LEGG MASON INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2004

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 1-8529

LEGG MASON, INC.

(Exact name of registrant as specified in its charter)

MARYLAND	52-1200960
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
100 Light Street - Baltimore, MD	21202
(Address of principal executive offices)	(Zip code)
(410) 539-0000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X No _____

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

105,923,323 shares of common stock and 2,815,722 exchangeable shares as of the close of business on February 2, 2005. The exchangeable shares, which were issued by Legg Mason Canada Holdings in connection with the acquisition of Legg Mason Canada Inc., are exchangeable at any time into common stock on a one-for-one basis and entitle holders to dividend, voting and other rights equivalent to common stock.

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

	Three months		Nine months
	ended December 31,		ended December 31,
	2004	2003	2004	2003
Revenues
Investment advisory and related fees	$ 433,114	$ 326,458	$1,195,810	$ 850,095
Commissions	92,821	85,307	261,655	253,332
Principal transactions	39,302	39,922	121,707	124,275
Investment banking	39,044	34,259	96,702	104,946
Interest	32,229	21,145	79,472	63,006
Other	21,768	14,075	43,375	32,130
Total revenues	658,278	521,166	1,798,721	1,427,784
Interest expense	21,490	14,744	55,031	46,291
Net revenues	636,788	506,422	1,743,690	1,381,493
Non-Interest Expenses
Compensation and benefits	347,110	278,622	960,794	779,367
Communications and technology	27,776	22,871	78,938	67,438
Occupancy	17,127	16,001	51,828	48,491
Distribution and service fees	18,757	14,489	52,973	32,531
Amortization of intangible assets	5,464	5,412	16,367	16,270
Litigation award charge	-	-	-	17,500
Other	39,276	35,328	114,131	94,239
Total non-interest expenses	455,510	372,723	1,275,031	1,055,836
Earnings from Continuing Operations before Income Tax Provision	181,278	133,699	468,659	325,657
Income tax provision	68,568	52,866	177,873	126,974
Net Earnings from Continuing Operations	112,710	80,833	290,786	198,683
Discontinued operations, net of income taxes	-	-	-	675
Gain on sale of discontinued operations, net of income taxes	-	-	-	6,481
Net Earnings	$ 112,710	$ 80,833	$ 290,786	$ 205,839

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(continued)

(In thousands, except per share amounts)

(Unaudited)

	Three months		Nine months
	ended December 31,		ended December 31,
	2004	2003	2004	2003
Earnings per Common Share
Basic:
Continuing operations	$ 1.10	$ 0.80	$ 2.85	$ 1.99
Discontinued operations	-	-	-	0.01
Gain on sale of discontinued operations	-	-	-	0.06
	$ 1.10	$ 0.80	$ 2.85	$ 2.06

Diluted:
Continuing operations	$ 0.98	$ 0.71	$ 2.55	$ 1.78
Discontinued operations	-	-	-	-
Gain on sale of discontinued operations	-	-	-	0.06
	$ 0.98	$ 0.71	$ 2.55	$ 1.84

Weighted Average Number of Common Shares Outstanding:
Basic	102,771	100,611	102,087	99,999
Diluted	116,401	114,771	115,554	113,598

Dividends Declared per Common Share	$ 0.15	$ 0.10	$ 0.40	$ 0.27

Book Value per Common Share, at end of period			$ 19.94	$ 14.50

See Notes to Consolidated Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

	December 31, 2004 (Unaudited)	March 31, 2004
Assets
Cash and cash equivalents	$ 828,945	$ 868,060
Cash and securities segregated for regulatory purposes or deposited with clearing organizations	2,458,045	2,876,413
Securities purchased under agreements to resell	175,000	-
Receivables:
Customers	1,212,167	1,104,830
Investment advisory and related fees	257,779	202,845
Brokers and dealers	92,537	70,067
Others	72,291	79,941
Securities borrowed	451,674	568,399
Trading assets, at fair value	364,773	264,095
Investment securities, at fair value	72,224	38,275
Equipment and leasehold improvements, net	98,221	91,753
Intangible assets, net	464,325	444,434
Goodwill	991,600	466,207
Other	193,646	187,662
Total Assets	$ 7,733,227	$ 7,262,981
Liabilities and Stockholders’ Equity
Liabilities
Payables:
Customers	$ 3,475,547	$ 3,576,059
Brokers and dealers	18,059	81,044
Securities loaned	330,959	487,717
Trading liabilities, at fair value	178,554	119,088
Accrued compensation	396,630	355,268
Other	350,157	289,957
Long-term debt	819,982	794,238
Total Liabilities	5,569,888	5,703,371
Commitments and Contingencies (Note 8)
Stockholders’ Equity
Common stock	10,566	6,655
Shares exchangeable into common stock	7,093	7,351
Additional paid-in capital	733,064	391,597
Deferred compensation and officer note receivable	(27,316)	(30,224)
Employee stock trust	(126,117)	(117,331)
Deferred compensation employee stock trust	126,117	117,331
Retained earnings	1,422,628	1,173,282
Accumulated other comprehensive income, net	17,304	10,949
Total Stockholders’ Equity	2,163,339	1,559,610
Total Liabilities and Stockholders’ Equity	$ 7,733,227	$ 7,262,981

See Notes to Consolidated Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

	Three months ended		Nine months ended
	December 31,		December 31,
	2004	2003	2004	2003
Net Earnings	$ 112,710	$ 80,833	$ 290,786	$ 205,839
Other comprehensive income (loss):
Foreign currency translation adjustment	6,037	6,067	6,356	11,527
Unrealized gains (losses) on investment securities:
Unrealized holding gains (losses) arising during the period	37	93	(40)	(102)
Reclassification adjustment for (gains) losses included in net income	-	-	20	(88)
Net unrealized gains (losses) on investment securities	37	93	(20)	(190)
Unrealized gains on cash flow hedges:
Unrealized holding gains arising during the period	-	-	-	743
Reclassification adjustment for losses realized in net income	-	-	-	1,672
Net unrealized gain	-	-	-	2,415
Deferred income taxes	(16)	(37)	19	(846)
Total other comprehensive income	6,058	6,123	6,355	12,906
Comprehensive Income	$ 118,768	$ 86,956	$ 297,141	$ 218,745

See Notes to Consolidated Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine months ended December 31,
	2004	2003
Cash Flows from Operating Activities
Net earnings	$ 290,786	$ 205,839
Non-cash items included in earnings:
Depreciation and amortization	40,417	36,694
Accretion and amortization of securities discounts and premiums, net	6,137	5,623
Originated mortgage servicing rights	-	(919)
Deferred compensation	14,435	11,714
Unrealized gains on firm investments	(3,513)	(2,522)
Other	54	1,344
Deferred income taxes	39,799	(7,943)
Gain on sale of discontinued operations	-	(10,861)
Sales (purchases) of trading investments, net	(30,789)	3,728
Decrease (increase) in assets excluding acquisitions:
Cash and securities segregated for regulatory purposes or deposited with clearing organizations	418,368	(62,324)
Receivables from customers	(107,337)	(114,995)
Receivables for investment advisory and related fees	(54,349)	(64,131)
Receivables from brokers and dealers and other	(14,336)	(19,547)
Securities borrowed	116,725	(161,246)
Trading assets	(100,678)	(148,292)
Other	12,144	(2,907)
Increase (decrease) in liabilities excluding acquisitions:
Payables to customers	(100,512)	281,689
Payables to brokers and dealers	(62,985)	(43,492)
Securities loaned	(156,758)	46,262
Trading liabilities	59,466	103,261
Accrued compensation	41,098	39,684
Other	13,836	106,076
Cash Provided by Operating Activities	422,008	202,735

LEGG MASON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)

(Dollars in thousands)

(Unaudited)

	Nine months ended December 31,
	2004	2003
Cash Flows from Investing Activities
Payments for:
Equipment and leasehold improvements	(40,747)	(25,422)
Acquisitions, net of cash acquired	(56,451)	(4,153)
Contractual acquisition earnouts	(502,500)	-
Proceeds from sale of assets	10,362	63,531
Net (increase) decrease in securities purchased under agreements to resell	(175,000)	35,000
Purchases of investment securities	(8,037)	(18,011)
Proceeds from sales and maturities of investment securities	8,303	13,233
Cash Provided by (Used for) Investing Activities	(764,070)	64,178

Cash Flows from Financing Activities
Net decrease in short-term borrowings	-	(29,478)
Net proceeds from issuance of long-term debt	51,583	-
Repayment of principal on long-term debt	(31,583)	-
Issuance of common stock (Note 6)	357,154	55,073
Repurchase of common stock	(40,729)	(30,388)
Dividends paid	(36,164)	(25,001)
Cash Provided by (Used for) Financing Activities	300,261	(29,794)
Effect of Exchange Rate Changes on Cash	2,686	2,529
Net Increase (Decrease) in Cash and Cash Equivalents	(39,115)	239,648
Cash and Cash Equivalents at Beginning of Period	868,060	690,752
Cash and Cash Equivalents at End of Period	$ 828,945	$ 930,400

SUPPLEMENTARY DISCLOSURE:

Non-cash activity:

In connection with the sale of the mortgage banking and servicing business of Legg Mason Real Estate Services during the nine months ended December 31, 2003, Legg Mason received a $6,900 non-interest bearing note due September 30, 2007, with a net present value of $5,100.

See Notes to Consolidated Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts, unless otherwise noted)

December 31, 2004

(Unaudited)

1. Interim Basis of Reporting

The accompanying unaudited interim consolidated financial statements of Legg Mason, Inc. and its subsidiaries (collectively "Legg Mason") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The interim consolidated financial statements have been prepared using the interim basis of reporting and, as such, reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. The nature of our business is such that the results of any interim period are not necessarily indicative of the results for a full year.

The information contained in the interim consolidated financial statements should be read in conjunction with our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission. Where appropriate, the prior year's financial statements have been reclassified to conform to the current year’s presentation. Unless otherwise noted, all per share amounts include both common shares of Legg Mason and shares issued in connection with the acquisition of Legg Mason Canada Inc., which are exchangeable into common shares of Legg Mason on a one-for-one basis at any time.

The preparation of interim consolidated financial statements requires management to make assumptions and estimates that affect the amounts reported in the interim consolidated financial statements and accompanying notes. Actual amounts could differ from those estimates and the differences could have a material impact on the interim consolidated financial statements.

Terms such as "we," "us," "our," and "company" refer to Legg Mason.

2. Significant Accounting Policies

Special Purpose Entities

In the normal course of our business activities, we are the general partner, and in some cases a limited partner, in investment partnerships and are the investment manager and/or managing member in limited liability companies and offshore investment vehicles. These entities are primarily vehicles to facilitate investments by our customers in many types of investment strategies including real estate, equity and fixed income portfolios. Our exposure to risk in these entities is generally limited to any equity investment we have made and any earned but uncollected management fees. Uncollected fees from these entities were not material at December 31, 2004.

The following lists Variable Interest Entities ("VIEs") in which we believe we have a variable interest but are not the primary beneficiary and, therefore, these VIEs are not subject to consolidation by us:

Entity Type	Number of Entities	Total Assets*	Legg Mason's Equity Investment at December 31, 2004*	Legg Mason's Remaining Capital Commitments*
Trusts	40	$ 5,734	$ 23	$ -
Collateralized Debt Obligations	7	4,084	-	-
Limited Partnerships/REITS	11	628	20	10
Offshore Investment Vehicles ⁽¹⁾	2	109	-	-
Limited Liability Companies ⁽¹⁾	1	25	-	-
TOTAL	61	$ 10,580	$ 43	$ 10
* in millions

(1) Excludes one offshore investment vehicle and three limited liability companies in which one of our asset management subsidiaries has approximately $17.5 million invested by its long-term incentive plan. We do not have a direct variable interest since we do not earn any fees on these assets.

During April 2004, we provided a $1,200 subordinated loan to an unaffiliated entity, which became the sole equity investor in a VIE. The VIE simultaneously issued $31,583 of debt instruments to third-party investors. As a result of our loan to the sole equity investor in the VIE, we considered ourselves the primary beneficiary of the VIE under Financial Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 46, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51.” Accordingly, we were required to consolidate this entity as of, and for the six months ended, September 30, 2004. In October 2004, the subordinated loan was repaid and, as a result, we are no longer required to consolidate this VIE.