10-Q 1 lm_10qx12312012.htm 10-Q LM_10Q_12.31.2012


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, 2012
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.
128,955,808 shares of common stock as of the close of business on January 31, 2013.




PART I. FINANCIAL INFORMATION
Item 1.         Financial Statements

LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

 
 
December 31, 2012
 
March 31, 2012
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
905,726

 
$
1,382,263

Cash and cash equivalents of consolidated investment vehicles
 
34,995

 
26,139

Restricted cash
 
3,697

 
2,167

Receivables:
 
 
 
 
Investment advisory and related fees
 
314,235

 
333,777

Other
 
43,876

 
100,060

Investment securities
 
346,316

 
412,119

Investment securities of consolidated investment vehicles
 
29,117

 
31,575

Deferred income taxes
 
103,618

 
117,391

Other
 
48,005

 
51,977

Total Current Assets
 
1,829,585

 
2,457,468

Fixed assets, net
 
226,741

 
239,411

Intangible assets, net
 
3,112,451

 
3,856,866

Goodwill
 
1,248,648

 
1,275,045

Investments of consolidated investment vehicles
 
253,514

 
294,853

Deferred income taxes
 
259,748

 
142,706

Other
 
183,117

 
287,653

Other assets of consolidated investment vehicles
 
1,256

 
1,745

Total Assets
 
$
7,115,060

 
$
8,555,747

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 

Liabilities
 
 

 
 

Current Liabilities
 
 

 
 

Accrued compensation
 
$
233,780

 
$
409,759

Accounts payable and accrued expenses
 
183,603

 
195,808

Short-term borrowings
 

 
250,000

Current portion of long-term debt
 
50,438

 
1,278

Other
 
47,342

 
114,840

Other current liabilities of consolidated investment vehicles
 
3,134

 
4,097

Total Current Liabilities
 
518,297

 
975,782

Deferred compensation
 
42,700

 
57,339

Deferred income taxes
 
126,698

 
242,567

Other
 
139,708

 
167,544

Other liabilities of consolidated investment vehicles
 
3,237

 
3,872

Long-term debt
 
1,094,275

 
1,135,614

Long-term debt of consolidated investment vehicles
 
250,160

 
271,707

Total Liabilities
 
2,175,075

 
2,854,425

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Redeemable Noncontrolling Interests
 
21,676

 
24,031

 
 
 
 
 
Stockholders’ Equity
 
 
 
 
Common stock, par value $.10; authorized 500,000,000 shares; issued 128,943,449 shares and 139,874,034 shares, respectively
 
12,894

 
13,987

Additional paid-in capital
 
3,553,176

 
3,864,216

Employee stock trust
 
(33,321
)
 
(32,419
)
Deferred compensation employee stock trust
 
33,321

 
32,419

Retained earnings
 
1,289,171

 
1,715,395

Appropriated retained earnings for consolidated investment vehicle
 
4,145

 
12,221

Accumulated other comprehensive income, net
 
58,923

 
71,472

Total Stockholders’ Equity
 
4,918,309

 
5,677,291

Total Liabilities and Stockholders’ Equity
 
$
7,115,060

 
$
8,555,747

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,
 
 
2012
 
2011
 
2012
 
2011
Operating Revenues
 
 
 
 
 
 
 
 
Investment advisory fees:
 
 
 
 
 
 
 
 
Separate accounts
 
$
181,755

 
$
187,570

 
$
547,617

 
$
588,382

Funds
 
360,827

 
351,598

 
1,080,208

 
1,128,577

Performance fees
 
46,395

 
6,079

 
65,240

 
34,677

Distribution and service fees
 
83,083

 
80,709

 
246,621

 
258,547

Other
 
1,840

 
1,022

 
5,201

 
3,800

Total Operating Revenues
 
673,900

 
626,978

 
1,944,887

 
2,013,983

Operating Expenses
 


 
 
 


 


Compensation and benefits
 
308,248

 
254,402

 
881,002

 
812,405

Transition-related compensation
 

 
8,818

 

 
32,559

Total Compensation and benefits
 
308,248

 
263,220

 
881,002

 
844,964

Distribution and servicing
 
143,410

 
148,275

 
458,370

 
489,422

Communications and technology
 
38,400

 
43,466

 
111,861

 
125,538

Occupancy
 
31,072

 
56,401

 
88,642

 
125,339

Amortization of intangible assets
 
3,505

 
4,869

 
10,514

 
15,951

Impairment of intangible assets
 
734,000

 

 
734,000

 

Other
 
48,588

 
51,424

 
138,010

 
146,228

Total Operating Expenses
 
1,307,223

 
567,655

 
2,422,399

 
1,747,442

Operating Income (Loss)
 
(633,323
)
 
59,323

 
(477,512
)
 
266,541

Other Non-Operating Income (Expense)
 


 
 
 


 


Interest income
 
1,646

 
2,577

 
5,300

 
8,614

Interest expense
 
(13,564
)
 
(21,831
)
 
(46,909
)
 
(65,828
)
Other income (expense), net, including $68,975 debt extinguishment loss in May 2012
 
9,926

 
255

 
(34,052
)
 
(31,844
)
Other non-operating income (loss) of consolidated investment vehicles, net
 
(3,449
)
 
7,424

 
(6,080
)
 
15,607

Total Other Non-Operating Income (Expense)
 
(5,441
)
 
(11,575
)
 
(81,741
)
 
(73,451
)
Income (Loss) Before Income Tax Provision (Benefit)
 
(638,764
)
 
47,748

 
(559,253
)
 
193,090

Income tax provision (benefit)
 
(180,214
)
 
12,607

 
(168,814
)
 
38,868

Net Income (Loss)
 
(458,550
)
 
35,141

 
(390,439
)
 
154,222

Less: Net income (loss) attributable to noncontrolling interests
 
(4,680
)
 
7,009

 
(7,908
)
 
9,474

Net Income (Loss) Attributable to Legg Mason, Inc.
 
$
(453,870
)
 
$
28,132

 
$
(382,531
)

$
144,748

 
 
 
 
 
 
 
 
 
Net Income (Loss) per Share Attributable to Legg Mason, Inc. Common Shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
(3.45
)
 
$
0.20

 
$
(2.84
)
 
$
1.00

Diluted
 
$
(3.45
)
 
$
0.20

 
$
(2.84
)
 
$
1.00

 
 
 
 
 
 
 
 
 
Weighted Average Number of Shares Outstanding
 
 
 
 
 
 
 
 
Basic
 
131,534

 
140,053

 
134,770

 
144,363

Diluted
 
131,534

 
140,082

 
134,770

 
144,428

 
 
 
 
 
 
 
 
 
Dividends Declared per Share
 
$
0.11

 
$
0.08

 
$
0.33

 
$
0.24

See Notes to Consolidated Financial Statements

3



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



 
 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
 
December 31,
 
 
2012
 
2011
 
2012
 
2011
Net Income (Loss)
 
$
(458,550
)
 
$
35,141

 
$
(390,439
)
 
$
154,222

Other Comprehensive Income (Loss):
 
 
 


 
 
 


Foreign currency translation adjustment
 
(7,107
)
 
3,309

 
(12,576
)
 
(29,357
)
Unrealized gains (losses) on investment securities:
 
 
 


 
 
 


Unrealized holding gains (losses), net of tax provision (benefit) of ($30), ($2), $14 and $167, respectively
 
(45
)
 
(3
)
 
21

 
250

Reclassification adjustment for losses included in net income (loss)
 
8

 
4

 
6

 
8

Net Unrealized Gains (Losses) on Investment Securities
 
(37
)
 
1

 
27

 
258

Total Other Comprehensive Income (Loss)
 
(7,144
)
 
3,310

 
(12,549
)
 
(29,099
)
Comprehensive Income (Loss)
 
(465,694
)
 
38,451

 
(402,988
)
 
125,123

Less: Comprehensive income (loss) attributable to noncontrolling interests
 
(4,680
)
 
7,009

 
(7,908
)
 
9,474

Comprehensive Income (Loss) Attributable to Legg Mason, Inc.
 
$
(461,014
)
 
$
31,442

 
$
(395,080
)
 
$
115,649

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,
 
 
2012
 
2011
COMMON STOCK
 
 
 
 
Beginning balance
 
$
13,987

 
$
15,022

Stock options and other stock-based compensation
 
7

 
7

Deferred compensation employee stock trust
 
6

 
6

Deferred compensation, net
 
175

 
119

Equity Units exchanged
 

 
183

Employee tax withholdings by net share transactions
 
(30
)
 

Shares repurchased and retired
 
(1,251
)
 
(1,360
)
Ending balance
 
12,894

 
13,977

ADDITIONAL PAID-IN CAPITAL
 
 

 
 

Beginning balance
 
3,864,216

 
4,111,095

Stock options and other stock-based compensation
 
9,890

 
13,465

Deferred compensation employee stock trust
 
1,592

 
1,901

Deferred compensation, net
 
31,554

 
25,357

Equity Units exchanged
 

 
102,831

Employee tax withholdings by net share transactions
 
(7,871
)
 

Shares repurchased and retired
 
(315,372
)
 
(398,906
)
Allocation from 2.5% Convertible Senior Notes repurchase, net of tax
 
(30,833
)
 

Ending balance
 
3,553,176

 
3,855,743

EMPLOYEE STOCK TRUST
 
 

 
 

Beginning balance
 
(32,419
)
 
(34,466
)
Shares issued to plans
 
(1,598
)
 
(1,907
)
Distributions and forfeitures
 
696

 
1,671

Ending balance
 
(33,321
)
 
(34,702
)
DEFERRED COMPENSATION EMPLOYEE STOCK TRUST
 
 

 
 

Beginning balance
 
32,419

 
34,466

Shares issued to plans
 
1,598

 
1,907

Distributions and forfeitures
 
(696
)
 
(1,671
)
Ending balance
 
33,321

 
34,702

RETAINED EARNINGS
 
 

 
 

Beginning balance
 
1,715,395

 
1,539,984

Net income (loss) attributable to Legg Mason, Inc.
 
(382,531
)
 
144,748

Dividends declared
 
(43,693
)
 
(34,019
)
Ending balance
 
1,289,171

 
1,650,713

APPROPRIATED RETAINED EARNINGS FOR CONSOLIDATED INVESTMENT VEHICLE
 
 

 
 

Beginning balance
 
12,221

 
10,922

Net income (loss) reclassified to appropriated retained earnings
 
(8,076
)
 
1,355

Ending balance
 
4,145

 
12,277

ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
 
 

 
 

Beginning balance
 
71,472

 
93,361

Net unrealized holding gains on investment securities
 
27

 
258

Foreign currency translation adjustment
 
(12,576
)
 
(29,357
)
Ending balance
 
58,923

 
64,262

TOTAL STOCKHOLDERS’ EQUITY
 
$
4,918,309

 
$
5,596,972


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,
 

2012

2011
Cash Flows from Operating Activities
 
 
 
 
Net Income (Loss)
 
$
(390,439
)
 
$
154,222

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 operations:
 
 
 
 
Impairment of intangible assets
 
734,000

 

Depreciation and amortization
 
49,807

 
75,160

Imputed interest for 2.5% Convertible Senior Notes
 
5,839

 
29,023

Accretion and amortization of securities discounts and premiums, net
 
2,531

 
3,464

Stock-based compensation
 
40,485

 
38,436

Net (gains) losses on investments
 
(29,440
)
 
39,209

Net losses (gains) of consolidated investment vehicles
 
8,182

 
(5,809
)
Deferred income taxes
 
(174,229
)
 
13,353

Other
 
2,522

 
2,709

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

 
55,993

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

 
(68,854
)
Other receivables
 
(687
)
 
(10,877
)
Other assets
 
1,661

 
13,453

Other assets of consolidated investment vehicles
 
(6,725
)
 
40,802

Increase (decrease) in liabilities:
 
 
 
 
Accrued compensation
 
(174,850
)
 
(30,188
)
Deferred compensation
 
(14,639
)
 
(36,733
)
Accounts payable and accrued expenses
 
(12,158
)
 
2,980

Other liabilities
 
(23,826
)
 
34,041

Other liabilities of consolidated investment vehicles
 
(1,514
)
 
(16,704
)
Cash Provided by Operating Activities
 
89,676


333,680

Cash Flows from Investing Activities
 
 

 
 

Payments for fixed assets
 
(28,230
)
 
(21,518
)
Change in restricted cash
 
(1,890
)
 
6,995

Purchases of investment securities
 
(5,300
)
 
(4,509
)
Proceeds from sales and maturities of investment securities
 
4,818

 
4,883

Purchases of investments by consolidated investment vehicles
 
(81,761
)
 
(127,275
)
Proceeds from sales and maturities of investments by consolidated investment vehicles
 
127,283

 
144,679

Cash Provided by Investing Activities
 
$
14,920


$
3,255


6



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

 
 
Nine Months Ended
 

December 31,
 

2012

2011
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
 
(9,006
)
 
(811
)
Repayment of long-term debt of consolidated investment vehicles
 
(32,820
)
 

Proceeds from issuance of long-term debt
 
1,143,246

 

Debt issuance costs
 
(10,289
)
 

Issuance of common stock
 
1,489

 
1,931

Repurchase of common stock
 
(324,524
)
 
(400,266
)
Dividends paid
 
(55,250
)
 
(32,384
)
Net repayments of consolidated investment vehicles
 

 
(18,309
)
Net redemptions/distributions paid to noncontrolling interest holders
 
(2,523
)
 
(16,016
)
Cash Used in Financing Activities
 
(579,889
)
 
(465,855
)
Effect of Exchange Rate Changes on Cash
 
(1,244
)
 
(14,404
)
Net Decrease in Cash and Cash Equivalents
 
(476,537
)
 
(143,324
)
Cash and Cash Equivalents at Beginning of Period
 
1,382,263

 
1,375,918

Cash and Cash Equivalents at End of Period
 
$
905,726

 
$
1,232,594



See Notes to Consolidated Financial Statements
  


7



LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts or unless otherwise noted)
December 31, 2012
(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.

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. The fiscal year-end condensed balance sheet was derived from audited financial statements and, in accordance with interim financial information standards, does not include all disclosures required by U.S. GAAP for annual financial statements. 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.

Terms such as “we,” “us,” “our,” and “Company” refer to Legg Mason.

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 its Net Income (Loss), net of amounts allocated to noncontrolling interests.  Also, see Note 12 for additional information regarding the consolidation of investment vehicles.

Restructuring Costs
In May 2010, Legg Mason's management committed to a plan to streamline its business model as further described in Note 11. The streamlining initiative was completed as of March 31, 2012. The costs associated with this initiative primarily related to employee termination benefits, incentives to retain employees during the transition period, charges for consolidating leased office space, and contract termination costs. Termination benefits, including severance and retention incentives, were recorded as Transition-related compensation in the Consolidated Statements of Income (Loss). These compensation items required employees to provide future service and were therefore expensed ratably over the required service period. Contract termination and other costs were expensed when incurred.

New Capital Plan
In May 2012, Legg Mason implemented a new capital plan for the refinancing/restructuring of debt, the completion of the existing share repurchase authorization, and the authorization of further share repurchases. As a result, Net Income (Loss) Attributable to Legg Mason, Inc. for the nine months ended December 31, 2012, includes a pre-tax loss on debt extinguishment of $68,975 and a net reduction in outstanding debt obligations of $350,000. See Notes 6 and 9 for further details.


8



Other New Developments
On December 13, 2012, the Company announced that it had entered into a Sale and Purchase Agreement to purchase all of the outstanding share capital of Fauchier Partners Management Limited, a leading European based manager of funds-of-hedge funds, from BNP Paribas Investment Partners. The transaction is expected to close in the fourth quarter of fiscal 2013 and will require an initial payment of approximately $80,000, with contingent consideration of up to approximately $24,000 and approximately $32,000, due on the second and fourth anniversaries of closing, respectively, dependent on achieving certain financial targets.

On December 12, 2012, the Company modified its employment and other arrangements with the management of its investment management affiliate The Permal Group, LTD ("Permal"). As further discussed in Note 5, these modifications included the Company investing in the Permal business in part by sharing certain compensation and other costs that result in lower margins from the business at current revenue levels in exchange for higher margins at significantly increased revenue levels. In addition, the Company and Permal are engaged in implementing a profits interest management equity plan for key employees that will entitle them to participate in 15% of the growth in value of the Permal business from the future implementation date.

Income Taxes
In July 2011, The U.K. Finance Act 2011 was enacted, which reduced the main U.K. corporate tax rate from 27% to 26% effective April 1, 2011, and from 26% to 25% effective April 1, 2012. In July 2012, The U.K. Finance Act 2012 was enacted, further reducing the main U.K. corporate tax rate to 24% effective April 1, 2012 and 23% effective April 1, 2013. The reductions in the U.K. corporate tax rate resulted in tax benefits of $18,075 and $18,268, recognized in the quarters ended September 30, 2012 and 2011, respectively, as a result of the revaluation of existing deferred tax assets and liabilities at the new rates. During the quarter ended December 31, 2012, as a result of the expiration of statutes of limitation and the completion of tax authority examinations, unrecognized benefits of $15,354 were realized. Also during the quarter ended December 31, 2012, based on estimates of future taxable income, using assumptions consistent with those used in Legg Mason's intangible and goodwill impairment testing, valuation allowances related to foreign tax credits and various U.S. state and foreign net operating loss carryforwards were increased by $28,636. It is more likely than not that tax benefits related to these tax credits and net operating loss carryforwards will not be realized. A summary of the impact of these items on Legg Mason's effective income tax rates follows:

 
 
Three Months Ended
 
Nine Months Ended
 
 
December 31,
 
December 31,
 
 
2012
 
2011
 
2012
 
2011
Tax provision (benefit) at statutory U.S. federal income tax rate
 
(35.0
)%
 
35.0
 %
 
(35.0
)%
 
35.0
 %
Effect of changes in valuation allowances
 
4.5

 
11.0

 
4.5

 
1.8

Effect of changes in unrecognized tax benefits
 
(2.4
)
 

 
(2.7
)
 
(0.5
)
Changes in U.K. tax rates on deferred tax assets and liabilities
 

 

 
(3.2
)
 
(9.4
)
Other jurisdiction income taxes and other items, net (primarily foreign taxes in 2011)
 
4.7

 
(19.6
)
 
6.2

 
(6.8
)
Effective income tax provision (benefit) rate
 
(28.2
)%
 
26.4
 %
 
(30.2
)%
 
20.1
 %

Noncontrolling Interests
Noncontrolling interests related to consolidated investment vehicles ("CIVs") are classified as redeemable noncontrolling interests if investors in these funds may request withdrawals at any time. There are no nonredeemable noncontrolling interests as of December 31, 2012, March 31, 2012, or December 31, 2011. 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.


9



Net income (loss) attributable to noncontrolling interests for the three and nine months ended December 31, 2012 and 2011, included the following amounts:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2012
 
2011
 
2012
 
2011
Net income (loss) attributable to redeemable noncontrolling interests
 
$
350

 
$
(148
)
 
$
168

 
$
8,119

Net Income (loss) reclassified to Appropriated retained earnings for consolidated investment vehicle
 
(5,030
)
 
7,157

 
(8,076
)
 
1,355

Total
 
$
(4,680
)
 
$
7,009

 
$
(7,908
)
 
$
9,474


Redeemable noncontrolling interests as of and for the nine months ended December 31, 2012 and 2011, were as follows:
 
 
Nine Months Ended December 31,
 
 
2012
 
2011
Balance, beginning of period
 
$
24,031

 
$
36,713

Net income attributable to redeemable noncontrolling interests
 
168

 
8,119

Net redemptions/distributions paid to noncontrolling interest holders
 
(2,523
)
 
(16,016
)
Balance, end of period
 
$
21,676

 
$
28,816


Recent Accounting Developments
In July 2012, the Financial Accounting Standards Board ("FASB") updated the guidance on the annual indefinite-lived intangible asset tests for impairment. The update permits companies to assess qualitative factors to determine if it is more likely than not that the fair value of the intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform the currently required quantitative fair value assessment. This update will be effective for Legg Mason in fiscal 2014, if not early adopted. This update is not expected to have a material effect on Legg Mason's recorded indefinite-lived assets, and Legg Mason is still evaluating its adoption.

In January 2013, the FASB ratified an EITF consensus that updates the guidance on a parent's accounting for a cumulative translation adjustment upon the sale, transfer, or liquidation of a foreign subsidiary entity. The update states that a cumulative translation adjustment should be released into earnings only if an entity ceases to have a controlling financial interest in a subsidiary or a group of assets within a foreign subsidiary, and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. This update will be effective for Legg Mason in fiscal 2014, and Legg Mason is still evaluating its adoption.


3. 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.


10



The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs:
 
 
As of December 31, 2012
 
 
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
 
$
513,113

 
$

 
$

 
$
513,113

Time deposits and other
 

 
124,978

 

 
124,978

Total cash equivalents
 
513,113

 
124,978

 

 
638,091

Current investments:
 
 

 
 

 
 

 
 

Trading investments relating to long-term incentive compensation plans(2)
 
100,396

 

 

 
100,396

Trading proprietary fund products and other investments(3)
 
104,261

 
102,680

 

 
206,941

Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments(4)(5)
 
12,685

 
26,294

 

 
38,979

Total current investments
 
217,342

 
128,974

 

 
346,316

Available-for-sale investment securities(6)
 
2,031

 
10,367

 
12

 
12,410

Investments in partnerships, LLCs and other(6)
 
986

 
2,696

 
27,464

 
31,146

Equity method investments in partnerships and LLCs(4)(6)
 
1,361

 

 
63,236

 
64,597

Derivative assets:
 
 
 
 
 


 
 

Currency and market hedges
 
317

 

 

 
317

Other investments(6)
 

 

 
107

 
107

 
 
$
735,150

 
$
267,015

 
$
90,819

 
$
1,092,984

Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Currency and market hedges
 
$
(744
)
 
$

 
$

 
$
(744
)



11



 
 
As of March 31, 2012
 
 
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
 
$
893,738

 
$

 
$

 
$
893,738

Time deposits
 

 
88,289

 

 
88,289

Total cash equivalents
 
893,738

 
88,289

 

 
982,027

Current investments:
 
 

 
 

 
 

 
 

Trading investments relating to long-term incentive compensation plans(2)
 
111,257

 

 

 
111,257

Trading proprietary fund products and other investments(3)
 
143,002

 
79,583

 

 
222,585

Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments(4)(5)
 
11,565

 
54,934

 
11,778

 
78,277

Total current investments
 
265,824

 
134,517

 
11,778

 
412,119

Available-for-sale investment securities(6)
 
2,091

 
9,810

 
12

 
11,913

Investments in partnerships, LLCs and other(6)
 
851

 
5,351

 
28,763

 
34,965

Equity method investments in partnerships and LLCs(4)(6)
 
1,415

 
1,348

 
166,438

 
169,201

Derivative assets:
 
 
 
 
 
 
 
 

Currency and market hedges
 
84

 

 

 
84

Other investments(6)
 

 

 
112

 
112

 
 
$
1,164,003

 
$
239,315

 
$
207,103

 
$
1,610,421

Liabilities:
 
 

 
 

 
 

 
 

Derivative liabilities:
 
 

 
 

 
 

 
 

Currency and market hedges
 
$
(886
)
 
$

 
$

 
$
(886
)
(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 47% and 53% in equity and debt securities as of December 31, 2012, respectively, and were invested approximately 52% and 48% in equity and debt securities as of March 31, 2012, respectively.
(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 approximates fair value) relating to long-term incentive compensation plans of $26,294 and $54,934 as of December 31, 2012 and March 31, 2012, respectively, and proprietary fund products and other investments of $12,685 and $23,343 as of December 31, 2012 and March 31, 2012, 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.




12



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, such that measurement uncertainty has little relevance.
The changes in financial assets measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended December 31, 2012 and 2011, are presented in the tables below:
 
 
Value as of September 30, 2012
 
Purchases
 
Sales
 
Redemptions/Settlements/ Other
 
Transfers Out
 
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
)
 
$
(64,559
)
 
$
(11,705
)
 
$
(1,634
)
 
$
90,819


 
 
Value as of September 30, 2011
 
Purchases
 
Sales
 
Redemptions/Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2011
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading proprietary fund products and other investments
 
$
179

 
$

 
$
(165
)
 
$

 
$

 
$
(14
)
 
$

Equity method investments in proprietary fund products
 
11,605

 

 

 

 

 
(545
)
 
11,060

Investments in partnerships, LLCs and other
 
28,469

 

 

 
(10
)
 

 
(219
)
 
28,240

Equity method investments in partnerships and LLCs
 
160,662

 
660

 
(1,869
)
 
(1,370
)
 

 
(7,781
)
 
150,302

Other investments
 
133

 

 

 

 

 

 
133

 
 
$
201,048

 
$
660

 
$
(2,034
)
 
$
(1,380
)
 
$

 
$
(8,559
)
 
$
189,735



13



 
 
Value as of March 31, 2012
 
Purchases
 
Sales
 
Redemptions/ Settlements/ Other
 
Transfers Out
 
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
)
 
$
(117,191
)
 
$
(11,705
)
 
$
14,484

 
$
90,819

 
 
Value as of March 31, 2011
 
Purchases
 
Sales
 
Redemptions/Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of December 31, 2011
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading proprietary fund products and other investments
 
$
11,378

 
$

 
$
(11,906
)
 
$

 
$

 
$
528

 
$

Equity method investments in proprietary fund products
 
12,167

 

 

 

 

 
(1,107
)
 
11,060

Investments in partnerships, LLCs and other
 
22,167

 
6,932

 

 
(119
)
 

 
(740
)
 
28,240

Equity method investments in partnerships and LLCs
 
153,931

 
26,164

 
(5,162
)
 
(14,067
)
 

 
(10,564
)
 
150,302

Other investments
 
282

 

 

 
(159
)
 

 
10

 
133

 
 
$
199,925

 
$
33,096

 
$
(17,068
)
 
$
(14,345
)
 
$

 
$
(11,873
)
 
$
189,735


Realized and unrealized gains and losses recorded for Level 3 investments are included in Other Non-Operating Income (Expense) on the Consolidated Statements of Income (Loss). Total unrealized losses for Level 3 investments relating only to those assets still held at the reporting date were $1,632 and $8,521 for the three months ended December 31, 2012 and 2011, respectively. Total unrealized losses for Level 3 investments relating only to those assets still held at the reporting date were $4,150 and $13,940 for the nine months ended December 31, 2012 and 2011, respectively.

There were no material transfers between Level 1 and Level 2 during the three or nine months ended December 31, 2012 and 2011.

14



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 reporting date.  The following table summarizes, as of December 31, 2012, 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, 2012
Category of Investment
 
Investment Strategy
 
December 31, 2012
 
March 31, 2012
 
Unfunded Commitments
 
Remaining Term
Funds-of-hedge funds
 
Global macro, fixed income, long/short equity, natural resources, systematic, emerging market, European hedge
 
$
45,481

(1)
$
51,251

(2)
n/a

 
n/a
Hedge funds
 
Fixed income - developed market, event driven, fixed income - hedge, relative value arbitrage, European hedge
 
24,073

 
25,460

 
$
20,000

 
n/a
Private equity funds
 
Long/short equity
 
25,591

(3)
27,927

(3)
5,218

 
Up to 7 years
Private fund(4)
 
Fixed income, residential and commercial mortgage-backed securities
 

 
89,323

 
n/a

 
n/a
Other
 
Various
 
2,164

 
2,450

 
n/a

 
Various (5)
Total
 
 
 
$
97,309

(6
)
$
196,411

(6
)
$
25,218

 
 
n/a-not applicable
(1)
58% monthly redemption; 42% quarterly redemption, of which 38% is subject to two-year lock-up, which expires in June 2013.
(2)
63% monthly redemption; 37% quarterly redemption, of which 36% is subject to two-year lock-up, which expires in June 2013.
(3)    Liquidations are expected over the remaining term.
(4) Legg Mason's investment was fully redeemed in the quarter ended December 31, 2012 upon liquidation of the fund.
(5)
Of this balance, 3% has a remaining term of less than one year and 97% has a remaining term of 20 years.
(6)
Comprised of approximately 37% and 63% of Level 2 and Level 3 assets, respectively, as of December 31, 2012 and 13% and 87% of Level 2 and Level 3 assets, respectively, as of March 31, 2012.

There are no current plans to sell any of these investments held as of December 31, 2012.

4. 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, 2012
 
March 31, 2012
Equipment
 
$
155,662

 
$
155,173

Software
 
221,522

 
205,760

Leasehold improvements
 
244,168

 
242,566

Total cost
 
621,352

 
603,499

Less: accumulated depreciation and amortization
 
(394,611
)
 
(364,088
)
Fixed assets, net
 
$
226,741

 
$
239,411


Depreciation and amortization expense included in operating income was $12,822 and $25,246 for the three months ended December 31, 2012 and 2011, respectively, and $39,293 and $59,209 for the nine months ended December 31, 2012 and 2011, respectively.



15



5. Intangible Assets and Goodwill

The following table reflects the components of intangible assets as of:
 
 
December 31, 2012
 
March 31, 2012
Amortizable asset management contracts
 
 

 
 

Cost
 
$
205,791

 
$
206,411

Accumulated amortization
 
(182,868
)
 
(172,974
)
Net
 
22,923

 
33,437

Indefinite–life intangible assets
 
 

 
 

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

 
2,502,351

Permal funds-of-hedge fund management contracts
 
626,000

 
947,000

Other fund management contracts
 
304,377

 
304,278

Trade names
 
52,800

 
69,800

 
 
3,089,528

 
3,823,429

Intangible assets, net
 
$
3,112,451

 
$
3,856,866


As part of Legg Mason's annual impairment testing process, and considering aspects of the modifications to Permal compensation and other arrangements discussed in Note 2, on December 12, 2012, and as updated through December 31, 2012, 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 result from a number of current trends and factors, including (i) a decrease in near-term margin projections; (ii) an increase in the rate used to discount projected future cash flows primarily due to company specific factors including continued market and regulatory influences, continued stock price uncertainty and the ongoing search for a permanent Chief Executive Officer; (iii) recent outflows and related reductions in assets under management; and (iv) a reduction in near-term projected growth rates. 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 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 these 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 included projected cash flows and discount rates, summarized as follows:
 
 
Projected Cash Flow Growth Rates
 
 
 
 
Range
 
Average
 
Discount Rates
Domestic mutual funds contracts asset
 
3% to 9%
 
6%
 
14.5%
Permal funds-of-hedge funds contracts and trade name assets
 
 (1)% to 17%
 
8%
 
16.0%

Projected cash flow growth rates for these assets are most dependent on product investment performance, client AUM flows, and changes in market conditions. Discount rates are also influenced by changes in market conditions, as well as interest rates and other factors. Decreases in the projected cash flow growth rates and/or increases in the discount rates could result in lower fair value measurements and potential additional impairments.

There were no impairments to other indefinite-life intangible assets, amortizable management contracts intangible assets, or goodwill, as of December 31, 2012.

As of December 31, 2012, amortizable asset management contracts are being amortized over a weighted-average remaining life of 2.5 years.


16



Estimated amortization expense for each of the next five fiscal years is as follows:
Remaining 2013
 
$
3,505

2014
 
11,835

2015
 
2,920

2016
 
2,663

2017
 
2,000

Thereafter
 

Total
 
$
22,923


The change in the carrying value of goodwill is summarized below:
 
 
Gross Book Value
 
Accumulated Impairment
 
Net Book Value
Balance as of March 31, 2012
 
$
2,436,945

 
$
(1,161,900
)
 
$
1,275,045

Impact of excess tax basis amortization
 
(16,189
)
 

 
(16,189
)
Other, including changes in foreign exchange rates
 
(10,208
)
 

 
(10,208
)
Balance as of December 31, 2012
 
$
2,410,548

 
$
(1,161,900
)
 
$
1,248,648


6. Short-Term Borrowings and 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.

In May 2012, Legg Mason announced a new capital plan that included the refinancing of its 2.5% Convertible Senior Notes (the "Notes”) due 2015, as further discussed below. The refinancing was effected through the issuance of $650,000 of 5.5% senior notes, the net proceeds of which, together with cash on hand and $250,000 of remaining borrowing capacity under an existing revolving credit facility, were used to repurchase the entire $1,250,000 face amount of the Notes.

Also, pursuant to the new capital plan, in June 2012, Legg Mason entered into a new unsecured credit agreement which provides for a new undrawn $500,000 revolving credit facility and a $500,000 term loan, also further discussed below. The proceeds of the term loan were used to repay the $500,000 of outstanding borrowings under the previous revolving credit facility, which was then terminated. As of March 31, 2012, there was $250,000 outstanding under the previous revolving credit facility, which had a then effective interest rate of 2.9%.
The new $500,000 revolving credit facility may be increased by an aggregate amount of up to $250,000, subject to the approval of the lenders, and expires in June 2017. The new revolving credit facility has an interest rate of LIBOR plus 150 basis points and an annual commitment fee of 20 basis points. The interest rate may change in the future based on changes in Legg Mason's credit ratings. This revolving credit facility is available to fund working capital needs and for general corporate purposes. There were no borrowings outstanding under this facility as of December 31, 2012.
The revolving credit facility and term loan have standard financial covenants, including a maximum net debt to EBITDA ratio (as defined in the documents) of 2.5 to 1 and minimum EBITDA to interest ratio (as defined in the documents) of 4.0 to 1. As of December 31, 2012, Legg Mason's net debt to EBITDA ratio was 1.2 to 1 and EBITDA to interest expense ratio was 12.6 to 1, and therefore, Legg Mason has maintained compliance with the applicable covenants.
Five-year Term Loan
The $500,000 term loan entered into in conjunction with the unsecured credit agreement noted above can be repaid at any time and will be due in four annual installments of $50,000, beginning in June 2013, with the remainder to be repaid at maturity in June 2017. The term loan bears interest at LIBOR plus 150 basis points, which may change in the future based on changes in Legg Mason's credit ratings. The effective interest rate as of December 31, 2012 was 1.7%.

17



5.5% Senior Notes
The $650,000 5.5% Senior Notes (the "Senior Notes") due May 2019, were sold at a discount of $6,754, which is being amortized to interest expense over the seven-year term. The Senior Notes are subject to certain nonfinancial covenants and registration rights, which if not complied with, require additional interest up to 0.50% over the stated rate. As of December 31, 2012, the interest rate was 6.00%, which includes 0.50% associated with the registration status of the Senior Notes. The exchange offer for the Senior Notes has been launched and upon completion of the twenty-day exchange period, the interest rate will revert back to the 5.5% stated rate. The Senior Notes can be redeemed at any time prior to their scheduled maturity, in part or in aggregate, at the greater of the related principal amount at that time or the sum of the remaining scheduled payments discounted at the Treasury rate (as defined) plus 0.50%, together with any related accrued and unpaid interest.
2.5% Convertible Senior Notes and Related Hedge Transactions
The terms of the repurchase of the Notes in May 2012 noted above included their repayment at par plus accrued interest, a prepayment fee of $6,250, and a non-cash exchange of warrants (the “Warrants”) to the holders of the Notes that replicate and extend the contingent conversion feature of the Notes. The cash payment of $1,256,250 to repurchase the Notes was allocated between their liability and equity components based on a liability fair value of $1,193,971, determined using a then current market interest rate of 4.1%, resulting in a loss on debt extinguishment of $68,975, including $7,851 of accelerated deferred issue costs. The remaining balance of the cash payment was allocated to the equity component of the Notes for a $62,279 reduction of additional paid-in capital, offset by related tax benefits of $31,446. The $1,193,971 amount of cash repurchase payment allocated to the liability component of the Notes upon their extinguishment exceeds the initial allocated value at issuance of $977,933, requiring the Consolidated Statements of Cash Flows for the nine months ended December 31, 2012 to include an allocation of the $216,038 excess to operating activities.
The Warrants issued to the holders of the Notes in connection with the repurchase of the Notes provide for the purchase, in the aggregate and subject to adjustment, of 14,205 shares of Legg Mason common stock, on a net share settled basis, at an exercise price of $88 per share. Upon exercise of the Warrants, Legg Mason will be required to deliver to the holders of the Warrants, at its election, either shares of its common stock or cash, in an amount based on the excess of the market price per share of its common stock over the exercise price of the Warrants. The Warrants expire in July 2017. Legg Mason has had the ability to settle its obligations under the Warrants with Legg Mason common stock. Accordingly, the Warrants are accounted for as equity.
In connection with the extinguishment of the Notes, the hedge transactions (purchased call options and warrants) executed in connection with the initial issuance of the Notes were also terminated.
The accreted value of long-term debt consists of the following:
 
 
December 31, 2012
 
March 31, 2012
 
 
Current Accreted Value
 
Unamortized Discount
 
Maturity Amount
 
Accreted Value
5.5% senior notes
 
$
643,836

 
$
6,164

 
$
650,000

 
$

Five-year term loan
 
500,000

 

 
500,000

 

Other term loans
 
877

 

 
877

 
9,883

2.5% convertible senior notes
 

 

 

 
1,127,009

Subtotal
 
1,144,713

 
6,164

 
1,150,877

 
1,136,892

Less: current portion
 
50,438

 

 
50,438

 
1,278

Total
 
$
1,094,275

 
$
6,164

 
$
1,100,439

 
$
1,135,614


During the three months ended December 31, 2012, a subsidiary of Legg Mason repaid the $8,153 outstanding balance on a term loan, included in Other term loans above as of March 31, 2012.


18



As of December 31, 2012, the aggregate maturities of long-term debt, based on their contractual terms, are as follows:
Remaining 2013
 
$

2014
 
50,438

2015
 
50,439

2016
 
50,000

2017
 
50,000

Thereafter
 
950,000

Total
 
$
1,150,877


At December 31, 2012, the estimated fair value of long-term debt was $1,201,642, and is classified as Level 2 in the fair value hierarchy.

Prior to the repurchase of the Notes in May 2012, as previously discussed, Legg Mason was accreting the carrying value of the Notes to the principal amount at maturity using an interest rate of 6.5% (the effective borrowing rate for non-convertible debt at the time of issuance) over its expected life of seven years, resulting in interest expense of $9,793 for the three months ended December 31, 2011, and $5,839 and $29,023 for the nine months ended December 31, 2012 and 2011, respectively.

7.  Stock-Based Compensation

Legg Mason's stock-based compensation includes stock options, employee stock purchase plans, restricted stock awards and units, performance shares payable in common stock, and deferred compensation payable in stock. Shares available for issuance under the active equity incentive stock plan as of December 31, 2012, were 10,876. 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.
 
Compensation expense relating to stock options for the three months ended December 31, 2012 and 2011, was $2,504 and $3,511, respectively, and for the nine months ended December 31, 2012 and 2011, was $8,407 and $11,192, respectively.
Stock option transactions during the nine months ended December 31, 2012, and 2011, respectively, are summarized below:
 
 
Nine Months Ended December 31,
 
 
2012
 
2011
 
 
Number of shares
 
Weighted-average exercise price per share
 
Number of shares
 
Weighted-average exercise price per share
Options outstanding at March 31
 
5,624

 
$
57.78

 
5,419

 
$
59.82

Granted
 
966

 
23.72

 
810

 
33.99

Exercised
 
(11
)
 
15.48

 
(14
)
 
26.41

Canceled/forfeited
 
(808
)
 
48.94

 
(375
)
 
48.84

Options outstanding at December 31
 
5,771

 
$
53.39

 
5,840

 
$
57.03


At December 31, 2012, options were exercisable on 3,572 shares, with a weighted-average exercise price of $68.69 and a weighted-average remaining contractual life of 2.8 years. Unamortized compensation cost related to unvested options (2,199 shares) at December 31, 2012, was $20,309 and is expected to be recognized over a weighted-average period of 1.7 years.

The weighted-average fair value of stock option grants during the nine months ended December 31, 2012 and 2011, using the Black-Scholes option pricing model, was $9.47 and $13.13 per share, respectively.


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The following weighted-average assumptions were used in the model for grants in fiscal 2013 and 2012:
 
 
Nine Months Ended December 31,
 
 
2012
 
2011
Expected dividend yield
 
1.44
%
 
1.39
%
Risk-free interest rate
 
0.81
%
 
1.95
%
Expected volatility
 
51.80
%
 
47.16
%
Expected life (in years)
 
5.02

 
5.12


Compensation expense relating to restricted stock and restricted stock units for the three months ended December 31, 2012 and 2011, was $10,730 and $8,876, respectively, and for the nine months ended December 31, 2012 and 2011, was $31,753 and $25,484, 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 Chief Executive Officer stepping down in September 2012.

Restricted stock and restricted stock unit transactions during the nine months ended December 31, 2012 and 2011, respectively, are summarized below:
 
 
Nine Months Ended December 31,
 
 
2012
 
2011
 
 
Number of shares
 
Weighted-average grant date value
 
Number of shares
 
Weighted-average grant date value
Unvested shares at March 31
 
2,873

 
$
33.83

 
2,637

 
$
33.01

Granted
 
2,185

 
24.04

 
1,315

 
33.79

Vested
 
(935
)
 
32.12

 
(806
)
 
32.44

Canceled/forfeited
 
(143
)
 
58.59

 
(55
)
 
32.85

Unvested shares at December 31
 
3,980

 
$
27.97

 
3,091

 
$
33.49


Unamortized compensation cost related to unvested restricted stock and restricted stock unit awards at December 31, 2012 of $81,294 is expected to be recognized over a weighted-average period of 1.7 years. In connection with the change in Legg Mason's Chief Executive Officer, in September 2012, 325 shares of restricted stock were granted to certain executives and key employees, with an aggregate value of $8,400. These shares vest on March 31, 2014, and are intended to retain and motivate these employees.

Compensation expense relating to the stock purchase plan and deferred compensation payable in stock for the three months ended December 31, 2012 and 2011, was $89 and $101, respectively, and for the nine months ended December 31, 2012 and 2011, was $325 and $385, respectively.

During the nine months ended December 31, 2012 and 2011, non-employee directors were granted 17 and 12 restricted stock units and 35 and 31 shares of common stock at a fair value of $1,250 and $1,375, respectively. As of December 31, 2012 and 2011, non-employee directors held 112 and 193 stock options, respectively, which are included in the outstanding options presented in the table above. As of December 31, 2012 and 2011, non-employee directors held 91 and 75 restricted stock units, respectively, which vest on the grant date and are, therefore, not included in the unvested shares of restricted stock and restricted stock units in the table above. During the nine months ended December 31, 2012 and 2011, non-employee directors did not exercise any stock options and no restricted stock units were distributed. During the nine months ended December 31, 2012 and 2011, there were 72 and 27 non-employee director stock options canceled or forfeited, respectively.

During fiscal 2012, Legg Mason established a long-term incentive plan (the "LTIP") under its equity incentive plan, which provides an additional element of compensation that is based on performance. Under the LTIP, executive officers were granted cash value performance units in the June 2011 quarter and the September 2012 quarter that will vest at the end of their respective three year periods based upon Legg Mason's cumulative adjusted earnings per share over the respective

20



periods. Awards granted under the LTIP may be settled in cash and/or shares of Legg Mason common stock, at the discretion of Legg Mason. The estimated payout amounts of the awards, if any, are expensed over the future vesting periods based on a probability assessment of the expected outcome under the LTIP provisions.

As part of the Company's streamlining initiative, as further discussed in Note 11, the employment of certain recipients of stock option and restricted stock awards has been terminated. The termination benefits extended to these employees included accelerated vesting of their unvested equity incentive awards to January 1, 2012, which precedes dates under the original terms of the awards. The portion of the awards subject to accelerated vesting was revalued and expensed over the new vesting period, the impact of which is included above in fiscal year 2012.

8. Commitments and Contingencies

Legg Mason leases office facilities and equipment under non-cancelable operating leases, and also has multi-year agreements for certain services. These leases and service agreements expire on varying dates through fiscal 2026. Certain leases provide for renewal options and contain escalation clauses providing for increased rentals based upon maintenance, utility and tax increases.
 
As of December 31, 2012, the minimum annual aggregate rentals under operating leases and service agreements are as follows:
Remaining 2013
 
$
35,044

2014
 
129,549