_____________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-8529
______________________
LEGG MASON, INC.
(Exact name of registrant as specified in its charter)
_____________________
Maryland 52-1200960
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Light Street 21202
Baltimore, Maryland (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (410) 539-0000
______________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of May 14, 1998, the aggregate market value of the registrant's common
stock held by non-affiliates was $1,520,492,000.
As of May 14, 1998, the number of shares outstanding of the registrant's
common stock was 27,572,660.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement dated June 12, 1998
are incorporated by reference into Part III.
<PAGE> 1
Part I
Item 1. Business.
General
Legg Mason, Inc. is a holding company which, through its
subsidiaries, is engaged in securities brokerage and trading,
investment management of institutional and individual accounts and
Company-sponsored mutual funds, investment banking for corporations and
municipalities, commercial mortgage banking and provision of other
financial services.
The Company's principal broker-dealer subsidiary is Legg Mason
Wood Walker, Incorporated ("Legg Mason Wood Walker"), a full service
regional broker-dealer and investment banking firm operating primarily
in the Eastern and Mid-South regions of the United States. Another
broker-dealer subsidiary, Howard, Weil, Labouisse, Friedrichs
Incorporated ("Howard Weil"), engages primarily in energy-related
investment banking and institutional brokerage.
The Company's principal investment advisory subsidiaries are
Legg Mason Fund Adviser, Inc., which serves as investment adviser to or
manager of Company-sponsored mutual funds; Western Asset Management
Company, which manages fixed-income assets for institutional clients;
Brandywine Asset Management, Inc., which was acquired in January 1998
and primarily manages equity portfolios for institutional and high net
worth individual clients; Batterymarch Financial Management, Inc.,
which manages emerging markets, international and U.S. equity
portfolios for institutional clients; Bartlett & Co., which manages
equity, balanced and fixed-income portfolios for high net worth
individuals and institutional clients; Legg Mason Capital Management,
Inc., which manages equity and fixed-income portfolios for individual
and institutional accounts; Gray, Seifert & Co., Inc., which primarily
manages equity portfolios for wealthy individual, family group,
endowment and foundation clients; and Western Asset Global Management
Limited, which manages international fixed-income and currency assets
for institutional clients. In addition to Legg Mason Fund Adviser, all
of the above firms also serve as investment advisor to Company-
sponsored mutual funds and/or other Company-structured investment
products.
As of March 31, 1998, the Company's investment advisory
subsidiaries had approximately $71.0 billion of assets under
management, of which approximately 35% were equity assets and
approximately 65% were fixed-income assets.
The Company's principal real estate finance subsidiaries are
Legg Mason Real Estate Services, Inc. and Legg Mason Dorman & Wilson,
Inc., which are primarily engaged in commercial mortgage banking and
commercial loan servicing.
The Company was incorporated in Maryland in 1981 to serve as a
holding company for Legg Mason Wood Walker and other subsidiaries. The
predecessor company to Legg Mason Wood Walker was formed in 1970 under
the name Legg Mason & Co., Inc. to combine the operations of Legg &
<PAGE> 2
Co., a Maryland-based broker-dealer formed in 1899, and Mason &
Company, Inc., a Virginia-based broker-dealer formed in 1962. The
Company's subsequent growth has occurred through internal expansion as
well as through its acquisitions of investment management, broker-
dealer and commercial mortgage banking firms.
Unless the context otherwise requires, all references in this
Report to the Company include Legg Mason, Inc. and its predecessors and
subsidiaries.
Registrations and Exchange Memberships
Legg Mason Wood Walker and Howard Weil are registered as
broker-dealers with the Securities and Exchange Commission ("SEC"), are
members of the New York Stock Exchange, Inc. ("NYSE"), the New York
Futures Exchange, Inc., the National Association of Securities Dealers,
Inc. ("NASD") and the Securities Investors Protection Corporation
("SIPC"), and are registered as futures commission merchants with the
Commodity Futures Trading Commission. In addition, Legg Mason Wood
Walker is a member of the Philadelphia, Pacific, Cincinnati and Chicago
Stock Exchanges.
<PAGE> 3
Brokerage Offices
The following table reflects, as of March 31, 1998, certain
information with respect to the Company's securities brokerage offices.
<TABLE>
<CAPTION>
Number of
Financial Number of
Location Advisors Offices
<S> <C> <C>
United States:
Maryland . . . . . . . . . . . . 278 16
Pennsylvania . . . . . . . . . . 199 22
Virginia . . . . . . . . . . . . 104 10
Louisiana. . . . . . . . . . . . 86 9
North Carolina . . . . . . . . . 62 8
Massachusetts. . . . . . . . . . 58 3
Florida. . . . . . . . . . . . . 51 9
Texas. . . . . . . . . . . . . . 44 4
District of Columbia . . . . . . 43 1
New York . . . . . . . . . . . . 35 3
Ohio . . . . . . . . . . . . . . 34 4
New Jersey . . . . . . . . . . . 32 5
Alabama. . . . . . . . . . . . . 29 3
Connecticut. . . . . . . . . . . 19 3
Mississippi. . . . . . . . . . . 14 3
Maine. . . . . . . . . . . . . . 14 1
West Virginia. . . . . . . . . . 12 2
Delaware . . . . . . . . . . . . 10 1
Tennessee. . . . . . . . . . . . 10 1
South Carolina . . . . . . . . . 9 1
Rhode Island . . . . . . . . . . 4 1
California . . . . . . . . . . . 1 1
United Kingdom:
London . . . . . . . . . . . . . 6 1
Switzerland:
Geneva/Nyon . . . . . . . . . . 5 2
France:
Paris. . . . . . . . . . . . . . 1 1
TOTAL . . . . . . . . . 1,160 115
</TABLE>
<PAGE> 4
Revenues by Source
The following table sets forth certain information regarding
the revenues of the Company by source.
<TABLE>
<CAPTION>
LEGG MASON, INC. AND SUBSIDIARIES (1)
Years Ended March 31,
1996 1997 1998
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Commissions
Listed and Over-the-
Counter . . . . . . . .$116,187 21.8% $124,841 18.8% $164,022 18.4%
Mutual Funds . . . . . . 35,276 6.6 41,054 6.2 48,687 5.5
Insurance and Annuities. 14,409 2.7 20,436 3.1 22,613 2.5
Options and Commodities. 3,309 0.6 3,649 0.5 5,962 0.7
Total. . . . . . 169,181 31.7 189,980 28.6 241,284 27.1
Principal Transactions (2)
Customer Related:
Government and Agency . 12,406 2.3 14,660 2.2 15,405 1.7
Municipal . . . . . . . 14,845 2.8 15,662 2.4 17,102 1.9
Corporate Debt. . . . . 8,817 1.7 8,437 1.3 11,301 1.3
Over-the-Counter. . . . 24,112 4.5 31,327 4.7 34,179 3.9
60,180 11.3 70,086 10.6 77,987 8.8
Dealer Related:
Government and Agency . 1,171 0.2 1,602 0.2 2,312 0.3
Municipal . . . . . . . (205) - 46 - 1,159 0.1
Corporate Debt. . . . . 398 0.1 295 - 1,035 0.1
Over-the-Counter. . . . 4,326 0.8 1,152 0.2 4,255 0.5
5,690 1.1 3,095 0.4 8,761 1.0
Total. . . . . . 65,870 12.4 73,181 11.0 86,748 9.8
Investment Advisory and
Related Fees . . . . . . 162,063 30.4 208,243 31.3 295,645 33.3
Investment Banking (3)
Corporate. . . . . . . . 36,495 6.8 63,850 9.6 90,123 10.1
Municipal. . . . . . . . 6,833 1.3 8,212 1.2 7,015 0.8
Total. . . . . . 43,328 8.1 72,062 10.8 97,138 10.9
Interest Income . . . . . 57,125 10.7 84,129 12.7 127,268 14.3
Other (4) . . . . . . . . 35,776 6.7 37,006 5.6 40,977 4.6
Total Revenues .$533,343 100.0% $664,601 100.0% $889,060 100.0%
</TABLE>
(1) All financial information has been restated for the acquisition, on a
pooling of interests basis, of Brandywine Asset Management, Inc. on
January 16, 1998.
(2) Principal transactions (securities transactions in which the Company buys
for or sells from its own inventory) are classified as "Customer Related" when
such transactions are effected with a customer of the Company (whether an
individual or institutional investor) and as "Dealer Related" when such
transactions are effected with another dealer.
(3) Principally selling concessions from underwriting participations and fees
from managed and co-managed offerings.
(4) Includes revenues from mortgage servicing and loan originations
(1996: $19,192; 1997: $16,922;1998: $21,475).
<PAGE> 5
Retail Securities Business
For the fiscal years ended March 31, 1996, 1997 and
1998, revenues derived from securities transactions for individual
investors (excluding interest on margin accounts) constituted
approximately 88%, 84% and 83%, respectively, of total revenues
from securities transactions and 41%, 37% and 34%, respectively,
of the Company's total revenues. Management believes that such
services will continue to be a significant source of revenues in
the foreseeable future, although the percentage of total revenues
may continue to decrease primarily as a result of increases in
investment advisory and investment banking revenues. Retail
commissions are charged on both exchange and over-the-counter
("OTC") transactions in accordance with a schedule which the
Company has formulated and may change from time to time.
Discounts from the schedule are granted in certain cases. The
Company also offers certain account arrangements under which a
single fee is charged based on a percentage of the assets held in
a customer's account and no commissions are charged on a
transaction-by-transaction basis. When OTC transactions are
executed by the Company as a dealer, the Company receives, in lieu
of commissions, mark-ups or mark-downs that are included in the
"Revenues by Source" table as customer-related principal
transactions. The Company has dealer-sales agreements with
several major distributors that offer mutual fund shares through
broker-dealers. In addition, the Company sells shares of Company-
sponsored mutual funds. See "Company-Sponsored Mutual Funds."
Margin Accounts, Interest Income and Free Credit Balances
Customers' securities transactions are effected on
either a cash or a margin basis. In a margin account, the
customer pays less than the full cost of the securities purchased
and the broker-dealer makes a loan for the balance of the purchase
price secured by the securities purchased or other securities
owned by the customer. The amount of the loan is subject to the
margin regulations (Regulation T) of the Board of Governors of the
Federal Reserve System, NYSE margin requirements, and the
Company's internal policies, which in some instances are more
stringent than Regulation T or NYSE requirements. In permitting a
customer to purchase securities on margin, the Company is subject
to the risk that a market decline could reduce the value of its
collateral below the amount of the customer's indebtedness and
that the customer might be unable otherwise to repay the
indebtedness.
Interest is charged on amounts borrowed by customers
(debit balances) to finance their margin transactions. The rate
of interest charged to customers is the prime rate plus or minus
an additional amount that varies depending upon the size of the
customer's debit balance and level of account activity. Interest
income derived from these sources constituted approximately 5%, 5%
and 6% of the Company's total revenues for the fiscal years ended
March 31, 1996, 1997 and 1998, respectively. Interest is also
earned on securities owned by the Company and on operating and
segregated cash balances.
<PAGE> 6
Free credit balances (excess funds kept by customers in
their brokerage accounts) is the primary source of funds used to
finance customers' margin account borrowings. Legg Mason Wood
Walker pays interest on certain free credit balances in customers'
accounts when the customer has indicated that the funds will be
used for reinvestment at a future date. In fiscal 1998, Legg
Mason Wood Walker paid interest on approximately 93% of customer
free credit balances.
Institutional Business
The Company is engaged in executing securities
transactions for institutional investors such as banks, mutual
funds, insurance companies and pension and profit-sharing plans.
Such investors normally purchase and sell securities in large
quantities which require special marketing and trading expertise.
The Company believes that a significant portion of its
institutional brokerage commissions is received as a consequence
of provision to institutions of research opinions and services
regarding specific corporations and industries and other matters
affecting the securities markets. See "Research."
Transactions are executed by the Company acting as
broker or as principal. The Company permits discounts from its
commission schedule to its institutional customers. The size of
such discounts varies with the size of particular transactions and
other factors. For the fiscal years ended March 31, 1996, 1997
and 1998, revenues derived from securities transactions for
institutional investors constituted approximately 12%, 16% and
17%, respectively, of total revenues from securities transactions
and 6%, 7% and 7%, respectively, of the Company's total revenues.
Principal Transactions
The Company makes primary markets in equity securities
that are traded OTC, particularly securities of companies located
in the Mid-Atlantic and Mid-South regions. The Company is also an
active market maker and distributor of municipal bonds,
particularly bonds issued by municipalities located in the Mid-
Atlantic and Mid-South regions.
As of March 31, 1998, the Company made markets in equity
securities of approximately 435 corporations, including
corporations for which the Company has acted as a managing or co-
managing underwriter. The Company has 40 traders involved in
trading corporate equity and debt securities, 16 in trading
municipal securities, and 10 in trading government securities.
The Company's market-making activities are also
conducted with other dealers, and with institutional and
individual customers of its branch office system. In making
markets in equity and debt securities, the Company maintains
positions in such securities to service its customers and
accordingly exposes its own capital to the risk of fluctuations in
market value. While the Company seeks to avoid substantial market
risk, and may engage in hedging transactions to minimize risk, it
does, nonetheless, realize profits
<PAGE>7
and losses from market fluctuations. Trading profits (or losses)
depend upon the skills of the employees engaged in market making, the
amount of capital allocated to positions in securities and the general
level of activity and trend of prices in the securities markets.
Investment Banking
Corporate and Municipal Finance
The Company participates as an underwriter in public
offerings of corporate debt and equity issues as well as municipal
securities. The Company also serves as manager or co-manager of
corporate equity and municipal offerings, generally involving
issuers located in the Mid-Atlantic and Mid-South regions.
The following tables set forth, for the periods
indicated, (i) the total number and dollar amount of corporate
stock and bond and municipal bond offerings managed or co-managed
by the Company, and (ii) the total number and dollar amount of its
underwriting participations in those offerings and in offerings
managed by others.
<TABLE>
<CAPTION>
Managed or Co-Managed Offerings
Calendar Year Number of Issues Amount of Offering
Corporate Municipal Corporate Municipal
<S> <C> <C> <C> <C>
1993 81 340 $9,949,500,000 $15,715,724,000
1994 24 227 3,764,956,000 5,779,156,000
1995 22 165 958,377,000 4,112,580,000
1996 33 258 3,808,000,000 5,555,638,000
1997 76 224 8,453,000,000 7,208,000,000
</TABLE>
<TABLE>
<CAPTION>
Underwriting Participations
Calendar Year Number of Issues Amount of Participation
Corporate Municipal Corporate Municipal
<S> <C> <C> <C> <C>
1993 598 458 $1,396,410,000 $ 6,017,729,000
1994 411 309 776,258,000 1,187,236,000
1995 354 232 675,257,000 627,973,000
1996 427 246 1,313,233,000 587,548,000
1997 298 198 1,380,000,000 936,668,000
</TABLE>
Underwriting involves both economic and regulatory
risks. An underwriter may incur losses if it is unable to resell
the securities it is committed to purchase, or if it is forced to
liquidate its commitments at less than the agreed purchase price.
In addition, an underwriter is subject to substantial potential
liability for material misstatements or omissions in prospectuses
and other communications with respect to underwritten offerings.
See "Item 3. Legal Proceedings." Furthermore, because
underwriting commitments require a charge against net capital, the
Company's broker-dealer subsidiaries could find it necessary to
limit their underwriting participations to remain in compliance
with regulatory net capital requirements. See "Net Capital
Requirements."
<PAGE> 8
Other Investment Banking Activities
The Company's investment banking activities also include
private debt and equity placements and initiation and advice with
respect to merger and acquisition transactions, as well as
provision of financial advisory services to corporate and
municipal clients.
At March 31, 1998, the Company had 83 professionals
engaged in investment banking activities, including 60 in
corporate finance and 23 in municipal finance.
Company-Sponsored Mutual Funds
Through various subsidiaries, the Company sponsors and
serves as investment advisor and distributor for domestic and
international equity, fixed-income and money market mutual funds
and offshore investment funds. As of March 31, 1997 and 1998, the
aggregate net assets of all of these proprietary funds were
approximately $9.1 billion and $13.8 billion, respectively.
For the fiscal years ended March 31, 1996, 1997 and
1998, the Company received approximately $26.0 million, $37.8
million and $66.5 million, respectively, in asset-based sales
charges from its proprietary mutual funds and offshore investment funds.
Investment Advisory Services
Legg Mason Fund Adviser, Inc. serves as investment
adviser to or manager of various Company-sponsored mutual funds.
In addition, all of the firms described in the following
paragraphs also serve as investment advisor to Company-sponsored
mutual funds and/or other Company-structured investment products.
The amounts indicated as assets under management by those firms
include the assets in such funds and/or other products.
Western Asset Management Company manages fixed-income
assets for institutional clients. At March 31, 1997 and 1998, Western
managed assets with a value of approximately $27.1 billion and $39.6 billion,
respectively, under management.
Brandywine Asset Management, Inc., acquired in January,
1998, primarily manages equity portfolios for institutional and
high net worth individual clients. At March 31, 1997 and 1998,
Brandywine managed assets with a value of approximately $6.5
billion and $8.2 billion, respectively.
Batterymarch Financial Management, Inc. manages emerging
markets, international and U.S. equity portfolios for
institutional clients. At March 31, 1997 and 1998, Batterymarch managed
assets with a value of approximately $4.3 billion.
Bartlett & Co. manages equity, balanced and fixed-income
portfolios for high net worth individuals and institutional
clients. At March 31, 1997 and 1998, Bartlett managed assets with
a value of approximately $2.4 billion and $3.1 billion,
respectively.
<PAGE> 9
Gray, Seifert & Co., Inc. primarily manages equity
portfolios for wealthy individuals and family groups, endowments
and foundations. At March 31, 1997 and 1998, Gray Seifert managed
assets with a value of approximately $950 million and $1.4
billion, respectively.
The Company has revenue sharing agreements with Western Asset
Management Company, Brandywine, Batterymarch, Gray Seifert and Bartlett
and certain of their key officers pursuant to which a specified percentage
of the subsidiary's revenues is required to be distributed to Legg Mason,
Inc., and the balance of the revenues is retained by the
subsidiary to pay its operating expenses, including salaries and
bonuses, with specific expense and compensation allocations being
determined by the subsidiary's management.
Western Asset Global Management Limited manages international
fixed-income and currency assets for institutions worldwide. At March 31,
1997 and 1998, Western Asset Global managed assets with a value of
approximately $2.1 billion and $1.9 billion, respectively.
Legg Mason Capital Management, Inc. manages equity and
fixed-income portfolios for individual and institutional clients.
At March 31, 1997 and 1998, this subsidiary managed assets with
values of approximately $1.5 billion and $2.7 billion,
respectively.
Fairfield Group, Inc. offers the Navigator REPO/LINE, a
service structured to meet the specialized investment needs of
banks and bank trust departments. This service invested
approximately $1.4 billion and $1.7 billion at March 31, 1997 and
1998, respectively, of short-term cash in repurchase agreements
collateralized by U.S. government and government agency
securities. Fairfield also markets certain of the Company-
sponsored mutual funds. Two money market funds managed by Fairfield,
with combined assets of approximately $195 million at March 31, 1998, are
expected to be liquidated during fiscal 1999.
The Company's advisory activities also include wrap-fee
programs in which the Company's customer pays a single asset-based
fee that covers all execution and advisory services, including
advisory services provided by the Company's investment advisory
affiliates and selected independent advisory firms. In addition,
the Company provides asset allocation and advisor performance and
selection consultation services.
Mortgage Banking and Real Estate Services
Legg Mason Real Estate Services, Inc. ("LMRES") and Legg
Mason Dorman & Wilson, Inc. are engaged in the commercial mortgage
banking business. These firms originate, structure, place and
service commercial mortgages on income-producing properties for
insurance companies, pension funds and other investors. LMRES is
also engaged in the business of managing commercial mortgage
<PAGE> 10
portfolios on behalf of pension funds, with a major portion of
this business consisting of management services provided to four
public pension funds. In addition, LMRES provides real estate
consulting services, specializing in sports arena and facility
feasibility, analysis and financing, as well as in providing
corporate real estate services and equity sales. LMRES'
headquarters are located in Philadelphia, Pennsylvania, and it has
offices located in the Mid-Atlantic and Southeastern regions of
the United States. Legg Mason Dorman & Wilson is headquartered in
White Plains, New York, and has offices in New York, New Jersey
and Massachusetts.
As of March 31, 1997 and 1998, the commercial mortgage
servicing portfolio of LMRES was $4.1 billion and $4.6 billion,
respectively, and of Legg Mason Dorman & Wilson was $5.9 billion
and $4.9 billion, respectively.
Insurance Brokerage and Financial Planning
Approximately 950 of the Company's financial advisors
are licensed to sell insurance. Legg Mason Financial Services,
Inc., a wholly-owned subsidiary of the Company, acts as general
agent for several life insurance companies and sells fixed and
variable annuities and insurance. The Company also offers
comprehensive financial planning services to individuals. See
"Revenues by Source" for information regarding revenue generated
by insurance brokerage activities.
Other Services
At March 31, 1998, the Company served as a non-bank
custodian for approximately 179,000 IRA's, 18,000 Simplified
Employee Pension Plans and 9,400 Qualified Plans.
The Company effects the purchase and sale of options and
commodities contracts on behalf of clients.
Legg Mason Trust Company, a state chartered, non-depository
bank, provides services as a trustee for trusts established by the
Company's individual and employee benefit plan clients. The Company
provides brokerage and advisory services for a significant portion of
the assets held in the Trust Company's accounts.
Research
The Company employs 48 analysts who develop investment
recommendations and market information with respect to companies
and industries. Legg Mason Wood Walker's research generally
focuses on the identification of securities of financially sound,
well-managed companies that appear to be undervalued in relation
to their long-term earning power or the value of underlying
assets. Legg Mason refers to this investment strategy as the
"Value Approach" to investing. Howard Weil's analysts concentrate
on the oil and gas exploration, pipeline and service industries.
The Company's research services are supplemented by research
services purchased from outside consultants.
<PAGE> 11
The Company's clients do not pay for research services
directly, although the Company is often compensated for its
research services by institutional clients through the direction
of brokerage transactions to the Company for execution. The
Company believes that its research activities are extremely
important in attracting and retaining individual and institutional
brokerage and investment advisory clients.
Operations
Administrative and operations personnel are responsible
for the processing of securities transactions; receipt,
identification and delivery of funds and securities; internal
financial controls; office services; custody of customers'
securities and the handling of margin accounts. At March 31,
1998, the Company had approximately 350 full-time employees
performing such functions.
There is considerable fluctuation during any year and
from year to year in the volume of transactions the Company must
process. The Company records transactions and posts its books on
a daily basis. Operations personnel monitor day-to-day operations
to determine compliance with applicable laws, rules and
regulations. Failure to keep current and accurate books and
records can render the Company liable to disciplinary action by
governmental and self-regulatory authorities, as well as to claims
by its clients.
Legg Mason Wood Walker executes and clears all of its
own securities transactions as a member of the NYSE and various
regional exchanges, clearing corporations and depositories.
The Company believes that its internal controls and
safeguards are adequate, although fraud and misconduct by
customers and employees and the possibility of theft of securities
are risks inherent in the securities industry. As required by the
NYSE and certain other authorities, the Company carries a fidelity
bond covering loss or theft of securities as well as forgery of
checks and drafts and embezzlement and misplacement of securities.
The bond provides total coverage of $30,000,000 (subject to a
$1,000,000 deductible per claim). See "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources -- Year 2000"
regarding the potential impact of "Year 2000" issues.
Employees
At March 31, 1998, the Company had approximately 3,950
employees. None of the Company's employees is covered by a
collective bargaining agreement. The Company considers its
relations with its employees to be satisfactory. However,
competition for experienced financial services personnel,
especially financial advisors and investment management
professionals, is keen and from time to time the Company may
experience a loss of valuable personnel.
<PAGE> 12
The Company recognizes the importance of hiring and
training financial advisors. The Company trains new financial
advisors who are required to take examinations given by the NYSE,
the NASD and various states in order to be registered and
qualified, and maintains ongoing training for financial advisors.
Competition
The Company is engaged in an extremely competitive
business. Its competition includes, with respect to one or more
aspects of its business, numerous national, regional and local
broker-dealer and investment advisory firms, and commercial banks
and thrift institutions. Many of these organizations have
substantially greater personnel and financial resources than the
Company. Discount brokerage firms oriented to the retail market,
including firms affiliated with banks and mutual fund
organizations, are devoting substantial funds to advertising and
direct solicitation of customers in order to increase their share
of commission dollars and other securities-related income. In
many instances, the Company is competing directly with such
organizations. The Company also competes for investment funds
with banks, insurance companies and investment companies. The
principal competitive factors relating to the Company's business
are the quality of advice and services provided to investors and
the price of those services.
Competition in the Company's business periodically has
been affected by significant developments in the securities
industry. See "Factors Affecting the Company and the Securities
Industry -- Industry Changes and Competitive Factors."
Regulation
The securities industry in the United States is subject
to extensive regulation under both Federal and state laws. The
SEC is the Federal agency charged with administration of the
Federal securities laws. Much of the regulation of broker-dealers
has been delegated to self-regulatory authorities, principally the
NASD and the securities exchanges. These self-regulatory
organizations conduct periodic examinations of member broker-
dealers in accordance with rules they have adopted and amended
from time to time, subject to approval by the SEC. Securities
firms are also subject to regulation by state securities
commissions in those states in which they do business. In
addition, securities firms are subject to regulation by various
foreign governments, securities exchanges, central banks and
regulatory bodies, particularly in those countries where they have
established an office.
Broker-dealers are subject to regulations that cover all
aspects of the securities business, including sales methods,
trading practices among broker-dealers, uses and safekeeping of
customers' funds and securities, capital structure and financial
soundness of securities firms, recordkeeping and the conduct of
directors, officers and employees. Additional legislation,
changes in rules promulgated by the SEC and self-regulatory
authorities, or changes
<PAGE> 13
in the interpretation or enforcement of existing laws and rules, may
directly affect the mode of operation and profitability of broker-dealers.
The SEC, self-regulatory authorities and state securities commissions may
conduct administrative proceedings that can result in censure, fine,
suspension or expulsion of a broker-dealer, its officers or
employees. Such administrative proceedings, whether or not
resulting in adverse findings, can require substantial
expenditures and can have an adverse impact on the reputation of a
broker-dealer. The principal purpose of regulation and discipline
of broker-dealers is the protection of customers and the
securities markets, rather than protection of creditors and
stockholders of the regulated entity.
The Company's investment advisory subsidiaries and the
Company-sponsored mutual funds are also subject to extensive
federal regulation by the SEC.
The Company's broker-dealer subsidiaries are required by
federal law to belong to the SIPC. When the SIPC fund falls below
a certain amount, members are required to pay annual assessments
of up to 1% of adjusted gross revenues. As a result of adequate
fund levels, the Company's broker-dealer subsidiaries each were
required to pay the minimum annual assessment of $150 in fiscal
1998. The SIPC fund provides protection for securities held in
customer accounts up to $500,000 per customer, with a limitation
of $100,000 on claims for cash balances. The Company purchases
insurance that provides additional protection for securities of up
to $24,500,000 per customer.
Net Capital Requirements
Every registered broker-dealer doing business with the
public is subject to the Uniform Net Capital Rule ("Rule 15c3-1")
promulgated by the SEC. Rule 15c3-1, which is designed to measure
the financial soundness and liquidity of broker-dealers, specifies
minimum net capital requirements. Since the Company is not itself
a registered broker-dealer, it is not directly subject to Rule
15c3-1. However, its broker-dealer subsidiaries are subject to
Rule 15c3-1, and a provision of Rule 15c3-1 requires that a
broker-dealer notify the SEC prior to the withdrawal of equity
capital by a parent company if the withdrawal would exceed the
greater of $500,000 or 30 percent of the broker-dealer's excess
net capital.
Rule 15c3-1 provides that a broker-dealer doing business
with the public shall not permit its aggregate indebtedness to
exceed 15 times its net capital (the "primary method") or,
alternatively, that it not permit its net capital to be less than
2% of its aggregate debit items (primarily receivables from
customers and broker-dealers) computed in accordance with Rule
15c3-1. As of March 31, 1998, the Company's broker-dealer
subsidiaries had aggregate net capital of $192.5 million, which
exceeded the minimum net capital requirements by $178.0 million.
Under NYSE Rule 326, Legg Mason Wood Walker as a member
organization that carries customer accounts, would be required to
reduce its business activities if its net capital, as defined, was
<PAGE> 14
less than 4% of aggregate debit items, as defined, and would be
precluded from expanding its business if its net capital was less
than 5% of aggregate debit items.
Compliance with applicable net capital rules could limit
operations of the Company's broker-dealer subsidiaries,
particularly operations such as underwriting and trading
activities that require use of significant amounts of capital. A
significant operating loss or an extraordinary charge against net
capital could adversely affect the ability of the broker-dealers
to expand or even maintain their present levels of business. See
Note 15 of Notes to Consolidated Financial Statements in Item 8 of
this Report.
Outstanding Subordinated Liabilities
Legg Mason Wood Walker has incurred subordinated
liabilities ("Subordinated Liabilities") which it is permitted to
treat as capital for the purposes of the Uniform Net Capital Rule
and NYSE Rules 325 and 326. The Subordinated Liabilities
instruments issued by Legg Mason Wood Walker provide that such
liabilities shall be subordinated in right of payment to the prior
payment in full, or provision for such payment, of all obligations
to all other present and future creditors of Legg Mason Wood
Walker (except for other Subordinated Liabilities similarly
subordinated). At March 31, 1998, Legg Mason Wood Walker had a
$40.0 million Subordinated Liability outstanding, due to Legg
Mason, Inc. The Subordinated Liability may, with the prior
written consent of the NYSE, be prepaid in whole or in part at any
time after such Subordinated Liability has been outstanding for
more than one year. Legg Mason Wood Walker may not pay or permit
the payment or withdrawal of any Subordinated Liability if, after
giving effect to such payment or withdrawal, its net capital would
be less than 5% (6% in the case of the Subordinated Liability due
to Legg Mason, Inc.) of aggregate debit items. See Note 15 of
Notes to Consolidated Financial Statements in Item 8 of this
Report.
<PAGE> 15
Factors Affecting the Company and the Securities Industry
The securities industry is characterized by frequent
change, the effects of which have been difficult to predict. In
addition to an evolving regulatory environment, the industry has
been subject to radical changes in pricing structure, alternating
periods of contraction and expansion and intense competition from
within and outside the industry.
Fluctuating Securities Volume and Prices
The securities industry is subject to substantial
fluctuations in volume and price levels of securities
transactions. These fluctuations can occur on a daily basis as
well as over longer periods as a result of national and
international economic and political events, and broad trends in
business and finance, as well as interest rate movements. Reduced
volume and prices generally result in lower brokerage and
investment banking revenues, as well as losses from trading as
principal and from underwriting. Profitability is adversely
affected in periods of reduced volume because fixed costs remain
relatively unchanged. To the extent that purchases of securities
are permitted to be made on margin, securities firms also are
subject to risks inherent in extending credit, especially during
periods of rapidly declining markets, in that a market decline
could reduce collateral value below the amount of a customer's
indebtedness. In the past, heavy trading volume has caused
clearance and processing problems for many securities firms, and
this could occur in the future. In addition, there is risk of
loss from errors that can occur in the execution and settlement
process. See "Operations."
Industry Changes and Competitive Factors
Considerable consolidation has occurred in the
securities industry as numerous securities firms have either been
acquired by other securities firms or ceased operations, in many
cases resulting in firms with greater financial resources than
firms such as the Company. In addition, a number of heavily
capitalized companies not previously engaged in the securities
business have made investments in and acquired securities firms.
Increasing competitive pressures in the securities industry
require regional securities firms to offer to their customers many
of the financial services that are provided by much larger
securities firms that have substantially greater resources than
the Company. A sizable number of new investment advisory firms
and mutual funds have been established in recent years, increasing
competition in that area of the Company's activities.
An increasing number of firms, including affiliates of
banks and mutual fund organizations, that offer discount brokerage
services to retail customers have been established in recent
years. These firms generally effect transactions at substantially
lower commission rates on an "execution only" basis, including
through the Internet, without offering other services such as
investment and financial advice and research that are provided by
"full-service" brokerage firms such as the Company. In addition,
some discount
<PAGE> 16
brokerage firms have increased the range of services
that they offer. Continued increases in the number of discount
brokerage firms and services provided by such firms may adversely
affect the Company.
Certain institutions, notably commercial banks and
thrift institutions, have become a competitive factor in the
securities industry by offering certain investment banking and
corporate and individual financial services traditionally provided
only by securities firms. The Federal Reserve Board has approved
applications of major commercial banks to underwrite and deal in
certain types of securities that such banks had not been permitted
to underwrite and deal in previously, subject to limitations on
the resulting underwriting volume and market share. Commercial
banks, generally, are expanding their securities activities, as
well as their activities relating to the provision of financial
services, and are deriving more revenue from such activities.
Continued expansion of the type and extent of competitive services
that banks and other institutions offer or further repeal or
modification of administrative or legislative barriers may
adversely affect securities firms such as the Company that are
heavily oriented to individual retail customers.
Regulation
The business of the Company and its subsidiaries in the
securities industry is subject to regulation by various regulatory
authorities that are charged with protecting the interests of
broker-dealers' and investment advisers' customers. See
"Regulation."
Effect of Net Capital Requirements
The SEC and the NYSE have stringent rules with respect
to the net capital requirements of securities firms. A
significant operating loss or extraordinary charge against net
capital may adversely affect the ability of the Company's broker-
dealer subsidiaries to expand or even maintain their present
levels of business. See "Net Capital Requirements."
Litigation
Many aspects of the Company's business involve
substantial risks of liability. In the normal course of business,
the Company's subsidiaries have been named as defendants or co-
defendants in lawsuits seeking substantial damages. There has
been an increased incidence of litigation in the securities
industry in recent years, including customer claims as well as
class action suits seeking substantial damages. See "Item 3. Legal
Proceedings."
<PAGE> 17
Item 2. Properties.
The Company currently leases all of its office space.
The Company's headquarters, Baltimore sales office and operations
functions are located in an office building in which the Company
is the major tenant, currently occupying approximately 285,000
square feet. The initial term of the lease will expire in 2009
and annual base rent is approximately $6.1 million. The lease has
two renewal options of eight years each.
Information concerning the location of the Company's
sales offices is contained in Item 1 of this Report. See Note 9
of Notes to Consolidated Financial Statements in Item 8 of this
Report.
Item 3. Legal Proceedings.
Nasdaq Market-Makers Antitrust Litigation
Legg Mason Wood Walker and approximately thirty other
broker-dealer firms have been named as defendants in a number of
purported class actions filed in various federal courts alleging
violation of federal antitrust laws. The first of these actions
was filed in May 1994, and in October 1994 the actions were
consolidated in the United States District Court for the Southern
District of New York under the caption In re Nasdaq Market-Makers
Antitrust Litigation. The consolidated complaint alleges that the
defendants violated the antitrust laws by conspiring to raise, fix
and maintain the "spreads" on certain securities traded on Nasdaq
by refusing to quote bids and asks in so-called "odd-eighths."
The actions purport to be brought on behalf of all persons who
purchased or sold these securities on Nasdaq during the
approximately five-year period preceding commencement of the
litigation. The plaintiffs seek treble damages in an unspecified
amount, injunctive relief, and attorneys' fees and costs. The
Court has certified a class.
In December 1997, Legg Mason Wood Walker, together with
other defendants in the litigation, entered into a settlement
agreement that requires Legg Mason Wood Walker to pay
approximately $2.8 million toward a total settlement amount of
$900 million for all defendants. The agreement, which has been
preliminarily approved by the court, is subject to final approval
by the court following the mailing of notice to the plaintiff
class and a fairness hearing presently scheduled for September
1998.
In addition to the matter described above, the Company's
subsidiaries have been named as defendants or co-defendants in
various other lawsuits alleging substantial damages. Some of
these proceedings relate to public offerings of securities in
which one or more subsidiaries of the Company participated as a
member of the underwriting syndicate. The Company is also aware
of litigation against certain underwriters of offerings in which
one or more subsidiaries of the Company was a participant, but
where the subsidiary is not now a defendant. In these latter
cases, it is possible that a subsidiary may be called upon to
contribute to settlements or judgments. While the ultimate
resolution of pending litigation cannot be predicted with
certainty, in the opinion of
<PAGE> 18
management, after consultation with legal counsel, pending litigation
will not have a material adverse effect on the consolidated financial
statements of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4A. Executive Officers of the Company.
Information (not included in the Company's definitive
proxy statement for the 1998 Annual Meeting of Stockholders)
regarding certain executive officers of the Company is as follows:
F. Barry Bilson, age 45, was elected Vice President-
Finance of the Company in June 1984. He served as Controller of
the Company from October 1983 until September 1988, and as
Controller of Legg Mason Wood Walker from April 1981 to September
1988. From December 1978 to March 1981, he was Assistant
Controller of the Coatings Division of Dutch Boy, Inc. Mr. Bilson
is a certified public accountant.
Robert G. Donovan, age 53, was elected an Executive Vice
President of the Company in January 1998 and of Legg Mason Wood
Walker in February 1998. He became a Senior Vice President of
Legg Mason Wood Walker in 1990. Mr. Donovan has responsibility
for the securities brokerage operations function of Legg Mason
Wood Walker. From May 1968 to July 1989, Mr. Donovan was employed
by Goldman, Sachs & Co. in various capacities.
Robert A. Frank, age 48, became Executive Vice President
of the Company and Executive Vice President, Director of Research
and Co-head of the Capital Markets Committee of Legg Mason Wood
Walker in August 1996. From 1975 until he joined the Company, he
was employed by Alex. Brown Incorporated in various capacities,
including as a Managing Director and Head of the Real Estate
Securities Research Group. Mr. Frank is a former Governor of the
National Association of Real Estate Investment Trusts, past
president of the Real Estate Analyst Group of New York, a Fellow
of the Financial Analysts Federation and a trustee of the Mid-
Atlantic Realty Trust.
Theodore S. Kaplan, age 55, became Senior Vice President
and General Counsel of the Company in April 1993. From 1970 until
he joined the Company, he was engaged in the private practice of
law. Prior to 1970, Mr. Kaplan served as an attorney in the
Office of the General Counsel and Division of Corporation Finance
of the Securities and Exchange Commission.
Timothy C. Scheve, age 40, has been Executive Vice
President of the Company and of Legg Mason Wood Walker since
January 1998 and Treasurer of the Company and of Legg Mason Wood
Walker since January 1992. He became a Vice President of the
Company in August 1993 and a Senior Vice President of Legg Mason
Wood Walker in
<PAGE> 19
August 1994. Mr. Scheve has served in various
financial and administrative capacities since joining the Company
in 1984, and presently has primary responsibility for the
Company's administrative functions. Mr. Scheve was a management
consultant with Price Waterhouse & Co. prior to joining the
Company.
Andrew M. Silton, age 44, became a Senior Vice President
of the Company in May 1998. He has various responsibilities in
connection with the Company's investment management activities.
From January 1996 until December 1997, Mr. Silton was the
President of Trade Street Investment Associates, a registered
investment adviser. From April 1994 until December 1997, he was a
Senior Vice President of NationsBank Corporation responsible for
oversight of asset management and trust operations and, from May
1993 until April 1994, he was the President of Cooperative
Ventures, a financial services consulting firm.
Elisabeth N. Spector, age 50, became a Senior Vice
President of the Company and Legg Mason Wood Walker in January
1994. She has general responsibilities in business and financial
strategy. From November 1989 until she joined the Company, Ms.
Spector was employed by the Resolution Trust Corporation, where,
among other things, she served as the initial Director of the
RTC's Capital Markets Division. From 1975 to November 1989 she
was an investment banker with Merrill Lynch & Co., Inc.
Edward A. Taber III, age 54, became an Executive Vice
President of the Company in September 1992 and a Senior Executive
Vice President in July 1995. He has overall responsibility for
the Company's investment management activities. From 1973 until
he joined the Company, Mr. Taber held various positions with T.
Rowe Price Associates, Inc., an investment management firm, last
serving as Director of that firm's taxable fixed income division.
Prior to 1973, Mr. Taber served as the Treasurer and Chief
Financial Officer of the Federal Home Loan Bank of Boston. Mr.
Taber is a Director of the Legg Mason Value Trust, Inc., the Legg
Mason Total Return Trust, Inc., the Legg Mason Special Investment
Trust, Inc. and LM Institutional Fund Advisors I, Inc., Chairman
and President of LM Institutional Fund Advisors II, Inc., a
trustee of the Legg Mason Tax-Free Income Fund and the Legg Mason
Cash Reserve Trust, President of the Legg Mason Income Trust,
Inc., President and a director of the Legg Mason Global Trust,
Inc. and the Legg Mason Investors Trust, Inc.
<PAGE> 20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
Shares of Legg Mason, Inc. common stock are listed and
traded on the New York Stock Exchange (symbol LM). As of March
31, 1998, there were 1,847 shareholders of record of the Company's
common stock. Information with respect to the Company's dividends
and stock prices is as follows:
<TABLE>
<CAPTION>
Quarter ended*
Mar. 31 Dec. 31 Sept. 30 June 30
<S> <C> <C> <C> <C>
Fiscal 1998
Cash dividend per share $ .110 $ .110 $ .110 $ .098
Stock price range:
High 63.875 56.313 54.000 40.500
Low 46.750 44.938 39.063 31.500
Fiscal 1997
Cash dividend per share $ .098 $ .098 $ .098 $ .090
Stock price range:
High 38.500 29.500 25.500 25.188
Low 28.313 23.813 21.000 20.626
* Adjusted to reflect the 4-for-3 stock split paid September 1997.
</TABLE>
On January 16, 1998, in connection with the Company's
acquisition of Brandywine Asset Management, Inc. ("Brandywine"),
the Company issued an aggregate of 2,574,156 shares of Common
Stock to the eighteen former stockholders of Brandywine in
exchange for all of the then outstanding shares of Brandywine
common stock. The Company also issued an aggregate of 225,836
stock options to purchase Common Stock at exercise prices ranging
from $2.46 to $14.61 per share to six Brandywine employees
to replace then outstanding Brandywine stock options held by these
individuals. The issuances of these securities were deemed to be
exempt from registration under the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereof.
<PAGE> 21
Item 6. Selected Financial Data *
<TABLE>
<CAPTION>
(Dollars in thousands except per share amounts)
Years ended March 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues $ 889,060 $ 664,601 $ 533,343 $ 404,234 $ 427,009
Expenses 760,681 568,391 468,792 375,959 365,886
Earnings before
income taxes 128,379 96,210 64,551 28,275 61,123
Income taxes 52,258 39,018 26,270 11,673 23,912
Net earnings $ 76,121 $ 57,192 $ 38,281 $ 16,602 $ 37,211
PER COMMON SHARE **
Basic earnings $ 2.80 $ 2.24 $ 1.73 $ .81 $ 1.87
Diluted earnings $ 2.63 $ 2.05 $ 1.47 $ .73 $ 1.54
Dividends declared $ .428 $ .383 $ .353 $ .323 $ .285
Book value $ 18.17 $ 15.71 $ 13.09 $ 11.28 $ 10.90
Average shares outstanding:
Basic 27,215,479 25,569,128 22,157,031 20,545,003 19,870,331
Diluted 29,003,334 27,992,706 27,392,748 26,754,938 25,921,010
FINANCIAL CONDITION
Total assets $2,832,329 $1,886,736 $1,320,820 $ 829,538 $ 824,154
Senior notes $ 99,628 $ 99,581 $ 99,534 - - - -
Subordinated
liabilities - - - - $ 68,000 $ 102,487 $ 102,487
Total stockholders'
equity $ 500,095 $ 423,039 $ 302,189 $ 233,061 $ 217,883
* Restated to reflect all pooling of interests transactions.
** Adjusted to reflect all stock splits.
</TABLE>
<PAGE> 22
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Legg Mason, Inc. and its subsidiaries (the "Company")
are principally engaged in providing securities brokerage,
investment advisory, investment banking and commercial mortgage
banking services to individuals, institutions, corporations and
municipalities. The Company's profitability is sensitive to a
variety of factors including the volume of trading in securities,
the volatility and general level of market prices, and the demand
for investment banking and mortgage banking services.
The U.S. financial markets set records for the third
consecutive fiscal year. In fiscal 1998, U.S. equity markets
achieved record trading volume and price levels, principally
because of continuing economic growth, stable interest rates,
gains in corporate earnings and modest inflation. As a result,
each of the Company's core businesses-securities brokerage,
investment advisory and investment banking- contributed to a third
consecutive year of record revenues and net earnings. It is
uncertain if the favorable conditions experienced in the past
three fiscal years will continue in fiscal 1999, or longer.
The Company's investment advisory activities and their
contribution to operating results have grown significantly,
through both internal growth and acquisition, over the past ten
years. During fiscal 1998, the Company acquired Brandywine Asset
Management, Inc. ("Brandywine"), as described in Note 2 of Notes
to Consolidated Financial Statements. Brandywine, acquired in
January 1998, currently manages approximately $8.2 billion for
institutional clients and high net worth individuals.
During fiscal 1996, the Company acquired Bartlett & Co.
("Bartlett") and Lehman Brothers Global Asset Management Limited,
since renamed Western Asset Global Management Limited ("Western
Asset Global"), as described in Note 2 of Notes to Consolidated
Financial Statements. Bartlett, acquired in January 1996,
currently manages approximately $3.1 billion for high net worth
individuals, family groups and institutions. Western Asset
Global, acquired in February 1996, now manages assets of
approximately $1.9 billion, invested principally in international
fixed-income securities and currencies.
Total assets under management for institutions, Company-
sponsored mutual funds and private accounts managed by the
Company's subsidiaries were $71.0 billion at March 31, 1998, up
62% from $43.8 billion a year earlier and from $6.2 billion ten
years ago. Earnings from investment advisory services tend to be
more stable than those from securities brokerage and investment
banking activities because they are less affected by changes in
securities market conditions. Revenues from investment advisory
activities now represent 33% of the Company's total revenues, up
from 20% five years ago.
Net interest income continued to be a growing source of
<PAGE> 23
earnings, primarily as a result of significant growth in retail
brokerage account balances.
The Company's financial statements for all periods
presented have been restated to include the results of Brandywine
and Bartlett, both acquired on a pooling of interests basis in
January, 1998 and 1996, respectively.
Results of any individual period should not be
considered representative of future profitability. Many of the
Company's activities have fixed operating costs which do not
decline with reduced levels of volume. While the Company attempts
to reduce costs, particularly during periods of low volume, it
does not, as a general rule, attempt to do so through personnel
reductions. Accordingly, sustained periods of unfavorable market
conditions may adversely affect profitability.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, items
in the Consolidated Statements of Earnings as percentages of total
revenues and the increase (decrease) by item as a percentage of
the amount for the previous period:
<TABLE>
<CAPTION>
Percentage of Total Revenues Period to Period Change
1998 1997
Years ended March 31, Compared Compared
1998 1997 1996 to 1997 to 1996
<S> <C> <C> <C> <C> <C>
REVENUES
Commissions...................... 27.1% 28.6% 31.7% 27.0% 12.3%
Principal transactions........... 9.8 11.0 12.4 18.5 11.1
Investment advisory and
related fees.................... 33.3 31.3 30.4 42.0 28.5
Investment banking............... 10.9 10.8 8.1 34.8 66.3
Interest......................... 14.3 12.7 10.7 51.3 47.3
Other............................ 4.6 5.6 6.7 10.7 3.4
100.0 100.0 100.0 33.8 24.6
EXPENSES
Compensation and benefits........ 57.5 57.6 58.7 33.6 22.4
Occupancy and equipment rental... 6.4 6.6 6.9 29.6 18.3
Communications................... 4.8 4.7 5.3 37.5 9.1
Floor brokerage and clearing fees 0.6 0.9 1.0 (7.6) 16.8
Interest......................... 8.3 6.5 4.9 70.0 65.6
Other............................ 8.0 9.2 11.1 15.1 3.7
85.6 85.5 87.9 33.8 21.2
EARNINGS BEFORE INCOME TAXES 14.4 14.5 12.1 33.4 49.0
Income taxes..................... 5.8 5.9 4.9 33.9 48.5
NET EARNINGS....................... 8.6% 8.6% 7.2% 33.1% 49.4%
</TABLE>
<PAGE> 24
In fiscal 1998, revenues, net earnings and earnings per
share reached record levels and were substantially higher than in
the prior fiscal year. Revenues were $889.1 million, a 34%
increase from revenues of $664.6 million in fiscal 1997. Net
earnings were $76.1 million, up 33% from net earnings of $57.2
million in the prior fiscal year. Basic earnings per share
increased by 25% to $2.80 from $2.24. Diluted earnings per share
increased 28% to $2.63 from $2.05.
Revenues
Commissions
Commission revenues rose 27% to $241.3 million in fiscal
1998 because of increases in sales of listed and over-the-counter
securities, non-affiliated mutual funds and variable annuities.
In fiscal 1997, commission revenues rose 12% to $190.0
million from levels in fiscal 1996 because of increases in sales
of listed securities, variable annuities and non-affiliated mutual
funds.
During both fiscal 1998 and 1997, commission revenues
benefited from an active and rising equity market.
Principal Transactions
Revenues from principal transactions increased 19% to
$86.7 million, principally because of increased sales of fixed-
income and over-the-counter securities, coupled with a reduction
in losses on proprietary positions in energy-related equity
securities.
In fiscal 1997, revenues from principal transactions
increased 11% to $73.2 million, primarily as a result of higher
sales of over-the-counter and fixed-income securities, partially
offset by losses on proprietary positions in energy-related equity
securities.
In fiscal 1998 and 1997, sales of over-the-counter
securities benefited from the favorable equity market.
<PAGE> 25
Investment Advisory and Related Fees
Investment advisory and related fees increased 42% to
$295.6 million, and 28% to $208.2 million in fiscal 1998 and 1997,
respectively, as a result of growth in assets under management in
Company-sponsored equity mutual funds, the Company's fixed-income
investment advisory subsidiary and fee-based brokerage accounts.
In addition, fiscal 1997 includes a full year of fees earned by
Western Asset Global.
<TABLE>
<CAPTION>
Investment Advisory Revenues and
Assets Under Management
The graph here depicts the growth in Assets Under Management and Investment
Advisory and Related Fees Revenue for the five fiscal periods ended
March 31, 1998.
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Assets Under Management $ 16,653 $ 24,561 $ 35,355 $ 43,771 $ 71,041
(in millions)
Investment Advisory
and Related Fees $ 91,020 $117,656 $162,063 $208,243 $295,645
(in thousands)
</TABLE>
Investment Banking
Investment banking revenues rose 35% to $97.1 million,
primarily as a result of increased corporate finance activities,
particularly co-managed public offerings of real estate investment
trusts.
In fiscal 1997, investment banking revenues rose 66% to
$72.1 million, principally as a result of increased corporate
finance activities, particularly co-managed public offerings of
energy and real estate investment trust-related securities and
financial advisory services.
<PAGE> 26
Other Revenues
Other revenues rose 11% to $41.0 million as a result of
an increase in loan origination fees at the Company's commercial
mortgage banking subsidiaries.
In fiscal 1997, other revenues rose 3% to $37.0 million,
principally as a result of higher transaction-related fees,
partially offset by a decline in loan origination fees at the
Company's commercial mortgage banking subsidiaries.
Expenses
Compensation and Benefits
Compensation and benefits increased 34% to $511.4
million, and 22% to $382.9 million in fiscal 1998 and 1997,
respectively, reflecting higher sales and profitability-based
compensation and personnel additions in sales, product and support
areas.
A substantial part of compensation expense fluctuates in
proportion to the level of business activity. Other compensation
costs, primarily salaries and benefits, are fixed and may not
decline with reduced levels of volume. Therefore, profitability
may be adversely affected by sustained periods of unfavorable
market conditions or slow revenue growth in acquired businesses or
new product areas.
Occupancy and Equipment Rental
Occupancy and equipment rental increased 30% to $56.7
million because of higher depreciation expense from continued
investments in technology and additional costs related to the
Company's relocation of its corporate headquarters, completed in
February 1998.
In fiscal 1997, occupancy and equipment rental increased
18% to $43.8 million because of higher depreciation expense
related to increased investments in technology, higher transaction
volume processed by the Company's data processing service bureau
and the addition of expenses of Western Asset Global.
Communications
Communications costs increased 38% to $42.7 million as a
result of expansion of the Company's data network and higher
business volume which gave rise to increased costs for printed
materials, quote services, postage and telephone usage.
<PAGE> 27
In fiscal 1997, communications costs increased 9% to
$31.1 million, primarily because of higher printing and office
supply expense as a result of increased business activity and the
addition of expenses of Western Asset Global.
Floor Brokerage and Clearing Fees
Despite increased trading volume, floor brokerage and
clearing fees declined 8% to $5.5 million, reflecting lower
execution costs from more efficient order routing.
In fiscal 1997, floor brokerage and clearing fees
increased 17% to $5.9 million, reflecting an increase in
securities transaction volume.
Other Expenses
Other expenses increased 15% to $70.6 million,
attributable to higher promotional and litigation-related
expenses.
In fiscal 1997, other expenses increased 4% to $61.3
million, attributable to increased promotional and consulting
expenses and the addition of expenses of Western Asset Global,
offset in part by lower litigation-related expenses.
Interest Revenue and Expense
Interest revenue increased 51% to $127.3 million, and
47% to $84.1 million in fiscal 1998 and 1997, respectively,
because of larger firm investments, predominantly funds segregated
for regulatory purposes and customer margin account and conduit
stock loan balances.
Interest expense increased 70% to $73.7 million, and 66%
to $43.4 million in fiscal 1998 and 1997, respectively, because of
larger interest-bearing customer credit and conduit stock loan
balances.
In addition, fiscal 1997 included a full year of debt
service related to $100 million of 6.50% Senior Notes issued in
February 1996, which was partially offset by elimination of debt
service on the Company's 5.25% Convertible Subordinated
Debentures. The 5.25% debentures were converted into common stock
in August 1996.
As a result of significantly higher levels of interest-
bearing customer credit balances, the Company's net interest
margin fell to 42.1% in fiscal 1998 from 48.5% in fiscal 1997.
<PAGE> 28
<TABLE>
<CAPTION>
Interest Revenue and Expense
(thousands of dollars)
The graph here depicts Interest Revenue and Interest Expense for the five
fiscal periods ended March 31, 1998.
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Interest Revenue $ 30,343 $ 39,728 $ 57,125 $ 84,129 $127,268
Interest Expense $ 15,493 $ 17,249 $ 26,187 $ 43,364 $ 73,706
Income Taxes
Income taxes rose 34% to $52.3 million in fiscal 1998
and 49% to $39.0 million in fiscal 1997, principally because of
increases in pre-tax earnings. The Company's effective tax rate
was 40.7%, 40.6% and 40.7% in fiscal 1998, 1997 and 1996,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are primarily liquid, consisting
mainly of cash and assets readily convertible into cash. These
assets are financed primarily by free credit balances, equity
capital, senior notes, bank lines of credit, and other payables.
During the fiscal year ended March 31, 1998, cash and
cash equivalents increased $55.1 million. Cash flows from
operating activities of $98.1 million were attributable to fiscal
1998 net earnings, adjusted for depreciation and amortization. The
Company invested cash of $42.6 million, primarily in purchases of
computer equipment and leasehold improvements. Cash flows from
financing activities utilized $.4 million as increased dividends
on common stock were substantially offset by common stock
issuances.
In July 1996, the Company called for redemption the
$68.0 million aggregate principal amount outstanding of its 5.25%
Convertible Subordinated Debentures due May 1, 2003. Substantially
all holders converted their 5.25% debentures into common stock.
<PAGE> 29
In February 1996, the Company issued $100 million of
6.50% Senior Notes due February 15, 2006. The proceeds of the
offering are being used for general corporate purposes. The
Company has available for offering an additional $50 million of
debt or convertible debt securities pursuant to a shelf
registration filed in January 1996.
In July 1995, the Company called for redemption the
$34.5 million aggregate principal amount outstanding of its 7%
Convertible Subordinated Debentures due June 15, 2011.
Substantially all holders converted their 7% debentures into
common stock.
The Company's broker-dealer subsidiaries are subject to
the requirements of the Securities and Exchange Commission's
Uniform Net Capital Rule which is designed to measure the general
financial soundness and liquidity of broker-dealers. At March 31,
1998, the brokerage subsidiaries had aggregate net capital of
$192.5 million, which exceeded minimum net capital requirements by
$178.0 million.
</TABLE>
<TABLE>
<CAPTION>
Regulatory Net Capital
(in thousands)
The graph here depicts Regulatory Net Capital at 3/31/98.
<S> <C>
Required Net Capital $ 14,472
Excess Net Capital $177,995
Total Net Capital $192,467
</TABLE>
The principal sources of the Company's funds are its
investment advisory and broker-dealer subsidiaries. The amount of
the broker-dealers' net assets that may be distributed is subject
to restrictions under applicable net capital rules. The Company
has a revolving bank line of credit in the amount of $50 million,
none of which is currently outstanding, and the Company's
subsidiaries have lines of credit, aggregating $297.5 million,
pursuant to which they may borrow on a short-term demand basis
generally at prevailing broker call rates. Management believes
that funds available from operations and its lines of credit are
sufficient to meet its present and reasonably foreseeable capital
needs, although the Company may augment its capital funds for
continued expansion by internal growth and acquisition.
The Company borrows and lends securities in the normal
course of business to facilitate the settlement of its customer
and proprietary transactions. In addition, the Company engages in
conduit securities borrowing and lending activities in which it
acts as an agent to facilitate settlement for other institutions.
In both firm and conduit transactions, the Company deposits or
receives cash, generally equal to 102% of the market value of securities
<PAGE> 30
exchanged, and monitors the adequacy of collateral levels on a
daily basis.
Year 2000
The Year 2000 issue affects the ability of computer
systems to correctly process dates after December 31, 1999. The
Company has evaluated its internal and third party software, as
well as its service providers' computer systems, for their ability
to accurately process in the next millennium. The Company has
identified and assessed those computer systems and processes that
require modification and is utilizing both internal and external
resources to make the necessary modifications. In addition to
internal testing, the Company will actively participate in systems
testing among securities brokerage firms, securities exchanges,
clearing organizations, and other vendors.
In November 1997, the Company converted its securities
brokerage processing system to a vendor that is the principal
service provider of this type to the securities brokerage
industry. The vendor has substantially completed the necessary
coding modifications with user testing to begin in the Summer of
1998. Confirmation has been received from the vendor that its
modification and testing plan is on schedule for Year 2000
compliance. The Company is pursuing similar confirmation from its
other vendors and service providers.
The Company believes that the costs associated with
modifications for internal systems will not be material to the
Company's financial statements. However, the Company could be
adversely affected if other organizations, including those
mentioned above, are unsuccessful in completing the required Year
2000 system modifications.
EFFECTS OF INFLATION
The Company's assets are not significantly affected by
inflation because they are primarily monetary, consisting of cash,
resale agreements, securities and receivables. However, the rate
of inflation affects various expenses, including employee
compensation, occupancy, and communications, which may not be
readily recoverable in charges for services provided by the
Company.
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, "Reporting Comprehensive Income,"
<PAGE> 31
effective for fiscal years beginning after December 15, 1997.
Statement No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial
statements. This statement requires the disclosure of an amount
that represents total comprehensive income and the components of
comprehensive income in a financial statement.
In June 1997, Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" was issued and
is effective for financial statements for periods beginning after
December 15, 1997. Statement No. 131 establishes standards for
determining an entity's operating segments and the type and level
of financial information to be disclosed in both annual and
interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas
and major customers.
The impact of adoption of Statements No. 130 and No. 131
will have a financial statement disclosure impact only and will
not have a material affect on the Company's financial statements.
<PAGE> 32
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders, Legg Mason, Inc.
We have audited the accompanying consolidated statements of
financial condition of Legg Mason, Inc. and Subsidiaries as of
March 31, 1998 and 1997, and the related consolidated statements
of earnings, changes in stockholders' equity and cash flows for
each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Legg Mason, Inc. and Subsidiaries as of
March 31, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended March 31, 1998, in conformity with generally accepted
accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
May 4, 1998
<PAGE> 33
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Years ended March 31,
1998 1997 1996
<S> <C> <C> <C>
REVENUES
Commissions $241,284 $189,980 $169,181
Principal transactions 86,748 73,181 65,870
Investment advisory and related fees 295,645 208,243 162,063
Investment banking 97,138 72,062 43,328
Interest 127,268 84,129 57,125
Other 40,977 37,006 35,776
889,060 664,601 533,343
EXPENSES
Compensation and benefits 511,413 382,909 312,870
Occupancy and equipment rental 56,740 43,793 37,016
Communications 42,726 31,067 28,472
Floor brokerage and clearing fees 5,464 5,912 5,063
Interest 73,706 43,364 26,187
Other 70,632 61,346 59,184
760,681 568,391 468,792
EARNINGS BEFORE INCOME TAXES 128,379 96,210 64,551
Income taxes 52,258 39,018 26,270
NET EARNINGS $ 76,121 $ 57,192 $ 38,281
EARNINGS PER COMMON SHARE
Basic $2.80 $2.24 $1.73
Diluted $2.63 $2.05 $1.47
See notes to consolidated financial statements.
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 206,245 $ 151,188
Cash and securities segregated for
regulatory purposes 921,606 442,305
Resale agreements 175,623 132,800
Receivable from customers 713,391 534,018
Securities borrowed 448,453 263,612
Securities owned, at market value 81,457 78,862
Investment securities, at market value 30,853 66,983
Equipment and leasehold improvements, net 51,991 36,584
Intangible assets, net 61,304 61,423
Other 141,406 118,961
$2,832,329 $1,886,736
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Payable to customers $1,562,997 $ 960,646
Payable to brokers and dealers 5,284 7,112
Securities loaned 453,030 250,804
Short-term borrowings 13,880 13,900
Securities sold, but not yet purchased,
at market value 14,132 12,507
Accrued compensation 97,912 60,432
Other 85,371 58,715
Senior notes 99,628 99,581
2,332,234 1,463,697
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.10; authorized
100,000,000 shares; issued 27,524,880
shares in 1998 and 20,845,592 in 1997 2,753 2,085
Additional paid-in capital 203,133 194,044
Retained earnings 293,263 226,677
Net unrealized appreciation on
investment securities 946 233
500,095 423,039
$2,832,329 $1,886,736
See notes to consolidated financial statements.
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands except share amounts)
Net Unrealized
Additional Appreciation Total
Common Stock Paid-in Retained on Investment Stockholders
Shares Amount Capital Earnings Securities Equity
<S> <C> <C> <C> <C> <C> <C>
Balance March 31, 1995,
as previously reported 13,574,138 $1,357 $83,328 $145,414 $358 $230,457
Adjustments for pooling
of interests 2,574,156 258 1,125 1,221 2,604
Balance March 31, 1995,
restated 16,148,294 $1,615 $84,453 $146,635 $358 $233,061
Issuance of common stock 227,187 23 3,864 3,887
Conversion of
subordinated debentures 1,582,168 158 33,768 33,926
Dividends declared
($.353 per share)* (6,557) (6,557)
Net unrealized loss
on investment securities (48) (48)
Adjustments of pooled entities (18) (343) (361)
Net earnings 38,281 38,281
Balance March 31, 1996 17,957,649 $1,796 $122,067 $178,016 $310 $302,189
Issuance of common stock 253,428 25 4,951 4,976
Conversion of
subordinated debentures 2,634,515 264 66,906 67,170
Dividends declared
($.383 per share)* (8,939) (8,939)
Net unrealized loss
on investment securities (77) (77)
Adjustments of pooled entity 120 408 528
Net earnings 57,192 57,192
Balance March 31, 1997 20,845,592 $2,085 $194,044 $226,677 $233 $423,039
Issuance of common stock 524,061 52 9,725 9,777
4-for-3 stock split 6,155,227 616 (636) (20)
Dividends declared
($.428 per share)* (10,847) (10,847)
Net unrealized gain
on investment securities 713 713
Adjustment to conform fiscal
year of pooled entity 920 920
Adjustments of pooled entity 392 392
Net earnings 76,121 76,121
Balance March 31, 1998 27,524,880 $2,753 $203,133 $293,263 $946 $500,095
* Adjusted to reflect the 4-for-3 stock split paid September 1997.
See notes to consolidated financial statements.
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended March 31,
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 76,121 $ 57,192 $ 38,281
Noncash items included in earnings:
Depreciation and amortization 21,986 17,422 14,439
Adjustments of pooled entities 1,058 688 183
Adjustment to conform fiscal year of
pooled entity 920
Deferred income taxes (7,712) (3,417) (2,978)
(Increase) decrease in assets
excluding acquisition:
Cash and securities segregated for
regulatory purposes (479,301) (273,446) (137,831)
Receivable from customers (179,373) (130,724) (89,595)
Securities borrowed (184,841) (67,043) (76,167)
Securities owned (2,595) 5,357 (32,329)
Other (16,087) (34,956) (16,376)
Increase (decrease) in liabilities
excluding acquisition:
Payable to customers 602,351 395,948 242,063
Payable to brokers and dealers (1,828) 3,258 (75)
Securities loaned 202,226 79,975 66,525
Securities sold, but not yet purchased 1,625 1,814 4,331
Accrued compensation 37,480 17,305 25,812
Other 26,053 10,559 14,086
CASH PROVIDED BY OPERATING ACTIVITIES 98,083 79,932 50,369
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for:
Equipment and leasehold improvements (31,687) (19,390) (13,081)
Intangible assets (5,587) (653) (389)
Acquisition, net of cash acquired (2,674)
Sale of property 6,154
Net increase in resale agreements (42,823) (24,387) (44,453)
Purchases of investment securities (149,745) (178,858) (86,534)
Proceeds from sales and maturities of
investment securities 187,256 195,196 22,933
CASH USED FOR INVESTING ACTIVITIES (42,586) (21,938) (124,198)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings (20) 6,746 6,349
Repayment of subordinated liabilities (29) (69)
Issuance of senior notes 99,528
Issuance of common stock 9,777 4,976 3,887
Dividends paid (10,197) (8,412) (6,058)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (440) 3,281 103,637
NET INCREASE IN CASH AND CASH EQUIVALENTS 55,057 61,275 29,808
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 151,188 89,913 60,105
CASH AND CASH EQUIVALENTS AT END OF YEAR $206,245 $151,188 $89,913
See notes to consolidated financial statements.
</TABLE>
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
Legg Mason, Inc. ("Parent") and its wholly-owned
subsidiaries (collectively, the "Company") are principally engaged
in providing securities brokerage, investment advisory, investment
banking and commercial mortgage banking services to individuals,
institutions, corporations and municipalities. The Company's
profitability is sensitive to a variety of factors including the
volume of trading in securities, the volatility and general level
of market prices, and the demand for investment banking and
mortgage banking services.
The consolidated financial statements include the
accounts of the Parent and its wholly-owned subsidiaries. All
material intercompany balances and transactions have been
eliminated. The consolidated financial statements have been
restated to reflect the business combinations (as described in
Note 2) accounted for as pooling of interests. Where appropriate,
prior years' financial statements have been reclassified to
conform with the 1998 presentation.
The consolidated financial statements are prepared in
accordance with generally accepted accounting principles which
require management to make assumptions and estimates that affect
the amounts and disclosures presented. Actual amounts could differ
from those estimates.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with
original maturities of less than 90 days, other than those held
for sale in the ordinary course of business.
Resale Agreements
The Company invests in short-term resale agreements
collateralized by U.S. government and agency securities. Resale
agreements are accounted for as collateralized financings. It is
the policy of the Company to obtain possession of collateral with
a market value in excess of the principal amount loaned.
Collateral is valued daily, and the Company may require
counterparties to deposit additional collateral when appropriate.
<PAGE> 38
Resale agreements are carried at the amounts at which the
securities will be subsequently resold as specified in the
respective agreements, plus accrued interest.
Securities
Securities transactions are recorded on a settlement
date basis which does not differ materially from a trade date
basis. Commission revenues and related expenses for unsettled
transactions are recorded on a trade date basis. Securities owned
and securities sold, but not yet purchased by the Company's
broker-dealer subsidiaries, both for trading and investing, are
valued at market and resulting unrealized gains and losses are
reflected in earnings. Market values are determined based on
quoted market, dealer prices or pricing models. Investment
securities of the Parent and its non-broker-dealer subsidiaries
held as available-for-sale are valued at market and resulting
unrealized gains and losses are reflected in stockholders' equity.
Securities Lending
Securities borrowed and loaned are accounted for as
collateralized financings and recorded at the amount of collateral
advanced or received. Securities borrowed transactions require the
Company to deposit cash or other collateral with the lender. The
Company generally receives collateral in the form of cash for
securities loaned. The fee received or paid by the Company is
recorded as interest revenue or expense. The Company monitors the
market value of securities borrowed and loaned on a daily basis,
with additional collateral obtained or refunded, as necessary.
Depreciation and Amortization
Equipment and leasehold improvements are reported at
cost, net of accumulated depreciation and amortization of $49,874
and $43,951 at March 31, 1998 and 1997, respectively.
Depreciation and amortization are determined by use of
the straight line method over the estimated useful life of the
asset or the remaining life of the lease. Maintenance and repair
costs are expensed as incurred.
Intangible Assets
Intangible assets consist principally of goodwill, asset
management and mortgage servicing contracts, attributable to
business combinations and are reported at cost net of accumulated
<PAGE> 39
amortization. Intangibles are amortized using straight line and
accelerated methods over periods not exceeding forty years.
Accumulated amortization at March 31, 1998 and 1997 was $54,209
and $54,726, respectively.
The Company periodically reviews its accounting for
goodwill and other intangible assets, considering such factors as
historical profitability and projected operating cash flows, to
determine that the assets are realizable and the amortization
periods are appropriate.
Fair Value of Financial Instruments
At March 31, 1998 and 1997, substantially all financial
instruments are carried at fair value or amounts which approximate
fair value. Fair values of senior notes are disclosed in Note 7.
Investment Advisory and Related Fees
The Company earns investment advisory fees on assets in
accounts managed by its subsidiaries, distribution fees on assets
in the Company's proprietary mutual funds and asset-based fees on
various types of single-fee brokerage accounts. Revenues from
investment advisory and related activities are accrued over the
period in which services are performed.
Earnings Per Share
Effective in fiscal 1998, earnings per common share
("EPS") are computed in accordance with Financial Accounting
Standards Board Statement No.128. Under Statement No. 128, basic
and diluted EPS replace primary and fully diluted EPS.
Accordingly, all periods presented have been restated to conform
to the provisions of Statement No. 128. Basic EPS is calculated by
dividing net earnings by the weighted-average number of common
shares outstanding. Diluted EPS is similar to basic EPS, but
adjusts for the effect of potential common shares.
<PAGE> 40
The following table presents the computations of basic
and diluted EPS:
<TABLE>
<CAPTION>
Years ended March 31,
(shares in thousands) 1998 1997 1996
<S> <C> <C> <C>
Weighted-average common
shares outstanding............ 27,215 25,569 22,157
Potential common shares:
Employee stock options........ 1,764 1,245 925
Shares issuable upon
conversion of
debentures.................... 24 1,179 4,311
Total weighted-average
diluted common shares 29,003 27,993 27,393
Net earnings..................... $76,121 $57,192 $38,281
Interest expense on
convertible debentures, net... 18 153 1,955
Net earnings applicable to
diluted common shares......... $76,139 $57,345 $40,236
Basic EPS........................ $ 2.80 $ 2.24 $ 1.73
Diluted EPS...................... $ 2.63 $ 2.05 $ 1.47
</TABLE>
At March 31, 1997 and 1996, options to purchase 15,731
and 4,666 shares, respectively, were not included in the
computation of diluted earnings per share because the options'
exercise prices were greater than the average price of the common
shares for the period.
2. Business Combinations
The Company acquired Brandywine Asset Management, Inc.
("Brandywine") and Bartlett & Co. ("Bartlett") in January, 1998
and 1996, respectively. Brandywine provides investment management
services for predominantly equity accounts for institutions and
high net worth individuals. Bartlett is an investment management
firm that manages equity, fixed income, and balanced accounts for
high net worth individuals and institutions.
The Company issued 2,574,156 shares and 1,765,455 shares
of its common stock to acquire Brandywine and Bartlett,
respectively, in transactions accounted for as pooling of
interests. Additionally, under the terms of the acquisition
agreement with Brandywine, 225,836 stock options were granted to
certain employees of Brandywine to replace outstanding Brandywine
stock options. The consolidated financial statements have been
restated to include the accounts of Brandywine and Bartlett for
all periods presented. In order to conform to the Company's fiscal
year, Brandywine's operating profit of $920 for the quarter ended
March 31, 1997 was reflected as an adjustment to retained
earnings. The acquisitions were not material to the Company's
<PAGE> 41
financial statements.
On February 13, 1996, the Company acquired Lehman
Brothers Global Asset Management Limited (since renamed Western
Asset Global Management Limited), an investment management firm
that specializes in international fixed-income and currency
management. The acquisition, which was not material to the
Company's financial statements, was accounted for under the
purchase method of accounting. Accordingly, the results of
operations have been included from the date of acquisition.
3. Receivable from and Payable to Customers
Receivable from and payable to customers represent
balances arising from cash and margin transactions. Securities
owned by customers are held as collateral for the receivable
balances. Included in payable to customers are free credit
balances of approximately $1,447,286 as of March 31, 1998, and
$867,413 as of March 31, 1997. The Company pays interest on
certain customer free credit balances held for investment
purposes.
4. Securities, at Market
Securities positions consist of the following at
March 31:
<TABLE>
<CAPTION>
Securities owned
1998 1997
<S> <C> <C>
U.S. government and federal agencies...... $18,757 $22,564
State and municipal bonds................. 36,342 27,228
Corporate debt and equity................. 26,358 29,070
$81,457 $78,862
</TABLE>
<TABLE>
<CAPTION>
Securities sold,
but not yet purchased
1998 1997
<S> <C> <C>
U.S. government and federal agencies...... $ 4,073 $ 6,568
State and municipal bonds................. 1,570 324
Corporate debt and equity................. 8,489 5,615
$14,132 $12,507
</TABLE>
<PAGE> 42
5. Investment Securities
The Company's investment securities, including the type and
maturity range for available-for-sale securities, are as follows:
<TABLE>
<CAPTION>
March 31, 1998
Cost/ Gross Gross Fair
amortized unrealized unrealized market
cost gains losses value
<S> <C> <C> <C> <C>
Non-broker-dealer:
Corporate debt:
within one year............ $ 1,998 $ (5) $ 1,993
U.S. governments:
within one year............ 697 (1) 696
one to five years.......... 1,107 $ 1 (2) 1,106
Equities.................... 8,348 2,363 (572) 10,139
$12,150 $2,364 $(580) $13,934
Broker-dealer............... 16,919
$30,853
</TABLE>
<TABLE>
<CAPTION>
March 31, 1997
Cost/ Gross Gross Fair
amortized unrealized unrealized Market
cost gains losses value
<S> <C> <C> <C> <C>
Non-broker-dealer:
Corporate debt:
within one year............ $ 8,954 $ (60) $ 8,894
one to five years.......... 1,997 (6) 1,991
U.S. governments:
within one year............ 41,121 (10) 41,111
Equities.................... 2,050 $635 (156) 2,529
$54,122 $635 $(232) $54,525
Broker-dealer............... 12,458
$66,983
</TABLE>
The proceeds and gross realized gains (losses) from the sale of
available-for-sale securities are as follows:
<TABLE>
<CAPTION>
Years ended March 31,
1998 1997 1996
<S> <C> <C> <C>
Proceeds..................... $187,256 $195,196 $22,546
Gross realized gains......... 260 1 ---
Gross realized losses........ (25) --- ---
</TABLE>
<PAGE> 43
6. Short-Term Borrowings
Short-term borrowings consist of loans from banks
totaling $13,880 and $13,900 at March 31, 1998 and 1997,
respectively.
The Company's subsidiaries have secured and unsecured
bank lines of credit totaling $297,500 that are generally subject
to termination at either party's discretion. At March 31, 1998 and
1997, the subsidiaries had $13,880 and $500, respectively,
outstanding under these agreements which bear interest at weighted
average rates of 7.71% and 8.25%, respectively. The borrowings
were collateralized by assets with market values of $19,048 at
March 31, 1998 and $7,768 at March 31, 1997.
Together with certain subsidiaries, the Parent has
jointly entered into revolving credit agreements which permit it
to borrow up to $55,000, generally repayable within 30 days. At
March 31, 1998, there were no borrowings outstanding under these
agreements. At March 31,1997, the Company had $13,400 outstanding
under these agreements which bear interest at 6.25%. The
borrowings were collateralized by securities with a market value
of $14,500 at March 31, 1997.
In addition, the Parent has a revolving credit agreement
that permits it to borrow up to $50,000, repayable generally over
two years, at floating rates. Under the terms of the agreement,
the Company is required, among other things, to maintain
consolidated net worth plus subordinated liabilities of not less
than $339,047 plus 50% of consolidated annual net earnings
subsequent to March 31, 1998.
Interest payments were $73,406 in 1998, $45,072 in 1997
and $25,553 in 1996.
7. Senior Notes
In February 1996, the Company issued $100 million
principal amount of senior notes due February 15, 2006, which bear
interest at 6.5%. The notes were sold at a discount to yield
6.57%. The fair value of the senior notes, estimated using current
market prices, was $98,958 and $92,375 at March 31, 1998 and 1997,
respectively. The Company has available for offering an additional
$50 million of debt or convertible debt securities pursuant to a
shelf registration filed in January 1996.
<PAGE> 44
8. Subordinated Liabilities
During fiscal 1997, the Company called for redemption
the full principal amount outstanding of its 5.25% Convertible
Subordinated Debentures. Substantially all holders converted their
debentures into 51.68 shares of common stock for each one thousand
dollars of principal amount of the debentures (based on the
conversion price of $19.35 per share of common stock), with cash
paid in lieu of fractional shares.
9. Commitments and Contingencies
The Company leases office facilities and equipment under
non-cancelable operating leases and also has multi-year agreements
for data processing and other services. These leases and service
agreements expire on varying dates through 2011. Certain leases
provide for renewal options and contain escalation clauses
providing for increased rentals. As of March 31, 1998, the minimum
annual aggregate rentals are as follows:
<TABLE>
<S> <C>
1999.................................................. $36,110
2000.................................................. 33,251
2001.................................................. 26,167
2002.................................................. 22,978
2003.................................................. 17,253
Thereafter............................................ 51,224
$ 186,983
</TABLE>
Total rental expense, including cancelable equipment
leases, was $37,908, $30,050, and $26,908 for 1998, 1997 and 1996,
respectively.
The Company enters into when-issued and underwriting
commitments. Had the open transactions relating to these
commitments as of March 31, 1998 been closed, the effect on the
consolidated financial statements of the Company would not have
been material.
The Company and its subsidiaries have been named as
defendants in various legal actions arising primarily from
securities and investment banking activities, including
certain class actions which primarily allege violations of
securities laws and seek unspecified damages which could be
substantial. While the ultimate resolution of these actions cannot
be currently determined, in the opinion of management, after
consultation with legal counsel, the actions will be resolved with
no material adverse effect on the consolidated financial
<PAGE> 45
statements of the Company.
10. Income Taxes
The Company and its subsidiaries file a consolidated
federal income tax return. The provision for income taxes consists
of:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal...................... $43,162 $31,823 $21,034
State and local.............. 9,096 7,195 5,236
$52,258 $39,018 $26,270
Current...................... $59,970 $42,435 $29,248
Deferred..................... (7,712) (3,417) (2,978)
$52,258 $39,018 $26,270
</TABLE>
A reconciliation of the difference between the effective
income tax rate and the statutory federal income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Taxes at statutory rates............. 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit......... 4.6 4.9 5.3
Tax-exempt interest income, net...... (0.5) (0.6) (0.8)
Other, net........................... 1.6 1.3 1.2
Effective income tax rates........... 40.7% 40.6% 40.7%
</TABLE>
<PAGE> 46
Components of the Company's deferred tax assets and
liabilities, included in other assets and other liabilities, are
as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Accrued compensation and
benefits...................... $18,556 $11,973
Accrued expenses................ 4,247 2,761
Operating loss carryforwards.... 731 771
Amortization of leasehold
improvements.................... 1,479 1,256
Other........................... 2,208 2,212
Valuation allowance............. (1,039) (1,071)
$26,182 $17,902
Deferred tax liabilities:
Depreciation.................... $ 1,971 $ 1,667
Deferred expenses............... 1,126 1,184
Deferred income................. 1,229 907
Other........................... 148 148
$ 4,474 $ 3,906
</TABLE>
At March 31, 1998 and 1997, the deferred tax valuation allowance
was primarily for benefits related to net operating losses which
expire from 2004 to 2013.
Income tax payments were $56,019 in 1998, $45,054 in 1997 and
$24,792 in 1996.
11. Employee Benefits
The Company, through its subsidiaries, maintains various defined
contribution plans covering substantially all employees.
Discretionary contributions charged to operations amounted to
$17,155, $12,144 and $8,112 in 1998, 1997 and 1996, respectively.
In addition, employees can make voluntary contributions under
certain plans.
12. Capital Stock
At March 31, 1998, the authorized numbers of common and
preferred shares were 100,000,000 and 4,000,000, respectively. In addition,
at March 31, 1998 and 1997, there were 5,732,216 and 6,313,455
shares of common stock, respectively, reserved for
<PAGE> 47
issuance under the Company's stock option plans.
On September 24, 1997, the Company paid a 4-for-3 stock split to
shareholders of record on September 8, 1997. All references in
the consolidated financial statements to the number of common
shares and per share amounts have been adjusted retroactively to
reflect the 4-for-3 stock split, except for the number of issued
common shares presented in the consolidated financial statements.
13. Stock Plans
Options under the Company's employee stock option plans
have been granted at prices not less than 100% of the fair market
value. Options are generally exercisable in 20% or 25% increments
over 4 to 5 years and expire within 5 to 10 years from the date of
grant.
At March 31, 1998, 4,000,000 shares were authorized to
be issued under the Company's employee stock option plans.
Transactions under the plans during the three years ending March
31, 1998 are summarized below:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise
shares price
<S> <C> <C>
Options outstanding
at March 31, 1995............. 2,168,517 $12.19
Granted........................ 647,561 $19.21
Exercised...................... (285,987) $10.18
Canceled....................... (31,140) $13.58
Options outstanding
at March 31, 1996............. 2,498,951 $14.22
Granted........................ 551,545 $21.94
Exercised...................... (263,086) $12.11
Canceled....................... (44,102) $19.33
Options outstanding
at March 31, 1997............. 2,743,308 $15.89
Granted........................ 684,021 $41.08
Exercised...................... (488,413) $13.29
Canceled....................... (58,236) $22.44
Options outstanding
at March 31, 1998............. 2,880,680 $22.18
</TABLE>
<PAGE> 48
The following information summarizes the Company's stock
options outstanding at March 31, 1998:
<TABLE>
<CAPTION>
Weighted Weighted
Option average average
Exercise shares exercise remaining life
price range outstanding price (in years)
<S> <C> <C> <C>
$ 2.46-$ 9.99.... 383,795 $ 7.51 2.3
$10.00-$ 19.99.... 922,459 $15.05 5.5
$20.00-$ 29.99.... 886,339 $21.48 2.9
$30.00-$ 43.56.... 688,087 $40.82 6.0
</TABLE>
At March 31, 1998, 1997 and 1996, options were
exercisable on 1,232,373, 1,080,361, and 944,168 shares,
respectively, and the weighted average exercise prices were
$13.77, $12.93 and $11.33, respectively.
The following information summarizes the Company's stock
options exercisable at March 31, 1998:
<TABLE>
<CAPTION>
Weighted
Option average
Exercise shares exercise
price range exercisable price
<S> <C> <C>
$ 2.46-$ 9.99............ 383,795 $ 7.51
$10.00-$19.99............ 609,201 $14.67
$20.00-$29.99............ 235,903 $21.38
$30.00-$43.56............ 3,474 $31.18
</TABLE>
The Company accounts for stock-based compensation under
the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," rather than the fair
value method in Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation costs were charged to earnings for options granted
under the Company's plans. Pro forma results based on the fair
value method prescribed in Statement No. 123 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET EARNINGS
As reported............ $76,121 $57,192 $38,281
Pro forma.............. $73,225 $56,398 $37,862
EARNINGS PER SHARE
As reported:
Basic................ $2.80 $2.24 $1.73
Diluted.............. $2.63 $2.05 $1.47
Pro forma:
Basic................ $2.69 $2.21 $1.71
Diluted.............. $2.53 $2.02 $1.45
</TABLE>
<PAGE> 49
The weighted-average fair value of stock options granted
in fiscal 1998, 1997 and 1996, using the Black-Scholes option-
pricing model, was $11.00, $7.30 and $7.86 per option share,
respectively. The following weighted-average assumptions were used
in the model for grants in fiscal 1998, 1997 and 1996,
respectively: expected dividend yield of 1.55%, 1.85% and 1.72%;
risk-free interest rate of 6.06%, 6.58% and 6.21%; expected
volatility of 21.99%, 21.62% and 25.98%; and expected lives of
4.90 years, 4.37 years and 4.85 years.
Pro forma compensation expense associated with option
grants is recognized over the vesting period. The initial impact
of applying Statement No. 123 is not representative of the
potential impact on pro forma net earnings for future years, which
will include compensation expense related to vesting of fiscal
1996, 1997, 1998 and subsequent grants.
The Company has also adopted the "Legg Mason 1988 Non-
Employee Director Option Plan." Options granted under the plan are
immediately exercisable at a price equal to the fair market value
of the shares on the date of grant. Options issuable under the
plan, limited to 233,333 shares in aggregate, have a term of not
more than ten years from the date of grant. At March 31, 1998,
options on 163,960 shares have been granted, of which 131,635 are
currently outstanding.
The Company has an Employee Stock Purchase Plan covering
substantially all employees. Shares of common stock are purchased
in the open market on behalf of participating employees, subject
to a 2,166,667 total share limit under the plan. Purchases are
made through payroll deductions with the Company matching 5% of
the employees' contributions. Charges to earnings were not
significant with respect to this plan.
14. Off-Balance Sheet Risk and Concentration of Credit
In the normal course of business, the Company executes,
settles and finances customer and proprietary securities
transactions. These activities expose the Company to off-
balance sheet risk in the event that customers or other
parties fail to satisfy their obligations.
In accordance with industry practice, securities
transactions are recorded on settlement date, generally three
business days after trade date. Should a customer or broker fail
to deliver cash or securities as agreed, the Company may be
required to purchase or sell securities at unfavorable market
prices.
The Company extends credit to customers, collateralized
by cash and securities, and subject to regulatory and internal
requirements. Customer margin transactions include sales of
securities, not yet purchased, option contracts and commodity
<PAGE> 50
futures contracts. The Company continually monitors margin
requirements and requests customers to deposit additional
collateral or reduce positions when necessary. Such transactions
expose the Company to risk in the event that margin requirements
are insufficient to fully cover customer losses.
The Company borrows and lends securities to finance
transactions and facilitate the settlement process, utilizing both
firm proprietary positions and customer margin securities held as
collateral. In addition, the Company engages in conduit securities
borrowing and lending activities in which it acts as an agent to
facilitate settlement for other institutions. In both firm and
conduit transactions, the Company deposits or receives cash
generally equal to 102% of the market value of the securities
exchanged and monitors the adequacy of collateral levels on a
daily basis. The Company periodically borrows from banks on a
collateralized basis, utilizing firm and customer margin
securities in compliance with Securities and Exchange Commission
rules. Should the counterparty fail to return customer securities
pledged, the Company is subject to the risk of acquiring the
securities at prevailing market prices in order to satisfy its
customer obligations. The Company sells securities it does not
currently own and is obligated to subsequently purchase such
securities at prevailing market prices. The Company is exposed to
risk of loss if securities prices increase prior to closing the
transactions.
15. Regulatory Requirements
The Company's broker-dealer subsidiaries are subject to
the Securities and Exchange Commission's Uniform Net Capital Rule.
The rule provides that equity capital may not be withdrawn or cash
dividends paid if resulting net capital would fall below specified
levels. As of March 31, 1998, the broker-dealer subsidiaries had
aggregate net capital, as defined, of $192,467 which exceeded
required net capital by $177,995.
The Company's principal broker-dealer subsidiary must
maintain a separate account for the exclusive benefit of customers
in accordance with Securities and Exchange Commission Rule 15c3-3,
as determined by periodic computations. The rule allows the
broker-dealer to maintain the required amounts in cash or
qualified securities.
16. Business Segment Information
The Company, through its subsidiaries, operates
predominantly in a single business segment the securities
industry. Within this segment, the Company is primarily engaged in
securities brokerage, investment advisory and investment banking
activities.
<PAGE> 51
QUARTERLY FINANCIAL DATA *
(Dollars in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended
1998 Mar. 31 Dec. 31 Sept. 30 June 30
<S> <C> <C> <C> <C>
Revenues $246,345 $235,212 $220,923 $186,580
Expenses 207,182 206,602 188,059 158,838
Earnings before income taxes 39,163 28,610 32,864 27,742
Income taxes 15,642 11,574 13,559 11,483
Net earnings $ 23,521 $ 17,036 $ 19,305 $ 16,259
Earnings per share: **
Basic $ .86 $ .63 $ .71 $ .60
Diluted .80 .59 .67 .57
1997 Mar. 31 Dec. 31 Sept. 30 June 30
Revenues $182,533 $173,490 $153,517 $155,061
Expenses 157,699 147,751 130,105 132,836
Earnings before income taxes 24,834 25,739 23,412 22,225
Income taxes 10,163 10,297 9,375 9,183
Net earnings $ 14,671 $ 15,442 $ 14,037 $ 13,042
Earnings per share: **
Basic $ .55 $ .58 $ .55 $ .56
Diluted .51 .55 .50 .49
* Restated to reflect pooling of interests transaction.
** Adjusted to reflect the 4-for-3 stock split paid September 1997.
</TABLE>
<PAGE> 52
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is contained under
the caption "Election of Directors" on pages 1 through 3 of the
Company's definitive proxy statement for the 1998 Annual Meeting
of Stockholders and the caption "Compliance With Section 16(a) of
the Securities Exchange Act of 1934" on page 12 of such proxy
statement. Such information is incorporated herein by reference
to the proxy statement. See Part I, Item 4A of this Report for
information regarding certain executive officers of the Company.
Item 11. Executive Compensation.
The information required by this item is contained under
the caption "Executive Compensation" on pages 6 and 7 of the
Company's definitive proxy statement for the 1998 Annual Meeting
of Stockholders. Such information is incorporated herein by
reference to the proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this item is contained under
the caption "Security Ownership of Management and Principal
Stockholders" on page 5 of the Company's definitive proxy
statement for the 1998 Annual Meeting of Stockholders. Such
information is incorporated herein by reference to the proxy
statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is contained under
the caption "Certain Transactions" on page 11 of the Company's
definitive proxy statement for the 1998 Annual Meeting of
Stockholders. Such information is incorporated herein by
reference to the proxy statement.
<PAGE> 53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Documents filed as a part of the report:
1. The following consolidated financial statements
are included in Item 8 of this Report:
Page Number in
this Report
Report of Independent Accountants 32
Consolidated Statements of Earnings 33
Consolidated Statements of Financial
Condition 34
Consolidated Statements of Changes in
Stockholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial
Statements 37-50
2. Financial Statement Schedules (included on pages
S-1 to S-5 of this Report):
Report of Independent Accountants on Financial
Statement Schedules
Schedule I - Condensed Financial Statement of
Registrant
All other schedules to the consolidated financial
statements for which provision is made in the accounting
regulations of the Securities and Exchange Commission are not
applicable or are not required and therefore have been omitted.
<PAGE> 54
3. Exhibits
3.1 Articles of Incorporation of the Company,
as amended (incorporated by reference to
Form 10-Q for the quarter ended September
30, 1996)
3.2 By-laws of the Company as amended and
restated April 25, 1988 (incorporated by
reference to the Company's Annual Report on
Form 10-K for the year ended March 31,
1988)
4 The Company hereby agrees, pursuant to Item
601(b)(4)(iii)(A) of Regulation S-K, to
furnish to the Commission upon request a
copy of each instrument with respect to the
rights of holders of long-term debt of the
Company or its subsidiaries.
10.1 Legg Mason, Inc. 1981 Incentive Stock
Option Plan, as amended through June 2,
1988 (incorporated by reference to the
Company's Annual Report on Form 10-K for
the year ended March 31, 1988)*
10.2 Legg Mason, Inc. 1998 Stock Option Plan For
Non-Employee Directors, filed herewith*
10.3 Legg Mason Wood Walker, Incorporated
Deferred Compensation/Phantom Stock Plan
(incorporated by reference to Registration
No. 33-28609 on Form S-8)*
10.4 Legg Mason, Inc. 1991 Omnibus Long-Term
Compensation Plan (incorporated by
reference to Exhibit A to the definitive
proxy statement for the Company's 1991
Annual Meeting of Stockholders)*
10.5 Form of Option Agreement under Legg Mason,
Inc. 1991 Omnibus Long-Term Compensation
Plan (incorporated by reference to the
Company;s Annual Report on Form 10-K for
the year ended March 31, 1993)*
10.6 Legg Mason, Inc. Executive Incentive
Compensation Plan (incorporated by
reference to Appendix A to the definitive
proxy statement for the Company's 1995
Annual Meeting of Stockholders)*
<PAGE> 55
10.7 Legg Mason, Inc. 1996 Equity Incentive
Plan (incorporated by reference to Appendix
A to the definitive proxy statement for the
Company's 1996 Annual Meeting of
Stockholders)*
10.8 Form of Option Agreement under Legg Mason,
Inc. 1996 Equity Incentive Plan
(incorporated by reference to the Company's
Annual Report on Form 10-K for the year
ended March 31, 1996)*
10.9 Form of Non-Qualified Stock Option
Agreement under Legg Mason, Inc. 1996
Equity Incentive Plan (incorporated by
reference to Form 10-Q for the quarter
ended September 30, 1996)*
10.10 Executive Convertible Debenture Purchase
and Loan Agreement between Legg Mason,
Inc. and an Executive Officer of Legg
Mason, Inc., dated as of August 29, 1996
(incorporated by reference to Form 10-Q
for the quarter ended December 31, 1996)*
10.11 Legg Mason, Inc. Executive Convertible
Subordinated Debenture Due August 29, 2000
issued to an Executive Officer of Legg
Mason, Inc. (incorporated by reference to
Form 10-Q for the quarter ended December
31, 1996)*
10.12 Promissory Note of Executive Officer of
Legg Mason, Inc., dated as of August 29,
1996 (incorporated by reference to Form 10-
Q for the quarter ended December 31, 1996)*
10.13 Pledge Agreement by and between an
Executive Officer of Legg Mason, Inc. as
Pledgor, and Legg Mason, Inc. as Pledgee,
dated as of August 29, 1996 (incorporated
by reference to Form 10-Q for the quarter
ended December 31, 1996)*
10.14 Agreement between RTKL Associates, Inc. and
a subsidiary of the Company relating to
architectural and engineering services
provided to the subsidiary by RTKL, of
which Harold Adams, a director of the
Company, is the President and Chairman,
filed herewith
<PAGE> 56
21 Subsidiaries of the Company, filed herewith
23 Consent of independent accountants, filed
herewith
27 Financial data schedule, filed herewith
_______________
*These exhibits are management contracts or compensatory
plans or arrangements.
(b) No reports on Form 8-K were filed during the
quarter ended March 31, 1998.
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LEGG MASON, INC.
By: /s/ Raymond A. Mason
Raymond A. Mason, Chairman
of the Board, President and
Chief Executive Officer
Date: June 29, 1998
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/Raymond A. Mason Chairman of the Board, June 29, 1998
Raymond A. Mason President and Chief
Executive Officer
(Principal Executive
Officer)
/s/ F. Barry Bilson Vice President-Finance June 29, 1998
F. Barry Bilson (Principal Financial
and Accounting Officer)
/s/ James W. Brinkley Director June 29, 1998
James W. Brinkley
/s/ Edmund J. Cashman, Jr. Director June 29, 1998
Edmund J. Cashman, Jr.
/s/ Charles A. Bacigalupo Director June 29, 1998
Charles A. Bacigalupo
<PAGE> 58
/s/ Harry M. Ford, Jr. Director June 29, 1998
Harry M. Ford, Jr.
/s/ Nicholas J. St. George Director June 29, 1998
Nicholas J. St. George
/s/ Richard J. Himelfarb Director June 29, 1998
Richard J. Himelfarb
/s/ James E. Ukrop Director June 29, 1998
James E. Ukrop
/s/ John B. Levert, Jr. Director June 29, 1998
John B. Levert, Jr.
/s/ Harold L. Adams Director June 29, 1998
Harold L. Adams
/s/ John E. Koerner, III Director June 29, 1998
John E. Koerner, III
/s/ Roger W. Schipke Director June 29, 1998
Roger W. Schipke
/s/ W. Curtis Livingston Director June 29, 1998
W. Curtis Livingston
/s/ Edward I. O'Brien Director June 29, 1998
Edward I. O'Brien
/s/ Peter F. O'Malley Director June 29, 1998
Peter F. O'Malley
<PAGE> 59
/s/ Margaret DeB. Tutwiler Director June 29, 1998
Margaret DeB. Tutwiler
/s/ William Wirth Director June 29, 1998
William Wirth
<PAGE> S-1
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
________
Our report on the consolidated financial statements of Legg
Mason, Inc. and Subsidiaries is included on page 32 in this Form
10-K. In connection with our audits of such financial statements,
we have also audited the related financial statement schedules
listed in the index on page 53 of this Form 10-K.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements takes as a whole, present fairly, in all material
respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
May 4, 1998
S-1
<PAGE> S-2
SCHEDULE I
LEGG MASON, INC.
(Parent Company Only)
STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31,
1997 1998
ASSETS
Cash and cash equivalents $ 38,558 $ 95,314
Resale agreements 73,801 42,623
Investment securities 54,023 11,171
Investments in and advances
to subsidiaries 358,159 452,851
Other 2,689 4,000
$527,230 $605,959
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Dividends payable $ 2,375 $ 3,025
Other 2,235 3,211
Senior notes 99,581 99,628
104,191 105,864
Stockholders' equity
Common stock, par value $.10;
authorized 100,000,000 shares;
issued 20,845,592 in 1997
and 27,524,880 in 1998 2,085 2,753
Additional paid-in capital 194,044 203,133
Retained earnings 226,677 293,263
Net unrealized appreciation
on investment securities 233 946
423,039 500,095
$527,230 $605,959
See notes to financial statements.
S-2
<PAGE> S-3
SCHEDULE I
LEGG MASON, INC.
(Parent Company Only)
STATEMENTS OF EARNINGS
(Dollars in thousands)
Years Ended March 31,
1996 1997 1998
Revenue
Interest income $ 8,906 $13,082 $14,962
Gain on sale of
investment securities - - 249
8,906 13,082 15,211
Expense
Interest expense 6,113 8,076 7,781
Operating expenses 1,050 1,423 2,788
7,163 9,499 10,569
Earnings before income taxes and equity
in net earnings of subsidiaries 1,743 3,583 4,642
Federal and state income taxes 714 1,434 1,859
Earnings before equity in net earnings
of subsidiaries 1,029 2,149 2,783
Equity in net earnings of
subsidiaries 37,252 55,043 73,338
Net earnings $38,281 $57,192 $76,121
See notes to financial statements.
S-3
<PAGE> S-4
SCHEDULE I
LEGG MASON, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended March 31,
1996 1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 38,281 $ 57,192 $ 76,121
Equity in earnings of subsidiaries (37,252) (55,043) (73,338)
(Increase) decrease in assets excluding
acquisitions (1,401) 1,202 (1,264)
Increase (decrease) in liabilities excluding
acquisitions 2,587 (1,609) 2,231
CASH PROVIDED BY OPERATING ACTIVITIES 2,215 1,742 3,750
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in resale agreements (29,453) (14,388) 31,178
Purchases of investment securities (85,718) (168,510) (127,737)
Proceeds from sales and maturities of investment
securities 22,546 195,166 171,339
Investments in and advances to subsidiary 5,738 17,705 (21,354)
Acquisitions, net of cash acquired (2,674) - -
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (89,561) 29,973 53,426
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of subordinated liabilities (69) (29) -
Issuance of senior notes 99,528 - -
Issuance of common stock 3,887 4,976 9,777
Dividends paid (6,058) (8,412) (10,197)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 97,288 (3,465) (420)
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,942 28,250 56,756
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 366 10,308 38,558
CASH AND CASH EQUIVALENTS AT END OF YEAR $10,308 $ 38,558 $ 95,314
Interest payments were $4,828 in 1996, $9,406 in 1997 and $7,481 in 1998.
No income tax payments were made in 1996, 1997, and 1998.
See notes to financial statements.
S-4
<PAGE> S-5
LEGG MASON, INC.
(Parent Company Only)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Basis of Presentation
The Parent Company Only financial statements include the
accounts of Legg Mason, Inc. and its wholly-owned subsidiaries.
The Notes to the Consolidated Financial Statements of Legg
Mason, Inc. and Subsidiaries included in Item 8 of this Report
include disclosures with respect to the Parent Company Only.
Transactions with Affiliates
Parent Company interest income for 1996, 1997, and 1998
includes $5,503, $4,509 and $3,993 arising from a promissory note
between the Parent Company and an investment advisory subsidiary
of the Company. The note, $46,714 at March 31, 1997 and $39,812
at March 31, 1998, is included in investment in and advances to
subsidiaries.
In addition, interest income for 1996, 1997, and 1998
includes $407, $363, and $1,576, respectively, principally arising
from senior subordinated loans to a broker-dealer subsidiary of
the Company. The indebtedness, $5,000 at March 31, 1997 and
$40,000 at March 31, 1998, is included in investment in and
advances to subsidiaries.
Business Combination
The Company acquired Brandywine Asset Management, Inc. ("Brandywine")
in January 1998, through the issuance of 2,574,156 shares of its common
stock in a transaction accounted for as a pooling of interests. Accordingly,
the Parent Company Only financial statements have been restated to include
the accounts of Brandywine for all periods presented. See Note 2 in Notes
to Consolidated Financial Statements of Legg Mason, Inc. and Subsidiaries
included in Item 8. of this Report.
S-5
<PAGE> 1
EXHIBIT 10.2
LEGG MASON, INC.
1998 Stock Option Plan
For Non-Employee Directors
(As Amended June 1, 1998)
1. Purpose.
This Stock Option Plan for Non-Employee Directors (the "Plan")
is intended to attract and retain the services of experienced and knowledgeable
independent directors of Legg Mason, Inc. (the "Company") for the benefit of
the Company and its shareholders and to provide additional incentive for such
directors to continue to work for the best interests of the Company and its
shareholders.
2. Stock Subject to the Plan.
There are reserved for issuance upon the exercise of options
granted under the Plan 550,000 shares of Common Stock of the Company (the
"Common Stock"). Such shares may be authorized and unissued shares of Common
Stock or previously outstanding shares of Common Stock then held in the
Company's treasury. If any option granted under the Plan shall expire or
terminate for any reason without having been exercised in full, the shares
subject thereto as to which the option has not been exercised shall again be
available for the purposes of issuance upon the exercise of options granted
under the Plan.
3. Administration.
The Plan shall be administered by the Board of Directors of the
Company (the "Board"). Subject to the express provisions of the Plan, the
Board shall have plenary authority to interpret the Plan, to prescribe, amend
and rescind rules and regulations relating to it, to determine the terms and
provisions of the option grants or agreements (which shall comply with and be
subject to the terms and conditions of the Plan) and to make all other
determinations necessary or advisable for the administration of the Plan. The
Board's determinations of the matters referred to in this Paragraph 3 shall be
conclusive.
4. Eligibility.
Each director of the Company who is not otherwise an employee
of the Company or a subsidiary and who has not previously been an employee of
the Company or a subsidiary for a period of at least two years prior to the
date of his first election as a director shall automatically
<PAGE>2
be granted an option to purchase 3,000 shares of Common Stock on the date of
the initialappointment or election of such director. Following the initial
grant, each then current non-employee director shall automatically be granted
on the date of each annual meeting of the shareholders of the corporation an
option for 3,000 shares.
Only non-qualified stock options (options which do not qualify
as "incentive stock options" under Section 422A of the Internal Revenue Code of
1986, as amended) shall be granted under the Plan.
5. Option Grants.
(a) The purchase price of the Common Stock under each
option granted under the Plan shall be the mean of the high and low sales
prices of the Common Stock on the New York Stock Exchange on the date of grant
of the option (or the next preceding date on which trading occurred if there
was no trading on the date of grant). In the event that the Common Stock is no
longer traded on the New York Stock Exchange at the date of any grant, then the
Board shall establish the purchase price at the fair market value determined
under Treasury Regulation Section 20.2031-2.
(b) Options shall be fully exercisable immediately after
the date of grant. The term of each option shall be ten years from the date of
grant thereof, or such shorter period as is prescribed in Paragraphs 5(c) and
5(d). Except as provided in Paragraphs 5(c) and 5(d), no option may be
exercised at any time unless the holder thereof is then a director of the
Company.
Upon exercise, the option price is to be paid in cash or in
shares of the Company's issued and outstanding Common Stock or any combination
of cash and such Stock. Upon exercise of an option, the Company shall have the
right to retain without notice sufficient shares of stock to cover government
withholding taxes or deductions, if any, as described in Paragraph 9. For
purposes of the two preceding sentences, the market value of any shares
retained shall be the mean of the high and low sales prices of the Common Stock
on the New York Stock Exchange on the date preceding the exercise date (or the
next preceding date on which trading occurred if there was no trading on the
date of grant); if the Common Stock is no longer traded on the New York Stock
Exchange, the fair market value on such date shall be determined under Treasury
Regulation Section 20.2031-2.
An option shall be exercisable only by delivery of written
notice to the Corporation. Such notice shall state the election to exercise
the option and the number of shares in respect of which it is being exercised,
and shall be signed by the person or persons so exercising the option. In the
event an option shall be exercised pursuant to Paragraph 5(d) by any person or
persons other than the director to whom the option was issued, such notice
shall be accompanied by appropriate evidence of the right of such person or
persons to exercise such option.
<PAGE> 3
(c) In the event that the optionee shall cease to serve as a
director, the optionee may exercise the option at any time prior to the earlier
of (i) the expiration of the term of the option or (ii) the first anniversary
of the date of termination of service as a director.
Nothing in the Plan or in any option granted pursuant to the
Plan shall confer on any individual any right to continue as a director of the
Company or interfere in any way with the right of the Company to terminate the
optionee's service as a director at any time.
(d) In the event of the death of a director to whom an
option has been granted under the Plan, the option may be exercised by a
legatee or legatees of the option holder under his last will or by his personal
representatives or distributees at any time prior to the earlier of (i) the
expiration of the term of the option or (ii) the second anniversary of the date
of termination of service as a director.
6. Transferability and Shareholder Rights of Holders of Options.
No option granted under the Plan shall be transferable
otherwise than by will or by the laws of descent and distribution, and an
option may be exercised, during the lifetime of the holder thereof, only by
him. The holder of an option shall have none of the rights of a shareholder
until the shares subject thereto shall have been registered in the name of the
person or persons exercising such option on the transfer books of the Company
upon such exercise.
7. Adjustments Upon Changes in Capitalization.
Notwithstanding any other provision of the Plan, the number
and class of shares subject to the options and the option prices of the options
covered thereby shall be proportionately adjusted in the event of changes in
the outstanding Common Stock by reason of stock dividends, stock splits,
recapitalizations, mergers, consolidations, combinations or exchanges of
shares, split-ups, split-offs, spin-offs, liquidations or other similar changes
in capitalization, or any distribution to common shareholders other than cash
dividends and, in the event of any such change in the outstanding Common Stock,
the aggregate number and class of shares available under the Plan and the
number of shares as to which options may be granted shall be appropriately
adjusted by the Board. The Board's determination of any adjustment shall be
conclusive.
8. Amendment and Termination.
Unless the Plan shall theretofore have been terminated as
hereinafter provided, the Plan shall terminate on, and no awards of options
shall be made after, July 31, 2008; provided, however, that such termination
shall have no effect on options granted prior thereto. The Plan may be
terminated, modified or amended by the shareholders of the Company. The Board
of Directors of the Company may also terminate the Plan or modify or amend the
Plan in such respects as it shall deem advisable in order to conform to any
change in any law or regulation
<PAGE> 4
applicable thereto, or in other respects which shall not change (i) the total
number of shares as to which options may be granted, (ii) the class of
persons eligible to receive options under the Plan, (iii) the manner of
determining the option prices, (iv) the period during which options may be
granted or exercised or (v) the provisions relating to the
administration of the Plan by the directors of the Company.
9. Withholding.
Upon the transfer of the Common Stock as a result of the
exercise of an option, the Company shall have the right to retain without
notice sufficient shares of stock (taken at the mean of the high and low sales
prices of such stock on the New York Stock Exchange on the date of exercise)
to cover the amount of any tax required by any government to be withheld or
otherwise deducted and paid with respect to such payment, remitting any balance
to the optionee; provided, however, that the optionee shall have the right to
provide the Company with the funds to enable it to pay such tax.
10. Effectiveness of the Plan.
The Plan became effective on April 25, 1988, the date of its
adoption by the Board of Directors, subject to approval by the vote of a
majority of the votes cast by holders of the shares of Common Stock at a
meeting of the shareholders within twelve months after the date of adoption of
the Plan by the Board of Directors. In the event such shareholder approval is
not obtained, the Plan and any options theretofore granted thereunder shall be
null and void and of no further force or effect.
AGREEMENT FOR
DESIGN CONSULTANT SERVICES
BETWEEN
LEGG MASON TOWER, INC.
Hereinafter Referred to as Owner
AND
RTKL ASSOCIATES INC.
Hereinafter Referred to as Design Consultant
FOR THE
LEGG MASON HEADQUARTERS PROJECT
DATE: November 8, 1996
AGREEMENT FOR DESIGN CONSULTANT SERVICES
TABLE OF CONTENTS
Page
Article 1 Definitions...............................................1
Article 2 Relationship of the Parties...............................3
Article 3 Basic Services............................................5
Article 4 Compensation..............................................8
Article 5 Period of Services.......................................10
Article 6 Owner's Responsibilities.................................10
Article 7 Additional Services......................................11
Article 8 Notices..................................................11
Article 9 Insurance................................................12
Article 10 Indemnification..........................................13
Article 11 Termination of Agreement.................................14
Article 12 Dispute Resolution.......................................15
Article 13 Successors/Assignment/Third Parties......................16
Article 14 Ownership of Documents/
Confidential Information..............................16
Article 15 Additional Provisions....................................16
Exhibit A Budget...................................................A1
Exhibit B Program of Requirements..................................B1
Exhibit C Management Plan..........................................C1
Exhibit D Scope of Services....................................D1-D12
Exhibit E Additional Services...................................E1-E3
<PAGE> 1
AGREEMENT FOR
DESIGN CONSULTANT SERVICES
AGREEMENT made this 8th day of November, 1996, BETWEEN the Owner: LEGG
MASON TOWER, INC. and the Design Consultant: RTKL ASSOCIATES INC. for
Professional Services in connection with the Project known as: Legg Mason
Headquarters (Interior Design for the Renovation of Floors 19-33 and Mechanical,
Electrical, Plumbing, and Structural ("MEPS") Engineering for both
Infrastructure Improvements and the Renovation of Floors 19-35 at 100 Light
Street, Baltimore, Maryland).
The Owner and the Design Consultant agree as set forth below:
ARTICLE 1
DEFINITIONS
The following words and phrases where appearing in initial capitalization,
shall for the purposes of this Agreement have the following meanings:
1.1 PROJECT. The Project shall be the Legg Mason Headquarters (i.e. the
relocation and consolidation of Legg Mason's facilities at 7 East Redwood Street
and 111 South Calvert Street into 100 Light Street, Baltimore, Maryland).
1.2 SERVICES. The Services to be performed by the Design Consultant under
this Agreement shall consist of the Basic Services and any Additional Services
both as defined herein.
1.3 BASIC SERVICES. Basic Services shall consist of all architectural and
engineering services necessary or advisable to design, construct, administer and
complete the Project in accordance with the Project Documents, including,
without limitation, the services specifically set forth in this Agreement and
Exhibit D attached hereto, but excluding services specifically designated as
Additional Services in Exhibit E attached hereto.
1.4 ADDITIONAL SERVICES. Additional Services shall consist of the
architectural and engineering services agreed to be performed by the Design
Consultant in connection with the Project but which are not specifically
designated as Basic Services in this Agreement or Exhibit D attached hereto.
A listing of potential Additional Services is included as Exhibit E.
1.5 WORK. The Work shall consist of the total construction, design and
related services (excluding the Services rendered by the Design Consultant)
performed on the Project.
<PAGE> 2
1.6 PROJECT DOCUMENTS. The Project shall be completed in accordance with
the following Project Documents which were prepared or approved by the Owner
prior to the execution of this Agreement between the Design Consultant and the
Owner:
1. Project Budget, Exhibit A
2. Program of Requirements, Exhibit B
3. Management Plan, Exhibit C
The term "Project Documents" shall include other documents within the General
Scope of the Project identified by the Owner or the Project Manager during the
course of the Project; such other documents shall not increase the scope of
services or liabilities of the Design Consultant from those identified in the
Project Documents identified above or in this contract.
1.7 CONSTRUCTION CONTRACT DOCUMENTS. The Construction Contract
Documents shall consist of the plans and specifications prepared by the Design
Consultant, and any addenda and change orders thereto, and the Owner-Contractor
agreement, all of which shall be compatible and consistent with this Agreement
and the Owner/Project Manager Contract.
1.8 CONTRACTOR. The Contractor is the person or entity which enters into an
agreement with the Owner to perform the construction of or any construction on
the Project, including, without limitation, the providing of labor, materials,
and equipment incorporated or to be incorporated into the Project. The term
"Contractor" means the Contractor or its authorized representative, but excludes
the Project Manager and the Design Consultant.
1.9 BASIC SERVICES COMPENSATION. Basic Services Compensation shall be the
lump sum fee designated in Article 4 to be paid by the Owner to the Design
Consultant in connection with the performance of the Basic Services by the
Design Consultant.
1.10 ADDITIONAL SERVICES COMPENSATION. Additional Services Compensation
shall be the fees determined in accordance with Article 7 to be paid by the
Owner to the Design Consultant in connection with the performance of Additional
Services.
1.11 REIMBURSABLE EXPENSES. In connection with Additional Services,
Reimbursable Expenses are those actual expenditures made by the Design
Consultant, its employees, or its Professional Consultants in the interest of
the Project including but not limited to, all out-of-pocket expenses for travel
and living expenses in connection with the Project, long distance telephone,
telex, expressage, computer time, photocopies, professional consultants (other
than those required for the performance of the Basic Services), and document
reproduction.
1.12 OWNER/PROJECT MANAGER CONTRACT. The Owner/Project Manager
Contract is the agreement between the Owner and the Project Manager dated
July 12, 1996, for the performance of project management services on the
Project.
<PAGE> 3
1.13 PROGRAM OF REQUIREMENTS. The Program of Requirements or "Program" is
the detailed written summary of the requirements of the facility which sets
forth the Owner's design objectives, constraints and criteria, including space
requirements and relationships, quality levels, flexibility and expandability,
special equipment and systems and site requirements, as described in Exhibit B.
1.14 MANAGEMENT PLAN. The Management Plan is the description and definition
of the phasing, sequencing and timing of the major project activities for
design, construction procurement, construction and occupancy as described in
Exhibit C.
1.15 MASTER SCHEDULE. A component of the Management Plan, the Master
Schedule is a graphic display of the major activities, phases, construction
packages and key interfaces on a time scaled, precedence diagram.
1.16 LIST OF CRITICAL DATES. A component of the Management Plan, the List of
Critical Dates is a milestone calendar of events and activities which prescribes
the dates by which they must be accomplished in order to maintain the project
schedule.
1.17 DESIGN PHASE CHANGE ORDER. A Design Phase Change Order is the form of
documentation from the Owner approving and authorizing a modification to the
Program, Budget, Management Plan, Master Schedule, or previously approved
Design Phase documents.
ARTICLE 2
RELATIONSHIP OF THE PARTIES
2.1 DESIGN CONSULTANT SERVICES. The Design Consultant shall provide
professional architectural/engineering services for the Project in accordance
with the terms and conditions of this Agreement. The Design Consultant's
performance of services shall be as professional consultant to the Owner to
carry out the activities of Project design and construction administration and
to provide the technical documents and supervision of Design Consultant services
to achieve the Owner's Project objectives.
2.2 OWNER REPRESENTATION. The Project Manager is under separate contract
with the Owner to provide project management services. The Project Manager has
no design responsibilities of any nature. None of the activities of the Project
Manager supplant or conflict with the design, budget or any other services and
responsibilities customarily furnished by the Design Consultant or
subconsultants in accordance with generally accepted architectural/engineering
practices except as otherwise modified by this Agreement. The Design Consultant
understands and agrees that the Project Manager is the Owner's exclusive
representative to the Design Consultant and Contractor insofar as this Agreement
is concerned. All instructions by the Owner to the Design Consultant relating
to services performed by the Design Consultant will be issued or made through
the Project Manager. All communications and submittals of the Design Consultant
to the Owner and Contractor shall be issued or made through the Project Manager
unless the Project
<PAGE> 4
Manager shall otherwise direct. The Project Manager shall
have the authority to establish procedures, consistent with this Agreement, to
be followed by the Design Consultant and Contractor and to call periodic
conferences to be attended by the Design Consultant, and his subconsultants,
throughout the term of this Agreement.
Design Consultant understands and agrees that it is not a third party
beneficiary of any contract between the Owner and the Project Manager or of
their performance thereunder, and Design Consultant waives any rights, claims
or causes of action it may have as an alleged third party beneficiary of any
such contract or of the performance of the parties thereunder, and covenants
not to sue the Project Manager as a third party beneficiary of any such
contract or of the performance of the parties thereunder.
2.3 DESIGN CONSULTANT REPRESENTATION.
2.3.1 The Design Consultant shall provide to the Owner, through the Project
Manager, a list of all consultants which the Design Consultant intends to
utilize relating to the Project. The list shall include such information on the
qualifications of the consultants as may be requested by the Owner or the
Project Manager. The Owner, through the Project Manager, reserves the right to
review the consultants proposed, and the Design Consultant shall not retain a
consultant to which the Owner, through the Project Manager, has a reasonable
objection.
2.3.2. The Design Consultant shall provide to the Owner, through the Project
Manager, a list of the proposed key project personnel of the Design Consultant
and its consultants to be assigned to the Project. This list, Exhibit F, shall
include such information on the professional background of each of the assigned
personnel as may be requested by the Owner, through the Project Manager. Such
key personnel and consultants shall be satisfactory to the Owner and shall not
be changed except with the consent of the Owner unless said personnel cease to
be in the Design Consultant's (or its consultants, if applicable) employ.
2.4 DIVISION OF RESPONSIBILITIES/SERVICES. The Design Consultant
understands and agrees that should the Project Manager provide the Design
Consultant with any estimating assistance, cost or time control recommendations
or other consultation, recommendations or suggestions, any or all such
activities on the part of the Project Manager or any other representative of
the Owner shall in no way relieve the Design Consultant of the responsibility of
fulfilling its obligations and responsibilities under this Agreement.
<PAGE> 5
ARTICLE 3
BASIC SERVICES
3.1 SCOPE OF SERVICES.
3.1.1 The Basic Services to be provided by the Design Consultant shall be
performed in the phases described hereinafter and shall include architectural,
structural engineering, mechanical engineering, electrical engineering, plumbing
engineering, and all other services customarily furnished by an architect/
engineer and its consultants in accordance with generally accepted architectural
and engineering practices consistent with the terms of this Agreement, and
specifically identified and described in Exhibit D attached hereto and made a
part of this Agreement.
3.1.2 This Agreement describes the Design Consultant's Basic Services in seven
phases. Each of these phases (Pre-Design, Schematic Design, Design Development,
Construction Documents, Bid/Award, Construction, and Post-Construction) may be
divided to facilitate bidding of separate trade contracts or phased construction
activities. The Owner shall have the right to determine early, late and other
separate contract awards and may modify the Management Plan to change the
number and times of issue of various contract document packages at no additional
compensation to the Design Consultant so long as there are no more than
three (3) document packages (which packages are exclusive of individual material
purchase orders, bid package alternates and rework by the Design Consultant of
documents already completed.) The document packages provide for the following:
Operations and Corporate Technology floors (20, 21, and 25); balance of the
floors (19, 22-24,and 26-33); and MEPS engineering only for floors 34 and 35.
3.2 DESIGN CONSULTANT'S PROFESSIONAL RESPONSIBILITY AND STANDARD OF CARE.
3.2.1 By execution of this Agreement, the Design Consultant covenants that
(a) it is an experienced architectural and engineering firm having the skill and
the legal and professional ability necessary to perform all the Services
required of it under this Agreement in connection with the design and
construction of a project having the scope and complexity of the Project
contemplated herein; (b) it has the capabilities and resources necessary to
perform its obligations hereunder; and (c) it is familiar with all current laws,
rules and regulations which are applicable to the design and construction of the
Project (such laws, rules and regulations including, but not limited to, all
local ordinances, requirements of building codes of city, county, state and
federal authorities which are applicable to the Project, local sanitary laws and
rules and regulations, and all orders and interpretations by governing public
authorities of such ordinances, requirements, laws, rules and regulations in
effect at the time of commencement of services on the Project), and that all
drawings, specifications and other documents prepared by the Design Consultant
shall be prepared in accordance with and shall accurately reflect and
incorporate all such laws, rules and regulations, except that with respect to
the Americans with Disabilities Act, all such laws, rules and regulations shall
include only Title III of the Americans with Disabilities Act.
<PAGE> 6
3.2.2 The Design Consultant hereby represents and agrees that the drawings,
specifications and other documents prepared by the Design Consultant pursuant to
this Agreement shall be complete and functional with respect to the requirements
detailed in the Program, except as to any deficiencies which are due to causes
beyond the control of the Design Consultant, and that the drawings,
specifications and other documents will set forth a project, which if
constructed in accordance with their requirements, shall be a complete and
properly functioning facility suitable for the purposes for which it is
intended.
3.2.3 The Design Consultant shall be responsible for any errors,
inconsistencies or omissions in the drawings, specifications, and other
documents. While the Design Consultant cannot guarantee the various documents
required herein to be completely free of minor human errors and omissions, it
shall be the responsibility of the Design Consultant throughout the period of
performance under this Agreement to use due care with professional competence.
The Design Consultant will correct at no additional cost to the Owner any and
all errors and omissions in the drawings, specifications and other documents
prepared by the Design Consultant. The Design Consultant further agrees, at no
additional cost, to render assistance to the Owner in resolving problems
relating to the design or specified materials.
3.2.4 It is the responsibility of the Design Consultant to make certain that
all drawings, specifications and other documents prepared by the Design
Consultant are in accordance with applicable laws, statutes, building codes and
regulations and that appropriate approvals of the drawings, specifications and
other documents prepared by the Design Consultant are obtained from Federal,
State and local governments.
3.3 PROJECT REQUIREMENTS.
3.3.1 Attached hereto and made a part of this Agreement as Exhibit A is
Project Budget, a component of which is the Project Construction Budget. The
Project Construction Budget shall be defined as the total cost of constructing
the Project, as illustrated in Exhibit A hereto. A component of the Project
Construction Budget is the Construction Contract Award Price, hereinafter
referred to as CCAP. The CCAP for this Project, or designated portion thereof,
may be modified in writing only in the form of a Design Phase Change Order,
executed by the Owner, Project Manager, and Design Consultant. The Design
Consultant shall prepare drawings, specifications and other documents necessary
so that the construction contract bid from a responsive, responsible bidding
contractor, acceptable to the Owner and the Project Manager, will be within the
CCAP.
3.3.1.1 During all phases of the Project the Owner shall have prepared such
estimates as it deems necessary, to assure itself that the estimated Project
cost is within the CCAP and the Design Consultant shall supply such data,
information or estimates as the Owner may require to substantiate that the
Project cost is within the CCAP.
<PAGE> 7
3.3.1.2 With each Design Phase submittal and each interim, revisionary or
subsequent design submittal of the Design Consultant to the Owner, the Design
Consultant shall make the following statement in writing: "The drawings,
specifications, and other documents submitted herewith, in my/our professional
opinion, fulfill the Program of Requirements and have been prepared in
accordance with the Design Consultant Services Agreement."
3.3.2 Incorporated herein and made a part of this Agreement by reference as
Exhibit B is the Program of Requirements which defines the physical and
environmental parameters for the Project and establishes the design objectives
and criteria. No deviations from the Program of Requirements shall be allowed
without written approval for change, in the form of a Design Phase Change Order
executed by the Owner, Project Manager and Design Consultant.
3.3.3 Incorporated herein and made a part of this Agreement by reference as
Exhibit C is the Management Plan for the Project which defines the sequence and
timing of the design and construction activities. The Management Plan consists
of the Master Schedule and the List of Critical Dates to be adhered to by the
Design Consultant.
No deviation from the Master Schedule or Critical Dates shall be allowed without
written approval in the form of a Design Phase Change Order executed by the
Owner, Project Manager and Design Consultant. Should the Owner and Project
Manager determine that the Design Consultant is behind schedule as a result of
causes within the Design Consultant's control, the Design Consultant shall
expedite and accelerate its efforts, including additional manpower and/or
overtime, to maintain the approved design schedule at no additional cost to the
Owner.
3.4 PROJECT CONFERENCES.
3.4.1 Throughout all phases of the Project, the Design Consultant and its
consultants shall meet periodically with the Owner and Project Manager when
reasonably requested. Attendees shall be as determined by the Owner and Project
Manager. As a minimum, regularly scheduled meetings which the Design Consultant
will attend include:
3.4.1.1 Design Consultant Orientation.
3.4.1.2 Pre-Design Conferences on a weekly basis.
3.4.1.3 Pre-Design Project Analysis Sessions, three days maximum.
3.4.1.4 Design Conferences on a weekly basis.
3.4.1.5 Pre-Bid Conference for each of three contract document packages.
3.4.1.6 Pre-Construction Conference for each of three contract document
packages.
<PAGE> 8
3.4.1.7 Construction Progress Meetings on a weekly basis for the construction
management contract.
3.4.1.8 Substantial Completion, Final Completion and Completion of Warranty
Period Inspections for the construction management contract.
3.4.2 The Design Consultant shall be responsible for scheduling and attending
any meetings necessary to properly coordinate the design effort including,
without limitation, meetings with governing agencies, code officials and
applicable utilities.
ARTICLE 4
COMPENSATION
4.1 BASIC SERVICES COMPENSATION
The Owner shall compensate the Design Consultant in accordance with the terms
and conditions of this Agreement, including the following:
4.1.1 For the Basic Services of the Design Consultant, Basic Services
Compensation shall be in the amount of Six Hundred Ninety Five Thousand Six
Hundred Thirty Dollars ($695,630.00): RTKL's August 20, 1996 Proposal less Cost
Consulting and Interior Architecture for Executive Space.
4.1.2 The Basic Services Compensation stated in paragraph 4.1.1 includes all
compensation and other payments due the Design Consultant (manpower,
overhead, profit, direct costs, etc.) in the performance of the Basic Services.
4.2 PAYMENTS TO THE DESIGN CONSULTANT. Payments on account of the
Design Consultant shall be made as follows:
4.2.1 Payments for Basic Services shall be made monthly in proportion to
services performed so that the compensation at the completion of each Phase
shall equal the following percentages of the Basic Services Compensation.
Pre-Design Phase ............................................................12%
Schematic Design Phase ......................................................14%
Design Development Phase ....................................................21%
Construction Documents Phase ................................................31%
Bidding or Negotiations Phase ................................................2%
Construction Phase ..........................................................17%
Post-Construction Phase ......................................................3%
______
100%
4.2.2 No deductions shall be made from the Design Consultant's Basic Services
Compensation on account of penalty, liquidated damages, retainage or other sums
withheld from payments to Contractor.
<PAGE> 9
4.2.3 If the Project is suspended for more than six months or abandoned in
whole or in part by the Owner, the Design Consultant shall be paid compensation
for services performed prior to receipt of written notice from the Owner of such
suspension or abandonment, and all reasonable termination expenses resulting
from such suspension or abandonment. If the Project is resumed after being
suspended for more than six months, the Design Consultant's Basic Services
Compensation shall be equitably adjusted.
4.3 ADDITIONAL SERVICES COMPENSATION.
4.3.1 With respect to any Additional Services, as described in Article 7
herein, performed by the Design Consultant hereunder, the Design Consultant and
Owner shall negotiate an equitable adjustment to the Basic Services
Compensation. However, if negotiations are not successful prior to the time the
additional services are needed, the Owner may direct the Design Consultant to
proceed with the Additional Services on a time spent basis with Additional
Compensation Services to be computed as follows:
4.3.2 Employee's time at the fixed hourly rates set forth in Exhibit E.
4.3.3 Payments for Additional Services of the Design Consultant shall be made
monthly upon presentation of the Design Consultant's statement of services,
fully supported by invoices, time cards/records, and other documentation as
reasonably requested by the Owner.
4.4 REIMBURSABLE EXPENSES. Reimbursable Expenses incurred while performing
Basic Services or Additional Services shall be computed at a multiple of 1.0
times actual cost. Before incurring any Reimbursable Expenses, exclusive of
reproduction costs associated with contract document packages, in excess of Two
Thousand Dollars ($2,000.00), the Design Consultant must request and receive
written authorization from the Owner, through the Project Manager.
4.5 ACCOUNTING RECORDS.
4.5.1 Records of the Design Consultant with respect to Additional Services and
payroll, consultant and other expenses (including Reimbursable Expenses)
pertaining to the Project, shall be kept on generally accepted accounting
principals and shall be available to the Owner or its authorized representative
for inspection and copying at mutually convenient times for three (3) years
after project completion.
4.5.2 At the request of the Owner or its authorized representative the Design
Consultant will supply in a timely manner and certify as accurate, unaltered
copies of all time sheets, invoices, and other documents to substantiate and
document any and all Additional Services and Reimbursable Expenses.
<PAGE> 10
ARTICLE 5
PERIOD OF SERVICE
5.1 Specific dates relating to the period of services are set forth in
Exhibit C Management Plan.
5.2 Unless earlier terminated as provided in Article 11 hereof, this
Agreement shall remain in force for a period which may reasonably be required
for the Basic Services and Additional Services hereunder. However, the
provisions of the Agreement relating to Professional Responsibility
(paragraph 3.2); Dispute Resolution (Article 12); Professional Liability
coverage (Article 9); Indemnification (Article 10); and Ownership of Documents/
Confidential Information (Article 14) shall remain in effect after termination
of the other provisions of the Agreement.
5.3 If the Project is delayed through no fault of the Design Consultant, all
specific dates noted in the Master Schedule and List of Critical Dates that are
affected by the delay will be adjusted by the number of calendar days of the
delay, and the Master Schedule and List of Critical Dates will be revised
accordingly.
5.4 If the Owner materially revises the Project, a reasonable time extension
and/or credit shall be negotiated between the Design Consultant and the Owner.
5.5 Time is of the essence of this Agreement.
ARTICLE 6
OWNER'S RESPONSIBILITIES
6.1 The Owner shall provide full information regarding the requirements for
the Project.
6.2 The Owner shall examine documents submitted by the Design Consultant and
shall render decisions pertaining thereto promptly, to avoid unreasonable delay
in the progress of the Design Consultant's Services.
6.3 Not used.
6.4 Not used.
6.5 The Owner shall pay for structural, mechanical, chemical and other
laboratory tests, inspections and reports as required by law that are not
otherwise called for in this Agreement.
6.6 The Owner shall furnish such legal, accounting, and insurance counseling
services as the Owner may deem necessary for the Project, and such auditing
services as it may require to ascertain how, or for what purposes, the
Contractor has used the moneys paid to it under the Construction Contract.
<PAGE> 11
6.7 All services, information, surveys and reports required of the Owner,
shall be furnished at the Owner's expense. The Design Consultant shall review
all such information with due care promptly upon receipt and shall advise the
Owner of any inaccuracies or inconsistencies, or suspected inaccuracies or
inconsistencies, detected by the Design Consultant in the course of its review.
6.8 The Owner shall furnish information and approvals required of it in a
timely manner as required for orderly progress of the Work and shall endeavor to
adhere as closely as possible with the time conditions for such Owner activities
as set forth in all approved schedules for the Project. Any necessary
adjustments to the Period of Service will be handled in accordance with
Article 5.
6.9 The Owner shall pay for all necessary permits, licenses, approvals,
easements, assessments, and charges required for the construction, use or
occupancy of the Project or any portion thereof.
ARTICLE 7
ADDITIONAL SERVICES
7.1 Attached hereto and made a part of this Agreement as Exhibit E is the
list of services which exceed the Scope of Basic Services under this Agreement.
If any of these Additional Services are authorized in advance by the Owner in
writing, the Design Consultant shall provide or obtain from others the
authorized services.
7.2 The Owner will compensate the Design Consultant for authorized
Additional Services performed as herein provided to the extent that they exceed
the obligations of the Design Consultant under this Agreement.
ARTICLE 8
NOTICES
8.1 Any notice required by this Agreement or other communications to either
party by the other shall be in writing and deemed given when delivered
personally or five (5) days after deposit in the United States Post Office,
postage prepaid certified mail, return receipt requested, addressed as follows,
or to such other address as shall be duly given by notice meeting the
requirement of this Article.
To Owner: Timothy C. Scheve
Senior Vice President and Treasurer
Legg Mason Wood Walker, Incorporated
Legg Mason Tower
111 South Calvert Street
P.O. Box 1476
Baltimore, Maryland 21203
<PAGE> 12
To Design Consultant: Kurt A. Haglund, AIA
Director, Washington Office
RTKL Associates Inc.
1250 Connecticut Avenue, N.W.
Washington, D.C. 20036
With Copy to Project Manager: Thomas W. Seybold, J.D.
Project Manager
Heery International, Inc.
100 East Pratt Street
Suite 2410
Baltimore, Maryland 21202
ARTICLE 9
INSURANCE
9.1 The Design Consultant shall purchase and maintain insurance for
protection from claims under worker's or workmen's compensation acts; claims
resulting from negligent acts or omissions for damages because of bodily injury,
including personal injury, sickness, disease or death of any of the Design
Consultant's employees or any other person; claims for damages because of injury
to or destruction of personal property including loss of use resulting
therefrom; and claims arising out of the performance of this Agreement and
caused by negligent acts or omissions for which the Design Consultant is legally
liable. Minimum limits of coverage shall be:
INSURANCE DESCRIPTION Minimum Required Coverage
a. Worker's Compensation Statutory
b. Public Liability $1,000,000.00 Combined Limit
Bodily Injury: Each Person
Bodily Injury: Each Accident
Property Damage: Each Accident
c. Automobile Liability & Property Damage $1,000,000.00 Combined Limit
Bodily Injury: Each Person
Bodily Injury: Each Accident
Property Damage: Each Accident
d. Professional Liability: $1,000,000.00 per Occurrence/
$10,000,000.00 Annual Aggregate
9.2 Evidence of such insurance shall be furnished to the Owner, and the
Owner shall receive thirty (30) days prior written notice of any cancellation,
non-renewal or reduction of coverage of any of the policies. Upon notice of
such cancellation, non-renewal or reduction, the Design Consultant shall procure
substitute insurance
<PAGE> 13
such that the minimum limits of coverage are maintained
continuously throughout the period of this Agreement.
9.2.1 The Design Consultant shall deliver to the Owner a certificate of
insurance for its Professional Liability coverage annually, so long as it is
required to maintain such coverage under paragraph 9.4.
9.3 All insurance policies (with the exception of Professional Liability)
required under this Agreement shall name the Owner and the Landlord as an
additional insured for the insurance and shall contain a waiver of subrogation
against the Owner.
9.4 So long as the Professional Liability insurance referenced above remains
available in the commercial insurance market, the Design Consultant shall
maintain in force during the performance of this contract and for a period of
five years after final completion of the Project, the Professional Liability
insurance coverage referenced above.
ARTICLE 10
INDEMNIFICATION
10.1 Notwithstanding anything to the contrary contained herein, the Design
Consultant shall indemnify and hold harmless the Owner, the Project Manager and
their agents and employees from and against all claims, damages, losses and
expenses, including but not limited to attorney's fees, arising out of or
resulting from (i) the Design Consultant's performance or failure to perform
its obligations under this Agreement and (ii) any claim, damage, loss or expense
attributable to bodily injury, sickness, disease or death, or to injury to or
destruction of personal property including the loss of use resulting therefrom
and caused by any negligent act or omission of the Design Consultant, anyone
directly or indirectly employed by the Design Consultant or anyone for whose
acts the Design Consultant may be liable. Such obligation shall not be construed
to negate, abridge or otherwise reduce any other right or obligation of
indemnity which would otherwise exist as to any party or person described in
this Article.
10.2 Notwithstanding to the contrary contained herein, the Owner shall
indemnify and hold harmless the Design Consultant and its agents and employees
from and against all claims, damages, losses and expenses, including but not
limited to attorney's fees, arising out of or resulting from (i) the Owner's
performance or failure to perform its obligations under this Agreement and (ii)
any claim, damage, loss or expense attributable to bodily injury, sickness,
disease or death, or to injury to or destruction of personal property including
the loss of use resulting therefrom and caused in whole or in part by any
negligent act or omission of the Owner. Such obligation shall not be construed
to negate, abridge or otherwise reduce any other right or obligation of
indemnity which would otherwise exist as to any party or person described in
this Article.
10.3 Except as otherwise set forth in this Agreement, the Design Consultant
and the Owner shall not be liable to each other for any delays in the
performance of their
<PAGE> 14
respective obligations and responsibilities under this
Agreement which arise from causes beyond their control and without their fault
or negligence, including but not limited to, any of the following events or
occurrences: fire, flood, earthquake, epidemic, atmospheric condition of
unusual severity, war, state or local government acting in its sovereign
capacity, and strikes. Owner shall not be liable to the Design Consultant for
acts or failures to act by Project Manager, the Contractor or the Owner's
consultants.
ARTICLE 11
TERMINATION OF AGREEMENT
11.1 If (1), the Owner abandons the Project or the Project is stopped for
more than six (6) months due to actions taken by the Owner, or under an order
of any court or other public authority having jurisdiction, or as a result of
an act of government, such as a declaration of a national emergency making
materials unavailable, or for any reason other than an act or fault of the
Design Consultant or its agents or employees, or (2), the Owner has failed to
substantially perform in accordance with the provisions of this Agreement due to
no fault of the Design Consultant and such non-performance continues without
cure for a period of thirty (30) days after the Owner receives from the Design
Consultant a written notice of such nonperformance (including a detailed
explanation of the actions of the Owner required for cure), the Design
Consultant may, upon fifteen (15) days' additional written notice to the Owner,
terminate this Agreement, without prejudice to any right or remedy otherwise
available to the Owner, and recover from the Owner payment for all services
performed to the date of the notice terminating this Agreement.
11.2 Upon the appointment of a receiver for the Design Consultant, or if the
Design Consultant makes a general assignment for the benefit of creditors, the
Owner may terminate this Agreement, without prejudice to any right or remedy
otherwise available to the Owner, upon giving three (3) working days written
notice to the Design Consultant. If an order for relief is entered under the
bankruptcy code with respect to the Design Consultant, the Owner may terminate
this Agreement by giving three working days written notice to the Design
Consultant unless the Design Consultant or the trustee: (1), promptly cures all
breaches; (2), provides adequate assurances of future performance; (3),
compensates the Owner for actual pecuniary loss resulting from such breaches;
and (4), assumes the obligations of the Design Consultant within the statutory
time limits.
11.3 If the Design Consultant persistently or repeatedly refuses or fails,
except in cases for which extension of time is provided, to supply sufficient
properly skilled staff or proper materials, or persistently disregards laws,
ordinances, rules, regulations or orders of any public authority
jurisdiction, or otherwise substantially violates or breaches any term or
provision of this Agreement, then the Owner may, without prejudice to any
right or remedy otherwise available to the Owner, and after giving
the Design Consultant written notice, terminate this Agreement.
<PAGE> 15
11.4 Upon termination of this Agreement by the Owner under paragraph 11.2 or
11.3 it shall be entitled to furnish or have furnished the Services to be
performed hereunder by the Design Consultant by whatever method the Owner
may deem expedient. Also, in such cases, the Design Consultant shall not be
entitled to receive any further payment until completion of the Work; and
the total compensation to the Design Consultant under this Agreement shall
be the amount which is equitable under the circumstances. If the Owner and
the Design Consultant are unable to agree on the amount to be paid under
the foregoing sentence, the dispute shall be resolved in accordance with
the provisions of Article 12.
11.5 The Owner may, upon thirty days' written notice to the Design Consultant
terminate this Agreement, in whole or in part, at any time for the convenience
of the Owner, without prejudice to any right or remedy otherwise available to
the Owner. Upon receipt of such notice, the Design Consultant shall
immediately discontinue all services affected unless such notice directs
otherwise. In the event of a termination for convenience of the Owner, the
Design Consultant's sole and exclusive right and remedy is to be paid for
all work performed and to receive equitable adjustment for all work
performed through the date of termination. The Design Consultant shall not
be entitled to be paid any amount as profit for unperformed services or
consideration for the termination of convenience by the Owner.
11.6 Should the Owner terminate the Design Consultant as provided for under
this Article, the Owner will acquire the rights to all design documents,
including the ownership and use of all drawings, specifications, documents and
materials relating to the Project prepared by or in the possession of the Design
Consultant. Upon receipt of payment in accordance with paragraphs 11.1 through
11.5 above, the Design Consultant will turn over to the Owner in a timely manner
and in good unaltered condition all original drawings, specifications, documents
and materials.
11.7 The payment of any sums by the Owner under this Article 11 shall not
constitute a waiver of any claims for damages by the Owner for any breach of
the Agreement by the Design Consultant.
ARTICLE 12
DISPUTE RESOLUTION
12.1 If a dispute arises out of or related to this Agreement, or its alleged
breach, and if that dispute has not been settled through direct discussions
within a reasonable period, the parties to this Agreement agree to first
endeavor to settle the dispute in an amicable manner by submitting the dispute
to a mutually acceptable mediator under the Construction Industry Mediation
Rules, before having recourse to a judicial forum. Each party further agrees
that it will endeavor to follow a similar dispute resolution procedure to
resolve any disputes against any third parties (including the Contractor and
Project Manager) which arise out of or relate to the Work.
<PAGE> 16
ARTICLE 13
SUCCESSORS/ASSIGNMENT
13.1 This Agreement shall inure to the benefit of and be binding on the
heirs, successors, assigns, trustees and personal representatives of the Owner,
as well as the permitted assigns and trustees of the Design Consultant.
13.2 The Design Consultant shall not assign, sublet or transfer its interest
in this Agreement without the written consent of the other, except that the
Design Consultant may assign accounts receivable to a commercial bank or
financial institution for securing loans, without prior approval of the Owner.
ARTICLE 14
OWNERSHIP OF DOCUMENTS/CONFIDENTIAL INFORMATION
14.1 Drawings and Specifications as instruments of service are and shall
remain the property of the Design Consultant except as provided for under
paragraph 11.6 whether the Project for which they are made is built or not.
The unique aesthetic elements of said documents and design concept are not to be
used by the Design Consultant on other projects; however, the typical details,
sketches, instructions, and specifications regularly reused by the Design
Consultant in the ordinary course of its business may be reused by Design
Consultant. Said documents are not to be used by the Owner on other projects
except by a written agreement with the Design Consultant or as provided for
under paragraph 11.6.
14.2 In order for the Design Consultant to fulfill this Agreement
effectively, it may be necessary or desirable for the Owner to disclose to the
Design Consultant confidential and proprietary information and trade secrets
pertaining to the Owner's past, present and future activities. The Design
Consultant hereby agrees to treat any and all information gained by it as a
result of the Services performed hereunder as strictly confidential. The
Design Consultant further agrees that it will not disclose to anyone outside of
the authorized Project team (i) Owner's trade secrets during the period of this
Agreement or thereafter or (ii) Owner's confidential and proprietary
information.
ARTICLE 15
ADDITIONAL PROVISIONS
15.1 Whenever renderings, photographs of renderings, photographs of models,
photographs, drawings, announcements, or other illustration or information of
the Project are released for public information, advertisement or publicity,
appropriate and proper credit for architectural and other services shall be
given to the Design Consultant and Project Manager respectively.
15.2 This Agreement and its Exhibits and Attachments represent the entire and
integrated agreement between the Owner and the Design Consultant and
supersedes all prior negotiations, representations or agreements, either written
or
<PAGE> 17
oral. This Agreement may be amended only by written instrument signed by
both Owner and Design Consultant.
15.3 Unless otherwise specified, this Agreement shall be governed by the law
of the State of Maryland, U.S.A.
15.4 If any one or more of the provisions contained in this Agreement, for
any reason, are held to be invalid, illegal, or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provisions thereof and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
15.5 Except where specifically stated otherwise, all periods of time stated
in terms of days shall be considered periods calculated in calendar days.
15.6 The headings or captions within this Agreement shall be deemed set
forth in the manner presented for the purposes of reference only and shall not
control or otherwise affect the information set forth therein or interpretation
thereof.
15.7 For the purpose of this Agreement unless the context clearly indicates
otherwise, the singular includes the plural, and the plural includes the
singular.
15.8 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, and the counterparts shall constitute one and
the same instrument, which shall be sufficient evidence by any one thereof.
This Agreement executed the day and year first written above.
OWNER DESIGN CONSULTANT
Legg Mason Tower, Inc. RTKL Associates Inc.
By: /s/ Julia A. McNeal By:
(Signature) (Signature)
Timothy C. Scheve /s/ Kurt Hagland_____________________
Vice President (Print Name)
_____________________________________ _____________________________________
(Date) (Title)
_____________________________________
111 South Calvert Street (Date)
P.O. Box 1476
Baltimore, Maryland 21203-1476 _____________________________________
(Address)
_____________________________________
(City, State, Zip Code)
<PAGE> A1
EXHIBIT A
BUDGET
The budget for the fit-out construction, excluding furniture, fixtures and
equipment, and infrastructure improvements, for Floors 19-33, is $6,500,000.00.
The budget for infrastructure improvements is $1,870,000.00
The total budget is $8,370,000.00.
<PAGE> B1
EXHIBIT B
PROGRAM OF REQUIREMENTS
Generally, the Program of Requirements includes: Facilities Programming Study
prepared by RTKL Associates Inc. dated October 30, 1996, Landlord's Work,
Landlord's Other Work and Miscellaneous Approval language from Letter of Intent
dated August 7, 1996, List of Physical Due Diligence Issues dated July 30, 1996,
other items forwarded to Design Consultant by Project Manager via Project
Manager's Letter of Transmittal dated August 1, 1996 and Facsimile Cover Sheet
dated August 15, 1996, and floor plans of:
7 East Redwood Street
111 South Calvert Street ("Legg Mason Tower")
100 Light Street ("USF&G Tower")
The Program of Requirements for Mechanical, Electrical, Plumbing, and
Structural Engineering for Floors 34 and 35 includes the Work contemplated
in Gensler's drawings dated October 18, 1996. The drawings are titled as
follows: Preliminary Space Plan 34 and Preliminary Space Plan 35.
Additionally, the Program of Requirements includes the following Sublease
Exhibits (attached): Exhibit K (Landlord's Pre-Possession Work); Exhibit L
(Landlord's Additional Work); Exhibit N (Tenant Work Letter); Exhibit O
(Pre-Approved Alterations); Exhibit P (Performance Standards); and Exhibit S
(Rules and Regulations).
<PAGE> C1
EXHIBIT C
MANAGEMENT PLAN
Refer to the Project Manager's Master Schedule dated November 8, 1996, and the
following list of Critical Dates.
Critical Dates
Phase I: Operations Center and Corporate Technology - Floors 20, 21, and 25
and infrastructure to support same
Schematic Design Complete 11/26/96
Design Development Complete 12/16/96
Construction Documents Complete 1/17/97
Phase II: Floors 19, 22-24, and 26-33 and infrastructure to support same
Schematic Design Complete 12/12/96
Design Development Complete 1/21/97
Construction Documents Complete 3/10/97
Phase III: Engineering only for floors 34 and 35 and infrastructure to support
same
Schematic Design Complete 12/12/96
Design Development Complete 1/21/97
Construction Documents Complete 3/10/97
<PAGE> D1
EXHIBIT D
SCOPE OF SERVICES
The Scope of Services to be performed by the Design Consultant consist of
professional tasks which have as their objective the design, technical documents
and construction administration to provide the Owner with a complete and
properly functioning facility. The Scope of Services shall be performed in
accordance with the standard of care set forth in this Agreement. The facility
shall be suitable for the purposes for which it is intended, comply with all
applicable codes and laws, and completed on a timely basis within the approved
construction budget. The services are described under the Project Phases in
which they customarily occur. This order is for convenience only and does not
necessarily reflect the sequence in which a service will actually be performed,
or necessarily limit the Project, or a designated portion of the Project, to one
of each Phase. These Phases may be divided to facilitate the procurement of
segregated portions of the Work, pursuant to the approved Management Plan
(Exhibit C). The Owner reserves the right to designate the phasing of
segregated portions of the Work and to modify the Management Plan, within the
terms and conditions of this Agreement.
A. PRE-DESIGN PHASE
1. The Design Consultant shall examine and analyze available
information provided by the Owner and Project Manager and shall
advise and recommend as to additional information necessary to
begin the programming for the Project.
2. Programming (space familiarisation, facility programming and
analysis, space and workstation review and standardisation, and
schedule development):
All aspects of the project other than furniture, fixtures and equipment,
shall be thoroughly reviewed and objectives defined. Executive
Management will be interviewed to acquire a statement of the long range
business plan and corporate image to be supported in the new facility
design.
The Design Consultant shall meet with the Owner and Project Manager to
determine a working schedule, agree on project control procedures, and
collect as much organizational and historical data as is available
consisting of, but not limited to, the following:
a. Organizational charts, cost center breakdown, telephone lists,
and other materials that reflect formal and informal reporting
relationships and lines of communication.
b. Plans of existing facilities at some scale; showing existing
departmental locations.
c. Historical background information relating to past growth and
studies that may have been completed in-house relating to this
project.
<PAGE> D2
d. Determine overall objectives and constraints of the project and
establish an outline of the operational requirements for the
project.
e. Obtain a thorough understanding of the image and quality that
is to be achieved in the design of the facility.
f. Determine the Departments functions, systems, and procedures.
Determine the work and paper flow, desired and required
adjacency, the public and interior movement patterns, security
requirements, and any special requirements within each Division/
Department.
g. Qualify and categorize personnel in accordance with the Owner's
space and furniture standards, as applicable. Identify
relationships and interface requirements between various
individuals and levels of staff. Survey individual office and
work station requirements to determine furniture and equipment
requirements related to the tasks performed.
h. Determine specific requirements for special facilities such as
reception areas, file and equipment areas, conferencing areas,
mail operations, etc.
i. Acknowledge preliminary project budget prepared by Project
Manager based on the image and quality objectives set for the
project.
j. Coordinate with Project Manager in order to prepare a
programming schedule identifying critical completion dates and
dates for decisions required by the Project Team.
The Design Consultant shall develop a comprehensive space programming
management report summarizing all conclusions reached as a result of the
investigations and analysis made. The report will begin with a
management summary clearly outlining the options which have been
identified in the course of the study, together with recommended
actions.
Additionally, the report shall include three "test fits"; one each for
type "A," "B" and "C" floors as described in the Program.
3. Preparation of preliminary stacking diagrams and space layouts;
conceptual design, finalization of space layout, and the preparation of
budgetary estimates.
The professional design team shall develop summary information about the
preliminary space layouts indicating total rentable square foot
requirements, allocation of total rentable square footages by use and
the useable to rentable ratio.
Upon the Owner's written approval of the programming report, the Design
Consultant shall prepare space allocation plans incorporating the
Owner's requirements as documented in the approved space programming
management report. These space allocations shall:
a. Incorporate blocking and stacking plans indicating shape of
assigned areas for proper flow of work between units and
satisfaction of adjacency requirements.
b. Delineate functional alignments and adjacency and expansion
needs over a predetermined period of growth, and as appropriate,
indicate personnel,
<PAGE> D3
furniture and equipment and any other
information in enclosed and open space that would facilitate
thorough and complete understanding of the plans.
c. Include necessary revisions, major and minor, to all plans and
revised drawings being prepared for approval.
d. Be reviewed with the Owner for compliance with the User's
operational requirements.
e. Review and update the project schedule to reflect progress to
date.
4. The Design Consultant shall provide those Pre-Design Phase services,
which are in addition to the services described elsewhere in Exhibit D,
required by the Request For Proposal dated July 12, 1996 (including the
Project Manager's Letter of Transmittal dated August 1, 1996 and
Facsimile Cover Sheet dated August 15, 1996), and offered by the Design
Consultant through its proposal dated August 6, 1996 and its letter
dated August 20, 1996. In those instances where the Design Consultant's
proposal differs from this Agreement, the Agreement shall have
precedence.
B. SCHEMATIC DESIGN PHASE
1. Upon written authorization from the Owner to proceed and, based on the
approved Design Narrative, the Project Construction Budget, Program of
Requirements, and the Management Plan (Exhibits A, B and C) the Design
Consultant shall prepare Schematic Design Studies consisting of drawings and
other documents illustrating the design concept, scale and relationship of the
Project components for approval by the Owner.
2. The Design Consultant shall provide the Project Manager periodically
with copies of Schematic Design Studies for the Project Manager's review during
the Schematic Design Phase. At the end of the Schematic Design Phase the
Design Consultant shall provide the Project Manager with complete sets of the
drawings and other documents for approval by the Owner.
3. Documents prepared by the Design Consultant for final Schematic Design Phase
submittal shall include drawings and a written report. The drawings shall
include, but not be limited to, schematic plans of all floor plan
conditions, and simplified elevations indicating the fundamentals of the
architectural concept. The report shall incorporate the status of the
Design Schedule as outlined in the Management Plan. Further, the report
shall include such discussion of design factors, if any, as are pertinent in
the opinion of the Design Consultant and outline descriptions of proposed
engineered systems, construction methods, materials and work to be included
in the construction contracts.
4. To be considered acceptable for final Schematic Design Phase submittal,
the documents shall contain, as a minimum:
a. Architectural
<PAGE> D4
- - Single-line drawings showing complete building layout, identifying the
various major areas, core areas and their relationships.
- - Preliminary exterior wall cross section and elevation indicating
location and size of fenestration, and indicating overall thermal transfer value
for exterior wall envelope.
- - Identification of roof system, deck, membrane flashing and drainage
technique and indicating overall combined heat transfer coefficient for roof/
ceiling composite and roof area.
- - Identification of all proposed finishes (includes all exterior surfaces,
doors and windows).
- - Gross and net area calculations separated to show conformance with the
Program of Requirements.
b. Structural
- - Structural systems layout with overall dimensions and floor elevations.
c. Mechanical
- - Block heating, ventilating and cooling loads calculations including
skin versus internal loading.
- - Minimum of two HVAC systems that appear compatible with loading
conditions for subsequent life-cycle costing.
- - Single-line drawings of all mechanical equipment spaces, duct chases and
pipe chases.
- - Location of all major equipment in allocated spaces.
d. Electrical
- - Lighting fixtures outlined in plan and roughly scheduled showing types
and quantities of fixtures to be used.
- - Major electrical equipment roughly scheduled indicating size and
capacity.
- - Complete preliminary one-line electrical distribution diagrams with
indications of final location of service entry, switchboards, motor control
centers, panels, transformers and emergency generator, if required.
<PAGE> D5
- - Legend showing all symbols used on drawings.
5. Upon Owner acceptance and approval of the Schematic Design, the
structural bay sizes, floor elevations and exterior wall locations (building
"footprint") may not be changed except by a Design Phase Change Order.
C. DESIGN DEVELOPMENT PHASE
1. The Design Consultant shall prepare from the approved Schematic Design
Studies, for further approval by the Owner, the Design Development Documents
consisting of drawings and other documents to fix and describe the size and
character of the entire Project as to structural, mechanical and electrical
systems, materials and such other essentials as may be appropriate.
2. Design Development Documents prepared by the Design Consultant shall
include drawings and a written report in more detail than the Schematic Design
Documents and shall take into account the Owner's comments on the previous
submittal. Drawings shall include dimensioned site development plan, floors
plans, elevations, and one or more typical sections indicating proposed
construction. Drawings shall also include information on major finishes as well
as diagrammatic drawings illustrating fundamentals of major engineered systems,
i.e., structural, mechanical and electrical.
3. The Design Consultant shall provide the Project Manager periodically
with copies of in-progress Design Development Documents during the Design
Development Phase. At the end of the Design Development Phase the Design
Consultant shall provide the Construction Program Manager with complete sets of
drawings and other documents for approval by the Owner. The documents for this
final Design Development Phase submittal shall consist of, as a minimum:
a. Architectural
- - Floor plans with final room locations including all openings.
- - Wall sections showing final dimensional relationships, materials and
component relationships.
- - Identification of all fixed and loose equipment to be installed in
contract.
- - Finish schedule identifying all finishes.
- - Well-developed door and hardware schedule showing final quantity plus
type and quality levels.
- - Preliminary development of details and large scale blow-ups.
<PAGE> D6
- - Legend showing all symbols used on drawings.
- - Outline specifications.
- - Reflective ceiling development including ceiling grid and all devices
that penetrate ceiling (i.e., light fixtures, sprinkler heads, ceiling register
or diffusers, etc.).
b. Structural
- - Plan drawings with all structural members located and sized.
- - Beam, column and connection schedules.
- - Final building elevations.
- - Outline specifications.
c. Mechanical
- - Heating and cooling load calculations for each space and major duct or
pipe runs sized to interface structural.
- - Major mechanical equipment scheduled indicating size and capacity.
- - Duct work and piping substantially located and sized.
- - Devices in ceiling located.
- - Legend showing all symbols used on drawings.
- - Outline specifications.
d. Electrical
- - All power consuming equipment and load characteristics.
- - Total electric load.
- - Major electrical equipment (switchgear, distribution panels, emergency
generator, transfer switches, UPS system, etc.) dimensioned and drawn to scale
into the space allocated.
- - Complete preliminary site lighting design.
- - Outline specifications.
<PAGE> D7
- - Lighting, power, telecommunications and office automation devices and
receptacles shown in plan.
- - Final light fixture schedule.
- - Interior electrical loads estimate for systems furniture, receptacles,
lighting, food service equipment, and any other special use areas, etc.
D. CONSTRUCTION DOCUMENTS PHASE
1. Upon written authorization from the Owner to proceed, the Design
Consultant shall prepare from the approved Design Development Documents, Working
Drawings and Specifications setting forth in detail the requirements for the
construction of the entire Project. The Owner will provide the Conditions of
the Contract (General and any Supplementary), Advertisement for Bids,
Instructions to Bidders, time control specification provisions, and Construction
Proposal Forms and Agreement(s) which the Design Consultant shall incorporate
into the Construction Documents.
2. Construction Documents shall be packaged as prescribed in the Management
Plan and completed in accordance with the Schedule.
3. Detailed drawings shall cover all work included in the Project or
designated portion thereof.
4. Single or multiple contracts shall be as stated in the Management Plan,
and the detailed drawings for each contract shall be prepared by the Design
Consultant with appropriate designation noted thereon.
5. Specifications shall be prepared using the Construction Specifications
Institute 16 division format.
6. The Design Consultant shall provide the Project Manager periodically
with copies of in-progress Construction Documents during this phase.
Additionally, and in accordance with the Management Plan, the Design Consultant
shall submit for approval by the Owner preliminary Construction Documents at the
stage of 60% completeness.
7. After review and approval of the 60% Construction Documents by the
Owner, the Design Consultant shall continue with preparation of final
Construction Documents and Bid Documents, including final Specifications for all
authorized work on the Project and shall incorporate in those final documents
the comments and any modifications and changes desired by the Owner and any
modifications required for compliance with all applicable codes, regulations,
standards, the approved program, and prior written approvals and instructions of
the Owner. The resulting final Construction Document submittal is to be a
complete, fully coordinated, integrated
<PAGE> D8
package, suitable for bidding distribution, without any
significant addenda or further clarification required.
8. The Design Consultant shall participate in such reviews and meetings as
are necessary to ensure that the project design confirms to all applicable codes
and all requirements of responsible agencies and will make any changes to the
Construction Documents which are required for issuance of all permits and legal
authorizations needed to construct the Project.
E. CONSTRUCTION BID/AWARD PHASE
1. After receiving written authorization from the Owner, the Design
Consultant shall proceed with the Construction Bid/Award Phase. There may be
more than one Construction Bid/Award Phase, depending upon the Management Plan.
2. The Design Consultant shall prepare such clarifications and addenda to
the bidding documents as may be required. The Design Consultant will provide
these to the Owner.
3. The Project Manager will schedule and conduct Prebid Conferences with
prospective bidders to review the Project requirements. The Design Consultant
shall provide knowledgeable representatives, including representatives of its
consultants, to participate in these conferences to explain and clarify Bidding
Documents. Within two days after the Prebid Conference the Design Consultant
shall deliver to the Owner, if needed, a final Addendum.
4. The Design Consultant shall assist the Project Manager and the Owner in
obtaining or evaluating bids or negotiating proposals and preparing
recommendations for the Owner concerning the contract award.
5. Should first bidding or negotiation produce prices in excess of the
approved budget, the Design Consultant shall participate with the Project
Manager in such rebidding, renegotiation, and redesign, at no additional expense
to the Owner, as may be necessary to obtain price(s) within the approved budget
or price(s) acceptable to the Owner. The Owner will assist in redesign
decisions. All redesign must be approved by the Owner.
6. Should the Design Consultant redesign or conduct rebidding under its
responsibilities set out in the preceding paragraph, its Construction Phase and
Post Construction Phase services shall be extended to take redesign/rebid delays
into account at no additional expense to the Owner.
7. The Design Consultant shall assist the Project Manager in the
preparation of the Agreement(s) Between Owner and Contractor(s) for the Owner's
execution. The Project Manager will coordinate award(s) and Notice(s) to
Proceed for the Owner.
<PAGE> D9
F. CONSTRUCTION PHASE
1. The Construction Phase for each portion of the Project will commence
with the award of the Construction Contract and will terminate when the
Substantial Completion payment is made by the Owner.
2. The Design Consultant shall consult with the Project Manager and the
Owner and participate in all decisions as to the acceptability of subcontractors
and other persons and organizations proposed by the Contractor for various
portions of the work.
3. The Design Consultant shall review and approve shop drawings, samples,
and other submissions of Contractor(s) as well as the Work performed by the
Contractor(s) for conformance with the design concept of the Project and for
compliance with the Contract Documents. The review and return of submittals
shall be accomplished by the Design Consultant within fourteen (14) calendar
days from date of receipt except when authorized by the Project Manager.
4. The Project Manager will establish with the Design Consultant procedures
to be followed for review and processing of all shop drawings, catalog
submissions, Project reports, test reports, maintenance manuals, and other
necessary documentation, as well as requests for changes and applications for
extensions of time.
5. The Design Consultant shall, when requested by the Project Manager,
prepare Change Order documentation.
6. The Design Consultant shall render to the Project Manager, within two
(2) working days unless otherwise authorized by the Project Manager,
interpretations of requirements of the Contract Documents. The Design
Consultant shall make all interpretations consistent with the intent of and
reasonably inferable from the Contract Documents. The Design Consultant's
decision in matters relating to artistic effect shall be final if consistent
with the intent of the Contract Documents.
7. Should errors, omissions or conflicts in the drawings, specifications or
other Contract Documents by the Design Consultant be discovered, the Design
Consultant will prepare and submit to the Project Manager, within two (2)
working days unless otherwise authorized by the Project Manager, such amendments
or supplementary documents and provide consultation as may be required, for
which the Design Consultant shall make no additional charges to the Owner.
8. The Project Manager, as the exclusive representative of the Owner
throughout this Contract, shall be the single point of contact with any and all
Contractors, except when the Project Manager or the Owner shall direct the
Design Consultant otherwise. All instructions to the Contractor(s) shall be
issued by and through the Project Manager except when the Design Consultant is
directed otherwise by the Project Manager.
<PAGE> D10
9. The Design Consultant will have access to the Work at all times. All site
visits, observations and other activities by the Design Consultant shall be
coordinated through the Project Manager.
10. The Design Consultant and its consultants (including, but not limited
to, the structural, mechanical and electrical disciplines) shall make such
periodic visits to the Project site as may be necessary to familiarize
themselves generally with the progress and quality of the Work and to determine
in general if the Work is proceeding in accordance with the Contract Documents.
On the basis of such on-site observations, the Design Consultant and its
consultants shall take the appropriate steps to guard the Owner against defects
and deficiencies in the Work of the Contractor. If the Design Consultant
observes any work that does not conform to the Contract Documents, the Design
Consultant shall immediately make an oral and written report of all such
observations to the Project Manager. The Design Consultant and its consultants
shall not be required to make exhaustive or full-time on-site observations to
check the quality or quantity of the Work, but shall make as many observations
as may be reasonably required to fulfill their obligations to the Owner. The
Design Consultant shall not be responsible for construction means, methods,
techniques, sequences or procedures, or safety precautions and programs in
connection with the Work, and shall not be responsible for the Contractor's
failure to carry out the Work in accordance with the Contract Documents.
11. Periodic visits of the Design Consultant shall be not less than once
weekly, timed to coincide with the weekly construction progress meeting with
the Contractor. Each engineering discipline shall make periodic visits not
less than once every two weeks, during the course of work applicable to its
discipline. During critical work phases, each engineering discipline may be
required to make periodic visits weekly, timed to coincide with the weekly
construction progress meeting. The engineering disciplines shall prepare and
submit a report on each visit, submitted via the Design Consultant to the
Project Manager within 3 working days of the visit.
12. The Design Consultant shall render written field reports relating to
the periodic visits and observations of the Project required by paragraph 11
within three (3) working days to the Project Manager in the form required by
the Project Manager.
13. Based upon observations at the site and upon the Contractor's
applications for payment, the Project Manager and Design Consultant shall
determine the amount owing to the Contractor(s), pursuant to the terms of the
Owner/Contractor Agreement, and shall issue Certificates for Payment to the
Owner in such amounts. The Project Manager shall consult with the Design
Consultant in the determination of the amount due the Contractor and the Design
Consultant shall sign the Certificate of Payment prior to the time it is
transmitted to the Owner by the Construction Program Manager.
<PAGE> D11
The Design Consultant's signing of a Certificate of Payment shall constitute a
representation by the Design Consultant to the Owner, based upon the Design
Consultant's observations at the site and the data comprising the Application
for Payment that the Work has progressed to the point indicated, that to the
best of the Design Consultant's knowledge, information and belief, the quality
of the Work appears to be in accordance with the Contract Documents (subject to:
an evaluation of the Work for conformance with the Contract Documents upon
Substantial Completion; the results of any subsequent tests required by the
Contract Documents; minor deviations from the Contract Documents correctable
prior to completion; and to any specific qualifications stated in the
Certificate for Payment), and that the Contractor is entitled to payment in the
amount certified. However, if it should later be found that the Contractor has
failed to comply with its contract with the Owner in any way or detail, such
failures and subsequent compliance shall be the sole responsibility of said
Contractor. By signing a Certificate for Payment to the Owner, the Design
Consultant shall not be deemed to represent that it has made any examination to
ascertain how and for what purpose the Contractor has used the monies paid on
account of the Construction Contract Sum.
14. If, in accordance with its duty, the Design Consultant advises the
Project Manager of non-conforming work as stated in paragraph 10, the Design
Consultant shall confirm the non-conformance in writing to the Project Manager
within two (2) days of observation.
15. The Project manager shall have authority to condemn or reject Work on
behalf of the Owner when in the Project Manager's or the Design Consultant's
opinion the Work does not conform to the Contract Documents. Whenever in the
Project Manager's or the Design Consultant's reasonable opinion it is considered
necessary or advisable to insure the proper implementation of the intent of the
Contract Documents, the Project Manager shall have the authority to require
special inspection or testing of any Work in accordance with the provisions of
the Contract Documents whether or not such Work is fabricated, installed or
completed.
16. The Design Consultant shall assist in obtaining governing agency
occupancy approval if any exceptions arise related to the design or specified
materials.
17. When the Owner and the Project Manager agree that the Work or portions
of the Work are substantially complete, the Design Consultant and its
consultants shall inspect the Work or portions of the Work and prepare and
submit to the Project Manager punchlists of the Work of the Contractor(s) which
is not in conformance with the Contract Documents. The Project Manager shall
transmit such punchlists to the Contractor(s). The Owner may request that the
Design Consultant inspect and prepare a punchlist on any portion of the Work.
G. POST CONSTRUCTION PHASE
<PAGE> D12
1. The Post Construction Phase will commence upon the issuance of the
Substantial Completion Certificate and shall be completed upon the expiration
of the guarantee/warranty period.
2. The Design Consultant shall prepare a set of reproducible record prints
of drawings showing significant changes in the Work made during the construction
process, based on neatly and clearly marked-up contract drawings, prints, and
other data furnished by the Contractor(s) and the applicable Addenda,
Clarifications, and Change Orders which occurred during the Project.
3. The Design Consultant shall provide assistance in the original
operation of any equipment or system such as initial start-up, testing,
adjusting and balancing.
4. The Design Consultant and/or its consultants shall observe and review
test data of the original operation of any equipment or system such as initial
start-up testing, adjusting and balancing to make sure that all equipment and
systems are properly installed and functioning in accordance with the design
and specifications.
5. The Design Consultant shall review the Contractor furnished maintenance
and operating instructions, schedules, guarantees, bonds, and certificates of
inspection as required by the Construction Documents and forward all approved
copies to the Project Manager for use by the Owner. In addition, the Design
Consultant shall conduct such observations as necessary to ensure all material
and equipment warranties are in compliance with applicable specifications.
6. The Design Consultant and its consultants shall conduct up to two (2)
comprehensive Final Completion inspections per construction contract at the
request of the Owner. If more than two (2) Final Completion inspections are
required, through no fault of the Design Consultant, the additional inspections
shall be deemed additional services.
7. Upon correction of the deficiency reports (punchlists), and acceptance
of all other close-out submittals and certificates of the Contractor, the
Project Manager and the Design Consultant shall approve the Application for
Final Payment and forward it to the Owner for execution.
8. The Design Consultant and its consultants shall conduct an inspection
of the Project ten (10) working days prior to warranty expiration and provide
to the Owner a written report specifying any warranty deficiencies which may
exist.
<PAGE> E1
EXHIBIT E
ADDITIONAL SERVICES
If any of the following Additional Services are authorized in advance by the
Owner in writing, the Design Consultant shall furnish or obtain from others the
authorized services. The Design Consultant shall be paid for these additional
services by the Owner as herein provided to the extent they exceed the
obligations of the Design Consultant under this Agreement.
1. Fully detailed presentation models or presentation renderings.
2. Providing financial feasibility or other special studies.
3. Providing planning surveys or alternative site evaluations.
4. Providing design services relative to base building upgrades by Landlord
to future facilities, systems and equipment which are not intended to be
constructed as part of the Project other than general planning and Master
Planning for future work as indicated by the Program of Requirements.
5. Making major revisions in Drawings, Specifications or other documents
when such revisions are inconsistent with written approvals or instructions
previously given by the Owner or are due to causes beyond the control and
without the fault and negligence of the Design Consultant or its consultants or
agents.
6. Preparing supporting data and other services in connection with an
Owner-initiated change order if the Basic Compensation is not commensurate with
the services required of the Design Consultant.
7. Providing operating and maintenance manuals, training personnel for
operation and maintenance, and consultation during operations other than initial
start-up.
8. Preparing to serve or serving as an expert witness for the Owner in
connection with any public hearing, arbitration proceeding or legal proceeding;
however, preparing to serve or serving as a fact witness for the Owner or
rendering testimony necessary to secure governmental approval of zoning or land
use clearances for the Project shall not constitute an additional service.
9. Providing services for interior furnishings, furniture and equipment or
graphics design (other than functional signage, which includes departmental,
support area and building core signage).
<PAGE> E2
10. Providing professional services made necessary by the default of a
Contractor or by major defects in the Work of the Contractor in the performance
of the Construction Contract.
11. Providing surveying services such as platting; mapping; subdivision
agreements or recording subdivision plats.
12. Providing additional or extended services during construction made
necessary by (a) defective work of the Contractor; (b) prolongation of the
Construction Contract time by more than 90 days, provided the prolongation is
not due to the fault or negligence of the Design Consultant, its employees,
consultants or agents and (c) default under the Construction Contract due to
delinquency or insolvency.
13. Providing extensive assistance in the initial start-up and test
operations of equipment or systems which is beyond the scope of that normally
required to insure proper operation in accordance with the design and
specifications.
14. Providing more than one (1) complete Substantial Completion (punch-list)
inspection attended by all disciplines and more than two (2) follow-up
inspections to determine Final Completion.
15. Providing additional services and costs necessitated by out-of-town
travel required by the Design Consultant and approved by the Owner other than
visits to the Project and other than for travel required to accomplish the Basic
Services.
16. Providing any other services not otherwise included in this Agreement
or not customarily furnished in accordance with generally accepted architectural
practices consistent with the terms of this Agreement.
17. As described in Exhibit B, providing interior design and engineering
services for mechanical, electrical, plumbing, and structural requirements of
interconnecting stairwell from the 33rd floor to the 35th floor; structural
requirements for new emergency generator; and architectural, mechanical,
electrical, plumbing, and structural requirements for replacing transformers on
floors 20-36. A Forty Thousand Dollar ($40,000.00) time-spent, not-to-exceed,
allowance is provided for through this Agreement for the three items described
in this paragraph.
<PAGE> E3
18. Hourly Rate Schedule for Additional Services:
Vice President $150.00
Senior Project Manager $120.00
Project Manager $105.00
Senior Project Architect/Engineer/Planner $95.00
Project Architect/Engineer/Planner $80.00
Senior Staff Architect/Engineer/Planner $65.00
Staff $50.00
Technical Assistant $40.00
Additional Services Authorizations
ASA 1 to 10 were not used.
ASA #11 Electrical Closet Upgrades $18,000.00
ASA #12 Structural Engineering for Generator $15,017.57
(Cooling Tower)
ASA #13 Design Consultants $10,427.02
ASA #14 Phase III Staircase $12,080.45
ASA #15 Miscellaneous Structural Analysis $ 3,926.00
ASA #16 Mechanical/Electrical Systems Options $ 5,000.00
ASA #17 Switch Floor 20 to 22 to Accommodate $ 5,520.00
Baltimore Sales
ASA #18 Corporate Tech(25th floor) planning $ 6,405.00
and document changes
ASA #19 Re-stack and Re-planning $23,252.29
ASA #20 Structural Engineering for Dry Coolers $ 4,096.90
at Roof Design
ASA #21 Furniture Consulting Services $98,780.00
ASA #22 Work on B-1 $29,603.50
ASA #23 Work on 7th Floor $43,255.00
ASA #24 Stairs between 19th and 20th floor $19,264.20
ASA #25 Revisions to CD persuant to Walsh-Lowe $ 3,560.00
ASA #26 not used
ASA #27 Revisions to Floors 7, 26, & 32 $28,966.90
ASA #28 not used
ASA #29 Changes after issue of Phase I, II CD S $46,344.60
ASA #30 Changes after 7/14/97 $41,749.68
ASA #31 not used
ASA #32 Cafeteria $20,668.65
ASA #33 Changes in Project Phasing $23,318.00
ASA #34 Changes during I & II CDS $36,115.00
ASA #35 MEP Engineering for Bulletins $10,500.00
ASA #36 MEP Engineering for 34/35 Electrical Rev $4,225.32
Signage $34,009.58
TOTAL $544,085.66
**********Earliest Invoice 8/1/96
**********Latest Invoice 2/28/98
Exhibit 21
List of Subsidiaries
Name of Subsidiary State of Incorporation
Legg Mason Wood Walker, Incorporated. . . . . . . . . .Maryland
Howard Weil Financial Corporation . . . . . . . . . . .Louisiana
Howard, Weil, Labouisse, Friedrichs Incorporated (1). .Louisiana
Western Asset Management Company. . . . . . . . . . . .California
Legg Mason Real Estate Services, Inc. . . . . . . . . .Pennsylvania
Legg Mason Dorman & Wilson, Inc . . . . . . . . . . . .Maryland
Legg Mason Merchant Banking, Inc. . . . . . . . . . . .Maryland
Legg Mason Fund Adviser, Inc. . . . . . . . . . . . . .Maryland
Legg Mason Capital Management, Inc. . . . . . . . . . .Maryland
Legg Mason Realty Group, Inc. . . . . . . . . . . . . .Maryland
Legg Mason Mortgage Capital Corporation . . . . . . . .Maryland
Legg Mason Trust Company. . . . . . . . . . . . . . . .Maryland
LM Financial Partners, Inc. . . . . . . . . . . . . . .Maryland
Fairfield Group, Inc. . . . . . . . . . . . . . . . . .Pennsylvania
GSH & Co., Inc. . . . . . . . . . . . . . . . . . . . .New York
Gray, Seifert & Co., Inc. (2) . . . . . . . . . . . . .New York
Batterymarch Financial Management, Inc. . . . . . . . .Maryland
Orchard Financial Services, Inc. . . . . . . . . . . .Maryland
Bartlett & Co. . . . . . . . . . . . . . . . . . . . .Ohio
Bartlett Real Estate, Inc. (3). . . . . . . . . . . . .Ohio
Legg Mason Holdings Limited . . . . . . . . . . . . . .England
and Wales
Western Asset Global Management Limited (4) . . . . . .England
and Wales
Brandywine Asset Management, Inc. . . . . . . . . . . .Delaware
______________________________
(1) Subsidiary of Howard Weil Financial Corporation
(2) Subsidiary of GSH & Co., Inc.
(3) Subsidiary of Bartlett & Co.
(4) Subsidiary of Legg Mason Holdings Limited
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Legg Mason, Inc. and Subsidiaries on Form S-8 (File Nos. 2-87754;
33-20027; 33-28609; 33-45453; 33-48239; 33-55814; 33-61441; 33-61445; 333-08721
and 333-45307) and on Form S-3 (Files Nos. 333-00151 and 333-44475) of our
reports dated May 4,1998, on our audits of the consolidated financial statements
and financial statement schedule of Legg Mason, Inc. and Subsidiaries as of
March 31, 1998 and 1997, and for each of the three years in the period ended
March 31, 1998, which reports are included in the Annual Report on Form 10-K.
Baltimore, Maryland
June 29, 1998
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<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 206,245,000
<RECEIVABLES> 713,391,000
<SECURITIES-RESALE> 175,623,000
<SECURITIES-BORROWED> 448,453,000
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<PP&E> 51,991,000
<TOTAL-ASSETS> 2,832,329,000
<SHORT-TERM> 13,880,000
<PAYABLES> 1,568,281,000
<REPOS-SOLD> 0
<SECURITIES-LOANED> 453,030,000
<INSTRUMENTS-SOLD> 14,132,000
<LONG-TERM> 99,628,000
0
0
<COMMON> 2,753,000
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