Revenue Share Agreement For Royce

BY AND AMONG


LEGG MASON, INC.,


ROYCE & ASSOCIATES, INC.,


AND


THE PRINCIPAL OFFICERS NAMED BELOW


THIS REVENUE SHARING AGREEMENT ("Agreement") is made and entered into as of July 16, 2001, by and among Legg Mason, Inc., a Maryland corporation ("Legg Mason"); Royce & Associates, Inc., a New York corporation ("R&A," and together with all its existing and future subsidiaries (each, a "Subsidiary" and, collectively, the "Subsidiaries") "Royce"); Charles M. Royce ("CMR"); W. Whitney George; and John D. Diederich, who are the principal officers of R&A (collectively, the "Principal Officers.")


WHEREAS, pursuant to the Stock Purchase Agreement dated as of July 16, 2001, by and among Legg Mason, R&A, the shareholders of R&A, and Royce Management Company ("RMC") (the "Stock Purchase Agreement"), at the Closing (as defined in the Stock Purchase Agreement) (the "Closing"), Legg Mason will acquire from the shareholders of R&A all of the outstanding capital stock of R&A (the "Transaction");


WHEREAS, prior to the Closing, all of the assets and liabilities of RMC will be transferred to a limited liability company ("New RMC") that is a wholly owned subsidiary of R&A;


WHEREAS, prior to the Closing, certain employees of Royce will enter into agreements with New RMC relating to the entitlement of such employees to participate in carried interests received by New RMC from certain limited partnerships for which New RMC acts as the general partner;


WHEREAS, the parties desire to afford the management of R&A discretion with respect to the day-to-day operations of Royce in light of existing management's demonstrated ability to manage Royce profitably; and


WHEREAS, the parties hereto desire to enter into certain agreements regarding revenues, expenses and management of Royce deemed necessary by the parties to foster the continued growth and expansion of Royce's business, such agreements to become effective as of, and subject to the occurrence of, the Closing; and


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NOW, THEREFORE, in consideration of the mutual premises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows;


1. Revenues.


(a) Definition of Gross Revenues. The term "Gross Revenues" shall mean, for any period, the consolidated gross revenues of R&A and its Subsidiaries (less any portion thereof attributable to any minority equity interest in a Subsidiary held by a third party other than an employee of R&A or any of its Subsidiaries) from whatever source derived, calculated on an accrual basis in accordance with generally accepted accounting principles consistently applied ("GAAP") (but also shall include (X) the amount by which any judgments, awards, settlement amounts, indemnification payments or insurance proceeds received exceed any Company Expenditures incurred or made in respect of the events giving rise to any such judgment, award, settlement amount,indemnification payment or insurance proceeds, and (Y) all annual gross revenues of New RMC constituting "carried interests" and other performance-related fees); provided, however, that Gross Revenues shall not include all or any proceeds received by R&A during such period from any transaction or series of transactions pursuant to which: (A) R&A undergoes a change of control constituting an "assignment" of its investment advisory contracts within the meaning of the Investment Company Act of 1940 (which change of control does not result from a change of control of Legg Mason), or (B) R&A ceases to serve (directly or through a Subsidiary) as the primary investment adviser to substantially all of the investment management clients of Royce existing immediately following the Closing, which proceeds shall be distributed in their entirety to Legg Mason; and, provided, further, that Gross Revenues shall not include (i) the amount of any judgments, awards, settlement amounts,indemnification payments (other than those distributions and other payments described in clause (iii) of this proviso, which shall be treated in the manner provided for in clause (iii) below) or insurance proceeds up to the amount that is the equal to the Company Expenditures incurred or made in respect of the events giving rise to such judgment, award, settlement amount, indemnification payment or insurance proceeds (and such amounts shall be added directly to Retained Operating Revenues in their entirety for the fiscal quarter in which such judgment, award, settlement amount, indemnification payment, or insurance proceeds is recorded in accordance with GAAP, and shall not be included in calculating the amount of any Legg Mason Distribution); (ii) any fees or reimbursements paid pursuant to a plan established under Rule 12b-1 under the Investment Company Act of 1940 ("Rule 12b-1 Fees"), or any front-end or back-end sales loads or other similar sales charges ("Sales Charges"), in either such case received by Royce from any registered investment company or its shareholders, to the extent that such 12b-1 Fees or Sales Charges are offset by payments to third parties in respect of distribution and/or shareholder servicing (and that portion of such fees and reimbursements shall be added directly to Retained Operating Revenues in its entirety for the fiscal quarter in which such third-party payments are incurred or made and utilized to pay or provide for such third-party payments, and shall not be included in calculating the amount of any Legg Mason Distribution); or (iii) the amount of any capital contribution made to R&A by Legg Mason pursuant to Section 1.3(e) of the Stock Purchase Agreement following Legg Mason having received a distribution or other payment (whether received from the Applicable Cost Overruns Escrow Account Deposit (as defined therein) or directly from the R&A Shareholders (as defined therein)) in respect of Applicable Cost Overruns (as defined


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therein) pursuant to the provisions of Section 1.3 of the Stock Purchase Agreement (and the amount of each such capital contribution shall (for purposes of this Agreement and the Stock Purchase Agreement) be added directly to Retained Operating Revenues in its entirety for the fiscal year in which the Company Expenditures constituting Applicable Cost Overruns are incurred or made and utilized to pay or provide for such Company Expenditures in the manner provided for in the second sentence of Section 1(c) hereof, and shall not be included in calculating the amount of any Legg Mason Distribution).


(b) Allocation of Gross Revenues. For each of R&A's fiscal quarters (or portion thereof) commencing on or after the Effective Date during the term of this Agreement:


(i) R&A shall distribute or cause to be distributed to Legg Mason 35% of the Gross Revenues for such fiscal quarter (the "Legg Mason Distribution") subject to any adjustments required pursuant to paragraph (e) below; and


(ii) R&A shall retain as Retained Operating Revenues 65% of the Gross Revenues for such fiscal quarter. Gross Revenues less the Legg Mason Distribution are referred to herein as "Retained Operating Revenues" (provided that Retained Operating Revenues for any fiscal quarter also shall have added directly to it any amounts contemplated to be added directly thereto for such fiscal quarter by the final proviso to Section 1(a) hereof).


R&A shall make distributions of the Legg Mason Distribution within five (5) business days after the determination of the amount of the Legg Mason Distribution pursuant to Section 1(e) below. Each Subsidiary shall timely make any distributions to R&A which are required for R&A to make distributions of the Legg Mason Distribution. R&A shall have the same fiscal year-end as Legg Mason during the period that it is a direct or indirect subsidiary of Legg Mason.


(c) Retained Operating Revenues.


(i) Retained Operating Revenues for any period shall be applied by R&A to pay and provide for all of Royce's expenses and expenditures during such period, which shall be determined in accordance with GAAP ("Company Expenditures"), including, without limitation: (A) all salaries (and other compensation) and employee benefits of employees of R&A or a Subsidiary, including, without limitation, the Principal Officers, and including, without limitation, any payments required to be made to any employee or former employee pursuant to the terms of an employment agreement between R&A or a Subsidiary and the employee (each, an "Employment Agreement" and, collectively, the "Employment Agreements")); (B) all liabilities of R&A or its Subsidiaries to third parties (other than Legg Mason); (C) all intercompany liabilities (excluding interest and any other payments owed to Legg Mason on debt incurred in connection with the Transaction) from Royce to Legg Mason or its subsidiaries, other than Royce (Legg Mason and its subsidiaries other than Royce are individually referred to as a "Legg Entity," and collectively, as the "Legg Entities"), including, without limitation, reasonable expenses incurred by Legg Entities upon authorization by R&A; (D) all liabilities of R&A or its Subsidiaries for federal, state or local taxes, licenses or registration


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fees pertaining to the operations of Royce after the Closing (except for any federal, state or local taxes on income of R&A or its Subsidiaries and the Legg Entities, which shall be the responsibility of Legg Mason and shall not be treated as an expense of Royce); (E) depreciation and amortization (other than the amortization of intangible assets resulting from the Transaction); (F) minor capital expenditures (which shall be expensed and not capitalized); (G) interest payments to Legg Mason pursuant to (I) any working capital loan from Legg Mason (as contemplated by Section 1(f) hereof) and (II) the funding of any capital expenditures as contemplated by Section 1(c)(ii) hereof; and (H) any payments or allocations to employee non-managing members of New RMC of carried interests and other performance-related fees in which any such person may participate directly as a member of New RMC.


Without limiting the general nature of the foregoing, "Company Expenditures" for a particular period shall include (without limitation) the amount of any expenses or expenditures incurred or made during such period constituting Applicable Cost Overruns (as defined in the Stock Purchase Agreement) (and the amount of the related capital contribution made to R&A by Legg Mason that was excluded from Gross Revenues pursuant to clause (iii) of the final proviso of Section 1(a) and added directly to Retained Operating Revenues for such period shall be used in such period to pay or provide for such Company Expenditures giving rise to Applicable Cost Overruns).


For purposes of this Agreement, a "minor capital expenditure" shall mean any single expenditure for real or personal property in the amount of $500 or less. The Principal Officers will use their commercially reasonable efforts not to cause R&A or a Subsidiary to enter into any contractual obligation that would reasonably be expected to cause R&A to exceed its ability to pay or provide for them when due out of Retained Operating Revenues.


(ii) If the President of R&A (the "President") determines to request the funding of non-minor capital expenditures by Legg Mason, such funding shall be discussed in advance by Legg Mason and the President. If Legg Mason agrees to fund a non-minor capital expenditure, such expenditure shall be amortized on the books and records of R&A over a period of time determined in accordance with Legg Mason's practice current at the time of the expenditure consistent with GAAP, and Legg Mason's funding of such expenditure shall be repaid to Legg Mason in accordance with the amortization schedule, together with interest at the rate specified in Section 1(f)(iii) herein or such other rate agreed to by the parties. Legg Mason shall be under no obligation to agree to fund any capital expenditure, and any failure of Legg Mason to so agree shall not constitute a breach of this Agreement. In the event that Legg Mason determines not to fund a non-minor capital expenditure, R&A may fund such non-minor capital expenditure from Retained Operating Revenues.


(d) Incentive Pool. To provide an incentive to the Principal Officers and other key employees of R&A, R&A shall establish an incentive compensation pool ("Incentive Pool"),which shall be equal to the balance (if any) of the Retained Operating Revenues remaining after subtraction of all Company Expenditures (other than the Incentive Pool)


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with respect to a fiscal year. The Incentive Pool shall be used by R&A to make cash bonus payments to such Principal Officers and key employees ("Incentive Pool Bonus Distributions"), and the entire Incentive Pool in the aggregate shall be paid as Incentive Pool Bonus Distributions with respect to each fiscal year. The Management Committee shall recommend to the Board of Directors of R&A (the "Board") the recipients and amounts of any Incentive Pool Bonus Distributions, and Incentive Pool Bonus Distributions shall be paid promptly following the completion of each fiscal year (and determination of amounts under Section 2(e) of this Agreement) upon (and subject to) approval by the Board of the recipients and individual bonus amounts to be received from the Incentive Pool for such fiscal year, which approval shall not be unreasonably delayed; provided, however, that, during the initial term of this Agreement, the aggregate portion of the Incentive Pool for any fiscal year to be paid to those Principal Officers and key employees of R&A ("Initial Senior Management Members") who were parties to Employment Agreements with R&A as of the Effective Date (but, for the avoidance of doubt, not the specific recipients of such aggregate portion of the Incentive Pool from among the Initial Senior Management Members, which shall remain subject to approval by the Board in its discretion) shall be jointly determined in good faith by (w) the Board and (x) CMR (for so long as CMR is employed by Royce) or the CMR Representative (as defined in the Stock Purchase Agreement) (following such time as CMR is no longer employed by Royce), each acting reasonably, provided that, in the event the Board and CMR or the CMR Representative (as applicable) are unable to jointly determine in good faith the aggregate portion of the Incentive Pool for any fiscal year to be paid to the Initial Senior Management Members (each acting reasonably), such aggregate portion shall be determined by the Board in good faith for such fiscal year, and provided, further, that, following such time as CMR is no longer employed by Royce, the consent of the CMR Representative shall not be required under this proviso in the event that the percentage of the total Incentive Pool to be paid to the Initial Senior Management Members in the aggregate for a particular fiscal year of R&A (other than the first fiscal year of R&A following the Effective Date) is at least equal to the percentage of the total Incentive Pool paid to the Initial Senior Management Members in the aggregate for the immediately preceding fiscal year of R&A; and provided, further, that any (I) Incentive Pool Bonus Distribution paid to an Initial Senior Management Member (other than CMR), or (II) Performance Bonus (as defined in the Employment Agreements) paid to an Initial Senior Management Member (other than CMR) that exceeds any minimum Performance Bonus contractually required (whether by a contractually specified minimum Performance Bonus dollar amount or a Performance Bonus formula expressly specified in such Employment Contract) to be paid to such Initial Senior Management Member under his or her Employment Agreement for the applicable fiscal year in respect of which it is paid (the aggregate amounts described in clauses (I) and (II) of this proviso with respect to such fiscal year, the "Applicable Compensation"), in either such case shall constitute (and be designated in writing to such Initial Senior Management Member as) an Early Special Bonus Payment (as such term is defined in the Employment Agreements) unless otherwise elected in writing by (y) CMR (for so long as CMR is employed by Royce) or (z) the Board (following such time as CMR is no longer employed by Royce) with the written consent of the CMR Representative, provided that, the consent of the CMR Representative under this proviso shall not be required if (I) the CMR Representative and the Board fail to agree on the designation of an amount as an Early Special Bonus Payment (each acting reasonably) after reasonable consultation, or the CMR Representative's consent is unreasonably withheld (in which case such percentage shall be determined for such fiscal year in good faith by


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the Board), or (II) following such time as CMR is no longer employed by Royce, with respect to a particular Initial Senior Management Member, the percentage of the Applicable Compensation paid to such Initial Senior Management Member for a particular fiscal year of R&A (other than the first fiscal year of R&A following the Effective Date) that is designated as an Early Special Bonus Payment is not less than the percentage of the Applicable Compensation paid to such Initial Senior Management Member for the immediately preceding fiscal year of R&A that was designated as an Early Special Bonus Payment. Notwithstanding anything to the contrary in this Agreement, no Incentive Pool Bonus Distributions shall be paid or committed unless and until R&A is current with respect to its required distributions of the Legg Mason Distribution, including the payment in full of principal ...