributable to Legg Mason, Inc. We did not
hedge risk on proprietary fund products as of March 31,
2009. Investments in proprietary fund products are not
liquidated until the related fund establishes a track record,
has other investors, or a decision is made to no longer pur-
sue the strategy.
Beginning in November 2007, we entered into a series of
arrangements to provide credit support to certain liquidity
funds. These arrangements included LOCs, CSAs, a TRS
arrangement and the purchase of securities issued by SIVs
and other conduits, all of which substantially increased our
exposure to the risk of security price fluctuations. During
fiscal 2009, we purchased and subsequently sold, or the
funds sold, all remaining securities issued by SIVs held in
our liquidity funds, effectively eliminating our exposure.
Prior to the purchase, the majority of these SIV securities
were supported under capital support arrangements, letters
of credit and a TRS. The various support arrangements ter-
minated in accordance with their terms upon the purchase.
During fiscal 2009, we also sold Canadian conduit securi-
ties purchased from one of our liquidity funds during fiscal
2008. During fiscal 2010, the four remaining CSAs to pro-
vide up to $42 million in support expired or terminated in
accordance with their terms and no losses were realized.
35
Non-trading assets and liabilities at March 31, 2010 and
2009 subject to risk of security price fluctuations are sum-
marized (in thousands) below.
Investment securities:
Available-for-sale
Investments in partnerships
and LLCs
Other investments
Total non-trading assets
Derivative liabilities:
2010
2009
$ 6,957
$ 6,818
136,469
1,884
$145,310
59,515
1,423
$67,756
Fund support arrangements
$
—
$20,631
Investments in partnerships and LLCs at March 31,
2010 includes approximately $55.7 million of invest-
ments related to our involvement with the U.S. Treasury’s
Public-Private Investment Program (“PPIP”).
As previously discussed, by March 31, 2009, we effectively
eliminated our exposure to SIVs. As of March 31, 2009,
we recorded derivative liabilities on fund support arrange-
ments of $20.6 million, for which our exposure was lim-
ited to approximately $41.5 million. After the termination
of these remaining fund support arrangements during
fiscal 2010, we no longer have any exposure or additional
potential losses related to supported securities.
Valuation of trading and non-trading investments is
described below within Critical Accounting Policies under
the heading “Valuation of Financial Instruments.” The
elimination of SIV exposure from our Balance Sheet and
money market funds as of March 31, 2009 substantially
reduced the sensitivity of our financial position to market
risk. See Notes 1, 17 and 18 of Notes to Consolidated
Financial Statements for further discussion of derivatives
and liquidity fund support actions.
The following is a summary of the effect of a 20% increase or decrease in the market values of our financial instru-
ments subject to market valuation risks at March 31, 2010:
Carrying Value
Fair Value
Assuming a
20% Increase(1)
Fair Value
Assuming a
20% Decrease(1)
Trading investments:
Investment related to deferred compensation plans
Proprietary fund products and other
Total trading investment
Available-for-sale investments
Investments in partnerships and LLCs
Other investments
Total investments subject to market risk
(1) Gains and losses related to certain investments in deferred compensation plans and proprietary fund products are directly offset by a corresponding adjustment to compen-
sation expense and related liability, or noncontrolling interests. In addition, investments in proprietary fund products of approximately $19.3 million have been hedged
to limit market risk. As a result, a 20% increase or decrease in the unrealized market value of our financial instruments subject to market valuation risks would result in a
$39.2 million increase or decrease in our pre-tax earnings, respectively, as of March 31, 2010.
$200,552
245,920
446,472
8,348
163,763
2,261
$620,844
$133,702
163,946
297,648
5,566
109,175
1,507
$413,896
$167,127
204,933
372,060
6,957
136,469
1,884
$517,370
Foreign Exchange Sensitivity
We operate primarily in the United States, but provide ser-
vices, earn revenues and incur expenses outside the United
States. Accordingly, fluctuations in foreign exchange rates
for currencies, principally in Brazil, Poland, the United
Kingdom, Australia, and Canada, may impact our com-
prehensive income and net income. Certain of our subsid-
iaries 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
income or net income or liquidity.
Interest Rate Risk
Exposure to interest rate changes on our outstanding debt
is mitigated as a substantial portion of our debt is at fixed
interest rates. At March 31, 2010 and 2009, approximately
$253.6 million and $806 million, respectively, of our
outstanding floating rate debt is subject to fluctuations in
interest rates and will have an impact on our non-operating
income and net income. As of March 31, 2010, we esti-
mate that a 1% change in interest rates would result in
a net annual change to interest expense of $2.5 million.
See Notes 6 and 7 of Notes to Consolidated Financial
Statements for additional disclosures regarding debt.
36
CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
Accounting policies are an integral part of the preparation
of our financial statements in accordance with account-
ing 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 criti-
cal 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.
Revenue Recognition
The vast majority of our revenues are calculated as a per-
centage of the fair value of our AUM. The underlying
securities within the portfolios we manage, which are not
reflected within our consolidated financial statements, are
generally valued as follows: (i) with respect to securities for
which market quotations are readily available, the market
value of such securities; and (ii) with respect to other secu-
rities and assets, fair value as determined in good faith.
For most of our mutual funds and other pooled products,
the boards of directors or similar bodies are responsible
for establishing policies and procedures related to the
pricing of securities. Each board of directors generally
delegates the execution of the various functions related
to pricing to a fund valuation committee which, in turn,
may rely on information from various parties in pricing
securities such as independent pricing services, the fund
accounting agent, the fund manager, broker dealers,
and others (or a combination thereof). The funds have
controls reasonably designed to ensure that the prices
assigned to securities they hold are accurate. Management
has established policies to ensure consistency in the appli-
cation of revenue recognition.
As manager and advisor for separate accounts, we are
generally responsible for the pricing of securities held
in client accounts (or may share this responsibility with
others) and have established policies to govern valuation
processes similar to those discussed above for mutual
funds that are reasonably designed to ensure consistency
in the application of revenue recognition. Management
relies extensively on the data provided by independent
pricing services and the custodians in the pricing of sepa-
rate account AUM. Separate account customers typically
select the custodian.
Valuation processes for AUM are dependent on the
nature of the assets and any contractual provisions with
our clients. Equity securities under management for
which market quotations are available are usually valued
at the last reported sales price or official closing price on
the primary market or exchange on which they trade.
Debt securities under management are usually valued at
bid, or the mean between the last quoted bid and asked
prices, provided by independent pricing services that are
based on transactions in debt obligations, quotations
from bond dealers, market transactions in comparable
securities and various other relationships between securi-
ties. Short-term debt obligations are generally valued at
amortized cost, which is designed to approximate fair
value. The vast majority of our AUM is valued based
on data from third parties such as independent pricing
services, fund accounting agents, custodians and bro-
kers. This varies slightly from time to time based upon
the underlying composition of the asset class (equity,
fixed income and liquidity) as well as the actual under-
lying securities in the portfolio within each asset class.
Regardless of the valuation process or pricing source, we
have established controls reasonably designed to assess
the reasonableness of the prices provided. Where market
prices are not readily available, or are determined not to
reflect fair value, value may be determined in accordance
with established valuation procedures based on, among
other things, unobservable inputs. Management fees on
AUM where fair values are based on unobservable inputs
are not material. As of March 31, 2010, equity, fixed
income and liquidity AUM values aggregated $173.8 bil-
lion, $364.3 billion, and $146.4 billion, respectively.
As the vast majority of our AUM is valued by independent
pricing services based upon observable market prices or
inputs, we believe market risk is the most significant risk
underlying valuation of our AUM. The recent economic
events and financial market turmoil have increased market
price volatility; however, the valuation of the vast majority
of the securities held by our funds and in separate accounts
continues to be derived from readily available market price
quotations. As of March 31, 2010, less than 2% of total
AUM is valued based on unobservable inputs.
37
Valuation of Financial Instruments
Substantially all financial instruments are reflected in
the financial statements at fair value or amounts that
approximate fair value, except long-term debt. Trading
investments, Investment securities and derivative assets
and liabilities included in the Consolidated Balance
Sheets include forms of financial instruments. Unrealized
gains and losses related to these financial instruments are
reflected in net income or other comprehensive income,
depending on the underlying purpose of the instrument.
For investments, we value equity and fixed income securi-
ties using closing market prices for listed instruments or
broker or dealer price quotations, when available. Fixed
income securities may also be valued using valuation
models and estimates based on spreads to actively traded
benchmark debt instruments with readily available mar-
ket prices. We evaluate our non-trading Investment secu-
rities 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 adjusted cost
of the investment security and its current fair value is rec-
ognized as a charge to earnings in the period in which the
impairment is determined.
In fiscal 2009 and 2008, we entered into various credit
support arrangements for certain liquidity funds man-
aged by a subsidiary that qualified as derivative transac-
tions. The fair values of these derivative instruments were
based on management’s estimates of expected outcomes
derived from pricing data for the underlying securities
and/or detailed collateral analyses. During fiscal 2009,
we purchased and subsequently sold all supported securi-
ties issued by SIVs held in our liquidity funds, effectively
eliminating our exposure to SIVs, and the various support
arrangements terminated in accordance with their terms
upon the purchase. As of March 31, 2009, four capital
support arrangements, which supported investments in
non-asset backed securities, remained outstanding for
which a derivative liability of $20.6 million was included
in Other current liabilities in the Consolidated Balance
Sheet. No derivative asset was recorded as of March 31,
2009. During fiscal 2010, these four remaining capital
support arrangements were terminated or expired in
accordance with their terms and previously recorded
unrealized losses of $20.6 million were recovered. None
of these derivative transactions were designated for
hedge accounting as defined in accounting guidance for
derivative instruments and hedging activities, and the
related gains and losses are included in Fund support in
the Consolidated Statement of Operations in fiscal 2010,
2009 and 2008.
For trading and non-trading investments in illiquid or
privately-held securities for which market prices or quota-
tions are not readily available, the determination of fair
value requires us to estimate the value of the securities
using a variety of methods and resources, including the
most current available financial information for the invest-
ment and the industry. As of March 31, 2010 and 2009,
we owned approximately $48.4 million and $42.2 million,
respectively, of trading and non-trading financial invest-
ments that were valued on our assumptions or estimates
and unobservable inputs.
At March 31, 2010 and 2009, we also have approxi-
mately $136.5 million and $59.5 million, respectively,
of other investments, such as investment partnerships,
that are included in Other assets on the Consolidated
Balance Sheets. These investments are generally
accounted for under the cost or equity method, with the
exception of $55.7 million of investments, as of March 31,
2010, related to our involvement with the U.S. Treasury’s
PPIP, which are recorded at fair value.
The accounting guidance for fair value measurement
and disclosures defines fair value and establishes a
framework for measuring fair value. The accounting
guidance defines fair value as the exchange price that
would be received for an asset or paid to transfer a liabil-
ity in the principal or most advantageous market for
the asset or liability in an orderly transaction between
market participants on the measurement date. A fair
value measurement should reflect all of the assumptions
that market participants would use in pricing the asset
or liability, including assumptions about the risk inher-
ent in a particular valuation technique, the effect of a
restriction on the sale or use of an asset, and the risk of
non-performance.
The accounting guidance for fair value measurements
establishes a hierarchy that prioritizes the inputs for valu-
ation techniques used to measure fair value. The fair
value hierarchy gives the highest priority to quoted prices
in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs.
38
Our financial instruments measured and reported at
fair value are classified and disclosed in one of the follow-
ing categories:
Level 1—Financial instruments for which prices are
quoted in active markets, which, for us, include invest-
ments in publicly traded mutual funds with quoted
market prices and equities listed in active markets.
Level 2—Financial instruments for which: prices are
quoted for similar assets and liabilities in active mar-
kets; prices are quoted for identical or similar assets
in inactive markets; or prices are based on observable
inputs, other than quoted prices, such as models or
other valuation methodologies. For us, this category
may include repurchase agreements, fixed income
securities and certain proprietary fund products.
Level 3—Financial instruments for which values are
based on unobservable inputs, including those for
which there is little or no market activity. This cat-
egory includes derivative assets and liabilities related
to investments in partnerships, limited liability
companies, and private equity funds. Previously, this
category included derivative assets related to fund sup-
port agreements and certain owned securities issued by
SIVs. This category may also include certain propri-
etary fund products with redemption restrictions.
The valuation of an asset or liability may involve inputs
from more than one level of the hierarchy. The level in the
fair value hierarchy within which a fair value measurement in
its entirety falls is determined based on the lowest level input
that is significant to the fair value measurement in its entirety.
Proprietary fund products are valued at NAV determined
by the fund administrator. These funds are typically
invested in exchange-traded investments with observ-
able market prices. Their valuations may be classified as
Level 1, Level 2 or Level 3 based on whether the fund is
exchange-traded, the frequency of the related NAV deter-
minations and the impact of redemption restrictions.
For investments in illiquid and privately-held securities
(private equity and investment partnerships) for which
market prices or quotations may not be readily avail-
able, management must estimate the value of the securi-
ties using a variety of methods and resources, including
the most current available financial information for the
investment and the industry to which it applies in order
to determine fair value. These valuation processes for
illiquid and privately-held securities inherently require
management’s judgment and are therefore classified in
Level 3.
As a practical expedient, we rely on the NAV of certain
investments as their fair value. The NAVs that have been
provided by investees are derived from the fair values of
the underlying investments as of the reporting date.
As of March 31, 2010, approximately 2% of total assets
(36% of financial assets measured at fair value) and no
liabilities meet the definition of Level 3.
Any transfers between categories are measured at the
beginning of the period.
See Note 3 of Notes to Consolidated Financial Statements
for additional information.
Intangible Assets and Goodwill
Balances as of March 31, 2010 are as follows:
Asset management contracts
Indefinite-life intangible assets
Trade names
Goodwill
Americas
$
70,073
2,601,551
7,700
910,959
$3,590,283
International
$
9,050
1,151,748
62,100
404,337
$1,627,235
Total
$
79,123
3,753,299
69,800
1,315,296
$5,217,518
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. Asset management contracts
are amortizable intangible assets that are capitalized at
acquisition and amortized over the expected life of the
contract. Contracts to manage proprietary mutual funds
or funds-of-hedge funds are indefinite-life intangible
39
assets because we assume that there is no foreseeable limit
on the contract period due to the likelihood of continued
renewal at little or no cost. Similarly, trade names are con-
sidered indefinite-life intangible assets because they are
expected to generate cash flows indefinitely.
In allocating the purchase price of an acquisition to intan-
gible assets, we must determine the fair value of the assets
acquired. We determine fair values of intangible assets
acquired based upon projected future cash flows, which
take into consideration estimates and assumptions including
profit margins, growth or attrition rates for acquired con-
tracts based upon historical experience, estimated contract
lives, discount rates, projected net client flows and market
performance. The determination of estimated contract lives
requires judgment based upon historical client turnover
and attrition rates and the probability that contracts with
termination provisions will be renewed. The discount rate
employed is a weighted-average cost of capital that takes
into consideration a premium representing the degree of risk
inherent in the asset as more fully described below.
For indefinite-life intangible assets and goodwill, we
project the impact of both net client flows and market
appreciation/depreciation on cash flows for the near-term
(generally the first five years) based on a year-by-year
assessment that considers current market conditions,
our past experience, relevant publicly available statistics
and projections, and discussions with our own market
experts. Beyond five years, our projections for net client
flows and market performance migrate towards relevant
long-term rates in line with our own results and industry
growth statistics. We believe our growth assumptions are
reasonable given our consideration of multiple inputs,
including internal and external sources described above.
However, there continues to be significant volatility and
uncertainty in the markets, and our assumptions are
subject to change based on fluctuations in our actual
results and market conditions.
or other events. If a triggering event has occurred, we
perform tests, which include critical reviews of all signifi-
cant assumptions, to determine if any intangible assets
or goodwill are impaired. At a minimum, we perform
these tests for indefinite-life intangible assets and goodwill
annually at December 31.
We completed our annual impairment tests of goodwill
and indefinite-life intangible assets as of December 31,
2009, and determined that there was no impairment
in the value of these assets as of December 31, 2009.
Further, no impairment in the value of amortizable
intangible assets was recognized during the year ended
March 31, 2010, as our estimates of the related future
cash flows exceeded the asset carrying values. We have
also determined that no triggering events have occurred
as of March 31, 2010, therefore, no additional indefinite-
life intangible asset and goodwill impairment testing
was necessary.
Amortizable Intangible Assets
Intangible assets subject to amortization are considered
for impairment at each reporting period using an undis-
counted cash flow analysis. Significant assumptions used
in assessing the recoverability of management contract
intangible assets include projected cash flows generated
by the contracts and the remaining lives of the contracts.
Projected cash flows are based on fees generated by cur-
rent AUM for the applicable contracts. Contracts are
generally assumed to turnover evenly throughout the life
of the intangible asset. The remaining life of the asset is
based upon factors such as average client retention and
client turnover rates. If the amortization periods are not
appropriate, the expected lives are adjusted and the impact
on the fair value is assessed. Actual cash flows in any one
period may vary from the projected cash flows without
resulting in an impairment charge because a variance in
any one period must be considered in conjunction with
other assumptions that impact projected cash flows.
Goodwill represents the residual amount of acquisition
cost in excess of identified tangible and intangible assets
and assumed liabilities.
The estimated useful lives of amortizable intangible assets
currently range from 1 to 8 years with a weighted-average
life of approximately 4.3 years.
Given the relative significance of our intangible assets
and goodwill to our consolidated financial statements,
on a quarterly basis we consider if triggering events have
occurred that may indicate a significant change in fair
values. Triggering events may include significant adverse
changes in our business, legal or regulatory environment,
loss of key personnel, significant business dispositions,
Indefinite-Life Intangible Assets
For intangible assets with lives that are indeterminable
or indefinite, fair value is determined from a market par-
ticipant’s perspective based on projected discounted cash
flows. We have two primary types of indefinite-life intan-
gible assets: proprietary fund contracts and, to a lesser
extent, trade names.
40
We determine the fair value of our intangible assets based
upon discounted projected cash flows, which take into
consideration estimates of profit margins, growth rates
and discount rates. An asset is determined to be impaired
if the current implied fair value is less than the recorded
carrying value of the asset. If an asset is impaired, the
difference between the current implied fair value and the
carrying value of the asset reflected on the financial state-
ments is recognized as an expense in the period in which
the impairment is determined to be other than temporary.
Projected cash flows are based on annualized cash flows
for the applicable contracts projected forward 40 years,
assuming annual cash flow growth from estimated net
client flows and projected market performance. Contracts
that are managed and operated as a single unit, such as
contracts within the same family of funds, are reviewed
in aggregate and are considered interchangeable because
investors can transfer between funds with limited restric-
tions. Similarly, cash flows generated by new funds added
to the fund group are included when determining the fair
value of the intangible asset. Actual cash flows in any one
period may vary from the projected cash flows without
resulting in an impairment charge because a variance in
any one period must be considered in conjunction with
other assumptions that impact projected cash flows.
The domestic mutual fund contracts acquired in the
Citigroup Asset Management (“CAM”) acquisition of
$2,502 million and the Permal funds-of-hedge funds
contracts of $947 million account for approximately 65%
and 25%, respectively, of our indefinite-life intangible
assets. For our December 31, 2009 annual impairment
test, cash flows from the domestic mutual fund contracts
were assumed to have a 5-year average annual growth
rate of approximately 8%, with a long-term annual
rate of approximately 8% thereafter. Cash flows on the
Permal contracts were assumed to have a 5-year aver-
age annual growth rate of approximately 14%, with a
long-term annual rate of approximately 9% thereafter.
The projected cash flows from the domestic mutual
fund and Permal funds were discounted at 14.7% and
15.1%, respectively. Assuming all other factors remain
the same, actual results and changes in assumptions for
the domestic mutual fund and Permal fund-of-hedge
funds contracts would have to cause our cash flow projec-
tions over the long-term to deviate more than 5% and
34%, respectively, from previous projections or the dis-
count rate would have to be raised to 15.2% and 18.8%,
respectively, for the asset to be deemed impaired. The
approximate fair values of these assets exceed their carry-
ing values by $144 million and $484 million, respectively.
Trade names account for 2% of indefinite-life intangible
assets and are primarily related to Permal. We tested
these intangible assets using assumptions similar to those
described above for indefinite-life contracts.
Goodwill
Goodwill is evaluated at the reporting unit level and is
considered for impairment 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
discounted projected cash flows, similar to techniques
employed in analyzing the purchase price of an acquisi-
tion target. We have defined the reporting units to be
the Americas and International divisions, which are the
same as our operating segments. Allocations of goodwill
to our divisions for any changes in our management
structure, acquisitions and dispositions are based on rel-
ative fair values of the businesses added to or sold from
the divisions. See Note 19 of Notes to Consolidated
Financial Statements for additional information related
to business segments.
Significant assumptions used in assessing the implied fair
value of the reporting unit under the discounted cash
flow method include the projected cash flows generated
by the reporting unit, including profit margins, expected
current and long-term cash flow growth rates, and the
discount rate used to determine the present value of the
cash flows. Cash flow growth rates consider estimates
of both AUM flows and market expectations by asset
class (equity, fixed income and liquidity), by investment
manager and by reporting unit based upon, among other
things, historical experience and expectations of future
market performance from internal and external sources.
The impact of both net client flows and market per-
formance on cash flows are projected for the near-term
(generally the first five years) based on a year-by-year
assessment that considers current market conditions, our
experience, our internal financial projections, relevant
publicly available statistics and projections, and discus-
sions with our own market experts. Actual cash flows in
any one period may vary from the projected cash flows
without resulting in an impairment charge because a
variance in any one period must be considered in con-
junction with other assumptions that impact projected
cash flows.
41
Discount rates are based on appropriately weighted
estimated costs of debt and capital using a market par-
ticipant perspective. We estimate the cost of debt based
on published debt rates. We estimate the cost of capital
based on the Capital Asset Pricing Model, which con-
siders the risk-free interest rate, market risk and size
premiums, peer-group betas and unsystematic risk. The
discount rates are also calibrated based on an assessment
of relevant market values.
Goodwill in the Americas reporting unit principally
originated from the acquisitions of CAM and Royce. The
value of this reporting unit is based on projected net cash
flows of assets managed in our U.S. mutual funds, closed
end funds and other proprietary funds, in addition to
separate account assets of our U.S. managers. Goodwill
in the International reporting unit principally originated
from the acquisitions of Permal and the international
CAM businesses. For our December 31, 2009 annual
impairment test, the projected cash flows were discounted
at 14.7% and 15.1%, respectively, for the Americas and
International divisions to determine the present value of
cash flows. As of December 31, 2009, the implied fair
values materially exceeded the carrying values for both
the Americas and International divisions. Projected cash
flows, on an aggregate basis across all asset classes in the
Americas division, were assumed to have a 5-year average
annual growth rate of approximately 12%, with a long-
term annual growth rate of approximately 9%. Projected
cash flows, on an aggregate basis across all asset classes
in the International division were assumed to have a five-
year average annual growth rate of approximately 15%,
with a long-term annual growth rate of approximately
9%. Cash flow growth for the Americas and International
divisions over the next five years was based on separate
factors for equity, fixed income, and liquidity products.
Equity product growth projections were based on histori-
cal recovery trends following prior recessionary periods, in
context with our long-term growth experience and current
market conditions. Fixed income product growth projec-
tions were based on the past experience of our primary
fixed income manager and market influences relevant to
their business. Long-term growth of 9% for both divisions
was based on our historical experience, available historic
market statistics, and estimates of future expectations. We
believe our growth assumptions are reasonable given our
consideration of multiple inputs, including internal and
external sources described above. However, our assump-
tions are subject to change based on fluctuations in our
actual results and market conditions. Assuming all other
factors remain the same, actual results and changes in
assumptions for the Americas and International report-
ing units would have to cause our cash flow projections
for both reporting units over the long-term to deviate
approximately 50% from previous projections or the dis-
count rate would have to increase approximately 6 and 7
percentage points, respectively, for goodwill to be consid-
ered for impairment.
As of December 31, 2009, considering relevant prices of
our common shares, our market capitalization, along with
a reasonable control premium, exceeds the aggregate car-
rying values of our reporting units.
Stock-Based Compensation
Our stock-based compensation plans include stock
options, employee stock purchase plans, market-based
performance share awards, restricted stock awards and
deferred compensation payable in stock. Under our stock
compensation plans, we issue equity awards to directors,
officers, and key employees.
In accordance with the applicable accounting guidance,
compensation expense for the years ended March 31,
2010, 2009 and 2008 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. Unamortized deferred compensa-
tion is recognized as a reduction of additional paid-in
capital. Also under the accounting guidance, cash flows
related to income tax deductions in excess of or less than
the stock-based compensation expense are classified as
financing cash flows.
We granted 1.5 million, 1.5 million, and 0.9 million stock
options in fiscal 2010, 2009 and 2008, respectively. For
additional information on share-based compensation, see
Note 12 of Notes to Consolidated Financial Statements.
We determine the fair value of each option grant using
the Black-Scholes option pricing model, except for market-
based grants, for which we use a Monte Carlo 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 exercise price require estimates or assumptions. We
calculate the dividend yield based upon the average of the
historical quarterly dividend payments over a term equal
42
to the vesting period of the options. We estimate volatil-
ity equally weighted between 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 esti-
mated 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. 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
operate. We file income tax returns representing our fil-
ing positions with each jurisdiction. Due to the inherent
complexities arising from conducting business and being
taxed in a substantial number of jurisdictions, we must
make certain estimates and judgments in determining our
income tax provision for financial statement purposes.
These estimates 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 differ-
ences in the timing of revenue and expense recognition
for tax and financial statement purposes. Management
assesses the likelihood that we will be able to realize our
deferred tax assets. If it is more likely than not that the
deferred tax asset will not be realized, then a valuation
allowance is established with a corresponding increase to
deferred tax provision.
Substantially all of our deferred tax assets relate to U.S.
and United Kingdom (“U.K.”) taxing jurisdictions. As of
March 31, 2010, U.S. federal deferred tax assets aggregated
$611 million, realization of which is expected to require
$4.0 billion of future U.S. earnings, approximately $116 mil-
lion of which must be in the form of foreign sourced
income. Deferred tax assets generated in U.S. jurisdic-
tions resulting from net operating losses generally expire
20 years after they are generated and those resulting from
foreign tax credits generally expire 10 years after they are
generated. Based on estimates of future taxable income,
using the same assumptions as those used in our goodwill
impairment testing, it is more likely than not that current
federal tax benefits are realizable and no valuation allow-
ance is necessary at this time. To the extent our analysis
of the realization of deferred tax assets relies on deferred
tax liabilities, we have considered the timing, nature and
jurisdiction of reversals. While tax planning may enhance
our positions, the realization of current tax benefits is not
dependent on any significant tax strategies. As of March 31,
2010, U.S. state deferred tax assets aggregated $212 mil-
lion. Due to limitations on net operating loss and capital
loss carryforwards and, taking into consideration certain
state tax planning strategies, a valuation allowance has
been established for the state capital loss and net operat-
ing loss benefits in certain jurisdictions in the amount of
$49.2 million for fiscal year 2010. Due to the uncertainty
of future state apportionment factors and future effective
state tax rates, the value of state net operating loss benefits
ultimately realized may vary. As of March 31, 2010, U.K.
deferred tax assets, net of valuation allowances, are not
material. An additional valuation allowance was recorded
on $2.9 million of foreign deferred tax assets relating to
various jurisdictions.
In the event we determine all or any portion of our
deferred tax assets are not realizable, we will be required
to establish a valuation allowance by a charge to the
income tax provision in the period in which that deter-
mination is made. Depending on the facts and circum-
stances, the charge could be material to our earnings.
The calculation of our tax liabilities involves uncertain-
ties 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 esti-
mate of whether, and the extent to which, additional
taxes will be due.
Consolidation
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 con-
tinued benefit, exhibit control or have recourse. We do not
utilize SPEs as a form of financing or to provide liquidity,
nor have we recognized any gains or losses from the sale of
assets to SPEs.
In accordance with accounting guidance for the con-
solidation of variable interest entities (“VIEs”), SPEs are
designated as either a voting interest entity or a VIE,
with VIEs subject to consolidation by the party deemed
43
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 sup-
port, either contractual or implied, or in which the equity
investors do not have the characteristics of a controlling
financial interest. Generally, limited partnership entities
where the general partner does not have substantive equity
investment at risk and where the other limited partners do
not have substantive rights to remove the general partner
or to dissolve the limited partnership are also considered
VIEs. 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 accor-
dance with the accounting guidance, our determination
of expected residual returns excludes gross fees paid to
a decision maker. Under current guidance, it is unlikely
that we will be the primary beneficiary for VIEs created
to manage assets for clients unless our ownership interest,
including interests of related parties, in a VIE is substan-
tial, unless we may earn significant performance fees from
the VIE or unless we are considered to have a material
implied variable interest.
The accounting guidance also requires the disclosure of
VIEs in which we are a sponsor or are considered to have
a significant variable interest. In determining whether a
variable interest is significant, we consider the same fac-
tors used for determination of the primary beneficiary.
In determining whether we are the primary beneficiary
of VIEs, we consider 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 us, related party ownership,
guarantees and implied relationships. In determining
the primary beneficiary, we must make assumptions and
estimates about, among other things, the future perfor-
mance of the underlying assets held by the VIE, including
investment returns, cash flows and credit and interest rate
risks. These assumptions and estimates have a significant
bearing on the determination of the primary beneficiary.
If we, together with our related party relationships, are
determined to be the primary beneficiary of a VIE, the
entity is consolidated within our financial statements. If
our assumptions or estimates were to be materially incor-
rect, we might be required to consolidate additional VIEs.
Consolidation of these VIEs would result in an increase
in Assets with a corresponding increase in Noncontrolling
interests or Liabilities on the Consolidated Balance
Sheets, and a decrease in Investment advisory fees and
an increase or decrease in Other non-operating income
(expense) with a corresponding offset in Noncontrolling
interests on the Consolidated Statements of Operations,
but would have no impact on Net income attributable to
Legg Mason, Inc.
As further discussed in Note 1 of Notes to Consolidated
Financial Statements, there are amendments and pro-
posed amendments to consolidation accounting that may
require us to consolidate additional VIEs or voting inter-
est entities.
As of March 31, 2010, we are the primary beneficiary of
one sponsored investment fund VIE, which resulted in
consolidation. This VIE had total assets and total equity
of $52.7 million as of March 31, 2010, and $48.2 million
as of March 31, 2009. Our investment in this VIE was
$27.5 million and $26.3 million as of March 31, 2010
and 2009, respectively, which represents our maximum
risk of loss.
See Note 16 of Notes to Consolidated Financial
Statements for additional discussion of variable interests.
RECENT ACCOUNTING DEVELOPMENTS
See discussion of Recent Accounting Developments in
Note 1 of Notes to Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
We have made in this 2010 Annual Report, and from
time to time may otherwise make in our public fil-
ings, press releases and statements by our management,
“forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995,
including information relating to anticipated growth
in revenues, margins or earnings per share, anticipated
changes in our business or in the amount of our client
AUM, anticipated future performance of our business,
anticipated future investment performance of our subsid-
iaries, our expected future net client cash flows, antici-
pated expense levels, changes in expenses, the expected
effects of acquisitions and expectations 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 statements are subject
to various known and unknown risks and uncertainties
and we caution readers that any forward-looking infor-
mation provided by or on behalf of Legg Mason is not a
guarantee of future performance.
44
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 Annual
Report on Form 10-K and our other public filings, press
releases and statements by our management. Due to
such risks, uncertainties and other factors, we caution
each person receiving such forward-looking informa-
tion 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
occurrence of unanticipated events.
Our future revenues may fluctuate due to numerous fac-
tors, such as: the total value and composition of AUM; the
volatility and general level of securities prices and interest
rates; the relative investment performance of company-
sponsored investment funds and other asset management
products compared with competing offerings and mar-
ket indices; investor sentiment and confidence; general
economic conditions; 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 acquisi-
tions, including prior acquisitions. Our future operating
results are also dependent upon the level of operating
expenses, which are subject to fluctuation for the follow-
ing or other reasons: variations in the level of compensa-
tion 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 infrastruc-
ture; unanticipated costs that may be incurred by Legg
Mason from time to time to protect client goodwill, to
otherwise support investment products or in connection
with litigation or regulatory proceedings; and the effects
of acquisitions and dispositions.
Our business is also subject to substantial governmental
regulation and changes in legal, regulatory, accounting,
tax and compliance requirements that may have a sub-
stantial 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 read-
ily recoverable in charges for services provided by us.
Further, to the extent inflation adversely affects the
securities markets, it may impact revenues and recorded
intangible asset and goodwill values. See discussion
of “Market Risks—Revenues and Net Income” and
“Critical Accounting Policies—Intangible Assets and
Goodwill” previously discussed.
45
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 finan-
cial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of Legg Mason; (ii) provide reason-
able assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
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 dispo-
sition 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, 2010,
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, 2010, Legg Mason’s internal control over financial reporting is effective based on the criteria established in
the COSO framework.
The effectiveness of Legg Mason’s internal control over financial reporting as of March 31, 2010, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing
herein, which expresses an unqualified opinion on the effectiveness of Legg Mason’s internal control over financial
reporting as of March 31, 2010.
Mark R. Fetting
Chairman and Chief Executive Officer
Charles J. Daley, Jr.
Executive Vice President, Chief Financial Officer and Treasurer
46
REpoRT oF INDEpENDENT REgISTERED pubLIC ACCouNTINg FIRM
To the Board of Directors
and Stockholders of Legg Mason, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations,
comprehensive income (loss), changes in stockholders’ equity and cash flows present fairly, in all material respects,
the financial position of Legg Mason, Inc. and its subsidiaries at March 31, 2010 and March 31, 2009, and the results
of their operations and their cash flows for each of the three years in the period ended March 31, 2010 in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of March 31, 2010, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal con-
trol over financial reporting, included in the accompanying Report of Management on Internal Control over Financial
Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal con-
trol over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and per-
form the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement
and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the finan-
cial statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide 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 maintenance 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 transac-
tions are recorded as necessary to permit preparation of financial statements in accordance 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 28, 2010
47
CoNSoLIDATED bALANCE Sh EETS
(Dollars in thousands)
ASSETS
Current Assets
Cash and cash equivalents
Restricted cash
Receivables:
Investment advisory and related fees
Other
Investment securities
Refundable income taxes
Deferred income taxes
Other
Total current assets
Fixed assets, net
Intangible assets, net
Goodwill
Deferred income taxes
Other
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Current Liabilities
Accrued compensation
Accounts payable and accrued expenses
Short-term borrowings
Current portion of long-term debt
Fund support
Other
Total current liabilities
Deferred compensation
Deferred income taxes
Other
Long-term debt
Total Liabilities
Commitments and Contingencies (Note 9)
Redeemable Noncontrolling Interests
Stockholders’ Equity
March 31,
2010
2009
$1,508,275
2,185
349,245
211,571
372,060
—
58,037
57,773
2,559,146
361,819
3,902,222
1,315,296
271,553
203,675
$8,613,711
$ 288,856
400,574
250,000
5,154
—
100,771
1,045,355
137,312
270,578
123,985
1,165,180
2,742,410
$1,084,474
41,688
293,084
306,837
336,092
603,668
94,112
99,432
2,859,387
367,043
3,922,801
1,186,747
759,433
136,888
$9,232,299
$ 374,025
400,761
250,000
8,188
20,631
227,588
1,281,193
105,115
258,944
225,400
2,732,002
4,602,654
29,577
31,020
Common stock, par value $.10; authorized 500,000,000 shares;
issued 161,438,993 shares in 2010 and 141,853,025 shares in 2009
16,144
14,185
Preferred stock, par value $10; authorized 4,000,000 shares;
no shares outstanding in 2010 and 2009, respectively
Shares exchangeable into common stock
Additional paid-in capital
Employee stock trust
Deferred compensation employee stock trust
Retained earnings
Accumulated other comprehensive income (loss), net
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
— —
2,760
4,447,612
(33,095)
33,095
1,316,981
58,227
5,841,724
$8,613,711
3,069
3,452,530
(35,094)
35,094
1,131,625
(2,784)
4,598,625
$9,232,299
48
CoNSoLIDATED STATEMENTS oF op ERATIoNS
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Investment advisory fees
Separate accounts
Funds
Performance fees
Distribution and service fees
Other
Total operating revenues
OPERATING EXPENSES
Compensation and benefits
Distribution and servicing
Communications and technology
Occupancy
Amortization of intangible assets
Impairment of goodwill and intangible assets
Other
Total operating expenses
OPERATING INCOME (LOSS)
OTHER NON-OPERATING INCOME (EXPENSE)
Interest income
Interest expense
Fund support
Other
Total other non-operating income (expense)
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit)
NET INCOME (LOSS)
Less: Net income attributable to noncontrolling interests
NET INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC.
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO
LEGG MASON, INC. COMMON SHAREHOLDERS
Basic
Diluted
See notes to consolidated financial statements.
Years Ended March 31,
2009
2008
2010
$ 814,824
1,367,297
71,452
375,333
5,973
2,634,879
1,111,298
691,931
163,098
156,967
22,769
—
167,633
2,313,696
321,183
7,367
(126,317)
23,171
104,252
8,473
329,656
118,676
210,980
6,623
$ 204,357
$ 1,017,195
1,836,350
17,429
475,003
11,390
3,357,367
1,132,216
969,964
188,312
209,537
36,488
1,307,970
182,060
4,026,547
(669,180)
56,272
(182,805)
(2,283,236)
(109,248)
(2,519,017)
(3,188,197)
(1,223,203)
(1,964,994)
2,924
$(1,967,918)
$1,464,512
2,319,788
132,740
692,277
24,769
4,634,086
1,569,517
1,273,986
192,821
129,425
57,271
151,000
209,890
3,583,910
1,050,176
76,923
(89,225)
(607,276)
6,729
(612,849)
437,327
173,496
263,831
266
$ 263,565
$
$
1.33
1.32
$
$
(13.99)
(13.99)
$
$
1.86
1.83
49
CoNSoLIDATED STATEMENTS oF Ch ANgES IN S ToCkhoLDERS’ EquITy
(Dollars in thousands)
COMMON STOCK
Beginning balance
Stock options and other stock-based compensation
Deferred compensation employee stock trust
Deferred compensation, net
Exchangeable shares
Equity Units exchanged
Business acquisitions
Shares repurchased and retired
Preferred share conversions
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
Convertible debt
Exchangeable shares
Equity Units exchanged
Business acquisitions
Cost of convertible note hedge, net
Future tax benefit on convertible note hedge
Shares repurchased and retired
Preferred share conversions
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
Cumulative effect of change in accounting principle
Net income (loss) attributable to Legg Mason, Inc.
Dividends declared
Ending balance
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET
Beginning balance
Realized and unrealized holding gains (losses) on investment securities,
net of tax
Unrealized and realized gains (losses) on cash flow hedge, net of tax
Foreign currency translation adjustment
Ending balance
TOTAL STOCKHOLDERS’ EQUITY
See notes to consolidated financial statements.
50
Years Ended March 31,
2009
2010
2008
$
$
14,185
8
13
66
12
1,860
—
—
—
16,144
$
13,856
109
16
92
76
—
—
—
36
14,185
3,069
(309)
2,760
4,982
(1,913)
3,069
13,178
157
5
30
8
—
39
(114)
553
13,856
5,188
(206)
4,982
3,452,530
18,758
3,156
29,056
—
297
943,815
—
—
—
—
—
4,447,612
(35,094)
(2,938)
4,937
(33,095)
35,094
2,938
(4,937)
33,095
3,446,559
37,988
6,505
33,107
(73,430)
1,837
—
—
—
—
—
(36)
3,452,530
(29,307)
(5,787)
—
(35,094)
29,307
5,787
—
35,094
3,540,568
91,873
4,915
24,195
—
198
—
32,461
(83,125)
113,858
(277,831)
(553)
3,446,559
(31,839)
(4,689)
7,221
(29,307)
31,839
4,689
(7,221)
29,307
1,131,625
—
204,357
(19,001)
1,316,981
3,236,314
—
(1,967,918)
(136,771)
1,131,625
3,112,844
(3,550)
263,565
(136,545)
3,236,314
(2,784)
82,930
37,895
(18)
—
61,029
58,227
$5,841,724
61
938
(86,713)
(2,784)
$ 4,598,625
(24)
(1,523)
46,582
82,930
$6,784,641
CoNSoLIDATED STATEMENTS oF CoMpREhENSIVE INCoME (LoSS)
(Dollars in thousands)
NET INCOME (LOSS)
Other comprehensive income gains (losses):
Foreign currency translation adjustment
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) net of tax provision (benefit)
of $(9), $9 and $(8), respectively
Reclassification adjustment for (gains) losses included
in net income
Net unrealized gains (losses) on investment securities
Unrealized and realized gains (losses) on cash flow hedge, net of
tax provision (benefit) of $0, $666 and $(1,080), respectively
Total other comprehensive income (loss)
COMPREHENSIVE INCOME (LOSS)
Less: Comprehensive income attributable to noncontrolling interests
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE
TO LEGG MASON, INC.
See notes to consolidated financial statements.
2010
$210,980
Years Ended March 31,
2009
$(1,964,994)
2008
$263,831
61,029
(86,713)
46,582
(13)
(5)
(18)
13
48
61
(11)
(13)
(24)
—
61,011
271,991
6,623
938
(85,714)
(2,050,708)
2,924
(1,523)
45,035
308,866
266
$265,368
$(2,053,632)
$308,600
51
CoNSoLIDATED STATEMENTS oF CASh FLowS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Loss on Equity Unit exchange
Realized loss on sale of SIV securities
Non-cash items included in net income:
Depreciation and amortization
Imputed interest for 2.5% convertible senior notes
Amortization of deferred sales commissions
Accretion and amortization of securities discounts
and premiums, net
Stock-based compensation
Unrealized (gains) losses on investments
Unrealized (gains) losses on fund support
Deferred income taxes
Impairment of goodwill and intangible assets
Other
Decrease (increase) in assets excluding acquisitions:
Investment advisory and related fees receivable
Net sales (purchases) of trading investments
Refundable income taxes
Other receivables
Other assets
Increase (decrease) in liabilities excluding acquisitions:
Accrued compensation
Deferred compensation
Accounts payable and accrued expenses
Other liabilities
CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for fixed assets, including leaseholds
Payments for business acquisitions and related costs
Contractual acquisition earnout settlements (payments)
Proceeds from sale of assets
Fund Support:
Restricted cash, net (principally collateral)
Payments under liquidity fund support arrangements
Proceeds from sale of SIV securities
Purchases of SIV securities, net of distributions
Net (increase) decrease in securities purchased under
agreements to resell
Purchases of investment securities
Proceeds from sales and maturities of investment securities
CASH USED FOR INVESTING ACTIVITIES
Years Ended March 31,
2009
2010
2008
$ 210,980
22,040
—
$(1,964,994)
—
2,257,217
$ 263,831
—
—
114,078
34,445
25,866
13,387
46,578
(120,816)
(22,115)
113,947
—
2,808
(53,402)
76,283
992,548
177,667
(62,292)
(89,800)
32,197
(187)
(86,484)
1,427,728
(84,117)
(11,092)
(179,804)
150
138,445
32,340
35,619
7,177
56,993
106,797
25,996
(817,477)
1,307,970
17,918
227,137
(95,074)
—
(626,392)
431,593
(234,817)
(44,838)
(89,380)
(362,348)
409,882
(130,950)
(7,524)
120,000
181,147
38,890
—
—
—
801,793
(305,933)
513,855
(2,868,815)
141,083
6,544
39,139
1,059
49,345
43,960
607,276
(175,649)
151,000
2,266
66,907
(92,772)
—
26,095
72,585
45,268
13,940
(30,332)
(86,671)
1,144,874
(184,275)
(14,858)
(207,500)
—
(851,688)
(59,537)
49,915
(229,810)
—
(55,507)
14,792
$ (276,688)
604,642
(1,293)
2,172
$(1,090,906)
(604,642)
(6,095)
5,180
$(2,103,310)
52
CoNSoLIDATED STATEMENTS oF CASh FLowS (CoNTINuED)
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings
Proceeds from issuance of long-term debt, net
Purchase of convertible note hedge, net
Debt issue costs
Third-party distribution financing, net
Repayment of principal on long-term debt
Payment on Equity Unit exchange
Issuance of common stock
Repurchase of stock
Dividends paid
Net (redemptions/distributions paid)/subscriptions received
from noncontrolling interest holders
Excess tax benefit associated with stock-based compensation
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
EFFECT OF EXCHANGE RATE CHANGES ON CASH
NET INCREASE (DECREASE) 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 (received) for:
Years Ended March 31,
2009
2010
2008
$
—
—
—
(3,056)
(2,428)
(554,913)
(135,015)
4,999
—
(48,241)
(8,066)
—
(746,720)
19,481
423,801
1,084,474
$1,508,275
$ (250,000)
1,089,463
—
—
(4,814)
(429,608)
—
31,983
—
(135,878)
28,004
—
329,150
(27,206)
(379,080)
1,463,554
$1,084,474
$ 500,000
1,252,600
(83,125)
—
5,264
(114,867)
—
35,920
(277,945)
(132,821)
(610)
35,587
1,220,003
18,370
279,937
1,183,617
$1,463,554
Income taxes (net of payments in 2010 of $60,747)
Interest
$ (994,823)
73,909
$ 156,129
158,499
$ 250,352
74,084
See notes to consolidated financial statements.
53
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 (collec-
tively, “Legg Mason”) are principally engaged in provid-
ing asset management and related financial services to
individuals, institutions, corporations and municipalities.
The consolidated financial statements include the
accounts of the Parent and its subsidiaries in which it has
a controlling financial interest. 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
beneficiary. See discussion of Consolidation that follows
for a further discussion of VIEs. All material intercom-
pany balances and transactions have been eliminated.
Unless otherwise noted, all per share amounts include
common shares of Legg Mason, shares issued in connec-
tion 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 was convertible into
shares of Legg Mason common stock. These non-voting
convertible preferred shares were considered “participating
securities” and therefore were included in the calculation
of basic earnings per common share. During fiscal 2010,
Legg Mason announced a plan to terminate the exchange-
able share arrangement, in accordance with its terms, and
in May 2010 all outstanding exchangeable shares were
exchanged for shares of Legg Mason common stock.
All references to fiscal 2010, 2009 or 2008 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 accom-
panying notes, including revenue recognition, valuation
of financial instruments, intangible assets and goodwill,
stock-based compensation, income taxes, and consolida-
tion. Management believes that the estimates used are
reasonable, although actual amounts could differ from the
estimates and the differences could have a material impact
on the consolidated financial statements.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with origi-
nal maturities of 90 days or less.
Restricted Cash
Restricted cash at March 31, 2010 is $2,185, which pri-
marily represents cash collateral required for market hedge
arrangements. This cash is not available to Legg Mason
for general corporate use. During fiscal 2010, restricted
cash of $41,500, which represented cash collateral required
under support arrangements that expired for certain
liquidity funds that a subsidiary manages, was released.
Financial Instruments
Substantially all financial instruments are reflected in the
financial statements at fair value or amounts that approxi-
mate fair value, except long-term debt.
Legg Mason holds debt and marketable equity invest-
ments which are classified as available-for-sale, held-to-
maturity or trading. Debt and marketable equity securi-
ties classified as available-for-sale are reported at fair value
and resulting unrealized gains and losses are reflected in
stockholders’ equity, noncontrolling interests, and com-
prehensive 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.
Equity and fixed income securities are valued using clos-
ing market prices for listed instruments or broker or
dealer price quotations, when available. Fixed income
securities may also be valued using valuation models and
estimates based on spreads to actively traded benchmark
debt instruments with readily available market prices.
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 amount of impairment that relates
to credit losses is recognized as a charge to income. As
54
of March 31, 2010 and 2009, the amount of temporary
unrealized losses for investment securities not recognized
in income was not material.
For investments in illiquid or privately-held securities for
which market prices or quotations may not be readily
available, management estimates the value of the securi-
ties using a variety of methods and resources, including
the most current available financial information for the
investment and the industry. As of March 31, 2010 and
2009, Legg Mason had approximately $48.4 million and
$42.2 million, respectively, of trading and non-trading
financial instruments which were valued based upon
management’s assumptions or estimates, taking into con-
sideration available financial information of the company
and industry.
At March 31, 2010 and 2009, Legg Mason had approxi-
mately $136.5 million and $59.5 million, respectively, of
investments in partnerships and limited liability corpora-
tions. These investments are reflected in Other noncur-
rent assets on the Consolidated Balance Sheets and are
accounted for under the cost or equity method, with the
exception of $55.7 million of investments, as of March 31,
2010, related to Legg Mason’s involvement with the U.S.
Treasury’s Public-Private Investment Program (“PPIP”),
which are recorded at fair value.
In addition to the financial instruments described above
and the derivative instruments described below, 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, 2010 and 2009 was
$1,265,418 and $2,804,262, respectively. These fair values
were estimated using current market prices.
Derivative Instruments
The fair values of derivative instruments are recorded as
assets or liabilities on the Consolidated Balance Sheets.
Legg Mason has used foreign exchange forwards and
interest rate swaps to hedge the risk of movement in
exchange rates or interest rates on financial assets on a
limited basis. Also more recently, Legg Mason has used
futures contracts on index funds to hedge the market risk
of certain seed capital investments.
Legg Mason applied hedge accounting as defined in the
accounting literature to the debt interest rate risk hedge,
which matured in fiscal 2009. Adjustment of this cash
flow hedge was recorded in Other comprehensive income
(loss) until it matured, at which time it was realized in
Other non-operating income (expense). The gains or
losses on other derivative instruments not designated
for hedge accounting are included as Other income
(expense) or Other non-operating income (expense) in
the Consolidated Statements of Operations except as
described below.
In fiscal 2009 and fiscal 2008, Legg Mason entered into
various credit support arrangements for certain liquid-
ity funds managed by a subsidiary. These arrangements
included letters of credit, capital support agreements and
a total return swap (“TRS”) that qualified as derivative
transactions and are described more fully in Note 17.
The fair values of these derivative instruments were based
on expected outcomes derived from pricing data for the
underlying securities and/or detailed collateral analyses
based on the most recent available information. There
were no related derivative assets as of March 31, 2010 and
2009. There were no related derivative liabilities as of
March 31, 2010 and the fair value of related derivative lia-
bilities as of March 31, 2009 of $20.6 million is included
in Fund support in the Consolidated Balance Sheet. None
of these derivative transactions were designated for hedge
accounting as defined in the accounting guidance and the
related gains and losses are included in Fund support in
the Consolidated Statement of Operations.
Fair Value Measurements
Accounting guidance for fair value measurements defines
fair value and establishes a framework for measuring fair
value. Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability
in the principal or most advantageous market for the asset
or liability in an orderly transaction between market par-
ticipants on the measurement date. Under the accounting
guidance, a fair value measurement should reflect all of
the assumptions that market participants would use in
pricing the asset or liability, including assumptions about
the risk inherent in a particular valuation technique, the
effect of a restriction on the sale or use of an asset, and the
risk of non-performance.
In February 2008, the Financial Accounting Standards
Board (“FASB”) partially deferred the accounting guid-
ance for one year for non-recurring fair value measure-
ments of non-financial assets and liabilities, such as
acquired intangible assets and goodwill. Application
of the deferred provisions of the accounting guidance
for non-recurring fair value measurements, which were
55
effective April 1, 2009, did not have a material impact on
Legg Mason’s consolidated financial statements.
In April 2009, the FASB issued various accounting guid-
ance intended to provide additional application guidance
and enhance disclosures regarding fair value measure-
ments and impairments of securities. This accounting
guidance relates to determining fair values when there is
no active market or where the price inputs being used rep-
resent distressed sales. It reaffirms that the objective of fair
value measurements is to reflect at the date of the finan-
cial statements for how much an asset would be sold in an
orderly transaction (as opposed to a distressed or forced
transaction) under current market conditions. Specifically,
it reaffirms the need to use judgment to ascertain if a
formerly active market has become inactive and in deter-
mining fair values when markets have become inactive.
This accounting guidance also relates to other-than
temporary impairments and is intended to bring greater
consistency to the timing of impairment recognition.
It is also intended to provide greater clarity to investors
about the credit and noncredit components of impaired
debt securities that are not expected to be sold. The guid-
ance also requires increased and more timely disclosures
regarding expected cash flows, credit losses, and an aging
of securities with unrealized losses. This accounting guid-
ance became effective for our June 2009 quarter and did
not have a material impact on Legg Mason’s consolidated
financial position.
The fair value accounting guidance also establishes a hier-
archy that prioritizes the inputs for valuation techniques
used to measure fair value. The fair value hierarchy gives
the highest priority to quoted prices in active markets
for identical assets or liabilities and the lowest priority to
unobservable inputs.
Legg Mason’s financial instruments measured and reported
at fair value are classified and disclosed in one of the follow-
ing categories:
Level 1—Financial instruments for which prices are
quoted in active markets, which, for Legg Mason,
include investments in publicly traded mutual funds
with quoted market prices and equities listed in
active markets.
Level 2—Financial instruments for which: prices are
quoted for similar assets and liabilities in active markets;
prices are quoted for identical or similar assets in inac-
tive markets; or prices are based on observable inputs,
other than quoted prices, such as models or other valua-
tion methodologies. For Legg Mason, this category may
include repurchase agreements, fixed income securities,
and certain proprietary fund products.
Level 3—Financial instruments for which values
are based on unobservable inputs, including those
for which there is little or no market activity. This
category includes derivative liabilities related to fund
support arrangements, investments in partnerships,
limited liability companies, and private equity funds,
and previously included derivative assets related to
fund support arrangements and certain owned securi-
ties issued by structured investment vehicles (“SIVs”).
This category may also include certain proprietary
fund products with redemption restrictions.
The valuation of an asset or liability may involve inputs
from more than one level of the hierarchy. The level in
the fair value hierarchy which a fair value measurement
in its entirety falls is determined based on the lowest level
input that is significant to the fair value measurement in
its entirety.
Proprietary fund products are valued at net asset value
(“NAV”) determined by the applicable fund administra-
tor. These funds are typically invested in exchange-traded
investments with observable market prices. Their valua-
tions may be classified as Level 1, Level 2 or Level 3 based
on whether the fund is exchange-traded, the frequency
of the related NAV determinations and the impact of
redemption restrictions. For investments in illiquid and
privately-held securities (private equity and investment
partnerships) for which market prices or quotations may
not be readily available, management must estimate the
value of the securities using a variety of methods and
resources, including the most current available financial
information for the investment and the industry to which
it applies in order to determine fair value. These valuation
processes for illiquid and privately-held securities inher-
ently require management’s judgment and are therefore
classified in Level 3.
As a practical expedient, Legg Mason relies on the NAV of
certain investments as their fair value. The NAVs that have
been provided by investees are derived from the fair values
of the underlying investments as of the reporting date.
Any transfers between categories are measured at the
beginning of the period.
56
See Note 3 for additional information regarding fair
value measurements.
Legg Mason also adopted accounting guidance that per-
mits companies to choose to measure certain financial
instruments and certain other items at fair value. The
standard requires that unrealized gains and losses on
items for which the fair value option has been elected be
reported in earnings. At this time, the Company has not
elected to apply the fair value option to any of its finan-
cial instruments.
Fixed Assets
Fixed assets consist of equipment, software and leasehold
improvements and capital lease assets. Equipment consists
primarily of communications and technology hardware
and furniture and fixtures. Software includes both pur-
chased software and internally developed software. Fixed
assets are reported at cost, net of accumulated deprecia-
tion and amortization. Capital lease assets are initially
reported at the lesser of the present value of the related
future minimum lease payments or the asset’s then cur-
rent fair value, subsequently reduced by accumulated
depreciation. Depreciation and amortization are deter-
mined 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
and capital lease assets are amortized or depreciated 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 acqui-
sition over the fair value of the net assets acquired.
Indefinite-life intangible assets and goodwill are not
amortized for book purposes. Given the relative signifi-
cance of intangible assets and goodwill to the Company’s
consolidated financial statements, on a quarterly basis
Legg Mason considers if triggering events have occurred
that may indicate that the fair values have declined below
their respective carrying amounts. Triggering events may
include significant adverse changes in the Company’s
business, legal or regulatory environment, loss of key per-
sonnel, significant business dispositions, or other events.
If a triggering event has occurred, the Company will per-
form tests, which include critical reviews of all significant
assumptions to determine if any intangible assets or good-
will are impaired. At a minimum, the Company performs
these tests annually at December 31, for indefinite-life
intangible assets and goodwill, considering factors such
as projected cash flows and revenue multiples, to deter-
mine whether the value of the assets is impaired and the
indefinite-life assumptions 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 intan-
gible assets subject to amortization are reviewed at each
reporting period using an undiscounted cash flow analy-
sis. 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 estimat-
ing the fair value of the reporting unit, Legg Mason uses
valuation techniques principally based on discounted cash
flows similar to models employed in analyzing the pur-
chase price of an acquisition target. Goodwill is deemed
to be recoverable at the reporting unit level, which is also
our operating segment level that Legg Mason defines as
the Americas and International divisions. This results
from the fact that operating segment management that
reports to the Chief Executive Officer, manage the
57
business at the division level and do not regularly receive
discrete financial information, such as operating results,
at any lower level, such as the advisory affiliate level.
Prior to March 31, 2009, Legg Mason’s reporting units
were its Managed Investments, Institutional and Wealth
Management divisions. Allocations of goodwill to Legg
Mason’s divisions for management restructures, acquisi-
tions and dispositions are based on relative fair values of
the respective businesses restructured, added to or sold
from the divisions. See Note 5 for additional information
regarding intangible assets and goodwill and Note 19 for
additional business segment information.
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 net income.
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 based on AUM at the beginning of the billing
period in accordance with the related advisory contracts.
Revenue associated with advance billings is deferred and
included in Other (current) liabilities in the Consolidated
Balance Sheets and is recognized over the period earned.
Performance fees may be earned on certain investment
advisory contracts for exceeding performance benchmarks
and are recognized at the end of the performance mea-
surement period. Accordingly, neither advanced billings
or performance fees are subject to reversal.
Legg Mason has responsibility for the valuation of AUM,
substantially all of which is based on observable market
data from independent pricing services, fund accounting
agents, custodians or brokers.
Distribution and Service Fees Revenue and Expense
Distribution and service fees represent fees earned
from funds to reimburse the distributor for the costs of
marketing and selling fund shares and servicing propri-
etary 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 and a reduction of the unamortized balance of
deferred sales commissions, with a corresponding expense.
Management periodically tests the deferred sales com-
mission 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 indi-
cate an impairment in value, management compares the
carrying value to the estimated undiscounted cash flows
expected to be generated by the asset over its remain-
ing 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, 2010, 2009, and 2008, no impairment charges
were recorded. Deferred sales commissions, included in
Other non-current assets in the Consolidated Balance
Sheets, were $15.3 million and $18.9 million at March 31,
2010 and 2009, respectively.
58
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 state-
ments. Deferred income tax assets are subject to a valu-
ation allowance if, in management’s opinion, it is more
likely than not that these benefits will not be realized.
Legg Mason’s deferred income taxes principally relate to
net operating loss carryforwards, business combinations,
amortization and accrued compensation.
Under applicable accounting guidance, a tax benefit
should only be recognized if it is more likely than not that
the position will be sustained based on its technical mer-
its. A tax position that meets this threshold is measured
as the largest amount of benefit that has a greater than
50% likelihood of being realized upon settlement by the
appropriate taxing authority having full knowledge of all
relevant information.
The Company’s accounting policy is to classify interest
related to tax matters as interest expense and related pen-
alties, if any, as other operating expense.
See Note 8 for additional information regarding
income taxes.
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 reasonably estimated.
Stock-Based Compensation
Legg Mason’s stock-based compensation includes stock
options, employee stock purchase plans, restricted stock
awards, market-based performance shares payable in com-
mon stock and deferred compensation payable in stock.
Under its stock compensation plans, Legg Mason issues
equity awards to directors, officers, and other key employees.
In accordance with the applicable accounting guidance,
compensation expense includes costs 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
options 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. See Note 12 for additional information regarding
stock-based compensation.
Earnings Per Share
Basic earnings per share attributable to Legg Mason, Inc.
common shareholders (“EPS”) is calculated by divid-
ing Net income attributable to Legg Mason, Inc. by the
weighted-average number of shares outstanding. The
calculation of weighted-average shares includes common
shares, shares exchangeable into common stock and con-
vertible preferred shares that are considered participating
securities. Diluted EPS is similar to basic EPS, but adjusts
for the effect of potential common shares unless they are
antidilutive. For periods with a net loss, potential com-
mon shares are considered antidilutive. See Note 14 for
additional discussion of EPS.
Consolidation
Special purpose entities (“SPEs”) are trusts, partner-
ships, corporations or other vehicles that are established
for a limited business purpose. SPEs generally involve
the transfer of assets and liabilities in which the transf-
eror 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 the accounting guidance for the con-
solidation of variable interest entities (“VIEs”), 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 activi-
ties without additional subordinated financial support,
either contractual or implied, or in which the equity inves-
tors do not have the characteristics of a controlling finan-
cial 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 the accounting guidance, Legg Mason’s determina-
tion of expected residual returns excludes gross fees paid
to a decision maker. Under current guidance, 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, unless Legg Mason may earn significant per-
formance fees from the VIE or unless Legg Mason is con-
sidered to have a material implied variable interest.
The accounting guidance also requires the disclosure of
VIEs in which Legg Mason is a sponsor or is considered
59
to have a significant variable interest. In determining
whether a variable interest is significant, 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 consid-
ers both qualitative and quantitative factors such as the
voting rights of the equity holders, including rights to
remove the decision maker, economic participation of
all parties, including how fees are earned by and paid to
Legg Mason, related party ownership, guarantees and
implied relationships. In determining the primary benefi-
ciary, Legg Mason must make assumptions and estimates
about, among other things, the future performance of
the underlying assets held by the VIE, including invest-
ment returns, cash flows and credit and interest rate
risks. These assumptions and estimates have a significant
bearing on the determination of the primary 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 in Assets with a corresponding
increase in Noncontrolling interests or Liabilities on the
Consolidated Balance Sheets and a decrease in Investment
advisory fees and an increase or decrease in Other non-
operating income (expense) with a corresponding offset in
Noncontrolling interests on the Consolidated Statements
of Operations, but have no impact on Net income attrib-
utable to Legg Mason, Inc.
In June 2009, the FASB issued amendments relating to
the consolidation of VIEs, which will be effective for Legg
Mason in fiscal 2011. The amendments include a new
approach for determining who should consolidate a VIE,
changes to when it is necessary to reassess who should
consolidate a VIE, and changes in the assessment of which
entities are VIEs. The new approach for determining who
should consolidate a VIE requires an analysis of whether a
variable interest gives an enterprise a controlling financial
interest in a VIE through both the power to direct the
activities that most significantly impact the VIE’s eco-
nomic performance and the obligation to absorb losses or
the right to benefits that could potentially be significant
to the VIE. The amendments would replace the quantita-
tive approach previously required to determine whether
a VIE should be consolidated with a qualitative analysis.
The amendments also require that for removal rights to be
effective, they must be vested with one party, rather than
a simple majority of parties, as under prior guidance. The
new guidance increases the likelihood of consolidation
of certain products Legg Mason manages. In February
2010, the FASB amended the new consolidation guid-
ance to defer the application for certain investment funds,
including money market funds, until the FASB and the
International Accounting Standards Board develop con-
sistent guidance on certain aspects of their respective con-
solidation standards. Legg Mason is continuing to evaluate
the impact of the original amendments and currently
believes that without the deferral Legg Mason would be
required to consolidate certain sponsored funds, particu-
larly those with performance fees, significant related-party
ownership, or implicit variable interests, such as fund sup-
port, that will be material to its balance sheet, revenues
and expenses, but will have no impact on Net income
attributable to Legg Mason, Inc. While Legg Mason con-
tinues to evaluate the deferral provisions, there are certain
sponsored funds, primarily collateralized debt or loan
obligation investment vehicles (“CDOs/CLOs”) that do
not qualify for deferral and may require consolidation that
would also be material to its balance sheet, revenues, and
expenses but still have no impact on Net income attribut-
able to Legg Mason, Inc. Legg Mason currently manages
12 CDOs/CLOs with approximately $3.5 billion in AUM.
Legg Mason does not have any equity interest in any of
these vehicles and each may or may not be contractually
eligible to earn subordinate fees and/or incentive fees. Legg
Mason does not expect to receive performance fees from
any of these vehicles that are eligible for such. Based on its
evaluation performed to date, Legg Mason believes it may
have to consolidate one of these CDOs with approximately
$300 million in AUM due to the potentially significant
economic interest created by subordinate fees.
Legg Mason, through one of its subsidiaries, is one of
eight managers involved in the U.S. Treasury’s PPIP,
which qualifies for the investment fund deferral from new
VIE accounting guidance. The Company’s subsidiary is
the general partner within the Legg Mason PPIP structure
and performs most of the routine activities through the
investment management contracts. The principal entity
within Legg Mason’s PPIP structure is a voting entity that
provides substantive rights that allow the general partner
to be removed by simple majority of the unrelated limited
partner investors, and therefore does not require consoli-
dation by Legg Mason. Other feeder funds within Legg
Mason’s PPIP structure are VIEs; however, Legg Mason is
not required to consolidate them.
See Note 16 for information on our CDOs/CLOs and
other VIEs.
60
Noncontrolling interests
Noncontrolling interests related to consolidated investment funds are classified as redeemable noncontrolling interests
as investors in these funds may request withdrawals at any time. Redeemable noncontrolling interests as of March 31,
2010 and 2009, were $29,577, and $31,020 with changes during the years then ended as follows:
Balance, beginning of period
Net income (loss) attributable to noncontrolling interests
Net (redemptions/distributions)/subscriptions received from noncontrolling interest holders
Balance, end of period
2010
$31,020
6,623
(8,066)
$29,577
$
2009
92
2,924
28,004
$31,020
Other Recent Accounting Developments
The following other relevant accounting pronouncement
was recently issued.
In January 2010, the FASB issued an amendment that
will require new disclosures about recurring and non-
recurring fair value measurements. The new disclosures
include significant transfers into and out of Level 1 and 2
measurements and will change the current disclosure
requirement of Level 3 measurement activity from a net
basis to a gross basis. The amendment also clarifies exist-
ing disclosure guidance about the level of disaggregation,
inputs and valuation techniques. The new and revised dis-
closures are effective for Legg Mason in fiscal 2011, except
for the revised disclosures about Level 3 measurement
activity, which are not effective for Legg Mason until fis-
cal 2012 and are not expected to have a material impact
on Legg Mason’s consolidated financial statements.
2. ACQUISITIONS AND DISPOSITIONS
On February 26, 2008, Legg Mason announced a
definitive agreement in which Citigroup Global Markets
Inc., an affiliate of Citigroup Inc. (“Citigroup”), would
re-acquire a majority of the overlay and implementa-
tion business of Legg Mason Private Portfolio Group
(“LMPPG”), which includes its managed account trading
and technology platform. In undertaking this transaction,
Legg Mason continued its focus on its core asset manage-
ment business. Legg Mason had originally acquired this
business from Citigroup in the December 2005 acquisi-
tion of Citigroup’s worldwide asset management business
(“CAM”). The sale closed on April 1, 2008 and cash pro-
ceeds of approximately $181 million were received. After
transaction costs, the gain on the sale of this business was
approximately $5.5 million ($3.4 million after tax), which
was recognized in Other non-operating income (expense)
in fiscal 2009.
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%
61
3. INVESTMENTS AND FAIR VALUES
OF ASSETS AND LIABILITIES
Legg Mason has investments in debt and equity securities
that are generally classified as available-for-sale and trad-
ing as described in Note 1. Investments as of March 31,
2010 and 2009, are as follows:
Investment securities:
2010
2009
Trading(1)
Available-for-sale
Other(2)
$336,092
6,818
1,423
$344,333
Total
(1) Includes assets of deferred compensation plans of $167,127 and $128,785, respec-
tively. The remainder represents seed investments in proprietary fund products
and investments in VIEs.
$372,060
6,957
1,884
$380,901
(2) Includes investments in private equity securities that do not have readily deter-
minable 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:
Available-for-sale:
Proceeds
Gross realized gains
Gross realized losses
Years Ended March 31,
2008
2009
2010
$1,279
1
(4)
$2,173
5
(84)
$5,194
34
(14)
The net unrealized and realized gain (loss) for investment
securities classified as trading was $141,633, ($1,995,428),
and ($62,001) for fiscal 2010, 2009 and 2008, respec-
tively. The realized and unrealized losses for fiscal 2009
and 2008 primarily relate to losses on SIV-issued securi-
ties purchased from certain liquidity funds.
Legg Mason’s available-for-sale investments consist of
mortgage backed securities, U.S. government and agency
securities and equity securities. Gross unrealized gains
and losses for investments classified as available-for-sale
were $172 and ($33), respectively, as of March 31, 2010,
and $209 and ($39), respectively, as of March 31, 2009.
Legg Mason had no investments classified as held-to-
maturity as of March 31, 2010 and 2009.
of the outstanding voting common stock of Permal. Legg
Mason had the right to purchase the preference shares
over four years from closing and, if that right was not
exercised, the holders of those shares had the right to
require Legg Mason to purchase the interests in the same
general time frame for approximately the same consider-
ation. The maximum aggregate price, including earnout
payments related to each purchase and based upon future
operating results, for all equity interests in Permal is
$1.386 billion excluding acquisition costs and dividends.
During fiscal 2008, payments of $240 million were made
to the former owners of Permal, representing earnout
payments based upon Permal’s operating results through
the second anniversary date and the purchase of 37.5% of
the preference shares, of which $208 million was paid in
cash and the balance was in its common stock. During
fiscal 2010, Legg Mason paid an aggregate of $171 mil-
lion in cash to acquire the remaining 62.5% of the out-
standing preference shares. The Company also elected to
purchase, for $9 million, the rights of the sellers of the
preference shares to receive an earnout payment of up to
$149 million in two years. As a result of this transaction,
there will be no further payments for the Permal acquisi-
tion. In addition, during fiscal 2010, 2009, and 2008,
Legg Mason paid an aggregate amount of $27.0 million
in dividends on the preference shares. All payments for
preference shares, including dividends, were recognized as
additional goodwill.
On August 1, 2001, Legg Mason purchased Private
Capital Management (“PCM”) for cash of approximately
$682 million, excluding acquisition costs. The transac-
tion included two contingent payments based on PCM’s
revenue growth for the years ending on the third and
fifth anniversaries of closing, with the aggregate purchase
price to be no more than $1.382 billion. During fiscal
2005, Legg Mason made the maximum third anniver-
sary payment of $400 million to the former owners of
PCM. During fiscal 2007, we paid from available cash the
maximum fifth anniversary payment of $300 million, of
which $150 million remained in escrow subject to certain
limited clawback provisions through fiscal 2010. During
fiscal 2009, the remaining contingency was settled by
releasing $30 million to the sellers and returning $120 mil-
lion to Legg Mason, which was recorded as a reduction
of goodwill.
62
The fair values of financial assets and (liabilities) of the Company were determined using the following categories of
inputs at March 31, 2010 and 2009:
Quoted
prices in
active markets
(Level 1)
Significant
other observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Value as of
March 31, 2010
$118,096
$ 49,031
$
—
$167,127
65,534
183,630
2,533
1,192
697
—
$188,052
92,476
141,507
4,412
—
—
—
$145,919
46,923
46,923
12
135,277
—
1,884
$184,096
204,933
372,060
6,957
136,469
697
1,884
$518,067
ASSETS:
Investments relating to long-term
incentive compensation plans(1)
Proprietary fund products and
other investments(2)
Total trading investment securities
Available-for-sale debt securities
Investments in partnerships and LLCs
Derivative assets:
Currency and market hedge
Equity securities
LIABILITIES:
Derivative liabilities:
Currency and market hedge
$
(485)
$
—
$
—
$
(485)
Quoted
prices in
active markets
(Level 1)
Significant
other observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Value as of
March 31, 2009
$128,785
$
—
$
—
$128,785
115,117
243,902
3,105
796
8,203
—
$256,006
51,471
51,471
3,701
—
—
—
$ 55,172
40,719
40,719
12
58,719
—
2,340
$101,790
207,307
336,092
6,818
59,515
8,203
2,340
$412,968
ASSETS:
Investments relating to long-term
incentive compensation plans(1)
Proprietary fund products and
other investments(2)
Total trading investment securities
Available-for-sale debt securities
Investments in partnerships and LLCs
Derivative assets:
Currency hedge
Equity securities
LIABILITIES:
Derivative liabilities:
Fund support(3)
—
(1) Primarily mutual funds where there is minimal market risk to the Company as any change in value is offset by an adjustment to compensation expense and related liability.
(2) Total proprietary fund products and other investments represent primarily mutual funds that are invested approximately 58% and 42% in equity and debt securities as of
March 31, 2010, respectively, and were approximately equally invested in equity and debt securities as of March 31, 2009. Total also includes approximately $22.2 million
and $16.6 million related to noncontrolling interests of consolidated investment funds as of March 31, 2010 and 2009, respectively.
$ (20,631)
$ (20,631)
—
$
$
(3) See Note 1 for additional information on the fair value of liquidity fund support.
63
The table below presents a summary of changes in financial assets and (liabilities) measured at fair value using significant
unobservable inputs (Level 3) for the periods from March 31, 2009 to March 31, 2010 and April 1, 2008 to March 31, 2009:
Value as of Purchases, sales, Net transfer Realized and Value as of
March 31,
unrealized March 31,
in (out) of
2009
issuances and
settlements, net
Level 3 gains/(losses), net
2010
ASSETS:
Proprietary fund products and
other investments
Investments in partnerships and LLCs
Other investments
LIABILITIES:
Fund support(1,2)
Total realized and unrealized gains, net
$ 40,719
58,719
2,352
$101,790
$(14,684)
72,992
(1,267)
$ 57,041
$10,414
—
—
$10,414
$ (20,631)
$
—
$
—
$10,474
3,566
811
$14,851
$20,631
$35,482
Value as of Purchases, sales, Net transfer Realized and
unrealized
gains/(losses), net
issuances and
settlements, net
in (out) of
Level 3
April 1,
2008
$ 46,923
135,277
1,896
$184,096
$
—
Value as of
March 31,
2009
ASSETS:
Securities issued by SIVs(1)
Proprietary fund products and
other investments
Investments in partnerships and LLCs
Total return swap(1)
Other investments
LIABILITIES:
Total return swap(1)
Fund support(1,2)
$ 141,509
$2,300,697
$
(96)
$(2,442,110)
$
—
23,781
67,022
45,706
1,903
$ 279,921
(13,781)
874
(45,706)
23
$2,242,107
52,041
(1,385)
—
—
$50,560
(21,322)
(7,792)
—
426
$(2,470,798)
$
—
(551,654)
$(551,654)
$ 188,103
—
$ 188,103
$
$
—
—
—
$ (188,103)
531,023
$ 342,920
$(2,127,878)
40,719
58,719
—
2,352
$101,790
$
—
(20,631)
$ (20,631)
Total realized and unrealized losses, net
(1) See Note 17 for further discussion of liquidity fund support.
(2) The decrease in the fund support derivative liability resulted from the termination of fund support agreements, upon the purchase of SIV securities from the funds.
Realized and unrealized gains and losses recorded for
Level 3 investments are included in Fund support and
Other income (expense) on the Consolidated Statements of
Operations. Total net gains (losses) for Level 3 investments
of $15.4 million and $(49.3) million for the years ended
March 31, 2010 and 2009, respectively, are attributable to
the change in unrealized gains (losses) relating to the assets
and liabilities still held at the reporting date.
64
As a practical expedient, Legg Mason relies on the net asset value of certain investments as their fair value. The net
asset values that have been provided by the investees have been derived from the fair values of the underlying invest-
ments as of the reporting date. The following table summarizes, as of March 31, 2010, the nature of these investments
and any related liquidation restrictions or other factors which may impact the ultimate value realized.
Category of Investment
Funds-of-hedge funds
Hedge funds
Private funds
Private fund
Investment Strategy
Global, fixed income, macro, long/
short equity, natural resources,
systematic, emerging market,
Europe hedge
Global, fixed income, macro, long/
short equity, systematic, emerging
market, U.S. and Europe hedge
Long/short equity
Fixed income, residential and com-
mercial mortgage-backed securities
Various
Fair Value
Determined
Using NAV Commitments Remaining Term
$ 39,440(1)
n/a
Unfunded
n/a
45,512(2)
n/a
n/a
32,728(3)
55,709(3)
$22,243
18,062
9 years
8 years, subject to two
1-year extensions
Various(4)
Other
Total
n/a—not applicable
(1) 23% monthly redemption, 77% quarterly redemption, 18% of which is subject to 2-year lock-up.
(2) 32% monthly redemption, 28% quarterly redemption, 9% annual redemption, and 31% subject to 3- to 5-year lock-up or side pocket provisions.
(3) Liquidations are expected during the remaining term.
(4) 84% 3-year remaining term, 16% 21-year remaining term.
n/a
$40,305
$185,044
11,655(3)
There are no current plans to sell any of these investments.
4. FIXED ASSETS
Fixed assets consist of equipment, software and leasehold improvements and capital lease assets. Equipment
consists primarily of communications and technology hardware and furniture and fixtures. Software includes
purchased software and internally developed software. Fixed assets are reported at cost, net of accumulated
depreciation and amortization. The following table reflects the components of fixed assets as of March 31:
Equipment
Software
Leasehold improvements and capital lease assets
Total cost
Less: accumulated depreciation and amortization
Fixed assets, net
2010
$ 196,624
212,835
306,435
715,894
(354,075)
$ 361,819
2009
$ 180,668
193,109
314,963
688,740
(321,697)
$ 367,043
Depreciation and amortization expense was $91,309, $101,957, and $83,812 for fiscal 2010, 2009, and 2008, respectively.
65
5. 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 value of the assets exceeds the book value. Intangible
assets subject to amortization are considered for impairment
at each reporting period. If the fair value is less than the
book value, Legg Mason will record an impairment charge.
The following tables reflect the components of intangible assets as of March 31:
AMORTIzABLE ASSET MANAGEMENT CONTRACTS
Cost
Accumulated amortization
Net
INDEFINITE-LIFE INTANGIBLE ASSETS
Fund management contracts
Trade names
Intangible assets, net
2010
$ 212,333
(133,210)
79,123
3,753,299
69,800
3,823,099
$3,902,222
2009
$ 208,416
(108,376)
100,040
3,752,961
69,800
3,822,761
$3,922,801
During fiscal 2010, there were no impairments of amor-
tizable or indefinite-life intangible assets.
Estimated amortization expense for each of the next five
fiscal years is as follows:
During fiscal 2009, Legg Mason recognized an impair-
ment of management contracts related to intangible
assets acquired in the acquisitions of CAM and PCM
of $72,326 and $26,644, respectively. The assets under
management and related revenues associated with these
acquired management contracts declined significantly
during fiscal year 2009. Based on client turnover data,
the estimated lives of the CAM retail separately man-
aged accounts contracts were decreased from 9 years to
5 years at March 31, 2009. The fair value of the remain-
ing acquired management contracts were determined
using valuation techniques based on discounted cash
flows over the estimated 5-year remaining life, using a
risk-adjusted discount rate. Based upon the continued
significant decline in AUM, Legg Mason wrote off the
remaining balance of the PCM management contracts
in fiscal 2009.
As of March 31, 2010, management contracts are being
amortized over a weighted-average life of 4.3 years.
2011
2012
2013
2014
2015
Thereafter
Total
$22,965
19,930
14,659
12,453
3,538
5,578
$79,123
The change in indefinite-life intangible assets is attribut-
able to the impact of foreign currency translation. Legg
Mason completed its most recent annual impairment
tests of indefinite-life intangible assets as of December 31,
2009, and determined that there was no impairment in
the value of these assets during fiscal 2010. Legg Mason
also determined that no triggering events occurred as
of March 31, 2010 that would require further impair-
ment testing. During fiscal 2009, as a result of significant
declines in AUM and other significant changes at PCM,
Legg Mason recognized an impairment for the PCM
trade name asset of $47,000.
66
The change in the carrying value of goodwill is summarized below:
Balance as of March 31, 2009
Business acquisitions and related costs
Contractual acquisition earnout payments (see Note 2)
Impact of excess tax basis amortization
Other, including changes in foreign exchange rates
Balance as of March 31, 2010
Balance as of March 31, 2008
Business acquisitions and related costs (see Note 2)
Contractual acquisition earnout payments
(settlements) (see Note 2)
Gross Book
Value
$2,348,647
11,968
98,804
(18,920)
36,697
$2,477,196
Gross Book
Value
$2,536,816
7,524
Accumulated
Impairment
$(1,161,900)
—
—
—
—
$(1,161,900)
Accumulated
Impairment
—
$
—
Net Book
Value
$1,186,747
11,968
98,804
(18,920)
36,697
$1,315,296
Net Book
Value
$ 2,536,816
7,524
Impairment of former Wealth Management Division(1)
Impact of excess tax basis amortization
Other, including changes in foreign exchange rates
Balance as of March 31, 2009
(1) In fiscal 2009, Legg Mason replaced its three former operating segments (divisions), Managed Accounts, Institutional, and Wealth Management, with two new divisions,
—
(1,161,900)
—
—
$(1,161,900)
(120,000)
(1,161,900)
(20,868)
(54,825)
$ 1,186,747
(120,000)
—
(20,868)
(54,825)
$2,348,647
Americas and International.
Legg Mason completed its most recent annual impair-
ment test of goodwill as of December 31, 2009, and deter-
mined that there was no impairment in the value of these
assets during fiscal 2010. Legg Mason also determined
that no triggering events occurred as of March 31, 2010
that would require further impairment testing.
Effective March 31, 2010, Legg Mason acquired contracts
to manage approximately $175 million of assets for a
total purchase price fair value of $5.2 million. The man-
agement contracts were valued at $1.3 million, with the
remaining $3.9 million of the fair value purchase price
recorded as goodwill.
Based on the earnings of Permal, in November 2009,
Legg Mason paid $171 million, of which $81 million was
accrued in fiscal 2008, in a fourth anniversary payment
under the purchase contract for the acquisition of the
remaining preference shares issued by Permal, which was
recognized with a corresponding increase in goodwill. In
addition, in December 2009, Legg Mason elected to pur-
chase, for $9 million, the rights of the sellers of the prefer-
ence shares to receive an earnout payment on the sixth
anniversary in November 2011 of up to $149 million. The
purchase amount of $9 million represents the fair value of
the obligation and also resulted in an increase in goodwill.
As a result of this transaction, there will be no further
payments for the Permal acquisition.
The severe market turmoil experienced during fiscal
2009 had a more significant impact on the former Wealth
Management division than on Legg Mason’s other former
divisions. AUM decreased over 30% in that division as
a result of both net client outflows and market deprecia-
tion. As a result of the dramatic changes in market condi-
tions during fiscal 2009, Legg Mason revised its growth
assumptions downward, to project contraction through
the next two years. Further, the applicable discount rate
was increased from 12.5% to 14.7% in the December
quarter based on changes in interest rates and risk factors.
The combined impact of these factors decreased projected
cash flows of the Wealth Management division by over
60% from Legg Mason’s prior projections. As a result, the
carrying value of Legg Mason’s Wealth Management divi-
sion goodwill was considered impaired, and a $1,161,900
impairment charge was recorded during fiscal 2009.
Legg Mason also recognizes the tax benefit of the amorti-
zation of excess tax basis related to the CAM acquisition.
In accordance with accounting guidance for income taxes,
the tax benefit is recorded as a reduction of goodwill and
deferred tax liabilities as the benefit is realized.
67
6. SHORT-TERM BORROWINGS
On October 14, 2005, Legg Mason entered into an unse-
cured 5-year $500 million revolving credit agreement.
During November 2007, Legg Mason borrowed $500 mil-
lion under this revolving credit facility for general cor-
porate purposes, the proceeds of which were invested in
short-term instruments. On January 3, 2008, the revolving
credit agreement was amended to increase the maximum
amount that Legg Mason may borrow to $1 billion and to
allow it to draw a portion of the availability in the form of
letters of credit (“LOCs”). In March 2009, Legg Mason
repaid $250 million of the outstanding borrowings under
this credit facility and the revolving credit agreement was
amended to decrease the maximum amount that Legg
Mason may borrow from $1 billion to $500 million. On
February 11, 2010, the revolving credit agreement was
amended to extend the expiration of the commitments and
the maturity date of the loans outstanding to February
2013. The revolving credit facility rate was LIBOR plus
262.5 basis points and LIBOR plus 225 basis points as of
March 31, 2010 and 2009, respectively. The effective inter-
est rate for the revolving credit agreement was 2.9% and
2.8% as of March 31, 2010 and 2009, respectively. These
rates may change in the future based on changes in Legg
Mason’s credit ratings. As of March 31, 2010 and 2009,
there was $250 million outstanding under this facility. On
March 7, 2008, Legg Mason elected to procure a LOC
for a money market fund to support up to $150 million of
the fund’s holdings in certain SIV-issued securities using
capacity on the revolving credit agreement as collateral.
This LOC terminated in accordance with its terms upon
Legg Mason’s purchase of the underlying securities from
the fund during fiscal 2009.
The Company’s revolving credit facility is with the same
lenders as the $550 million 5-year term loan, which was
repaid in full during fiscal 2010, described in Note 7
below. This facility has standard financial covenants that
were revised during fiscal 2010, including a maximum
net debt to EBITDA ratio of 2.5 (previously 3.0 on gross
debt) and minimum EBITDA to interest ratio of 4.0. As
of March 31, 2010, Legg Mason’s debt to EBITDA ratio
was 0.9 and EBITDA to interest expense ratio was 7.4.
Legg Mason has maintained compliance with the appli-
cable covenants but if it is determined that compliance
with these covenants may be under pressure, a number
of actions may be taken, including reducing expenses to
increase EBITDA, using available cash to repay all or a
portion of the $250 million outstanding debt subject to
these covenants or seeking to negotiate with lenders to
modify the terms or to restructure the debt.
A subsidiary of Legg Mason maintains a credit line for
general operating purposes. In May 2009, the maxi-
mum amount that may be borrowed on this credit line
was decreased from $40 million to $12 million. There
were no borrowings outstanding under this facility as of
March 31, 2010 and 2009.
Another subsidiary of Legg Mason had a $100 million,
one-year revolving credit agreement for general operating
purposes that expired in September 2009 with no borrow-
ings outstanding.
7. LONG-TERM DEBT
The accreted value of long-term debt consists of the following:
5-year term loan
Third-party distribution financing
2.5% convertible senior notes
5.6% senior notes from Equity Units
Other term loans
Subtotal
Less: current portion
Total
Current
Accreted
Value
$
—
1,639
1,051,243
103,039
14,413
1,170,334
5,154
$1,165,180
2010
Unamortized
Discount
—
$
—
198,757
—
—
198,757
—
$198,757
Maturity
Amount
$
—
1,639
1,250,000
103,039
14,413
1,369,091
5,154
$1,363,937
2009
Current
Accreted
Value
$ 550,000
4,067
1,016,798
1,150,000
19,325
2,740,190
8,188
$2,732,002
68
5-Year Term Loan
On October 14, 2005, Legg Mason entered into an unse-
cured 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 acquisition of CAM. During fiscal 2008 and
2007, Legg Mason repaid an aggregate of $150 million of
the outstanding borrowings on this term loan, and did not
make any payments during fiscal 2009. In January 2010,
Legg Mason repaid in full the $550 million of remaining
outstanding borrowings under this term loan.
Third-Party Distribution Financing
On July 31, 2006, a subsidiary of 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 con-
nection with sales of certain share classes of proprietary
funds. The outstanding balance at March 31, 2010 was
$1.6 million. Distribution fee revenues, which are used to
repay the financing, are based on the average AUM of the
respective funds. Interest has been imputed at an average
rate of 2.7%. In April 2009, Legg Mason terminated the
agreement and the outstanding balance will be paid in the
normal course of operations.
2.5% Convertible Senior Notes and
Related Hedge Transactions
On January 14, 2008, Legg Mason sold $1.25 billion of
2.5% convertible senior notes (the “Notes”). The Notes
bear interest at 2.5%, payable semi-annually in cash. Legg
Mason is accreting the carrying value to the principal
amount at maturity using an imputed interest rate of 6.5%
(the effective borrowing rate for nonconvertible debt at
the time of issuance) over its expected life of seven years,
resulting in additional interest expense for fiscal 2010 and
2009 of approximately $34.4 million and $32.3 million,
respectively. The Notes are convertible, if certain condi-
tions are met, at an initial conversion rate of 11.3636
shares of Legg Mason common stock per $1,000 princi-
pal amount of Notes (equivalent to a conversion price of
approximately $88.00 per share), or a maximum of 14.2 mil-
lion shares, subject to adjustment. Unconverted notes
mature in January 2015. Upon conversion of a $1,000
principal amount note, the holder will receive cash in an
amount equal to $1,000 or, if less, the conversion value
of the note. If the conversion value exceeds the principal
amount of the Note at conversion, Legg Mason will also
deliver, at its election, cash or common stock or a combi-
nation of cash and common stock for the conversion value
in excess of $1,000. The amount by which the accreted
value of the Notes exceeds their if-converted value as of
March 31, 2010 (representing a potential loss) is approxi-
mately $95.8 million using a current interest rate of
4.35%. The agreement governing the issuance of the notes
contains certain covenants for the benefit of the initial
purchaser of the notes, including leverage and interest
coverage ratio requirements, that may result in the notes
becoming immediately due and payable if the covenants
are not met. The leverage covenant was waived to accom-
modate the Equity Units issuance in May 2008, discussed
below. Otherwise, Legg Mason has maintained compli-
ance with the applicable covenants.
In connection with the sale of the Notes, on January 14,
2008, Legg Mason entered into convertible note hedge
transactions with respect to its common stock (the
“Purchased Call Options”) with financial institution
counterparties (“Hedge Providers”). The Purchased Call
Options are exercisable solely in connection with any con-
versions of the Notes in the event that the market value
per share of Legg Mason common stock at the time of
exercise is greater than the exercise price of the Purchased
Call Options, which is equal to the $88 conversion price
of the Notes, subject to adjustment. Simultaneously, in
separate transactions Legg Mason also sold to the Hedge
Providers warrants to purchase, in the aggregate and sub-
ject to adjustment, 14.2 million shares of common stock
on a net share-settled basis at an exercise price of $107.46
per share of common stock. The Purchased Call Options
and warrants are not part of the terms of the Notes and
will not affect the holders’ rights under the Notes. These
hedging transactions had a net cost of $83 million, which
was paid from the proceeds of the Notes and recorded as a
reduction of Additional paid-in capital.
If, when the Notes are converted, the market price per
share of Legg Mason common stock exceeds the $88 exer-
cise price of the Purchased Call Options, the Purchased
Call Options entitle Legg Mason to receive from the
Hedge Providers shares of Legg Mason common stock,
cash, or a combination of shares of common stock and
cash, that will match the shares or cash Legg Mason
must deliver under terms of the Notes. Additionally, if at
the same time the market price per share of Legg Mason
common stock exceeds the $107.46 exercise price of
the warrants, Legg Mason will be required to deliver to
the Hedge Providers net shares of common stock, in an
amount based on the excess of such market price per share
of common stock over the exercise price of the warrants.
69
These transactions effectively increase the conversion
price of the Notes to $107.46 per share of common stock.
Legg Mason has contractual rights, and, at execution
of the related agreements, had the ability to settle its
obligations under the conversion feature of the Notes,
the Purchased Call Options and warrants, with Legg
Mason common stock. Accordingly, these transactions are
accounted for as equity, with no subsequent adjustment
for changes in the value of these obligations.
5.6% Senior Notes from Equity Units
In May 2008, Legg Mason issued 23 million Equity Units
for $1.15 billion, of which $50 million was used to pay issu-
ance costs. Each unit consists of a 5% interest in $1,000
principal amount of 5.6% senior notes due June 30, 2021
and a detachable contract to purchase a varying number of
shares of Legg Mason’s common stock for $50 by June 30,
2011. The notes and purchase contracts are separate and dis-
tinct instruments, but their terms are structured to simulate
a conversion of debt to equity and potentially remarketed
debt approximately three years after issuance. The holders’
obligations to purchase shares of Legg Mason’s common
stock are collateralized by their pledge of the notes or other
prescribed collateral. In connection with the issuance of
the Equity Units, Legg Mason incurred issuance costs of
$36.2 million, of which $27.6 million was allocated to
the equity component of the Equity Units and recorded
as a reduction of Additional paid-in capital. The notes are
considered to be mandatorily convertible. For their com-
mitment to purchase shares of Legg Mason’s common
stock, holders also receive quarterly payments, referred to as
Contract Adjustment Payments (“CAP”), at a fixed annual
rate of 1.4% of the commitment amount over the three-year
contract term. Upon issuance of the Equity Units, Legg
Mason recognized a $45.8 million liability for the fair value
of its obligation (based upon discounted cash flows) to pay
unitholders a quarterly contract adjustment payment. This
amount also represented the fair value of Legg Mason’s
commitment under the contract to issue shares of common
stock in the future at designated prices, and was recorded as
a reduction to Additional paid-in capital. The CAP obliga-
tion liability is being accreted over the approximate 3-year
contract term by charges to Interest expense based on a
constant rate calculation. Subsequent contract adjustment
payments reduce the CAP obligation liability, which as of
March 31, 2010 and 2009, was $1.6 million and $31.8 mil-
lion, respectively, and is included in Other liabilities on the
Consolidated Balance Sheets. The decrease in the CAP
obligation liability was primarily due to the Equity Unit
extinguishment discussed below.
Each purchase contract obligates Legg Mason to sell a
number of newly issued shares of common stock that are
based on a settlement rate determined by Legg Mason’s
stock price at the purchase date. The settlement rate
adjusts with the price of Legg Mason stock in a way
intended to maintain the original investment value when
Legg Mason’s common stock is priced between $56.30
and $67.56 per share. The settlement rate is 0.7401 shares
of Legg Mason common stock, subject to adjustment,
for each Equity Unit if the market value of Legg Mason
common stock is at or above $67.56. The settlement rate
is 0.8881 shares of Legg Mason common stock, subject to
adjustment, for each Equity Unit if the market value of
Legg Mason common stock is at or below $56.30. If the
market value of Legg Mason common stock is between
$56.30 and $67.56, the settlement rate will be a number
of shares of Legg Mason common stock equal to $50
divided by the market value.
During the September 2009 quarter, Legg Mason com-
pleted a tender offer and retired 91% of its outstanding
Equity Units (20.9 million units) including the extin-
guishment of $1.05 billion of its outstanding 5.6% Senior
notes and termination of the related purchase contracts in
exchange for the issuance of 18.6 million shares of Legg
Mason common stock and a payment of $130.9 million in
cash. The cash payment was allocated between the liabil-
ity and equity components of the Equity Units based on
relative fair values, resulting in a loss on debt extinguish-
ment of $22.0 million (including a non-cash charge of
$6.3 million of accelerated expense of deferred issue costs)
and a decrease in additional paid-in capital of $115.2 mil-
lion. The maximum number of shares that may be issued
for the remaining Equity Units, subject to adjustment, is
1.8 million. As the purchase contracts were deemed to be
equity upon issuance, Legg Mason will not incur a gain or
loss on the outstanding Equity Units, if settled in accor-
dance with their original terms.
70
Shares of Legg Mason’s common stock issuable under the
Equity Unit purchase contracts are currently antidilu-
tive under the treasury stock method because the market
price of Legg Mason common stock is less than $67.56
per share. In the event the probability of a successful
remarketing of the Equity Unit notes becomes remote, the
amount of shares issuable under the purchase contracts
that must be included in diluted earnings per share would
be determined under the if-converted method.
Legg Mason has the option to remarket the remaining
notes beginning December 27, 2010, and is required to
attempt to remarket the notes by June 30, 2011. Upon
a successful remarketing, the interest rate and maturity
date of the senior notes will be reset such that the notes
may remain outstanding for some time after the exercise
of the purchase contracts and the related issuance of
Legg Mason common shares. If such remarketing is not
successful during this period, the note holders can put
their notes at par to Legg Mason upon the settlement
of the purchase contracts. Further, notes not redeemed
or remarketed by June 30, 2013, can be called at par by
Legg Mason.
Other Term Loans
A subsidiary of Legg Mason entered into a loan in fiscal
2005 to finance leasehold improvements. The outstanding
balance at March 31, 2010 was $2.3 million, which bears
interest at 4.2% and is due October 31, 2010. In fiscal
2006, a subsidiary of Legg Mason entered into a $12.8 mil-
lion 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 balance at March 31, 2010 was $10.1 million.
As of March 31, 2010, the aggregate maturities of long-
term debt (current accreted value of $1,369,091), based on
their contractual terms, are as follows:
2011
2012
2013
2014
2015
Thereafter
Total
$
5,154
2,329
843
894
1,250,948
108,923
$1,369,091
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
portion of its $700 million, 5-year term loan. Under the
terms of the Swap, Legg Mason paid a fixed interest rate
of 4.9% on a notional amount of $400 million. During
the March 2007 quarter, this Swap began to unwind at
$50 million per quarter. Quarterly payments or receipts
under the Swap 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
were not expected to be changed, then as long as at least
the unamortized balance of the Swap was outstanding on
the 5-year term loan, the Swap continued to be an effec-
tive cash flow hedge. As a result, changes in the market
value of the Swap were recorded as a component of Other
comprehensive income. The Swap matured on December 1,
2008 and the estimated unrealized loss previously included
in Other comprehensive income of $157 was realized as
Other non-operating income (expense) on the maturity
date. This amount was offset by lower interest expense on
the hedged debt.
71
8. INCOME TAXES
The components of income (loss) before income tax provision (benefit) are as follows:
Domestic
Foreign
Total
2010
$207,210
122,446
$329,656
The components of income tax expense (benefit) are as follows:
Federal
Foreign
State and local
Total income tax provision (benefit)
Current
Deferred
Total income tax provision (benefit)
2010
$ 78,224
14,066
26,386
$118,676
$ 4,729
113,947
$118,676
2009
$(3,053,327)
(134,870)
$(3,188,197)
2009
$(1,075,462)
32,845
(180,586)
$(1,223,203)
$ (405,726)
(817,477)
$(1,223,203)
2008
$210,073
227,254
$437,327
2008
$ 89,558
52,698
31,240
$ 173,496
$ 349,145
(175,649)
$ 173,496
Legg Mason received approximately $580 million in tax
refunds during the June 2009 quarter, primarily attrib-
utable to the utilization of $1.6 billion of realized losses
incurred in fiscal 2009 on the sale of securities issued by
SIVs. Federal legislation, enacted in November 2009 to
temporarily extend the net operating loss carryback period
from two to five years enabled Legg Mason to utilize an
additional $1.3 billion of net operating loss deductions
and, as a result, an additional $459 million in tax refunds
was received in January 2010.
A reconciliation of the difference between the effective income tax rate and the statutory federal income tax rate is as follows:
Tax provision (benefit) at statutory U.S. federal income tax rate
State income taxes, net of federal income tax benefit(2)
Effect of foreign tax rates(2)
Repatriation of foreign earnings
Loss on Canadian restructuring
Changes in tax rates on deferred tax assets and liabilities
Other non-deductible expenses, principally goodwill impairment in 2009
Other, net
Effective income tax (benefit) rate
(1) Certain prior year amounts have been reclassified to conform with the current year presentation.
(2) State income taxes include changes in valuation allowances, net of the impact on deferred tax assets of changes in state apportionment factors and planning strategies. The
2009(1)
(35.0)%
(3.3)
0.1
—
(2.9)
—
2.6
0.1
(38.4)%
2010
35.0%
2.5
(3.5)
—
—
—
1.5
0.5
36.0%
2008(1)
35.0%
4.7
(2.5)
4.1
—
(4.0)
0.9
1.5
39.7%
effect of foreign tax rates also includes changes in valuation allowances.
72
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 deduct-
ible amounts in future years. A summary 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
Unrealized net losses
Deferred liquidity fund support charges
Convertible debt obligations
Foreign tax credit carryforward
Other
Deferred tax assets
Valuation allowance
Deferred tax assets after valuation allowance
DEFERRED TAX LIABILITIES
Basis differences, principally for intangible
assets and goodwill
2010
$129,389
55,252
270,672
42,404
5,456
—
6,579
40,617
12,234
562,603
(87,605)
$474,998
2010
2009(1)
$122,095
59,696
598,562
41,988
40,664
5,582
3,246
30,964
13,328
916,125
(35,542)
$880,583
2009
$249,383
36,057
541
285,981
$594,602
$246,288
169,069
630
415,987
$ 59,011
Depreciation and amortization
Other
Deferred tax liabilities
Net deferred tax asset
(1) Certain prior year deferred tax assets related to accrued compensation and benefits, unrealized losses and loss carryforwards have been reclassified to conform with the
current year presentation.
Certain tax benefits associated with Legg Mason’s employee
stock plans are recorded directly in Stockholders’ equity.
No tax benefit was recorded to equity in 2010 or 2009 due
to the net operating loss position of the Company. As of
March 31, 2010, an additional $3.9 million of net operating
loss will be recognized as an increase in stockholders’ equity
when ultimately realized.
In connection with the sale of the Notes in January 2008,
Legg Mason entered into the Purchase Call Options with
the Hedge Providers (see Note 7). For income tax pur-
poses, the call options and Notes are considered part of a
single, integrated transaction and the $297.5 million cost
of the call options is therefore tax deductible over the term
of the Notes. For financial statements purposes, $272 mil-
lion was established as debt discount and will be amor-
tized to interest expense over the 7-year term of the Notes.
Accordingly, Legg Mason will generate future net tax
benefits of $9.7 million over a period of up to the 7-year
term of the notes. The benefit of this deferred tax asset
was recorded as an increase in additional paid-in capital
and therefore will not reduce future tax provisions.
At March 31, 2010, the gross deferred tax asset related to
the call options is $218.2 million and the gross deferred
tax liability related to the debt discount is $198.7 million.
The net balance at March 31, 2010 is a deferred tax asset
of $7.6 million. These benefits are partially offset by tem-
porary differences associated with the Equity Units.
Legg Mason has various loss carryforwards that may
provide future tax benefits. Related valuation allowances
are established in accordance with accounting guidance
for income taxes, if it is management’s opinion that it
is more likely than not that these benefits will not be
realized. Substantially all of Legg Mason’s deferred tax
assets relate to U.S. and United Kingdom (“U.K.”) taxing
jurisdictions. As of March 31, 2010, U.S. federal deferred
tax assets aggregated $611 million, realization of which is
expected to require approximately $4.0 billion of future
73
U.S. earnings, approximately $116 million of which must
be in the form of foreign source income. Based on esti-
mates of future taxable income, using the same assump-
tions as those used in Legg Mason’s goodwill impairment
testing, it is more likely than not that current federal tax
benefits are realizable and no valuation allowance is neces-
sary at this time. To the extent the analysis of the realiza-
tion of deferred tax assets relies on deferred tax liabilities,
Legg Mason has considered the timing, nature and
jurisdiction of reversals. While tax planning may enhance
Legg Mason’s tax positions, the realization of these cur-
rent tax benefits is not dependent on any significant tax
strategies. As of March 31, 2010, U.S. state deferred tax
assets aggregated $212 million. Due to limitations on net
operating loss and capital loss carryforwards and, taking
into consideration certain state tax planning strategies,
a valuation allowance has been established for the state
capital loss and net operating loss benefits in certain juris-
dictions in the amount of $49.2 million for fiscal year
2010. Due to the uncertainty of future state apportion-
ment factors and future effective state tax rates, the value
of state net operating loss benefits ultimately realized may
vary. As of March 31, 2010, U.K. deferred tax assets, net
of valuation allowances, are not material. An additional
valuation allowance of $2.9 million was recorded on for-
eign deferred tax assets relating to various jurisdictions.
The following deferred tax assets and valuation allowances relating to carryforwards have been recorded at March 31,
2010 and 2009, respectively.
DEFERRED TAX ASSETS
U.S. federal net operating losses
U.S. federal foreign tax credits
U.S. state net operating losses(1,2,3)
U.S. state capital losses
Non-U.S. net operating losses
Non-U.S. capital losses(1)
Total deferred tax assets for carryforwards
VALUATION ALLOWANCES
2010
2009
Expires Beginning
after Fiscal Year
$119,328
40,617
121,475
34,833
29,869
7,571
$353,693
$504,779
30,964
62,065
34,833
31,718
7,155
$671,514
2029
2015
2015
2015
2010
n/a
U.S. state net operating losses
U.S. state capital losses
Non-U.S. net operating losses
Non-U.S. capital losses
Total valuation allowances
(1) Due to the Permal acquisition structure, for periods prior to December 1, 2009, U.S. subsidiaries of Permal filed separate federal income tax returns, apart from Legg
34,833 —
29,860
7,571
$ 87,605
27,398
7,155
$ 35,542
$ 15,341
989
$
Mason Inc.’s consolidated federal income tax return, and separate state income tax returns.
(2) Substantially all of the U.S. state net operating losses carryforward through fiscal year 2029.
(3) Due to the volatility in the factors relating to apportionment of income to various states, the Company’s effective state tax rates are subject to fluctuation which will impact
the value of the Company’s deferred tax assets, including net operating losses, and could have a material impact on the future effective tax rate of the Company.
Legg Mason had total gross unrecognized tax benefits
of approximately $51.0 million, $43.7 million and
$29.3 million as of March 31, 2010, 2009, and 2008,
respectively. Of these totals, $42.1 million, $34.3 million
and $21.1 million, respectively, (net of the federal benefit
for state tax liabilities) are the amounts of unrecognized
benefits which, if recognized, would favorably impact
future income tax provisions and effective tax rates.
74
A reconciliation of the beginning and ending amount of unrecognized gross tax benefits for the years ended March 31,
2010, 2009 and 2008 is as follows:
Balance, beginning of year
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Decreases related to settlements with taxing authorities
Expiration of statute of limitations
Balance, end of year
2010
$43,662
2,830
12,664
(5,846)
(515)
(1,768)
$51,027
2009
$ 29,287
15,756
14,366
(4,082)
(11,665)
—
$ 43,662
2008
$28,706
6,192
3,110
(7,941)
—
(780)
$29,287
As of March 31, 2010, management does not anticipate
any material increases or decreases in the amounts of
unrecognized tax benefits over the next twelve months.
The Company accrues interest related to unrecognized
tax benefits in interest expense and recognizes penalties in
other operating expense. During the years ended March 31,
2010, 2009, and 2008, the Company recognized approxi-
mately $2.2 million, $5.4 million, and $1.2 million, respec-
tively, which was substantially all interest. At March 31,
2010, 2009, and 2008, Legg Mason had approximately
$6.0 million, $5.0 million, and $2.9 million, respectively,
accrued for interest and penalties on tax contingencies in
the Consolidated Balance Sheets.
Legg Mason is under examination by the Internal Revenue
Service and other tax authorities in various states. The fol-
lowing tax years remain open to income tax examination
for each of the more significant jurisdictions where Legg
Mason is subject to income taxes: after fiscal year 2005 for
U.S. federal; after fiscal year 2005 for the United Kingdom;
after fiscal year 2002 for the state of Connecticut; after fis-
cal year 2003 for the state of California; after fiscal year
2005 for the state of New York; and after fiscal year 2006
for the state of Maryland. The Company does not anticipate
making any significant cash payments with the settlement
of these audits.
During the quarter ended September 30, 2007, the United
Kingdom enacted the Finance Act of 2007, which reduced
the corporate tax rate from 30% to 28% for tax periods
ending after April 1, 2008. The impact on prior deferred
tax liabilities at the time of the change in fiscal 2008 was a
one-time tax benefit approximating $18.5 million.
In fiscal 2008, Legg Mason initiated plans to repatri-
ate earnings from certain foreign subsidiaries for up to
$225 million. It had been anticipated that these earnings
would be used for the contingent acquisition payments to
the former owners of Permal discussed in Note 9. During
fiscal 2008, $36 million was repatriated under this plan
and an additional income tax provision of approximately
$18.4 million (net of foreign tax credits not previously
recognized) was recognized. Although all Permal pay-
ments have now been made and therefore the original
premise for establishing the deferred tax liability is no
longer applicable, Legg Mason still intends to repatriate
these earnings to create foreign source income in order
to utilize foreign tax credits that may otherwise expire
unutilized. No further repatriation beyond the original
$225 million of foreign earnings is contemplated.
Except as noted above, 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 undis-
tributed 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.
9. 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.
75
As of March 31, 2010, the minimum annual aggregate
rentals under operating leases and servicing agreements
are as follows:
2011
2012
2013
2014
2015
Thereafter
Total
$ 139,174
121,766
107,195
88,659
80,415
593,101
$1,130,310
The table above does not include aggregate obligations
of $33.7 million for property and equipment under
capital leases.
One such lease was amended during fiscal 2008 to include
a put/purchase option agreement with the owner of land
and a building. The agreement is for a fixed price of
$29.0 million, if executed. The seller has a put option
through December 2012 and beginning in November
2011 a buyer purchase option becomes exercisable. A
$4 million escrow deposit was made in connection with
the put/purchase option agreement.
The minimum rental commitments in the table above
have not been reduced by $153.7 million for minimum
sublease rentals to be received in the future under non-
cancelable subleases, of which approximately 57% is due
from one counterparty. If a sub-tenant defaults on a sub-
lease, Legg Mason may have to incur operating charges to
reflect expected future sublease rentals at reduced amounts,
as a result of the current commercial real estate market.
The above minimum rental commitments includes $1.0 bil-
lion in real estate leases and equipment leases and $92.3 mil-
lion in service and maintenance agreements.
Included in the table above is $16.1 million in commit-
ments related to office space that has been vacated, but
for which a sublease is being pursued. A lease liability was
adjusted in fiscal 2010 to reflect the present value of the
excess existing lease obligations over the estimated sublease
income and related costs. The lease liability takes into
consideration various assumptions, including the amount
of time it will take to secure a sublease agreement and
prevailing rental rates in the applicable real estate markets.
These, and other related costs incurred during fiscal 2010,
aggregated $19.3 million.
76
The following table reflects rental expense under all oper-
ating leases and servicing agreements.
Rental expense
Less: sublease income
Net rent expense
2008
2010
2009
$137,771 $127,949 $128,111
10,870
$129,198 $112,461 $117,241
15,488
8,573
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 pay-
ments specified in the contract, including contractual
rent increases, and are reduced by any lease incentives
received from the landlord, including those used for ten-
ant improvements.
As of March 31, 2010 and 2009, Legg Mason had com-
mitments to invest approximately $45,697 and $29,466,
respectively, in limited partnerships that make private
investments. These commitments will be funded as
required through the end of the respective investment
periods ranging through fiscal 2018.
During fiscal 2008, Legg Mason recorded contingent
payment obligations of $160 million related to the Permal
acquisition in addition to the $161 million previously
recorded obligation. During fiscal year 2008, payments of
$240 million were made to the former owners of Permal
of which $208 million was paid in cash and the balance
was in common stock. In fiscal 2010, Legg Mason paid
$171 million in cash to the former owners of Permal for
the fourth anniversary payment under the purchase con-
tract for the acquisition of the remaining preference shares
issued by Permal. In addition, in December 2009, Legg
Mason elected to purchase, for $9 million, the rights of
the sellers of the preference shares to receive an earnout
payment on the sixth anniversary in November 2011 of
up to $149 million. As a result of this transaction, there
will be no further payments for the Permal acquisition.
See Note 2, Acquisitions and Dispositions, for additional
information related to the Permal acquisition.
See Note 17, Liquidity Fund Support, for additional infor-
mation related to Legg Mason’s commitments.
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 Private Client/Capital Markets (“PC/CM”) businesses,
thus transferring the entities that would have primary
liability for most of the customer complaint, litigation
and regulatory liabilities and proceedings 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. While the ultimate resolution of
these matters cannot be currently determined based on
current information, after consultation with legal counsel,
management believes that any accrual or range of reason-
ably possible losses as of March 31, 2010 or 2009, is not
material. Similarly, although Citigroup transferred to
Legg Mason the entities that would be primarily liable for
most customer complaint, litigation and regulatory liabili-
ties 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 guidance for accounting for contingencies, Legg
Mason has established provisions for estimated losses
from pending complaints, legal actions, investigations and
proceedings. 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 finan-
cial 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
addition, the ultimate costs of litigation related charges
can vary significantly from period to period, depending
on factors such as market conditions, the size and volume
of customer complaints and claims, including class action
suits, and recoveries from indemnification, contribution
or insurance reimbursement.
Legg Mason and a current and former officer, together with
an underwriter in a public offering, were named as defen-
dants in a consolidated legal action. The action alleged that
the defendants violated the Securities Act of 1933 by omit-
ting certain material facts with respect to the acquisition
of Citigroup’s worldwide asset management business in a
prospectus used in a secondary stock offering in order to
artificially inflate the price of Legg Mason common stock.
On March 17, 2008, the action was dismissed with preju-
dice and on September 30, 2009, the dismissal was upheld
on appeal. The plaintiffs have no further avenue to appeal
the dismissal so this proceeding has concluded.
As of March 31, 2010 and 2009, Legg Mason’s liability
for losses and contingencies was $21,500 and $1,800,
respectively. During fiscal 2010, 2009 and 2008, Legg
Mason recorded litigation-related charges of approxi-
mately $21,200, $600, and $1,100, respectively (net of
recoveries of $100 in fiscal 2008). The charge in fiscal
2010 primarily represents a $19 million reserve for an
affiliate investor settlement, which was settled subsequent
to March 31, 2010. During fiscal 2010, 2009, and 2008,
the liability was reduced for settlement payments of
approximately $1,500, $500, and $2,100, respectively.
10. EMPLOYEE BENEFITS
Legg Mason, through its subsidiaries, maintains vari-
ous 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. Profit sharing and matching
contributions amounted to $18,199 and $39,446 in fis-
cal 2010 and 2008, respectively. Matching contributions
amounted to $14,366 in fiscal 2009. Legg Mason elected
to not make a profit sharing contribution in fiscal 2009.
In addition, employees can make voluntary contributions
under certain plans.
11. CAPITAL STOCK
At March 31, 2010, the authorized numbers of common,
preferred and exchangeable shares were 500 million, 4 mil-
lion and an unlimited number, respectively. In addition,
77
at March 31, 2010 and 2009, there were 16.4 million
and 10.9 million shares of common stock, respectively,
reserved for issuance under Legg Mason’s equity plans
and 1.1 million and 1.2 million common shares, respec-
tively, reserved for exchangeable shares issued in con-
nection with the acquisition of Legg Mason Canada Inc.
Exchangeable shares are exchangeable at any time by the
holder on a one-for-one basis into shares of Legg Mason’s
common stock and are included in basic shares outstand-
ing. During fiscal 2010, Legg Mason announced a plan to
terminate the exchangeable share arrangement, in accor-
dance with its terms, and in May 2010 all outstanding
exchangeable shares were converted into shares of Legg
Mason common stock.
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 were con-
vertible, upon transfer into 13.35 million shares of common
stock. During fiscal 2009, Legg Mason issued approxi-
mately 0.36 million common shares, upon conversion of
approximately 0.36 of the non-voting convertible preferred
stock. Also, during fiscal 2008, Legg Mason repurchased
2.5 shares of the non-voting convertible preferred stock
using proceeds from the 2.5% convertible senior notes. As
of March 31, 2010 and 2009, there were no outstanding
shares of non-voting convertible preferred stock.
As discussed in Note 7, in May 2008, Legg Mason issued
$1.15 billion of Equity Units, each unit consisting of a 5%
interest in $1,000 principal amount of senior notes due
June 30, 2021, and a purchase contract committing the
holder to purchase shares of Legg Mason’s common stock
by June 30, 2011. During fiscal 2010, Legg Mason issued
18.6 million shares through the Equity Unit tender offer
in exchange for 91% of the outstanding Equity Units. As
of March 31, 2010, the maximum amount of shares that
could be issued, and are reserved for issuance, is approxi-
mately 1.8 million, subject to adjustment. Also discussed
in Note 7, in January 2008, Legg Mason issued $1.25 bil-
lion of 2.5% contingent convertible senior notes, which, if
certain conditions are met, could result in the issuance of
a maximum of 14.2 million shares of Legg Mason com-
mon stock, subject to adjustment.
Changes in common stock and shares exchangeable into common stock for the three years ended March 31, 2010,
2009 and 2008 are as follows:
COMMON STOCK
Beginning balance
Shares issued for:
Stock option exercises and other stock-based compensation
Deferred compensation trust
Deferred compensation
Exchangeable shares
Shares repurchased and retired
Permal contingent payment
Conversion of non-voting preferred stock
Equity Units exchange
Ending balance
SHARES EXCHANGEABLE INTO COMMON STOCK
Beginning balance
Exchanges
Ending balance
2010
Years Ended March 31,
2009
2008
141,853
138,556
131,777
72
133
662
123
—
—
—
18,596
161,439
1,222
(123)
1,099
1,094
155
922
761
—
—
365
—
141,853
1,983
(761)
1,222
1,569
53
298
82
(1,140)
392
5,525
—
138,556
2,065
(82)
1,983
78
Dividends declared per share were $0.12, $0.96 and $0.96
for fiscal 2010, 2009 and 2008, respectively. Dividends
declared but not paid at March 31, 2010, 2009 and 2008
were $4,844, $34,043 and $33,103, respectively, and are
included in Other current liabilities.
On May 10, 2010, Legg Mason announced that its Board of
Directors replaced its existing stock buyback authority with
the authority to purchase up to $1 billion worth of Legg
Mason common stock. There is no expiration date attached
to this new authorization.
On May 24, 2010, Legg Mason entered into separate
accelerated share repurchase agreements (each an “ASR
Agreement”) with each of two financial institutions
(each a “Counterparty”) to repurchase, in the aggre-
gate, $300 million of Legg Mason common stock. Legg
Mason’s repurchases under the ASR Agreements are part
of the $1 billion share repurchase program announced on
May 10, 2010. Under the ASR Agreements, Legg Mason
will pay $300 million to the Counterparties from avail-
able cash on hand to repurchase outstanding shares of
its common stock and will receive a substantial majority
of the shares to be delivered under the agreements on or
about June 21, 2010. The specific number of shares that
ultimately will be repurchased under the agreements
will be based generally on the volume-weighted average
share price of Legg Mason’s common stock during the
term of the agreements, subject to provisions that estab-
lish minimum and maximum numbers of shares. The
Counterparties are expected to purchase shares of Legg
Mason common stock in the open market in connection
with the accelerated share buyback. The ASR Agreements
contemplate that final settlement may occur in August or
September 2010, at a time selected by each Counterparty
in its discretion, although earlier or later settlement is pos-
sible in certain circumstances. At settlement, Legg Mason
may be entitled to receive additional shares of common
stock or cash and under certain limited circumstances
may have an obligation to the Counterparties which can
be settled, at Legg Mason’s discretion, by making a pay-
ment or delivering common stock to the Counterparties.
All of the repurchased shares will be retired.
Legg Mason currently intends to use a portion of its avail-
able cash to purchase an additional $100 million of Legg
Mason common stock by the end of fiscal 2011. During
the fiscal years ended March 31, 2010 and 2009, no shares
were repurchased. During the fiscal year ended March 31,
2008, 1.1 million shares were repurchased under the prior
authorization for $97,945.
In fiscal 2008, Legg Mason issued 392 common shares
in connection with the contingent acquisition payment
made to the former owners of Permal as discussed in
Note 2.
12. STOCK-BASED COMPENSATION
Legg Mason’s stock-based compensation includes stock
options, employee stock purchase plans, restricted stock
awards and units, performance shares payable in com-
mon stock, and deferred compensation payable in stock.
Effective July 28, 2009, the number of shares authorized
to be issued under Legg Mason’s active equity incen-
tive stock plan was increased by 6 million to 35 million.
Shares available for issuance as of March 31, 2010 were
approximately 10 million. 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 three to five years and
expire within five to ten years from the date of grant.
Compensation expense relating to stock options, the stock
purchase plan and deferred compensation payable in stock
for the years ended March 31, 2010, 2009 and 2008 was
$17,770, $22,964 and $24,588, respectively. The related
income tax benefit for the years ended March 31, 2010, 2009
and 2008 was $6,285, $8,837 and $9,486, respectively.
79
Stock option transactions under Legg Mason’s equity incentive plans during the years ended March 31, 2010, 2009 and
2008, respectively, are summarized below:
Options outstanding at March 31, 2007
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2008
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2009
Granted
Exercised
Canceled/forfeited
Options outstanding at March 31, 2010
Number
of Shares
6,478
933
(1,675)
(272)
5,464
1,496
(1,104)
(656)
5,200
1,457
(45)
(845)
5,767
Weighted-Average
Exercise Price
Per Share
$ 53.48
100.77
28.43
94.00
$ 67.20
29.54
25.01
68.24
$ 65.19
26.82
26.31
49.83
$ 58.05
The total intrinsic value of options exercised during the years ended March 31, 2010, 2009 and 2008 was $160, $10,456
and $109,626, respectively. At March 31, 2010, the aggregate intrinsic value of options outstanding was $8,368.
The following information summarizes Legg Mason’s stock options outstanding at March 31, 2010:
Exercise
Price Range
$ 12.65–$ 25.00
25.01– 35.00
35.01– 94.00
94.01– 100.00
100.01– 132.18
Option Shares
Outstanding
464
2,710
433
606
1,554
5,767
At March 31, 2010, 2009 and 2008, options were exercis-
able on 2,522, 2,455, and 3,197 shares, respectively, and
the weighted-average exercise prices were $76.08, $67.05
and $45.54, respectively. Stock options exercisable at
March 31, 2010 have a weighted-average remaining con-
tractual life of 3.3 years. At March 31, 2010, the aggregate
intrinsic value of options exercisable was $1,863.
Weighted-Average
Exercise Price
Per Share
$ 16.08
29.68
52.82
95.23
107.01
Weighted-Average
Remaining Life
(in years)
6.6
5.9
2.0
4.3
4.3
The following information summarizes Legg Mason’s
stock options exercisable at March 31, 2010:
Exercise
Price Range
$ 12.65–$ 25.00
25.01– 35.00
35.01– 94.00
94.01– 100.00
100.01– 132.18
Option Shares
Exercisable
69
590
425
365
1,073
2,522
Weighted-Average
Exercise Price
Per Share
$ 15.07
28.94
52.22
95.23
108.89
80
The following information summarizes unvested stock
options under Legg Mason’s equity incentive plans for the
year ended March 31, 2010:
Shares unvested at
March 31, 2009
Granted
Vested(1)
Canceled/forfeited
Shares unvested at
March 31, 2010
Number
of Shares
Weighted-Average
Grant Date
Fair Value
2,745
1,457
(805)
(152)
$ 22.70
12.09
28.47
21.53
3,245
$17.04
(1) Generally, vesting occurs in July of each year. For stock options granted in fiscal
2011, annual vesting occurs in May of each year.
Unamortized compensation cost related to unvested
options at March 31, 2010 was $43,452 and is expected to
be recognized over a weighted-average period of 2.0 years.
Cash received from exercises of stock options under Legg
Mason’s equity incentive plans was $1,829, $25,463 and
$30,944 for the years ended March 31, 2010, 2009 and
2008, respectively. The tax benefit expected to be realized
for the tax deductions from these option exercises totaled
$15, $3,853 and $41,189 for the years ended March 31,
2010, 2009 and 2008, respectively.
The weighted-average fair value of stock options granted
in fiscal 2010, 2009 and 2008, using the Black-Scholes
option pricing model, was $12.09, $13.36 and $31.76 per
share, respectively.
The following weighted-average assumptions were used in
the model for grants in fiscal 2010, 2009, and 2008:
Legg Mason uses an equally weighted combination
of both implied and historical volatility to measure
expected volatility for calculating Black-Scholes
option values.
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 mil-
lion 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 years ended March 31, 2010,
2009 and 2008, approximately 147, 188 and 59 shares,
respectively, have been purchased in the open market on
behalf of participating employees.
On January 28, 2008, the Compensation Committee
of Legg Mason approved grants to senior officers of 120
market-based performance shares that upon vesting,
subject to certain conditions, are distributed as shares of
common stock. The grants will vest ratably on January 28
of each of the five years following the grant date, upon
attaining the service criteria and the stock price hurdles
beginning at $77.97 in year one and ending at $114.15 in
year five.
The weighted-average fair value per share for these awards
of $11.81 was estimated as of the grant date using a grant
price of $70.88, and a Monte Carlo option-pricing model
with the following assumptions:
Expected dividend yield
Risk-free interest rate
Expected volatility
1.33%
3.30%
36.02%
Expected dividend yield
Risk-free interest rate
Expected volatility
Expected lives (in years)
2010
1.45%
2.86%
55.26%
5.17
2009
0.89%
3.46%
56.65%
5.28
2008
0.81%
4.71%
29.17%
4.95
In connection with the termination of one of the senior
officers in fiscal 2009, 20 performance shares were volun-
tarily forfeited, resulting in a charge of $550 representing
an acceleration of expense associated with the unvested
portion of the award.
81
Restricted stock transactions during the years ended March 31, 2010, 2009, and 2008, respectively, are summarized below:
Unvested Shares at March 31, 2007
Granted
Performance shares granted
Vested
Canceled/forfeited
Unvested Shares at March 31, 2008
Granted
Vested
Canceled/forfeited
Unvested Shares at March 31, 2009
Granted
Vested
Canceled/forfeited
Unvested Shares at March 31, 2010
Number
of Shares
563
229
120
(219)
(51)
642
956
(234)
(40)
1,324
670
(446)
(52)
1,496
Weighted-Average
Grant Date Value
$114.03
92.51
59.07
108.16
115.48
$ 98.30
34.64
107.21
79.43
$ 50.25
22.12
60.19
54.41
$ 35.54
The restricted stock awards were non-cash transactions.
In fiscal 2010, 2009 and 2008, Legg Mason recognized
$26,104, $32,412 and $25,015, respectively, in compen-
sation expense for all restricted stock awards. The tax
benefit expected to be realized for the tax deductions
from restricted stock totaled $3,621, $2,870 and $4,771
for the years ended March 31, 2010, 2009 and 2008,
respectively. Unamortized compensation cost related
to unvested restricted stock awards for 1,496 shares not
yet recognized at March 31, 2010 was $32,321 and is
expected to be recognized over a weighted-average period
of 1.5 years.
Restricted stock unit transactions during the years ended March 31, 2010 and 2009, respectively, are summarized below:
Unvested Shares at March 31, 2008
Granted
Vested
Canceled/forfeited
Unvested Shares at March 31, 2009
Granted
Vested
Canceled/forfeited
Unvested Shares at March 31, 2010
Number
of Shares
—
19
(1)
(1)
17
98
(4)
(2)
109
Weighted-Average
Grant Date Value
$
—
40.07
61.85
61.85
$37.23
23.03
37.99
25.44
$24.60
The restricted stock unit awards were non-cash transac-
tions. In fiscal 2010 and 2009, Legg Mason recognized
$1,129 and $217, respectively, in compensation expense
for all restricted stock unit awards. Unamortized compen-
sation cost related to unvested restricted stock unit awards
for 109 shares not yet recognized at March 31, 2010 was
$2,042 and is expected to be recognized over a weighted-
average period of 1.9 years.
In addition to the above, Legg Mason also has an equity
plan for non-employee directors. Under the equity plan,
directors may elect to receive shares of stock or restricted
stock units. Prior to a July 19, 2007 amendment to the
Plan, directors could also elect to receive stock options.
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
82
years. In fiscal 2010, 2009 and 2008, Legg Mason recog-
nized expense of $1,575, $1,400 and $1,475, respectively,
for awards under this plan. Shares, options, and restricted
stock units issuable under the equity plan are limited to
625 shares in aggregate, of which 184 shares were issued
under the plan as of March 31, 2010. At March 31, 2010,
there were 288 stock options and 53 restricted stock
units outstanding under the non-employee director plan.
There were 27 stock options exercised and 5 restricted
stock units distributed during fiscal 2010. There were 19
restricted stock units granted during fiscal 2010. There
were 41 stock options and no restricted stock units can-
celled or forfeited during fiscal 2010.
Deferred compensation payable in shares of Legg Mason
common stock has been granted to certain employees in an
elective plan. The vesting in the plan is immediate and the
plan provides 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 plan. In fiscal 2010,
2009 and 2008, Legg Mason recognized $176, $322 and
$254, respectively, in compensation expense related to this
plan. During fiscal 2010, 2009 and 2008, Legg Mason
issued 128, 125 and 48 shares, respectively, under the plan
with a weighted-average fair value per share at the grant
date of $22.53, $39.62 and $84.11, respectively.
13. DEFERRED COMPENSATION STOCK TRUST
Legg Mason has issued shares in connection with cer-
tain 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 corresponding liability related to
the deferred compensation plans are presented as compo-
nents of stockholders’ equity as Employee stock trust and
Deferred compensation employee stock trust, respectively.
Shares held by the trust at March 31, 2010 and 2009 were
2,205 and 2,003, respectively.
14. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing Net
income or loss attributable to Legg Mason, Inc. by the
weighted-average number of shares outstanding. The
calculation of weighted-average shares includes common
shares, shares exchangeable into common stock and con-
vertible preferred shares that are considered participating
securities. Diluted EPS is similar to basic EPS, but adjusts
for the effect of potential common shares except when
inclusion is antidilutive.
In situations where a net loss is reported, the inclusion
of potentially issuable common shares will decrease the
net loss per share. Since this would be antidilutive, such
shares are excluded from the calculation. Basic and diluted
earnings per share for the fiscal years ended March 31,
2010 and 2009 include all vested shares of restricted stock
related to Legg Mason’s deferred compensation plans.
During fiscal 2010, Legg Mason issued 18,596 shares of
common stock through the Equity Units tender offer and
11,565 shares are included in the weighted-average shares
outstanding for the year ended March 31, 2010.
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 payment of contingent consideration
Total weighted-average diluted shares
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Legg Mason, Inc.
Net income (loss) per share attributable to Legg Mason, Inc.
common shareholders:
Basic
Diluted
2010
153,715
Years Ended March 31
2009
140,669
56
455
1,136
155,362
$210,980
6,623
$204,357
—
—
—
140,669
$(1,964,994)
2,924
$(1,967,918)
2008
142,018
1,664
51
243
143,976
$263,831
266
$263,565
$
$
1.33
1.32
$
$
(13.99)
(13.99)
$
$
1.86
1.83
83
The diluted EPS calculations for the years ended March 31,
2010, and 2009, exclude any potential common shares
issuable under the convertible 2.5% senior notes or the
convertible Equity Units because the market price of
Legg Mason common stock has not exceeded the price at
which conversion under either instrument would be dilu-
tive using the treasury stock method. Also, the diluted
EPS calculation for the fiscal year ended March 31, 2009
excludes 6,629 potential common shares that are antidilu-
tive due to the net loss for the fiscal year.
convertible note hedge transactions described in Note 7 are
excluded from the calculation of diluted earnings per share
because the effect would be antidilutive. As of March 31,
2010, 2.1 million of the 23.0 million Equity Units issued
in May 2008, that include purchase warrants providing for
the issuance of between 1.5 and 1.8 million shares of Legg
Mason common stock by June 2011, remain outstanding,
as more fully described in Note 7.
15. ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS)
Options to purchase 5,130 shares and 2,780 shares for the
fiscal years ended March 31, 2010 and 2008, respectively,
were not included in the computation of diluted earnings
per share because the presumed proceeds from exercising
such options, including related income tax benefits, exceed
the average price of the common shares for the fiscal year
and therefore the options are deemed antidilutive. Diluted
earnings per share for the fiscal years ended March 31,
2010 and 2008, include unvested shares of restricted
stock, except for 1,041 shares and 707 shares, respectively,
which were deemed antidilutive. Also at March 31, 2010,
2009 and 2008, warrants issued in connection with the
Accumulated other comprehensive income includes cumu-
lative foreign currency translation adjustments, net of tax
gains and losses on interest rate swap, and net of tax gains
and losses on investment securities. The change in the
accumulated translation adjustments for fiscal 2010 and
2009 primarily resulted from the impact of changes in
the Brazilian real, the Polish zloty, the British pound, the
Australian dollar and the Canadian dollar in relation to the
U.S. dollar on the net assets of Legg Mason’s subsidiaries in
Brazil, Poland, the United Kingdom, Australia and Canada,
for which the real, the zloty, the pound, the Australian and
Canadian dollar are the functional currencies, respectively.
A summary of Legg Mason’s accumulated other comprehensive income (loss) as of March 31, 2010 and 2009 is as follows:
Foreign currency translation adjustments
Unrealized gains on investment securities, net of tax provision of $56 and $68, respectively
Total
2010
$58,143
84
$58,227
2009
$(2,886)
102
$(2,784)
16. VARIABLE INTEREST ENTITIES
In the normal course of its business, Legg Mason sponsors
and is the manager of various types of investment vehicles
for clients 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 man-
agement fees. Uncollected management fees from these
VIEs were not material at March 31, 2010 and 2009. Legg
Mason has not issued any investment performance guar-
antees to these VIEs or their investors.
Legg Mason concludes it is the primary beneficiary of a
VIE if it absorbs a majority of the VIE’s expected losses,
or will receive a majority of the VIE’s expected residual
returns, if any. Legg Mason’s determination of expected
residual returns excludes gross fees paid to a decision
maker. Under current accounting guidance, 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, unless Legg Mason may earn significant
performance fees from the VIE or unless Legg Mason
is considered to have a material implied variable inter-
est. In determining whether it is the primary beneficiary
of a VIE, Legg Mason considers both qualitative and
quantitative factors such as the voting rights of the equity
84
holders, economic participation of all parties, including
how fees are earned by and paid to Legg Mason, related
party ownership, guarantees and implied relationships. 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 and interest rate risks. In determining whether
a VIE is significant, Legg Mason considers the same fac-
tors used for determination of the primary beneficiary.
During fiscal 2010, 2009 and 2008, Legg Mason had
variable interests in certain liquidity funds to which it
provided various forms of credit and capital support as
described in Note 17. After evaluating both the contrac-
tual and implied variable interests in these funds, as of
and during the years ended March 31, 2010 and 2009,
it was determined that Legg Mason was not the primary
beneficiary of these funds.
As of March 31, 2010 and 2009, Legg Mason was the pri-
mary beneficiary of one sponsored investment fund VIE
which resulted in consolidation. This VIE had total assets
and total equity of $52.7 million as of March 31, 2010,
and $48.2 million as of March 31, 2009. Legg Mason’s
investment in this VIE was $27.5 million and $26.3 mil-
lion, as of March 31, 2010 and 2009, respectively, which
represents the maximum risk of loss. Creditors of this VIE
have no recourse to the general credit of Legg Mason. The
assets of this VIE are primarily comprised of investments.
As of March 31, 2010, 2009 and 2008, Legg Mason was
not required to consolidate any other VIEs that were
material to its consolidated financial statements.
As of March 31, 2010 and 2009, for VIEs in which Legg Mason holds a significant variable interest or is the sponsor
and holds a variable interest, but for which it was not the primary beneficiary, Legg Mason’s carrying value, the related
VIEs’ assets and liabilities and maximum risk of loss were as follows:
CDOs/CLOs
Public-Private Investment Program
Other sponsored investment funds
Total
VIE Assets That
the Company
Does Not
Consolidate
$ 3,508,290
411,489
16,564,227
$20,484,006
For the Year Ended March 31, 2010
VIE Liabilities Equity Interests
That the
on the
Company Does Consolidated
Not Consolidate Balance Sheet
Maximum
Risk of Loss*
$3,215,890
—
1,334
$3,217,224
$
—
55,526
47,484
$103,010
$
—
72,245
71,383
$143,628
VIE Assets That
the Company
Does Not
Consolidate
$ 7,548,539
5,116,004
18,207,082
$30,871,625
For the Year Ended March 31, 2009
Equity Interests
VIE Liabilities
on the
That the
Company Does
Consolidated
Not Consolidate Balance Sheet
$ 121,338
4,786,604
3,381
$4,911,323
$
—
—
34,458
$34,458
Maximum
Risk of Loss*
$41,500
1,566
52,019
$95,085
Liquidity funds subject to capital support
CDOs/CLOs
Other sponsored investment funds
Total
*
Includes capital support to liquidity funds, equity interests the Company has made or is required to make and any earned but uncollected management fees.
85
The assets of these VIEs are primarily comprised of cash
and cash equivalents and investments and the liabilities are
primarily comprised of debt and various expense accruals.
17. LIQUIDITY FUND SUPPORT
Due to prior years’ stress in the liquidity markets, cer-
tain asset backed securities previously held by liquidity
funds that a Legg Mason subsidiary manages were in
default or had been restructured after a default. Although
the Company was not required to provide support to
its funds, Legg Mason elected to do so to maintain the
confidence of its clients, maintain its reputation in the
marketplace, and in certain cases, support the AAA/Aaa
credit ratings of funds. If clients were to lose confidence in
the Company, they could potentially withdraw funds in
favor of investments offered by competitors, resulting in a
reduction in Legg Mason’s assets under management and
investment advisory and other fees.
During fiscal 2009 and 2008, Legg Mason entered into
and amended various arrangements to provide support
to certain of its liquidity funds. During fiscal 2009, Legg
Mason sold, or the funds sold, all securities issued by SIVs
held in its money market funds, on its Balance Sheet,
and supported through a TRS with a major bank. As of
March 31, 2010, all previously existing support arrange-
ments had expired or were terminated in accordance with
their terms. The par value, support amounts, collateral
and impact on the Consolidated Statements of Operations
for the fiscal years ended March 31, 2010, 2009 and 2008,
for all support that remained outstanding as of the end of
each period and sale transactions that occurred during the
period were as follows:
Description
Capital Support Agreements—
Non-asset Backed Securities
Total
Description
Capital Support Agreements—
Non-asset Backed Securities
Purchase of Non-bank Sponsored SIV(4)
Sale of Non-bank Sponsored SIV(4)
Total
Description
Letters of Credit
Capital Support Agreements—
Asset Backed Securities
Par
Value
Year Ended March 31, 2010
Cash
Collateral(1)
Pre-Tax
Gain(2)
Support
Amount
After Tax
Gain(3)
n/m
$
$
—
—
$
$
—
—
$
$
23,171
23,171
$ 16,565
$ 16,565
Par
Value
Year Ended March 31, 2009
Cash
Collateral(1)
Pre-Tax
Charge(2)
Support
Amount
After Tax
Charge(3)
n/m
—
—
$
$
41,500
—
—
41,500
$ 41,500
—
—
$ 41,500
$
20,906
965
2,261,365
$ 2,283,236
$
12,289
2,144
1,362,146
$1,376,579
Par
Value
$1,192,000
Year Ended March 31, 2008
Cash
Collateral(1)
$286,250
Pre-Tax
Charge(2)
$ 235,468
Support
Amount
$ 485,000
After Tax
Charge(3)
$ 97,866
2,163,000
890,000
82,000
94,000
$4,421,000
Total Return Swap
Purchase of Non-bank Sponsored SIV(4,5)
Purchase of Canadian Conduit Securities
Total
n/m—not meaningful
(1) Included in restricted cash on the Consolidated Balance Sheet.
(2) Pre-tax charges include reductions in the value of underlying securities, in addition to a gain of $2,540, primarily related to foreign exchange forward contracts and inter-
est payments received, for the year ended March 31, 2010, and losses of $181,183 relating to reimbursements to two funds for a portion of losses they incurred in selling
SIV securities and $2,863 principally relating to transaction costs which were substantially offset by a gain on a foreign exchange forward contract and interest payments
received on underlying securities for the year ended March 31, 2009, and are included in fund support in Other non-operating income (expense) on the Consolidated
Statements of Operations.
415,000
139,480
—
—
$840,730
316,185
18,042
162
37,419
$ 607,276
415,000
890,000
82,000
94,000
$1,966,000
195,149
4,454
40
16,218
$ 313,727
(3) After tax and after giving effect to operating expense adjustments.
(4) Securities issued by SIVs.
(5) Support amount for securities purchased from funds reflects amount paid to fund less subsequent principal repayments.
86
The following table provides a summary of changes (in millions) in liquidity fund support, including securities pur-
chased from the funds by Legg Mason, for the fiscal years ended March 31:
Capital
Support
Capital
Support Agreements–
Agreements– Non-asset
Letters Asset Backed Backed
Securities
Securities
of Credit
$
$ —
485
—
—
485
257
—
—
—
(742)
—
—
—
—
—
—
415
—
—
415
395
635
—
—
(1,430)
(15)
—
—
—
—
$ —
—
—
—
—
27
15
—
—
—
—
—
42
(23)
(19)
Purchase
& Sale of
Non-bank Purchase of
Sponsored Canadian
Conduit
Securities
SIV
Securities
$
—
—
82
—
82
—
—
2,973
(2,932)
—
(82)
(41)
—
—
—
$ —
—
98
(4)
94
—
—
—
(76)
—
—
(18)
—
—
—
Total
$
—
1,790
180
(4)
1,966
679
650
2,973
(3,363)
(2,172)
(537)
(154)
42
(23)
(19)
Total
Return
Swap
$ —
890
—
—
890
—
—
—
(355)
—
(440)
(95)
—
—
—
Support amount as of
March 31, 2007
New support agreements
Purchases
Other(1)
Support amount as of
March 31, 2008
New support agreements
Amended support agreements
Purchases
Sales
Terminations of
support agreements
Maturities
Other(1)
Support amount as of
March 31, 2009
Amended support agreements
Terminations of
support agreements
Support amount as of
March 31, 2010
$ —
$
—
$ —
$ —
$
—
$ —
$
—
(1) Includes principal and interest payments received related to purchased securities and securities subject to the TRS, in addition to currency gains (losses) on Canadian
conduit securities.
Letter of Credit
During fiscal 2008, Legg Mason provided support to
three liquidity funds in the form of LOCs issued by two
third-party banks for an aggregate amount of approxi-
mately $485 million to support investments in asset
backed commercial paper issued by two SIVs. During
fiscal 2009, Legg Mason provided additional support
to liquidity funds in the form of two LOCs issued by a
third-party bank for an aggregate amount of approxi-
mately $257 million to support investments in asset
backed commercial paper issued by two SIVs. Under
the terms of the LOC agreements, the LOCs could be
drawn in certain circumstances, including upon the
fund’s realizing a loss on disposition or restructuring of
the position, upon the agreement’s termination if unpaid
amounts remained on certain of the fund’s SIV-issued
securities, or in certain circumstances upon ratings
downgrades of the issuing bank. As part of the LOC
arrangements, Legg Mason agreed to reimburse to the
banks any amounts that were drawn on the LOCs. As of
the date the LOCs were issued, Legg Mason established
a derivative liability for the fair value of its guarantee
to reimburse the banks any amounts drawn under the
LOCs. Due to the sale of all securities issued by SIVs
held by the liquidity funds during fiscal 2009, the LOCs
were terminated in accordance with their terms, no
amounts were drawn thereunder, and no derivative lia-
bility was reported as of March 31, 2009. At March 31,
2008, Legg Mason reported derivative liabilities of
$235.5 million for these LOCs.
87
Capital Support Agreements—Asset Backed Securities
During fiscal 2008, Legg Mason entered into six CSAs
with two liquidity funds to support investments in asset
backed securities issued by SIVs. Under the terms of one of
the CSAs, the Company agreed to provide up to $15 mil-
lion in contributions to the fund if the fund recognized
a loss from certain investments or continued to hold the
underlying securities at the expiration of the one-year term
of the agreement, and at the applicable time, the fund’s net
asset value was less than a specified threshold. Under the
terms of five of the CSAs, the Company agreed to provide
up to $400 million of contributions to the fund if the fund
recognized a loss on the sale of, or certain other events
relating to, securities issued by two SIVs. Contributions
made by the Company under any of its CSAs would not
result in Legg Mason acquiring an ownership or other
interest in the fund. During fiscal 2009, Legg Mason
amended five of the CSAs entered into in fiscal 2008 to
increase the maximum contributions that the Company
would make thereunder by $525 million, from $400 mil-
lion to $925 million.
During fiscal 2009, Legg Mason also entered into seven
new CSAs, aggregating $395 million, with four liquid-
ity funds to support investments in asset backed securi-
ties issued by four SIVs. All but one of these CSAs were
amended during the year to provide up to $110 million
of additional support. Under the amended terms of six of
the CSAs and the original terms of one of the CSAs, the
Company agreed to provide up to the maximum contri-
bution amount to the funds if the funds recognized a loss
on the sale of, or certain other events relating to, securities
issued by the four SIVs.
Due to maturities of supported securities and the sale of
all securities issued by SIVs held by the liquidity funds
during fiscal 2009, all CSAs which supported asset backed
securities issued by SIVs were terminated in accordance
with their terms, no contributions were made thereunder,
and no derivative liability was reported as of March 31,
2009. At March 31, 2008, Legg Mason reported a deriva-
tive liability of $316.2 million related to CSAs.
Capital Support Agreements—Non-Asset
Backed Securities
During the year ended March 31, 2009, Legg Mason
also entered into four CSAs, aggregating $27 million,
to support investments in non-asset backed securities
held in four liquidity funds. Two of these CSAs were
amended during the year to provide up to $15 million of
additional support. Under the amended terms of two of
the CSAs and the original terms of two of the CSAs, Legg
Mason agreed to provide up to the maximum contribu-
tion amount to the funds if the funds recognized a loss
from investments in certain non-asset backed securities or
continued to hold the underlying securities at the expira-
tion of the one-year terms of the agreements, and at the
applicable time, the funds net asset value was less than a
specified threshold. These four CSAs included a recovery
clause in which the funds were required to reimburse
Legg Mason for all contributions made upon the expira-
tion of the CSA to the extent that the funds subsequently
received payments from the issuer of the underlying secu-
rities or upon the sale or other disposition thereof that
exceeded the amortized cost of the underlying securities.
As of March 31, 2009, Legg Mason reported a derivative
liability of $20.6 million related to these CSAs.
During fiscal 2010, Legg Mason terminated two of these
CSAs to provide up to $14 million in contributions to two
funds. Also, one CSA to provide up to $5 million in con-
tributions to a fund expired in accordance with its terms
with no amounts drawn thereunder. Finally, Legg Mason
amended one CSA to provide up to $22.5 million in con-
tributions to a fund to reduce the maximum contribution
that the Company would make to the fund thereunder
to $5 million. This CSA expired in accordance with its
terms in March 2010 with no amounts drawn thereunder.
As of March 31, 2010, no CSAs remain outstanding.
Total Return Swap
During fiscal year 2008, Legg Mason entered into a TRS
arrangement with a major bank (“the Bank”) pursuant to
which the Bank purchased securities issued by three SIVs
from a Dublin-domiciled liquidity fund managed by a
subsidiary of Legg Mason. The $890 million of securities
in face amount of commercial paper were purchased by
the Bank for cash at an aggregate amount of $832 mil-
lion, which represented an estimate of value determined
for collateral purposes. In addition, Legg Mason reim-
bursed the fund for the $59.5 million difference between
the fund’s carrying value, including accrued interest, and
the amount paid. The securities had a market value of
$886 million at March 31, 2008, which after expected
financing costs, exceeded the amount paid by the Bank
by $45.7 million. This difference was accounted for as a
derivative asset included in Other current assets on the
Consolidated Balance Sheet as of March 31, 2008, and
represented the amount Legg Mason expected to recover
from the Bank upon maturity or sale of the underlying
88
securities. Under the TRS, Legg Mason agreed to pay to
the Bank any losses (including losses incurred through a
sale of the securities or through principal not being repaid
at maturity) the Bank incurred from its ownership of the
securities and a return on the purchase price paid for the
securities equal to the one-month LIBOR rate plus 1%,
and the Bank agreed to pay to Legg Mason any principal
and interest it received on the securities in excess of the
price it paid for the securities. During fiscal year 2009,
$440 million of securities supported by the TRS matured
and were paid in full and $95 million in principal amount
of securities supported by the TRS was paid. The TRS
arrangement terminated in November 2008. Legg Mason
amended the TRS to extend its expiration to November
2009 and, due to maturities of, and principal payments
on, the underlying securities, decrease the total amount
of securities covered by the TRS from $890 million to
$355 million. The TRS was terminated in fiscal 2009
upon the sale of the underlying securities.
Non-Bank Sponsored SIV
During fiscal 2008, Legg Mason purchased for cash an
aggregate of $132 million in principal amount of non-
bank sponsored SIV securities from a liquidity fund.
During January 2008 and May 2008, approximately
$50 million and $82 million, respectively, in principal
amount of the securities matured and were paid in full.
Canadian Conduit Securities
During fiscal 2008, Legg Mason acquired for cash an aggre-
gate of $98 million in principal amount of conduit securities
issued by Canadian asset backed commercial paper issuers
from a fund managed by a Legg Mason subsidiary. These
securities were sold in fiscal 2009, as described below.
During fiscal 2009, Legg Mason purchased for $2.9 bil-
lion in cash, including $24 million of accrued interest,
$3.0 billion in principal amount of non-bank sponsored
SIV securities from six liquidity funds that were previously
supported under twelve CSAs and seven LOCs. Upon the
purchase of these securities, the twelve CSAs aggregating
$1.4 billion and seven LOCs aggregating $742 million
were terminated in accordance with their terms. The
Company subsequently sold the $3.0 billion of purchased
securities along with $355 million of securities previously
supported by the TRS and the $76 million of Canadian
conduit securities held on its balance sheet, to third parties
for $655 million, excluding transaction costs. Legg Mason
also paid $181.2 million to reimburse two funds for a por-
tion of losses they incurred in selling unsupported SIV
securities. As a result of the sale and reimbursement to the
funds, which completely eliminated the Company’s expo-
sure to securities issued by SIVs, the Company incurred a
realized loss of $2.3 billion ($1.4 billion, net of taxes and
operating expense adjustments) in fiscal 2009.
18. DERIVATIVES AND HEDGING
Legg Mason continues to use currency forwards to eco-
nomically hedge the risk of movements in exchange rates,
primarily between the U.S. dollar, euro, Great Britain
pound, Canadian dollar, and Australian dollar. As of
March 31, 2010, Legg Mason had open currency for-
ward contracts with aggregate gross fair values of $671
and $255, classified as Other assets and Other liabilities,
respectively. In the Consolidated Balance Sheets, Legg
Mason nets the fair value of certain foreign currency for-
wards executed with the same counterparty where Legg
Mason has both the legal right and intent to settle the
contracts on a net basis. For the year ended March 31,
2010, Legg Mason recognized gains and losses of $5,669
and $11,092, respectively, included in Other expense for
foreign exchange hedges associated with operating activi-
ties, and $269 and $19, respectively, included in Other
non-operating income (expense) for foreign exchange
hedges associated with seed capital investments.
During the year ended March 31, 2010, Legg Mason also
initiated market hedges on certain seed capital invest-
ments by entering into futures contracts to sell index
funds that benchmark the hedged seed capital invest-
ments. As of March 31, 2010, Legg Mason had open
futures contracts with aggregate gross fair values of $26
and $230, classified as Other assets and Other liabilities,
requiring cash collateral of $2,185. For the year ended
March 31, 2010, Legg Mason recognized gains and losses
of $26 and $1,081 included in Other non-operating
income (expense) relating to futures contracts intended to
offset movements in the value of seed capital investments.
Derivatives associated with fund support are discussed in
Note 17.
19. BUSINESS SEGMENT INFORMATION
Legg Mason is a global asset management company that
provides investment management and related services to
a wide array of clients. We operate in one reportable busi-
ness segment, Asset Management. Asset Management
provides investment advisory services to institutional
and individual clients and to company-sponsored invest-
ment funds. The primary sources of revenue in Asset
Management are investment advisory, distribution and
89
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 con-
tracts for exceeding performance benchmarks.
Legg Mason operates though two operating segments
(divisions), Americas and International, which are
primarily based on the geographic location of the advi-
sor or the domicile of fund families we manage. The
Americas Division consists of our U.S.-domiciled fund
families, the separate account businesses of our U.S.-
based investment affiliates and the domestic distribu-
tion organization. Similarly, the International Division
consists of our fund complexes, distribution teams and
investment affiliates located outside the U.S., primarily
in the United Kingdom.
The table below reflects our revenues and long-lived assets by geographic region (in thousands) as of March 31:
OPERATING REVENUES
United States
United Kingdom
Other International
Total
INTANGIBLE ASSETS, NET AND GOODWILL
United States
United Kingdom
Other International
Total
2010
2009
2008
$1,866,909
478,510
289,460
$2,634,879
$3,590,283
1,139,065
488,170
$5,217,518
$2,290,474
747,257
319,636
$3,357,367
$3,606,678
1,052,007
450,863
$5,109,548
$3,217,182
972,419
444,485
$4,634,086
$4,816,712
1,255,816
574,023
$6,646,551
20. SUBSEQUENT EVENT
In May 2010, Legg Mason announced a plan to stream-
line its business model to drive increased profitability
and growth that includes: 1) transitioning certain shared
services to its investment affiliates where they are closer
to the actual client relationships and can be delivered
with greater effectiveness; and 2) its Americas distribution
group sharing in revenue on retail-based AUM growth.
This plan involves headcount reductions in operations,
technology and other administrative areas at the corpo-
rate location, which may be partially offset by headcount
increases at the affiliates, and will ultimately enable Legg
Mason to eliminate a portion of its corporate office space
that was dedicated to operations and technology employ-
ees. Legg Mason expects that this initiative will result in
cost savings in excess of costs to execute. The initiative is
projected to involve restructuring- and transition-related
costs that will primarily include transition payments to
affiliates (primarily compensation) to temporarily offset
the cost of absorbing the services, charges for severance
and retention incentives, and may also include costs for
early contract terminations and asset disposals.
90
quARTERLy FINANCIAL DATA
(Dollars in thousands, except per share amounts)
(Unaudited)
Fiscal 2010(1)
Operating Revenues
Operating Expenses
Operating Income
Other Non-Operating Income (Expense)
Income before Income Tax Provision
Income tax provision
Net Income
Less: Net income attributable to
noncontrolling interests
Net Income attributable to Legg Mason, Inc.
Net Income per Share attributable to
Legg Mason, Inc. common shareholders:
Basic
Diluted
Cash dividend per share
Stock price range:
High
Low
Assets Under Management:
Quarter Ended
Mar. 31
$671,420
565,584
105,836
(4,116)
101,720
36,619
65,101
Dec. 31
$690,479
611,331
79,148
(6,909)
72,239
26,006
46,233
Sept. 30
$659,896
582,012
77,884
(2,891)
74,993
27,671
47,322
Jun. 30
$613,084
554,769
58,315
22,389
80,704
28,380
52,324
1,494
$ 63,607
1,311
$ 44,922
1,548
$ 45,774
2,270
$ 50,054
$
0.40
0.39
0.03
31.95
24.00
$
0.28
0.28
0.03
33.70
26.99
$
0.30
0.30
0.03
33.08
22.06
$
0.35
0.35
0.03
26.74
15.53
$702,700
684,034
$656,857
647,218
End of period
Average
$681,614
693,254
(1) Due to rounding of quarterly results, total amounts for each fiscal year may differ immaterially from the annual results.
As of May 20, 2010, the closing price of Legg Mason’s common stock was $29.53.
$684,549
681,227
Fiscal 2009(1)
Operating Revenues
Operating Expenses(2)
Operating Income (Loss)
Other Non-Operating Income (Expense)(3)
Income before Income Tax Provision (Benefit)
Income tax provision (benefit)
Net Income (Loss)
Less: Net income (loss) attributable to
noncontrolling interests
Net Income (Loss) attributable to Legg Mason, Inc.
Net Income (Loss) per Share attributable to
Legg Mason, Inc. common shareholders:
Basic
Diluted
Cash dividend per share
Stock price range:
High
Low
Assets Under Management:
End of period
Average
Mar. 31
$ 617,211
662,546
(45,335)
(646,141)
(691,476)
(364,532)
(326,944)
Quarter Ended
Dec. 31
$ 719,988
1,792,993
(1,073,005)
(1,198,022)
(2,271,027)
(778,047)
(1,492,980)
Sept. 30
$ 966,137
745,924
220,213
(388,093)
(167,880)
(58,891)
(108,989)
3,280
$(330,224)
(148)
$(1,492,832)
(254)
$(108,735)
$
(2.33)
(2.33)
0.24
$
(10.59)
(10.59)
0.24
$
(0.77)
(0.77)
0.24
25.53
10.37
38.74
11.09
47.82
26.56
Jun. 30
$1,054,031
825,084
228,947
(286,762)
(57,815)
(21,734)
(36,081)
$
$
46
(36,127)
(0.26)
(0.26)
0.24
65.50
43.37
$ 632,404
657,430
$ 698,241
745,084
$ 841,933
898,390
$ 922,767
948,529
(1) Due to rounding of quarterly results, total amounts for each fiscal year may differ immaterially from the annual results.
(2) The quarters ending March 31, 2009 and December 31, 2008 include $82,870 and $1,225,100, respectively, of impairment charges related to intangibles assets.
(3) The quarters ending March 31, 2009, December 31, 2008, September 30, 2008, and June 30, 2008 include $606,426, $1,085,296, $324,639 and $266,875, respectively,
of charges resulting from providing support to liquidity funds.
91
ExECuTIVE oFFICERS
Mark R. Fetting
Chairman and Chief Executive Officer
Ronald R. Dewhurst
Senior Executive Vice President
Charles J. Daley, Jr.
Executive Vice President, Chief Financial Officer
and Treasurer
Jeffrey A. Nattans
Executive Vice President
David R. Odenath
Senior Executive Vice President
Joseph A. Sullivan
Senior Executive Vice President
CoRpoRATE DATA
Executive Offices
100 International Drive
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 2010.
NYSE Certification
In 2009, the Chief Executive Officer of
Legg Mason, Inc. submitted an unqualified
annual certification to the NYSE regarding
the Company’s compliance with the NYSE
corporate governance listing standards.
Form 10-K
Legg Mason’s Annual Report on Form
10-K for fiscal 2010, filed with the
Securities and Exchange Commission and
containing audited financial statements, is
available upon request without charge by
writing to the Corporate Secretary at 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, 2010, there were 1,640
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, 2005). The SNL Asset Manager Index consists of 34 asset management firms.
E
U
L
A
V
x
E
D
N
I
200
150
100
50
0
Legg Mason, Inc.
s&P 500 stock Index
snL asset Manager Index
03/31/05
03/31/06
03/31/07
03/31/08
03/31/09
03/31/10
92
P E R I O D EN D I N G
INDEx
03/31/05 03/31/06 03/31/07 03/31/08 03/31/09 03/31/10
Legg Mason, Inc.
100.00 161.40 122.33
73.59 21.28 39.51
S&P 500 Stock Index
100.00 140.80 157.88 141.78 75.37 139.10
SNL Asset Manager Index
100.00 111.73 124.94 118.60 73.43 109.97
Source: SNL Financial LC, Charlottesville, VA
Source: S&P 500 Stock Index return rates obtained from www.standardandpoors.com
OuR COMMITMENT TO THE GLOBAL COMMu NITY
Legg Mason is committed to helping the global communities in which our employees
live and work. We strongly believe that being a leader in our industry means being a
responsible corporate citizen. Through the sponsorship of employee volunteerism
efforts and Legg Mason Charitable Foundation’s philanthropic giving, we support
community initiatives by investing time and money in areas that promote community
well-being. Legg Mason focuses on a broad array of local and global causes, with an
emphasis on education and at-risk youth, in addition to health and human services,
sustainability and the environment, diversity and the arts, and more. We believe that
by investing in our communities, we invest in our futures.
2010 AnnuAl report