LM_10Q_12.31.2013


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, 2013
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 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 International Drive - Baltimore, MD
 
21202
(Address of principal executive offices)
 
(Zip code)
 
 
 
(410) 539-0000
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes
X
 
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
X
 
Accelerated filer
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
 
No
X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
119,104,334 shares of common stock as of the close of business on January 30, 2014.




PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
 
 
December 31, 2013
 
March 31, 2013
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
805,338

 
$
933,036

Cash and cash equivalents of consolidated investment vehicles
 
15,223

 
46,541

Restricted cash
 
21,510

 
8,812

Receivables:
 
 
 
 
Investment advisory and related fees
 
377,970

 
350,726

Other
 
72,409

 
72,392

Investment securities
 
436,747

 
371,080

Investment securities of consolidated investment vehicles
 
26,181

 
24,792

Deferred income taxes
 
76,611

 
85,257

Other
 
53,274

 
48,239

Other assets of consolidated investment vehicles
 

 
1,987

Total Current Assets
 
1,885,263

 
1,942,862

Fixed assets, net
 
192,045

 
201,819

Intangible assets, net
 
3,166,698

 
3,177,562

Goodwill
 
1,240,735

 
1,269,165

Investments of consolidated investment vehicles
 
119,755

 
210,553

Deferred income taxes
 
216,593

 
279,361

Other
 
183,843

 
187,274

Other assets of consolidated investment vehicles
 
695

 
1,064

Total Assets
 
$
7,005,627

 
$
7,269,660

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Liabilities
 
 
 
 

Current Liabilities
 
 
 
 

Accrued compensation
 
$
364,945

 
$
351,965

Accounts payable and accrued expenses
 
193,261

 
214,803

Current portion of long-term debt
 
50,438

 
50,438

Other
 
120,063

 
74,940

Other liabilities of consolidated investment vehicles
 
771

 
10,320

Total Current Liabilities
 
729,478

 
702,466

Deferred compensation
 
48,264

 
56,809

Deferred income taxes
 
147,907

 
161,298

Other
 
170,999

 
204,446

Other liabilities of consolidated investment vehicles
 
2,046

 
2,930

Long-term debt
 
1,044,801

 
1,094,516

Long-term debt of consolidated investment vehicles
 
94,370

 
207,835

Total Liabilities
 
2,237,865

 
2,430,300

 
 
 
 
 
Commitments and Contingencies (Note 9)
 
 
 


 
 
 
 
 
Redeemable Noncontrolling Interests
 
21,058

 
21,009

 
 
 
 
 
Stockholders’ Equity
 
 
 
 
Common stock, par value $.10; authorized 500,000,000 shares; issued 119,026,094 shares in December 2013 and 125,341,361 shares in March 2013
 
11,903

 
12,534

Additional paid-in capital
 
3,235,298

 
3,449,190

Employee stock trust
 
(30,226
)
 
(32,623
)
Deferred compensation employee stock trust
 
30,226

 
32,623

Retained earnings
 
1,473,133

 
1,304,259

Appropriated retained earnings for consolidated investment vehicle
 
4,059

 
4,829

Accumulated other comprehensive income, net
 
22,311

 
47,539

Total Stockholders’ Equity
 
4,746,704

 
4,818,351

Total Liabilities and Stockholders’ Equity
 
$
7,005,627

 
$
7,269,660


See Notes to Consolidated Financial Statements

2



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
 
December 31,
 
 
2013
 
2012
 
2013
 
2012
Operating Revenues
 
 
 
 
 
 
 
 
Investment advisory fees:
 
 
 
 
 
 
 
 
Separate accounts
 
$
197,295

 
$
181,755

 
$
579,974

 
$
547,617

Funds
 
381,020

 
360,827

 
1,124,170

 
1,080,208

Performance fees
 
50,748

 
46,395

 
90,115

 
65,240

Distribution and service fees
 
88,299

 
83,083

 
259,380

 
246,621

Other
 
2,730

 
1,840

 
6,722

 
5,201

Total Operating Revenues
 
720,092

 
673,900

 
2,060,361

 
1,944,887

Operating Expenses
 
 
 
 
 
 
 
 
Compensation and benefits
 
322,553

 
308,248

 
912,936

 
881,002

Distribution and servicing
 
148,801

 
143,410

 
474,131

 
458,370

Communications and technology
 
38,702

 
38,400

 
117,069

 
111,861

Occupancy
 
30,904

 
31,072

 
82,635

 
88,642

Amortization of intangible assets
 
4,170

 
3,505

 
11,418

 
10,514

Impairment of intangible assets
 

 
734,000

 

 
734,000

Other
 
53,310

 
48,588

 
150,620

 
138,010

Total Operating Expenses
 
598,440

 
1,307,223

 
1,748,809

 
2,422,399

Operating Income (Loss)
 
121,652

 
(633,323
)
 
311,552

 
(477,512
)
Other Non-Operating Income (Expense)
 


 
 
 
 
 
 
Interest income
 
1,681

 
1,646

 
4,691

 
5,300

Interest expense
 
(12,690
)
 
(13,564
)
 
(38,617
)
 
(46,909
)
Other income (expense), net, including $68,975 debt extinguishment loss in May 2012
 
14,622

 
9,926

 
24,369

 
(34,052
)
Other non-operating income (expense) of consolidated investment vehicles, net
 
690

 
(3,449
)
 
5,698

 
(6,080
)
Total other non-operating income (expense)
 
4,303

 
(5,441
)
 
(3,859
)
 
(81,741
)
Income (Loss) Before Income Tax Provision (Benefit)
 
125,955

 
(638,764
)
 
307,693

 
(559,253
)
Income tax provision (benefit)
 
46,004

 
(180,214
)
 
90,949

 
(168,814
)
Net Income (Loss)
 
79,951

 
(458,550
)
 
216,744

 
(390,439
)
Less: Net income (loss) attributable to noncontrolling interests
 
(1,783
)
 
(4,680
)
 
907

 
(7,908
)
Net Income (Loss) Attributable to Legg Mason, Inc.
 
$
81,734

 
$
(453,870
)
 
$
215,837

 
$
(382,531
)
 
 
 
 
 
 
 
 
 
Net Income (Loss) per Share Attributable to Legg Mason, Inc. Common Shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.68

 
$
(3.45
)
 
$
1.76

 
$
(2.84
)
Diluted
 
$
0.67

 
$
(3.45
)
 
$
1.75

 
$
(2.84
)
 
 
 
 
 
 
 
 
 
Weighted Average Number of Shares Outstanding
 
 
 
 
 
 
 
 
Basic
 
120,583

 
131,534

 
122,920

 
134,770

Diluted
 
121,126

 
131,534

 
123,236

 
134,770

 
 
 
 
 
 
 
 
 
Dividends Declared per Share
 
$
0.13

 
$
0.11

 
$
0.39

 
$
0.33

See Notes to Consolidated Financial Statements

3



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(Unaudited)


 
 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
 
December 31,
 
 
2013
 
2012
 
2013
 
2012
Net Income (Loss)
 
$
79,951

 
$
(458,550
)
 
$
216,744

 
$
(390,439
)
Other comprehensive income (loss):
 


 


 


 


Foreign currency translation adjustment
 
(9,943
)
 
(7,107
)
 
(25,035
)
 
(12,576
)
Unrealized gains (losses) on investment securities:
 


 


 


 


Unrealized holding gains (losses), net of tax provision (benefit) of ($40), ($30), ($139) and $14, respectively
 
(60
)
 
(45
)
 
(208
)
 
21

Reclassification adjustment for losses included in net income
 
4

 
8

 
15

 
6

Net unrealized gains (losses) on investment securities
 
(56
)
 
(37
)
 
(193
)
 
27

Total other comprehensive loss
 
(9,999
)
 
(7,144
)
 
(25,228
)
 
(12,549
)
Comprehensive Income (Loss)
 
69,952

 
(465,694
)
 
191,516

 
(402,988
)
Less: Comprehensive income (loss) attributable to noncontrolling interests
 
(1,783
)
 
(4,680
)
 
907

 
(7,908
)
Comprehensive Income (Loss) Attributable to Legg Mason, Inc.
 
$
71,735

 
$
(461,014
)
 
$
190,609

 
$
(395,080
)
See Notes to Consolidated Financial Statements

4



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)


 
 
Nine Months Ended December 31,
 
 
2013
 
2012
COMMON STOCK
 
 
 
 
Beginning balance
 
$
12,534

 
$
13,987

Stock options and other stock-based compensation
 
67

 
7

Deferred compensation employee stock trust
 
5

 
6

Deferred compensation, net
 
104

 
175

Employee tax withholdings by net share transactions
 
(44
)
 
(30
)
Shares repurchased and retired
 
(763
)
 
(1,251
)
Ending balance
 
11,903

 
12,894

ADDITIONAL PAID-IN CAPITAL
 
 
 
 

Beginning balance
 
3,449,190

 
3,864,216

Stock options and other stock-based compensation
 
32,762

 
9,890

Deferred compensation employee stock trust
 
1,565

 
1,592

Deferred compensation, net
 
36,740

 
31,554

Employee tax withholdings by net share transactions
 
(13,910
)
 
(7,871
)
Shares repurchased and retired
 
(269,233
)
 
(315,372
)
Allocation from 2.5% Convertible Senior Notes repurchase, net of tax
 

 
(30,833
)
Redeemable noncontrolling interest reclassified for management equity plan vesting
 
(1,816
)
 

Ending balance
 
3,235,298

 
3,553,176

EMPLOYEE STOCK TRUST
 
 
 
 

Beginning balance
 
(32,623
)
 
(32,419
)
Shares issued to plans
 
(1,570
)
 
(1,598
)
Distributions and forfeitures
 
3,967

 
696

Ending balance
 
(30,226
)
 
(33,321
)
DEFERRED COMPENSATION EMPLOYEE STOCK TRUST
 
 
 
 

Beginning balance
 
32,623

 
32,419

Shares issued to plans
 
1,570

 
1,598

Distributions and forfeitures
 
(3,967
)
 
(696
)
Ending balance
 
30,226

 
33,321

RETAINED EARNINGS
 
 
 
 

Beginning balance
 
1,304,259

 
1,715,395

Net Income (Loss) Attributable to Legg Mason, Inc.
 
215,837

 
(382,531
)
Dividends declared
 
(46,963
)
 
(43,693
)
Ending balance
 
1,473,133

 
1,289,171

APPROPRIATED RETAINED EARNINGS FOR CONSOLIDATED INVESTMENT VEHICLE
 
 
 
 

Beginning balance
 
4,829

 
12,221

Net income (loss) reclassified to appropriated retained earnings
 
(770
)
 
(8,076
)
Ending balance
 
4,059

 
4,145

ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
 
 
 
 

Beginning balance
 
47,539

 
71,472

Net unrealized holding gains (losses) on investment securities
 
(193
)
 
27

Foreign currency translation adjustment
 
(25,035
)
 
(12,576
)
Ending balance
 
22,311

 
58,923

TOTAL STOCKHOLDERS’ EQUITY
 
$
4,746,704

 
$
4,918,309


See Notes to Consolidated Financial Statements

5



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

 
 
Nine Months Ended
 
 
December 31,
 
 
2013
 
2012
Cash Flows from Operating Activities
 
 
 
 
Net Income (Loss)
 
$
216,744

 
$
(390,439
)
2.5% Convertible Senior Notes:
 
 
 
 
Allocation of repurchase payment
 

 
(216,038
)
Loss on extinguishment
 

 
68,975

Adjustments to reconcile Net Income (Loss) to net cash provided by (used in) operations:
 
 
 
 
Impairment of intangible assets
 

 
734,000

Depreciation and amortization
 
48,243

 
49,807

Imputed interest for 2.5% Convertible Senior Notes
 

 
5,839

Accretion and amortization of securities discounts and premiums, net
 
2,276

 
2,531

Stock-based compensation
 
49,143

 
40,485

Net gains on investments
 
(19,898
)
 
(29,440
)
Net (gains) losses of consolidated investment vehicles
 
(4,066
)
 
8,182

Deferred income taxes
 
83,322

 
(174,229
)
Other
 
4,651

 
2,522

Decrease (increase) in assets:
 
 
 
 
Investment advisory and related fees receivable
 
(31,678
)
 
18,903

Net sales (purchases) of trading and other current investments
 
(29,646
)
 
201,316

Other receivables
 
9,689

 
(687
)
Other assets
 
(25,331
)
 
1,661

Other assets of consolidated investment vehicles
 
34,143

 
(6,725
)
(Decrease) increase in liabilities:
 
 
 
 
Accrued compensation
 
17,254

 
(174,850
)
Deferred compensation
 
(8,545
)
 
(14,639
)
Accounts payable and accrued expenses
 
(21,239
)
 
(12,158
)
Other liabilities
 
790

 
(23,826
)
Other liabilities of consolidated investment vehicles
 
(10,498
)
 
(1,514
)
Cash Provided by Operating Activities
 
315,354

 
89,676

Cash Flows from Investing Activities
 
 
 
 

Payments for fixed assets
 
(30,230
)
 
(28,230
)
Proceeds from sale of assets
 
1,351

 

Change in restricted cash
 
(13,196
)
 
(1,890
)
Purchases of investment securities
 
(3,030
)
 
(5,300
)
Proceeds from sales and maturities of investment securities
 
2,902

 
4,818

Purchases of investments by consolidated investment vehicles
 
(17,328
)
 
(81,761
)
Proceeds from sales and maturities of investments by consolidated investment vehicles
 
110,785

 
127,283

Cash Provided by Investing Activities
 
$
51,254

 
$
14,920

        

6



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)


 
 
Nine Months Ended
 
 
December 31,
 
 
2013
 
2012
Cash Flows from Financing Activities
 
 
 
 
Repayment of short-term borrowings
 
$

 
$
(250,000
)
Repayment of 2.5% Convertible Senior Notes, net of operating allocation
 

 
(1,040,212
)
Repayment of long-term debt
 
(50,439
)
 
(9,006
)
Proceeds from issuance of long-term debt
 

 
1,143,246

Debt issuance costs
 

 
(10,289
)
Issuance of common stock
 
20,120

 
1,489

Employee tax withholdings by net share transactions
 
(13,954
)
 
(7,901
)
Repurchase of common stock
 
(269,996
)
 
(316,623
)
Dividends paid
 
(46,256
)
 
(55,250
)
Repayment of principal on long-term debt of consolidated investment vehicle
 
(113,851
)
 
(32,820
)
Net redemptions/distributions paid to noncontrolling interest holders
 
(3,444
)
 
(2,523
)
Cash Used in Financing Activities
 
(477,820
)
 
(579,889
)
Effect of Exchange Rate Changes on Cash
 
(16,486
)
 
(1,244
)
Net Decrease in Cash and Cash Equivalents
 
(127,698
)
 
(476,537
)
Cash and Cash Equivalents at Beginning of Period
 
933,036

 
1,382,263

Cash and Cash Equivalents at End of Period
 
$
805,338

 
$
905,726


See Notes to Consolidated Financial Statements
  


7



LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts or unless otherwise noted)
December 31, 2013
(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 (“U.S. GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (the "SEC"). 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 statement of the results for the periods presented. 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.

The nature of Legg Mason's business is such that the results of any interim period are not necessarily indicative of the results of a full year. Certain disclosures included in the Company's annual report are not required to be included on an interim basis in the Company's quarterly reports on Forms 10-Q. The Company has condensed or omitted these disclosures. Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation.

The information contained in the interim consolidated financial statements should be read in conjunction with Legg Mason's latest Annual Report on Form 10-K filed with the SEC.

2. Significant Accounting Policies

Consolidation
In accordance with financial accounting standards on consolidation, Legg Mason consolidates and separately identifies certain sponsored investment vehicles, the most significant of which is a collateralized loan obligation entity (“CLO”).  The consolidation of these investment vehicles has no impact on Net Income (Loss) Attributable to Legg Mason, Inc. and does not have a material impact on Legg Mason's consolidated operating results.  The change in the value of these consolidated investment vehicles, which is recorded in Other Non-Operating Income (Expense), is reflected in Net Income (Loss), net of amounts allocated to noncontrolling interests.  Also, see Notes 4 and 12 for additional information regarding the consolidation of investment vehicles.

Income Taxes
In July 2012, The U.K. Finance Act 2012 was enacted, which reduced the main U.K. corporate tax rate from 25% to 24% effective April 1, 2012 and to 23% effective April 1, 2013. In July 2013, the Finance Bill 2013 was enacted, further reducing the main U.K. corporate tax rate to 21% effective April 1, 2014 and to 20% effective April 1, 2015. The reductions in the U.K. corporate tax rate resulted in tax benefits of $19,164 and $18,075, recognized in the quarters ended September 30, 2013 and 2012, respectively, as a result of the revaluation of existing deferred tax assets and liabilities at the new rates. As a result of the revaluation adjustments, the effective tax (benefit) rate for the nine months ended December 31, 2013 and 2012, was reduced by 6.2 percentage points and increased by 3.2 percentage points, respectively.

Noncontrolling Interests
For consolidated investment vehicles with third-party investors ("CIVs"), the related noncontrolling interests are classified as redeemable noncontrolling interests if investors in these funds may request withdrawals at any time. There were no nonredeemable noncontrolling interests as of December 31, 2013 or March 31, 2013. As noted above, Net income (loss) attributable to noncontrolling interests in the Consolidated Statements of Income (Loss) also includes Net income (loss) reclassified to Appropriated retained earnings for consolidated investment vehicle in the Consolidated Balance Sheets.


8



Net income (loss) attributable to noncontrolling interests for the three and nine months ended December 31, 2013 and 2012, included the following amounts:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2013
 
2012
 
2013
 
2012
Net income attributable to redeemable noncontrolling interests
 
$
779

 
$
350

 
$
1,677

 
$
168

Net loss reclassified to appropriated retained earnings for consolidated investment vehicle
 
(2,562
)
 
(5,030
)
 
(770
)
 
(8,076
)
Total Income (Loss)
 
$
(1,783
)
 
$
(4,680
)
 
$
907

 
$
(7,908
)

Redeemable noncontrolling interests as of and for the nine months ended December 31, 2013 and 2012, included the following amounts:
 
 
Nine Months Ended December 31,
 
 
2013
 
2012
Balance, beginning of period
 
$
21,009

 
$
24,031

Net income attributable to redeemable noncontrolling interests
 
1,677

 
168

Net redemptions/distributions paid to noncontrolling interest holders
 
(3,444
)
 
(2,523
)
Additional paid-in capital reclassified for management equity plan vesting
 
1,816

 

Balance, end of period
 
$
21,058

 
$
21,676


In conjunction with the December 2012 modification of employment and other arrangements with the employees of its subsidiary, The Permal Group, Ltd. (“Permal”), Legg Mason completed implementation of a management equity plan during the quarter ended June 30, 2013. The plan better aligns the interests of Permal's management with those of Legg Mason and its shareholders, and was part of the modifications which provide for, among other things, higher margins at specified higher revenue levels. The management equity plan entitles certain key employees of Permal to participate in 15% of the future growth, if any, of the Permal enterprise value (subject to appropriate discounts) subsequent to the date of grant. Current and future grants under the plan vest 20% annually for five years, over which the related grant-date fair value will be recognized as Compensation expense in the Consolidated Statements of Income. Once vested, plan units can be put to Legg Mason for settlement at fair value, beginning one year after the holder terminates their employment. Legg Mason can also call plan units, generally post employment, for settlement at fair value. Changes in control of Legg Mason or Permal do not impact vesting, settlement or other provisions of the units. However, upon sale of substantially all of Permal's assets, the vesting of plan units would accelerate and participants would receive a fair value payment in respect of their interests under the plan. Future grants of additional plan units will dilute the participation of existing outstanding units in 15% of the future growth of the Permal enterprise value, if any, subsequent to the related future grant date, for which additional compensation cost would be incurred. Further, future grants under the plan will not entitle the plan participants, collectively, to more than an aggregate 15% of the future growth of the Permal enterprise value. Upon vesting, the grant-date fair value of vested plan units will be reflected in the Consolidated Balance Sheets as redeemable noncontrolling interests through an adjustment to additional paid-in capital. Thereafter, redeemable noncontrolling interests will continue to be adjusted to the ultimate maximum estimated redemption value over the expected term, through retained earnings adjustments. See Note 8 for additional information.

Accumulated Other Comprehensive Income
There were no significant amounts reclassified from Accumulated other comprehensive income to the Consolidated Statements of Income (Loss) for the three or nine months ended December 31, 2013 or 2012.

Recent Accounting Developments
In June 2013, the Financial Accounting Standards Board ("FASB") updated the guidance for investment company entities. The update clarifies the characteristics of an investment company, provides comprehensive guidance for assessing whether an entity is an investment company, requires an investment company to measure noncontrolling ownership interests in other

9



investment companies at fair value rather than using the equity method, and requires additional disclosures. This update will be effective for Legg Mason in fiscal 2015. Legg Mason is evaluating its adoption.

In December 2013, the FASB ratified an Emerging Issues Task Force ("EITF") consensus that will update the guidance on measuring the financial assets and financial liabilities of consolidated collateralized financing entities. The update will require that an entity electing to apply the guidance should measure both the financial assets and financial liabilities using the fair value of the consolidated collateralized financing entity’s financial assets or financial liabilities, whichever is more observable. This update will also require certain disclosures by entities that apply its provisions and will be effective for Legg Mason in fiscal 2016, unless adopted earlier. Legg Mason is evaluating its adoption.

3. Acquisition

On March 13, 2013, Permal, a wholly-owned subsidiary of Legg Mason, completed the acquisition of all of the outstanding share capital of Fauchier Partners Management, Limited ("Fauchier"), a European based manager of funds-of-hedge funds, from BNP Paribas Investment Partners, S.A. in accordance with a Sale and Purchase Agreement ("SPA") entered into in December 2012. This transaction expanded Permal's institutional business, creating a global institutional capability across geographies and client profiles. At the time of acquisition Fauchier managed assets of approximately $5,400,000.

The initial purchase price was a cash payment of $63,433, using the exchange rate between the British pound and U.S. dollar at the acquisition date, and was funded from existing cash resources. In addition, contingent consideration of up to approximately $25,000 and approximately $33,000 (using the exchange rate between the British pound and the U.S. dollar as of December 31, 2013) may be due on or about the second and fourth anniversaries of closing, respectively, dependent on achieving certain levels of revenue, net of distribution costs, and subject to a catch-up adjustment on the fourth anniversary of closing. The contingent consideration liability established at closing had an acquisition date fair value of $21,566, which represented the present value of the contingent consideration expected to be paid. As of December 31, 2013, the fair value of the contingent consideration liability was $28,877, an increase of $6,977 from March 31, 2013, with $5,000 attributable to revised estimates of amounts that will be payable and $1,977 attributable to changes in the exchange rate. The contingent consideration liability is included in Other liabilities in the Consolidated Balance Sheet. The increase in the contingent consideration liability due to revised estimates of amounts that will be payable was recorded in Other expenses in the Consolidated Statements of Income (Loss) for the three and nine months ended December 31, 2013. Legg Mason has executed currency forwards to economically hedge the risk of movements in the exchange rate between the U.S. dollar and the British pound in which the estimated contingent liability payment amounts are denominated. See Note 11 for additional information regarding derivatives and hedging.

A summary of the acquisition-date fair values of the assets acquired and liabilities assumed are as follows:
Cash
 
$
8,156

Receivables
 
12,174

Amortizable asset management contracts
 
2,865

Indefinite-life fund management contracts
 
65,126

Goodwill
 
28,983

Other current liabilities, net
 
(16,667
)
Contingent consideration
 
(21,566
)
Deferred tax liability
 
(15,638
)
Total net assets acquired
 
$
63,433


The fair value of the amortizable asset management contracts is being amortized over a period of six years. None of the acquired intangible assets or goodwill are deductible for U.K. tax purposes.


10



Management estimated the fair values of the indefinite-life fund management contracts based upon discounted cash flow analyses, and the contingent consideration expected to be paid based upon probability-weighted revenue projections, using unobservable market data inputs, which are Level 3 measurements. As is typical with the acquisition of a portion of a business from a larger financial services firm with other related operations, Legg Mason expected some initial contraction in the acquired business. The significant assumptions used in these analyses at acquisition included projected annual cash flows, revenues and discount rates, are summarized as follows:

 
 
Projected Cash Flow Growth Rates
 
Discount Rate
Indefinite-life fund management contracts
 
(35)% to 11% (weighted-average: 6% )
 
16.0%
 
 
 
 
 
 
 
Projected Revenue Growth Rates
 
 
Contingent consideration
 
(16)% to 1% (weighted-average: (5)%)
 
2.0%

The revised contingent consideration estimate at December 31, 2013, considers the higher level of Fauchier performance fees to date and includes various scenarios with net revenue growth rates ranging from 0% to 8% (weighted-average 2%) and a discount rate of 2.7%.

The Company has not presented pro forma combined results of operations for this acquisition because the results of operations as reported in the accompanying Consolidated Statements of Income (Loss) would not have been materially different. The financial results of Fauchier included in Legg Mason's consolidated financial results for the three and nine months ended December 31, 2013, include revenues of $28,660 and $59,250, respectively. Fauchier operations have been integrated such that the related expenses are not readily identifiable.



11



4. Investments and Fair Values of Assets and Liabilities

The disclosures below include details of Legg Mason's assets and liabilities that are measured at fair value, excluding the assets and liabilities of CIVs. See Note 12, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the assets and liabilities of CIVs that are measured at fair value.

The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs:
 
 
As of December 31, 2013
 
 
Quoted prices in active markets
(Level 1)
 
Significant other observable
inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents(1):
 
 
 
 
 
 
 
 
Money market funds
 
$
393,186

 
$

 
$

 
$
393,186

Time deposits and other
 

 
110,036

 

 
110,036

Total cash equivalents
 
393,186

 
110,036

 

 
503,222

Current investments:
 
 

 
 

 
 

 
 

Trading investments relating to long-term incentive compensation plans(2)
 
109,231

 

 

 
109,231

Trading proprietary fund products and other investments(3)
 
227,107

 
74,117

 
193

 
301,417

Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments(4)(5)
 
12,387

 
13,712

 

 
26,099

Total current investments
 
348,725

 
87,829

 
193

 
436,747

Available-for-sale investment securities(6)
 
2,066

 
10,088

 

 
12,154

Investments in partnerships, LLCs and other(6)
 

 
2,693

 
26,094

 
28,787

Equity method investments in partnerships and LLCs(4)(6)
 

 

 
65,545

 
65,545

Derivative assets:
 
 
 
 
 


 
 

Currency and market hedges
 
6,026

 

 

 
6,026

Other investments(6)
 

 

 
88

 
88

Total
 
$
750,003

 
$
210,646

 
$
91,920

 
$
1,052,569

Liabilities:
 
 
 
 
 
 
 
 
  Contingent consideration liability(7)
 
$

 
$

 
$
(28,877
)
 
$
(28,877
)
Derivative liabilities:
 
 
 
 
 
 
 
 
Currency and market hedges
 
(5,950
)
 

 

 
(5,950
)
Total
 
$
(5,950
)
 
$

 
$
(28,877
)
 
$
(34,827
)



12



 
 
As of March 31, 2013
 
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents(1):
 
 
 
 
 
 
 
 
Money market funds
 
$
485,776

 
$

 
$

 
$
485,776

Time deposits and other
 

 
177,471

 

 
177,471

Total cash equivalents
 
485,776

 
177,471

 

 
663,247

Current investments:
 
 

 
 

 
 

 
 

Trading investments relating to long-term incentive compensation plans(2)
 
86,583

 

 

 
86,583

Trading proprietary fund products and other investments(3)
 
158,846

 
69,064

 
246

 
228,156

Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments(4)(5)
 
12,600

 
43,741

 

 
56,341

Total current investments
 
258,029

 
112,805

 
246

 
371,080

Available-for-sale investment securities(6)
 
2,034

 
10,354

 
12

 
12,400

Investments in partnerships, LLCs and other(6)
 
761

 
2,620

 
27,762

 
31,143

Equity method investments in partnerships and LLCs(4)(6)
 
1,518

 
924

 
66,338

 
68,780

Derivative assets:
 
 
 
 
 
 
 
 

Currency and market hedges
 
1,939

 

 

 
1,939

Other investments(6)
 

 

 
99

 
99

Total
 
$
750,057

 
$
304,174

 
$
94,457

 
$
1,148,688

Liabilities:
 
 
 
 
 
 
 
 
  Contingent consideration liability(7)
 
$

 
$

 
$
(21,900
)
 
$
(21,900
)
Derivative liabilities:
 
 
 
 
 
 
 
 
Currency and market hedges
 
(781
)
 

 

 
(781
)
Total
 
$
(781
)
 
$

 
$
(21,900
)
 
$
(22,681
)
(1)
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at net asset value ("NAV") and are classified as Level 1.  Cash investments in time deposits and other are measured at amortized cost, which approximates fair value because of the short time between the purchase of the instrument and its expected realization, and are classified as Level 2.
(2)
Primarily mutual funds where there is minimal market risk to the Company as any change in value is primarily offset by an adjustment to compensation expense and related deferred compensation liability.
(3)
Trading proprietary fund products and other investments primarily represent mutual funds that are invested approximately 52% and 48% in equity and debt securities, respectively, as of December 31, 2013, and were invested approximately 49% and 51% in equity and debt securities, respectively, as of March 31, 2013.
(4)
Substantially all of Legg Mason's equity method investments are investment companies which record their underlying investments at fair value.  Fair value is measured using Legg Mason's share of the investee's underlying net income or loss, which is predominately representative of fair value adjustments in the investments held by the equity method investee.
(5)
Includes investments under the equity method (which approximate fair value) relating to long-term incentive compensation plans of $13,712 and $43,741 as of December 31, 2013 and March 31, 2013, respectively, and proprietary fund products and other investments of $12,387 and $12,600 as of December 31, 2013 and March 31, 2013, respectively, which are classified as Investment securities on the Consolidated Balance Sheets.
(6)
Amounts are included in Other non-current assets on the Consolidated Balance Sheets for each of the periods presented.
(7)
See Note 3.

Proprietary fund products include initial cash investments made by Legg Mason to fund new investment strategies and products. The primary purpose of these "seed capital investments" is to generate an investment performance track record in a product in order to attract third-party investors. Legg Mason had investments in proprietary fund products which totaled $379,513 and $304,713, as of December 31, 2013 and March 31, 2013, respectively, which are substantially comprised of investments in 45 funds and 39 funds as of December 31, 2013 and March 31, 2013, respectively, that are individually

13



greater than $1,000 and together comprise over 90% of the seed capital investment total in each period. Legg Mason's initial investment in a new product typically represents 100% of the ownership in that product.
Investments in proprietary fund products are initially consolidated and the individual securities within the portfolio are accounted for as trading investments. Legg Mason consolidates these products as long as it holds a controlling financial interest in the product. Upon deconsolidation, which typically occurs after several years, Legg Mason accounts for its investments in proprietary fund products as equity method investments if its ownership is between 20% and 50%, or it otherwise has the ability to significantly influence the financial and operating policies of the investee. For partnerships and LLCs, where third-party investors may have less ability to influence operations, the equity method of accounting is considered if Legg Mason's ownership is greater than 3%. Changes in the fair value of proprietary fund products classified as trading or equity method investments are recognized in Other non-operating income (expense) on the Consolidated Statements of Income (Loss).
Legg Mason generally redeems its investment in proprietary fund products when the related product establishes a sufficient track record, when third-party investments in the related product are sufficient to sustain the strategy, or a decision is made to no longer pursue the strategy. The length of time Legg Mason holds a majority interest in a product varies based on a number of factors, such as market demand, market conditions and investment performance.
See Note 12 for information regarding the determination of whether investments in proprietary fund products represent variable interest entities ("VIEs").
Substantially all of the above financial instruments where valuation methods rely on other than observable market inputs as a significant input utilize the equity method, the cost method, or NAV practical expedient discussed below, such that measurement uncertainty has little relevance.
The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended December 31, 2013 and 2012, are presented in the tables below:
 
 
Value as of September 30, 2013
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2013
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading proprietary fund products and other investments
 
$
209

 
$
1

 
$

 
$
(25
)
 
$

 
$
8

 
$
193

Investments in partnerships, LLCs and other
 
27,189

 

 

 
(883
)
 

 
(212
)
 
26,094

Equity method investments in partnerships and LLCs
 
63,639

 
1,598

 

 
(1,812
)
 

 
2,120

 
65,545

Other investments
 
107

 

 
(12
)
 

 

 
(7
)
 
88

 
 
$
91,144

 
$
1,599

 
$
(12
)
 
$
(2,720
)
 
$

 
$
1,909

 
$
91,920

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
(23,335
)
 
$

 
$

 
$

 
$

 
$
(5,542
)
 
$
(28,877
)

14



 
 
Value as of September 30, 2012
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2012
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity method investments in proprietary fund products
 
$
11,705

 
$

 
$

 
$
(11,705
)
 
$

 
$

 
$

Investments in partnerships, LLCs and other
 
28,041

 

 
(182
)
 
(46
)
 

 
(349
)
 
27,464

Equity method investments in partnerships and LLCs
 
129,294

 
911

 
(1,183
)
 
(64,513
)
 

 
(1,273
)
 
63,236

Other investments
 
131

 

 

 

 

 
(12
)
 
119

 
 
$
169,171

 
$
911

 
$
(1,365
)
 
$
(76,264
)
 
$

 
$
(1,634
)
 
$
90,819

 
 
Value as of March 31, 2013
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2013
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading proprietary fund products and other investments
 
$
246

 
$
1

 
$

 
$
(69
)
 
$

 
$
15

 
$
193

Investments in partnerships, LLCs and other
 
27,762

 
800

 
(617
)
 
(1,047
)
 

 
(804
)
 
26,094

Equity method investments in partnerships and LLCs
 
66,338

 
4,364

 
(750
)
 
(7,500
)
 

 
3,093

 
65,545

Other investments
 
111

 

 
(12
)
 

 

 
(11
)
 
88

 
 
$
94,457

 
$
5,165

 
$
(1,379
)
 
$
(8,616
)
 
$

 
$
2,293

 
$
91,920

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
(21,900
)
 
$

 
$

 
$

 
$

 
$
(6,977
)
 
$
(28,877
)



15



 
 
Value as of March 31, 2012
 
Purchases
 
Sales
 
Redemptions/Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2012
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity method investments in proprietary fund products
 
$
11,778

 
$

 
$

 
$
(11,705
)
 
$

 
$
(73
)
 
$

Investments in partnerships, LLCs and other
 
28,763

 

 
(970
)
 
(612
)
 

 
283

 
27,464

Equity method investments in partnerships and LLCs
 
166,438

 
1,123

 
(2,025
)
 
(116,579
)
 

 
14,279

 
63,236

Other investments
 
124

 

 

 

 

 
(5
)
 
119

 
 
$
207,103

 
$
1,123

 
$
(2,995
)
 
$
(128,896
)
 
$

 
$
14,484

 
$
90,819


Realized and unrealized gains and losses recorded for Level 3 investments are primarily included in Other Non-Operating Income (Expense) on the Consolidated Statements of Income (Loss). The change in unrealized losses for Level 3 investments and liabilities still held at the reporting date was $156 and $1,632 for the three months ended December 31, 2013 and 2012, respectively. The change in unrealized losses for Level 3 investments and liabilities still held at the reporting date was $2,553 and $4,150 for the nine months ended December 31, 2013 and 2012, respectively. Also, included in realized and unrealized gains (losses), net, for the periods ended December 31, 2013, is the change in the fair value of the contingent consideration liability.

There were no significant transfers between Level 1 and Level 2 during the three months ended December 31, 2013 and 2012.


16



As a practical expedient, Legg Mason relies on the NAV of certain investments as their fair value.  The NAVs that have been provided by the investees have been derived from the fair values of the underlying investments as of the respective reporting dates.  The following table summarizes the nature of these investments and any related liquidation restrictions or other factors which may impact the ultimate value realized:
 
 
 
 
Fair Value Determined Using NAV
 
As of December 31, 2013
Category of Investment
 
Investment Strategy
 
December 31, 2013
 
March 31, 2013
 
Unfunded Commitments
 
Remaining Term
Funds-of-hedge funds
 
Global macro, fixed income, long/short equity, natural resources, systematic, emerging market, European hedge
 
$
34,964

(1
)
$
38,811

(1
)
n/a

 
n/a
Hedge funds
 
Fixed income - developed market, event driven, fixed income - hedge, relative value arbitrage, European hedge
 
21,188

 
24,716

 
$
20,000

 
n/a
Private equity funds
 
Long/short equity
 
23,587

(2
)
23,763

(2
)
6,061

 
Up to 10 years
Other
 
Various
 
2,391

 
2,408

 
n/a

 
Various (3)
Total
 
 
 
$
82,130

(4
)
$
89,698

(4
)
$
26,061

 
 
n/a-not applicable
(1)
40% monthly redemption and 60% quarterly redemption as of December 31, 2013. 49% monthly redemption and 51% quarterly redemption as of March 31, 2013. Any remaining lock-up expired in June 2013.
(2)    Liquidations are expected over the remaining term.
(3)
Of this balance, 10% has a remaining term of less than one year and 90% has a remaining term of 20 years.
(4)
Comprised of approximately 30% and 70% of Level 2 and Level 3 assets, respectively, as of December 31, 2013 and 32% and 68% of Level 2 and Level 3 assets, respectively, as of March 31, 2013.

There are no current plans to sell any of these investments held as of December 31, 2013.

5. Fixed Assets
Fixed assets consist of equipment, software and leasehold improvements. Equipment consists primarily of communications and technology hardware and furniture and fixtures. Software includes purchased software and internally developed software. Fixed assets are reported at cost, net of accumulated depreciation and amortization. The following table reflects the components of fixed assets as of:
 
 
December 31, 2013
 
March 31, 2013
Equipment
 
$
148,467

 
$
152,065

Software
 
242,199

 
227,739

Leasehold improvements
 
213,665

 
222,260

Total cost
 
604,331

 
602,064

Less: accumulated depreciation and amortization
 
(412,286
)
 
(400,245
)
Fixed assets, net
 
$
192,045

 
$
201,819


Depreciation and amortization expense included in operating expenses was $12,802 and $12,822 for the three months ended December 31, 2013 and 2012, respectively, and $36,825 and $39,293 for the nine months ended December 31, 2013 and 2012, respectively.



17



6. Intangible Assets and Goodwill

The following table reflects the components of intangible assets as of:
 
 
December 31, 2013
 
March 31, 2013
Amortizable asset management contracts
 
 

 
 

Cost
 
$
207,037

 
$
208,651

Accumulated amortization
 
(196,128
)
 
(186,324
)
Net
 
10,909

 
22,327

Indefinite–life intangible assets
 
 

 
 

U.S. domestic mutual fund management contracts
 
2,106,351

 
2,106,351

Permal/Fauchier funds-of-hedge fund management contracts
 
692,133

 
692,133

Other fund management contracts
 
304,505

 
303,951

Trade names
 
52,800

 
52,800

 
 
3,155,789

 
3,155,235

Intangible assets, net
 
$
3,166,698

 
$
3,177,562


Legg Mason completed its annual impairment testing process of goodwill and indefinite-life intangible assets and determined that there was no impairment in the value of these assets as of December 31, 2013. As a result of uncertainty regarding future market conditions and economic results, assessing the fair value of the reporting unit and intangible assets requires management to exercise significant judgment. The current assessed fair value of the indefinite-life domestic mutual funds contracts asset related to the Citigroup Asset Management acquisition exceeds the carrying value by 21%. The current assessed fair value of the indefinite-life funds-of-hedge funds contracts asset related to the Permal and Fauchier acquisitions exceeds the combined carrying values by 10%. Should market performance, flows, or related assets under management levels decrease in the near term such that cash flow projections deviate from current projections, it is reasonably possible that the assets could be deemed to be impaired by a material amount.

As part of Legg Mason's annual impairment testing process in the prior fiscal year, the Company concluded that the carrying value of two significant indefinite-life fund management contract intangible assets and a trade name asset exceeded their respective fair values, and the assets were impaired by an aggregate amount of $734,000. The impairment charges resulted from a number of then current trends and factors. These changes resulted in a reduction of the projected cash flows and Legg Mason's overall assessment of fair value of the assets, such that the fair value of the domestic mutual fund management contracts asset, Permal funds-of-hedge fund management contracts asset, and Permal trade name declined below their carrying values, and accordingly were impaired by $396,000, $321,000, and $17,000, respectively. Management estimated the fair values of the indefinite-life intangible assets based upon discounted cash flow analyses using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in these cash flow analyses as of December 31, 2012, included projected cash flows and discount rates, summarized as follows:

 
 
Projected Cash Flow Growth Rates
 
 
 
 
Range
 
Average
 
Discount Rates
Domestic mutual fund contracts asset
 
3% to 9%
 
6%
 
14.5%
Permal funds-of-hedge funds contracts and trade name assets
 
(1)% to 17%
 
8%
 
16.0%

As of December 31, 2013, amortizable asset management contracts are being amortized over a weighted-average remaining life of 3.4 years.


18



Estimated amortization expense for each of the next five fiscal years is as follows:
Remaining 2014
 
$
902

2015
 
3,405

2016
 
3,148

2017
 
2,484

2018
 
485

Thereafter
 
485

Total
 
$
10,909


The change in the carrying value of goodwill is summarized below:
 
 
Gross Book Value
 
Accumulated Impairment
 
Net Book Value
Balance as of March 31, 2013
 
$
2,431,065

 
$
(1,161,900
)
 
$
1,269,165

Impact of excess tax basis amortization
 
(16,179
)
 

 
(16,179
)
Other, including changes in foreign exchange rates
 
(12,251
)
 

 
(12,251
)
Balance as of December 31, 2013
 
$
2,402,635

 
$
(1,161,900
)
 
$
1,240,735



7. Long-Term Debt

The disclosures below include details of Legg Mason’s debt, excluding the debt of CIVs.  See Note 12, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the debt of CIVs.

The accreted value of long-term debt consists of the following:
 
 
December 31, 2013
 
March 31, 2013
 
 
Current Accreted Value
 
Unamortized Discount
 
Maturity Amount
 
Accreted Value
5.5% senior notes
 
$
644,801

 
$
5,199

 
$
650,000

 
$
644,077

Five-year amortizing term loan
 
450,000

 

 
450,000

 
500,000

Other term loans
 
438

 

 
438

 
877

Subtotal
 
1,095,239

 
5,199

 
1,100,438

 
1,144,954

Less: current portion
 
50,438

 

 
50,438

 
50,438

Total
 
$
1,044,801

 
$
5,199

 
$
1,050,000

 
$
1,094,516


As of December 31, 2013, the aggregate maturities of long-term debt, based on their contractual terms, are as follows:
Remaining 2014
 
$

2015
 
50,438

2016
 
50,000

2017
 
50,000

2018
 
300,000

Thereafter
 
650,000

Total
 
$
1,100,438


At December 31, 2013, the estimated fair value of long-term debt was approximately $1,168,207. The carrying value of the five-year term loan approximates fair value because the debt is a credit facility with a market-based variable interest rate. The fair value of the 5.5% senior notes was estimated using publicly quoted market prices and, along with the fair value of other long-term debt, was classified as Level 2 in the fair value hierarchy.


19



See Note 13 for subsequent issuance of $400,000 of 5.625% senior notes, repayment of the $450,000 of outstanding borrowings under the five-year term loan, and a $250,000 increase in the amount available under revolving credit facilities in January 2014.

8.   Stock-Based Compensation

Legg Mason's stock-based compensation includes stock options, restricted stock awards and units, an employee stock purchase plan, deferred compensation payable in stock, and other stock-based compensation. Shares available for issuance under the active equity incentive stock plan as of December 31, 2013, were 9,802. Options under Legg Mason’s employee stock plans have been granted at prices not less than 100% of the fair market value. Options are generally exercisable in equal increments over four to five years and expire within eight to ten years from the date of grant.
 
Stock Options
Compensation expense relating to stock options for the three months ended December 31, 2013, and 2012 was $3,184 and $2,504, respectively, and for the nine months ended December 31, 2013 and 2012, was $10,171 and $8,407, respectively.

Stock option transactions during the nine months ended December 31, 2013 and 2012, respectively, are summarized below:
 
 
Nine Months Ended December 31,
 
 
2013
 
2012
 
 
Number of Shares
 
Weighted-Average Exercise Price Per Share
 
Number of Shares
 
Weighted-Average Exercise Price Per Share
Options outstanding at March 31
 
5,361

 
$
53.13

 
5,624

 
$
57.78

Granted
 
1,215

 
33.64

 
966

 
23.72

Exercised
 
(628
)
 
30.34

 
(11
)
 
15.48

Canceled/forfeited
 
(952
)
 
98.51

 
(808
)
 
48.94

Options outstanding at December 31
 
4,996

 
$
42.62

 
5,771

 
$
53.39


At December 31, 2013, options were exercisable for 2,561 shares and the weighted-average exercise price was $53.87. Stock options exercisable at December 31, 2013, have a weighted-average remaining contractual life of 3.0 years.  Unamortized compensation cost at December 31, 2013, was $20,427 and is related to unvested options for 2,435 shares. The unamortized compensation cost at December 31, 2013 is expected to be recognized over a weighted-average period of 1.6 years.

The weighted-average fair value of service-based stock option grants during the nine months ended December 31, 2013, and 2012, excluding those granted to our Chief Executive Officer in May 2013 discussed below, using the Black-Scholes option pricing model, was $12.13 and $9.47 per share, respectively.

The following weighted-average assumptions were used in the model for grants in fiscal 2013 and 2012:
 
 
Nine Months Ended December 31,
 
 
2013
 
2012
Expected dividend yield
 
1.54
%
 
1.44
%
Risk-free interest rate
 
0.80
%
 
0.81
%
Expected volatility
 
45.08
%
 
51.80
%
Expected life (in years)
 
4.93

 
5.02


In May 2013, Legg Mason awarded options to purchase 500 shares of Legg Mason, Inc. common stock at an exercise price of $31.46, equal to the then current market value of Legg Mason's common stock, to its Chief Executive Officer, which is included in the outstanding options table. The award had a grant date fair value of $5,525 and is subject to vesting requirements, 25% of which vests over a two-year service period; 25% of which vests over a two-year service period and is subject to Legg Mason's common stock price equaling or exceeding $36.46 for 20 consecutive trading days; 25% of which is subject to Legg Mason's common stock price equaling or exceeding $41.46 for 20 consecutive trading days; and 25% of which is subject to

20



Legg Mason's common stock price equaling or exceeding $46.46 for 20 consecutive trading days; as well as a requirement that certain shares received upon exercise are retained for a two-year period.

The weighted-average fair value per share for these awards of $11.05 was estimated as of the grant date using a grant price of $31.46, and a Monte Carlo option pricing model with the following assumptions:
Expected dividend yield
 
1.48
%
Risk-free interest rate
 
0.86
%
Expected volatility
 
44.05
%

Restricted Stock
Compensation expense relating to restricted stock and restricted stock units for the three months ended December 31, 2013 and 2012, was $12,013 and $10,730, respectively, and for the nine months ended December 31, 2013 and 2012, was $36,844 and $31,753, respectively.

Compensation expense for the nine months ended December 31, 2012, includes approximately $1,800 of accelerated stock-based net compensation costs associated with Legg Mason's former Chief Executive Officer stepping down in September 2012.

Restricted stock and restricted stock unit transactions during the nine months ended December 31, 2013 and 2012, respectively, are summarized below:
 
 
Nine Months Ended December 31,
 
 
2013
 
2012
 
 
Number of Shares
 
Weighted-Average Grant Date Value
 
Number of Shares
 
Weighted-Average Grant Date Value
Unvested shares at March 31
 
3,738

 
$
27.99

 
2,873

 
$
33.83

Granted
 
1,289

 
35.16

 
2,185

 
24.04