item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 following consolidated financial statements included item 8 report 2 financial statement schedules included pages s1 s7 report independent accountants financial statement schedules schedule iii condensed financial statement registrant schedule ix shortterm borrowings schedule x supplemental income statement information schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitted exhibits management contracts compensatory plans arrangements b reports form 8k filed quarter ended march 31 1994 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer date june 28 1994 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 14 exhibits financial statement schedules reports form 8k documents filed part report 1 following consolidated financial statements included item 8 report 2 financial statement schedules included pages s1 s5 report independent accountants financial statement schedules schedule condensed financial statement registrant schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitteditem 14 exhibits financial statement schedules reports form 8k documents filed part report 1 following consolidated financial statements included item 8 report page number report independent accountants 30 consolidated statements earnings 31 consolidated statements financial condition 32 consolidated statements changes stockholders equity 33 consolidated statements cash flows 34 notes consolidated financial statements 3547 2 financial statement schedules included pages s1 s5 report independent accountants financial statement schedules schedule condensed financial statement registrant schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitted 3 exhibits 31 articles incorporation company amended incorporated reference form 10q quarter ended september 30 1996 32 bylaws company amended restated april 25 1988 incorporated reference companys annual report form 10k year ended march 31 1988 4 company hereby agrees pursuant item 601b4iiia regulation sk furnish commission upon request copy instrument respect rights holders longterm debt company subsidiaries 101 legg mason inc 1981 incentive stock option plan amended june 2 1988 incorporated reference companys annual report form 10k year ended march 31 1988 102 legg mason inc 1988 nonemployee director stock option plan incorporated reference companys annual report form 10k year ended march 31 1993 103 legg mason wood walker incorporated deferred compensationphantom stock plan incorporated reference registration 3328609 form s8 104 legg mason inc 1991 omnibus longterm compensation plan incorporated reference exhibit definitive proxy statement companys 1991 annual meeting stockholders 105 form option agreement legg mason inc 1991 omnibus longterm compensation plan incorporated reference companys annual report form 10k year ended march 31 1993 106 legg mason inc executive incentive compensation plan incorporated reference appendix definitive proxy statement companys 1995 annual meeting stockholders 107 legg mason inc 1996 equity incentive plan incorporated reference appendix definitive proxy statement companys 1996 annual meeting stockholders 108 form option agreement legg mason inc 1996 equity incentive plan incorporated reference companys annual report form 10k year ended march 31 1996 109 form nonqualified stock option agreement legg mason inc 1996 equity incentive plan incorporated reference form 10q quarter ended september 30 1996 1010 executive convertible debenture purchase loan agreement legg mason inc executive officer legg mason inc dated august 29 1996 incorporated reference form 10q quarter ended december 31 1996 1011 legg mason inc executive convertible subordinated debenture due august 29 2000 issued executive officer legg mason inc incorporated reference form 10q quarter ended december 31 1996 1012 promissory note executive officer legg mason inc dated august 29 1996 incorporated reference form 10q quarter ended december 31 1996 1013 pledge agreement executive officer legg mason inc pledgor legg mason inc pledgee dated august 29 1996 incorporated reference form 10q quarter ended december 31 1996 11 statement regarding computation per share earnings filed herewith 21 subsidiaries company filed herewith 23 consent independent accountants filed herewith 27 financial data schedule filed exhibits management contracts compensatory plans arrangements b reports form 8k filed quarter ended march 31 1997 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer date june 27 1997 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date raymond mason chairman board june 27 1997 raymond mason president chief executive officer principal executive officer f barry bilson vice presidentfinance june 27 1997 f barry bilson principal financial accounting officer john f curley jr director june 27 1997 john f curley jr james w brinkley director june 27 1997 james w brinkley director june 1997 edmund j cashman jr charles bacigalupo director june 27 1997 charles bacigalupo harry ford jr director june 27 1997 harry ford jr nicholas j st george director june 27 1997 nicholas j st george richard j himelfarb director june 27 1997 richard j himelfarb james e ukrop director june 27 1997 james e ukrop john b levert jr director june 27 1997 john b levert jr harold l adams director june 27 1997 harold l adams john e koerner iii director june 27 1997 john e koerner iii roger w schipke director june 27 1997 roger w schipke w curtis livingston director june 27 1997 w curtis livingston edward obrien director june 27 1997 edward obrien peter f omalley director june 27 1997 peter f omalley margaret deb tutwiler director june 27 1997 margaret deb tutwiler william wirth director june 27 1997 william wirthitem 14 exhibits financial statement schedules reports form 8k documents filed part report 1 following consolidated financial statements included item 8 report page number report independent accountants 32 consolidated statements earnings 33 consolidated statements financial condition 34 consolidated statements changes stockholders equity 35 consolidated statements cash flows 36 notes consolidated financial statements 3750 2 financial statement schedules included pages s1 s5 report independent accountants financial statement schedules schedule condensed financial statement registrant schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitted 3 exhibits 31 articles incorporation company amended incorporated reference form 10q quarter ended september 30 1996 32 bylaws company amended restated april 25 1988 incorporated reference companys annual report form 10k year ended march 31 1988 4 company hereby agrees pursuant item 601b4iiia regulation sk furnish commission upon request copy instrument respect rights holders longterm debt company subsidiaries 101 legg mason inc 1981 incentive stock option plan amended june 2 1988 incorporated reference companys annual report form 10k year ended march 31 1988 102 legg mason inc 1998 stock option plan nonemployee directors filed herewith 103 legg mason wood walker incorporated deferred compensationphantom stock plan incorporated reference registration 3328609 form s8 104 legg mason inc 1991 omnibus longterm compensation plan incorporated reference exhibit definitive proxy statement companys 1991 annual meeting stockholders 105 form option agreement legg mason inc 1991 omnibus longterm compensation plan incorporated reference companys annual report form 10k year ended march 31 1993 106 legg mason inc executive incentive compensation plan incorporated reference appendix definitive proxy statement companys 1995 annual meeting stockholders 107 legg mason inc 1996 equity incentive plan incorporated reference appendix definitive proxy statement companys 1996 annual meeting stockholders 108 form option agreement legg mason inc 1996 equity incentive plan incorporated reference companys annual report form 10k year ended march 31 1996 109 form nonqualified stock option agreement legg mason inc 1996 equity incentive plan incorporated reference form 10q quarter ended september 30 1996 1010 executive convertible debenture purchase loan agreement legg mason inc executive officer legg mason inc dated august 29 1996 incorporated reference form 10q quarter ended december 31 1996 1011 legg mason inc executive convertible subordinated debenture due august 29 2000 issued executive officer legg mason inc incorporated reference form 10q quarter ended december 31 1996 1012 promissory note executive officer legg mason inc dated august 29 1996 incorporated reference form 10 q quarter ended december 31 1996 1013 pledge agreement executive officer legg mason inc pledgor legg mason inc pledgee dated august 29 1996 incorporated reference form 10q quarter ended december 31 1996 1014 agreement rtkl associates inc subsidiary company relating architectural engineering services provided subsidiary rtkl harold adams director company president chairman filed herewith 21 subsidiaries company filed herewith 23 consent independent accountants filed herewith 27 financial data schedule filed herewith exhibits management contracts compensatory plans arrangements b reports form 8k filed quarter ended march 31 1998 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer date june 29 1998 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date sraymond mason chairman board june 29 1998 raymond mason president chief executive officer principal executive officer f barry bilson vice presidentfinance june 29 1998 f barry bilson principal financial accounting officer james w brinkley director june 29 1998 james w brinkley edmund j cashman jr director june 29 1998 edmund j cashman jr charles bacigalupo director june 29 1998 charles bacigalupo harry ford jr director june 29 1998 harry ford jr nicholas j st george director june 29 1998 nicholas j st george richard j himelfarb director june 29 1998 richard j himelfarb james e ukrop director june 29 1998 james e ukrop john b levert jr director june 29 1998 john b levert jr harold l adams director june 29 1998 harold l adams john e koerner iii director june 29 1998 john e koerner iii roger w schipke director june 29 1998 roger w schipke w curtis livingston director june 29 1998 w curtis livingston edward obrien director june 29 1998 edward obrien peter f omalley director june 29 1998 peter f omalley margaret deb tutwiler director june 29 1998 margaret deb tutwiler william wirth director june 29 1998 william wirth s1 report independent accountants financial statement schedules report consolidated financial statements legg mason inc subsidiaries included page 32 form 10k connection audits financial statements also audited related financial statement schedules listed index page 53 form 10k opinion financial statement schedules referred considered relation basic financial statements takes whole present fairly material respects information required included therein coopers lybrand llp baltimore maryland may 4 1998 s1 s2 schedule legg mason inc parent company statements financial condition dollars thousands march 31 1997 1998 assets cash equivalents 38558 95314 resale agreements 73801 42623 investment securities 54023 11171 investments advances subsidiaries 358159 452851 2689 4000 527230 605959 liabilities stockholders equity liabilities dividends payable 2375 3025 2235 3211 senior notes 99581 99628 104191 105864 stockholders equity common stock par value 10 authorized 100000000 shares issued 20845592 1997 27524880 1998 2085 2753 additional paidin capital 194044 203133 retained earnings 226677 293263 net unrealized appreciation investment securities 233 946 423039 500095 527230 605959 see notes financial statements s2 s3 schedule legg mason inc parent company statements earnings dollars thousands years ended march 31 1996 1997 1998 revenue interest income 8906 13082 14962 gain sale investment securities 249 8906 13082 15211 expense interest expense 6113 8076 7781 operating expenses 1050 1423 2788 7163 9499 10569 earnings income taxes equity net earnings subsidiaries 1743 3583 4642 federal state income taxes 714 1434 1859 earnings equity net earnings subsidiaries 1029 2149 2783 equity net earnings subsidiaries 37252 55043 73338 net earnings 38281 57192 76121 see notes financial statements s3 s4 schedule legg mason inc parent company statements cash flows dollars thousands years ended march 31 1996 1997 1998 cash flows operating activities net earnings 38281 57192 76121 equity earnings subsidiaries 37252 55043 73338 increase decrease assets excluding acquisitions 1401 1202 1264 increase decrease liabilities excluding acquisitions 2587 1609 2231 cash provided operating activities 2215 1742 3750 cash flows investing activities net decrease increase resale agreements 29453 14388 31178 purchases investment securities 85718 168510 127737 proceeds sales maturities investment securities 22546 195166 171339 investments advances subsidiary 5738 17705 21354 acquisitions net cash acquired 2674 cash provided used investing activities 89561 29973 53426 cash flows financing activities repayment subordinated liabilities 69 29 issuance senior notes 99528 issuance common stock 3887 4976 9777 dividends paid 6058 8412 10197 cash provided used financing activities 97288 3465 420 net increase cash equivalents 9942 28250 56756 cash equivalents beginning year 366 10308 38558 cash equivalents end year 10308 38558 95314 interest payments 4828 1996 9406 1997 7481 1998 income tax payments made 1996 1997 1998 see notes financial statements s4 s5 legg mason inc parent company consolidated statement cash flows dollars thousands basis presentation parent company financial statements include accounts legg mason inc whollyowned subsidiaries notes consolidated financial statements legg mason inc subsidiaries included item 8 report include disclosures respect parent company transactions affiliates parent company interest income 1996 1997 1998 includes 5503 4509 3993 arising promissory note parent company investment advisory subsidiary company note 46714 march 31 1997 39812 march 31 1998 included investment advances subsidiaries addition interest income 1996 1997 1998 includes 407 363 1576 respectively principally arising senior subordinated loans brokerdealer subsidiary company indebtedness 5000 march 31 1997 40000 march 31 1998 included investment advances subsidiaries business combination company acquired brandywine asset management inc brandywine january 1998 issuance 2574156 shares common stock transaction accounted pooling interests accordingly parent company financial statements restated include accounts brandywine periods presented see note 2 notes consolidated financial statements legg mason inc subsidiaries included item 8 report s5item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 following consolidated financial statements included item 8 report page number report independent accountants 26 consolidated statements earnings 27 consolidated statements financial condition 28 consolidated statements changes stockholders equity 29 consolidated statements cash flows 30 notes consolidated financial statements 3137 2 financial statement schedules included pages s1 s5 report independent accountants financial statement schedules schedule condensed financial statement registrant schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitted 3 exhibits 31 articles incorporation company amended incorporated reference form 10q quarter ended september 30 1996 32 bylaws company amended restated april 25 1988 incorporated reference companys annual report form 10k year ended march 31 1988 4 company hereby agrees pursuant item 601b4iiia regulation sk furnish commission upon request copy instrument respect rights holders longterm debt company subsidiaries 101 legg mason inc 1981 incentive stock option plan amended june 2 1988 incorporated reference companys annual report form 10k year ended march 31 1988 102 legg mason inc 1998 stock option plan non employee directors incorporated reference companys annual report form 10k year ended march 31 1998 103 form option agreement legg mason inc 1998 stock option plan nonemployee directors incorporated reference form 10q quarter ended june 30 1998 104 legg mason wood walker incorporated deferred compensationphantom stock plan june 1999 amending restatement filed herewith 105 legg mason inc 1991 omnibus longterm compensation plan incorporated reference exhibit definitive proxy statement companys 1991 annual meeting stockholders 106 form option agreement legg mason inc 1991 omnibus longterm compensation plan incorporated reference companys annual report form 10k year ended march 31 1993 107 legg mason inc executive incentive compensation plan incorporated reference appendix definitive proxy statement companys 1995 annual meeting stockholders 108 legg mason inc 1996 equity incentive plan incorporated reference appendix definitive proxy statement companys 1996 annual meeting stockholders 109 form option agreement legg mason inc 1996 equity incentive plan incorporated reference companys annual report form 10k year ended march 31 1996 1010 form nonqualified stock option agreement legg mason inc 1996 equity incentive plan incorporated reference form 10q quarter ended september 30 1996 1011 executive convertible debenture purchase loan agreement legg mason inc executive officer legg mason inc dated august 29 1996 incorporated reference form 10q quarter ended december 31 1996 1012 legg mason inc executive convertible subordinated debenture due august 29 2000 issued executive officer legg mason inc incorporated reference form 10q quarter ended december 31 1996 1013 promissory note executive officer legg mason inc dated august 29 1996 incorporated reference form 10q quarter ended december 31 1996 1014 pledge agreement executive officer legg mason inc pledgor legg mason inc pledgee dated august 29 1996 incorporated reference form 10q quarter ended december 31 1996 1015 executive stock purchase loan agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1016 restricted stock agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1017 promissory note executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1018 pledge agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 21 subsidiaries company filed herewith 23 consent independent accountants filed herewith 27 financial data schedule filed herewith exhibits management contracts compensatory plans arrangements b reports form 8k filed quarter ended march 31 1999 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer date june 28 1999 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date raymond mason chairman board june 28 1999 raymond mason president chief executive officer principal executive officer timothy c scheve executive vice president june 28 1999 timothy c scheve principal financial officer charles j daley jr principal accounting officer june 28 1999 charles j daley jr james w brinkley director june 28 1999 james w brinkley edmund j cashman jr director june 28 1999 edmund j cashman jr charles bacigalupo director june 28 1999 charles bacigalupo harry ford jr director june 28 1999 harry ford jr nicholas j st george director june 28 1999 nicholas j st george richard j himelfarb director june 28 1999 richard j himelfarb james e ukrop director june 28 1999 james e ukrop harold l adams director june 28 1999 harold l adams john e koerner iii director june 28 1999 john e koerner iii roger w schipke director june 28 1999 roger w schipke w curtis livingston director june 28 1999 w curtis livingston edward obrien director june 28 1999 edward obrien peter f omalley director june 28 1999 peter f omalley margaret deb tutwiler director june 28 1999 margaret deb tutwiler william wirth director june 28 1999 william wirth report independent accountants financial statement schedules report consolidated financial statements legg mason inc subsidiaries included page 26 form 10k connection audits financial statements also audited related financial statement schedules listed index page 39 form 10k opinion financial statement schedules referred considered relation basic financial statements taken whole present fairly material respects information required included therein pricewaterhousecoopers llp baltimore maryland june 2 1999 s1 schedule legg mason inc parent company statements financial condition dollars thousands see notes financial statements s2 schedule legg mason inc parent company statements earnings dollars thousands see notes financial statements s3 schedule legg mason inc parent company statements cash flows dollars thousands interest payments 9406 1997 7481 1998 7371 1999 income tax payments made legg mason inc 1997 1998 1999 see notes financial statements s4 legg mason inc parent company notes financial statements dollars thousands basis presentation parent company financial statements include accounts legg mason inc addition assets liabilities whollyowned subsidiaries presented investments advances subsidiaries notes consolidated financial statements legg mason inc subsidiaries included item 8 report include disclosures respect parent company transactions affiliates parent company interest income 1997 1998 1999 includes 4509 3993 3367 respectively arising promissory note parent company investment advisory subsidiary company note 39812 march 31 1998 28519 march 31 1999 included investments advances subsidiaries addition interest income 1997 1998 1999 includes 363 1576 2865 respectively principally arising senior subordinated loans brokerdealer subsidiary company indebtedness 40000 march 31 1998 35000 march 31 1999 included investments advances subsidiaries income tax payments paid legg mason wood walker inc whollyowned subsidiary employee stock trust july 1998 emerging issues task force eitf reached consensus eitf issue 9714 accounting deferred compensation amounts earned held rabbi trust invested eitf 9714 eitf 9714 assets trust must consolidated employer value employers stock held rabbi trust must classified stockholders equity generally accounted manner similar treasury stock certain situations corresponding deferred compensation liability must recorded fair market value shares held rabbi trust changes fair market value deferred compensation liability september 30 1998 must recognized earnings subsidiary company adopted eitf 9714 september 30 1998 shares parent companys stock 1423619 march 31 1999 shown stockholders equity similar treasury stock cost deferred compensation obligation recorded liabilities fair market value stock held trust difference cost fair market value september 30 1998 presented separate component stockholders equity accordance eitf 9714 fiscal year ended march 31 1999 subsidiary company recorded noncash charge earnings 10352 included equity net earnings subsidiaries subsidiary company amended plan subsequent first quarter fiscal 2000 changes value stock held plan longer affect companys earnings stockholders equity substantially restored s5item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 following consolidated financial statements included item 8 report page number report independent accountants 28 consolidated statements earnings 29 consolidated statements financial condition 30 consolidated statements changes stockholders equity 31 consolidated statements comprehensive income 32 consolidated statements cash flows 33 notes consolidated financial statements 3442 2 financial statement schedules included pages s1 s6 report independent accountants financial statement schedules schedule condensed financial statements registrant schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitted 3 exhibits 31 articles incorporation company amended incorporated reference form 10q quarter ended september 30 2000 32 bylaws company amended restated april 25 1988 incorporated reference companys annual report form 10k year ended march 31 1988 4 company hereby agrees pursuant item 601b4iiia regulation sk furnish commission upon request copy instrument respect rights holders longterm debt company subsidiaries 101 legg mason inc 1981 incentive stock option plan amended june 2 1988 incorporated reference companys annual report form 10k year ended march 31 1988 102 legg mason inc stock option plan nonemployee directors incorporated reference companys annual report form 10k year ended march 31 1998 103 form option agreement legg mason inc stock option plan nonemployee directors incorporated reference form 10q quarter ended june 30 1998 104 legg mason wood walker incorporated deferred compensationphantom stock plan june 1999 amending restatement incorporated reference companys annual report form 10k year ended march 31 1999 105 legg mason inc 1991 omnibus longterm compensation plan incorporated reference exhibit definitive proxy statement companys 1991 annual meeting stockholders 106 form option agreement legg mason inc 1991 omnibus longterm compensation plan incorporated reference companys annual report form 10k year ended march 31 1993 107 legg mason inc executive incentive compensation plan incorporated reference appendix definitive proxy statement companys 2000 annual meeting stockholders 108 legg mason inc 1996 equity incentive plan incorporated reference registration statement 33308721 form s8 109 form option agreement legg mason inc 1996 equity incentive plan incorporated reference companys annual report form 10k year ended march 31 1996 1010 form nonqualified stock option agreement legg mason inc 1996 equity incentive plan incorporated reference form 10q quarter ended september 30 1996 1011 executive stock purchase loan agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1012 restricted stock agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1013 promissory note executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1014 pledge agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1015 form restricted stock agreement legg mason inc 1996 equity incentive plan filed herewith 1016 legg mason wood walker incorporated private client group deferred compensation plan filed herewith 21 subsidiaries company filed herewith 23 consent independent accountants filed herewith exhibits management contracts compensatory plans arrangements b reports form 8k filed quarter ended march 31 2001 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer date june 20 2001 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date raymond mason chairman board june 20 2001 president chief raymond mason executive officer principal executive officer thomas l souders senior vice president june 20 2001 treasurer thomas l souders principal financial accounting officer james w brinkley director june 20 2001 james w brinkley edmund j cashman jr director june 20 2001 edmund j cashman jr harry ford jr director june 20 2001 harry ford jr nicholas j st george director june 20 2001 nicholas j st george richard j himelfarb director june 20 2001 richard j himelfarb james e ukrop director june 20 2001 james e ukrop director june 20 2001 harold l adams john e koerner iii director june 20 2001 john e koerner iii roger w schipke director june 20 2001 roger w schipke director june 20 2001 w curtis livingston edward obrien director june 20 2001 edward obrien peter f omalley director june 20 2001 peter f omalley margaret deb tutwiler director june 20 2001 margaret deb tutwiler william wirth director june 20 2001 william wirth report independent accountants financial statement schedules report consolidated financial statements legg mason inc subsidiaries included page 28 form 10k connection audits financial statements also audited related financial statement schedules listed index page 45 form 10k opinion financial statement schedules referred considered relation basic financial statements taken whole present fairly material respects information required included therein pricewaterhousecoopers llp baltimore maryland may 3 2001 except note 5 date may 31 2001 s1 schedule 1 legg mason inc parent company statements financial condition dollars thousands see notes financial statements s2 schedule legg mason inc parent company statements earnings comprehensive income dollars thousands see notes financial statements s3 schedule legg mason inc parent company statements cash flows dollars thousands interest payments 6500 2001 6832 2000 7371 1999 income tax payments made 2001 2000 1999 see notes financial statements s4 legg mason inc parent company notes financial statements dollars thousands 1 basis presentation parent company financial statements include accounts legg mason inc addition assets liabilities whollyowned subsidiaries presented investments advances subsidiaries notes consolidated financial statements legg mason inc subsidiaries included item 8 report include disclosures respect parent company 2 transactions affiliates parent company interest income 2001 2000 1999 includes 7448 4091 3558 respectively arising promissory notes parent company asset management subsidiaries company notes 82369 march 31 2001 82938 march 31 2000 included investments advances subsidiaries addition interest income 2001 2000 1999 includes 2876 2526 2865 respectively principally arising subordinated loans brokerdealer subsidiary company indebtedness 35000 march 31 2001 2000 included investments advances subsidiaries income tax payments made legg mason wood walker inc wholly owned subsidiary 3 intangible assets intangible assets consist principally goodwill asset management contracts acquired purchase barrett associates inc 50 interest joint venture bingham dana llp intangible assets amortized using straightline method periods exceeding twenty years accumulated amortization march 31 2001 570 description business combinations see note 2 notes consolidated financial statements legg mason inc subsidiaries included item 8 report 4 deferred compensation employee stock trust july 1998 emerging issues task force eitf reached consensus eitf issue 9714 accounting deferred compensation arrangements amounts earned held rabbi trust invested eitf 9714 eitf 9714 assets trust must consolidated employer value employers stock held rabbi trust must classified stockholders equity generally accounted manner similar treasury stock certain situations corresponding deferred compensation liability must recorded fair value shares held rabbi trust changes fair value deferred compensation liability september 30 1998 must recognized earnings subsidiary company adopted eitf 9714 account deferred compensation employee stock trust plan effective september 30 1998 fiscal 2000 subsidiary company recorded noncash credit 1063 credit represents change fair value stock held trust april 1 1999 june 2 1999 fiscal 1999 subsidiary company recorded noncash charge earnings 10352 charge represents change fair value stock held trust september 30 1998 march 31 1999 s5 june 2 1999 subsidiary company amended plan limit distributions plan assets shares companys common stock accordance provisions eitf 9714 changes value stock held plan subsequent june 2 1999 longer affect companys earnings addition result plan amendment obligation previously recorded deferred compensation liability reclassified stockholders equity accordingly trust shares 2855192 march 31 2001 2345667 march 31 2000 corresponding liability presented components stockholders equity march 31 2001 5 subsequent events may 29 2001 company entered agreement acquire ownership interests private capital management lppcm manages assets high net worth individuals families endowments foundations selected institutions terms agreement company pay 682 million cash closing expected occur second quarter fiscal 2002 transaction also includes two contingent payments based pcms revenue growth third fifth anniversaries closing aggregate purchase price 1382 billion 682 million cash required closing 150 million available companys excess cash 250 million raised private offering zero coupon convertible notes described company currently assessing financing options respect remainder purchase price may 31 2001 company entered purchase agreement sale 567 million principal amount maturity zero coupon convertible notes due 2031 resulting gross proceeds approximately 250 million including amount covered exercised overallotment option convertible notes offered qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity issue price represents yield maturity 275 per annum initial conversion premium 25 market value companys common stock purchase date upon certain events note convertible 77062 shares companys common stock company may redeem convertible securities cash june 6 2006 accreted value addition company may required repurchase convertible securities accreted value option holders various dates beginning june 6 2003 repurchases paid cash shares companys common stock combination see note 17 notes consolidated financial statements legg mason inc subsidiaries included item 8 report s6item 14 controls procedures date within 90 days filing report legg mason’s management including chief executive officer principal financial officer evaluated effectiveness design operation legg mason’s disclosure controls procedures based evaluation legg mason’s management including chief executive officer principal financial officer concluded legg mason’s disclosure controls procedures effective timely alerting management including chief executive officer principal financial officer material information legg mason required included periodic securities exchange commission filings however evaluating disclosure controls procedures management recognized controls procedures matter well designed operated provide reasonable assurance achieving desired control objectives management necessarily required apply judgment evaluating costbenefit relationship possible controls procedures significant changes legg mason’s internal controls factors could significantly affect internal controls subsequent date evaluation part iv item 15item 14 principal accountant fees services information required item contained captions “independent registered public accounting firm audit fees” “independent registered public accounting firm preapproval independent registered public accounting firm services” definitive proxy statement 2004 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accounting fees services information required item contained captions “independent registered public accounting firm audit fees” “independent registered public accounting firm preapproval independent registered public accounting firm services” definitive proxy statement 2005 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accounting fees services information required item contained captions “proposed ratification appointment independent registered public accounting firm fees paid independent registered public accounting firm” “proposed ratification appointment independent registered public accounting firm preapproval independent registered public accounting firm services” definitive proxy statement 2007 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services information required item contained captions proposed ratification appointment independent registered public accounting firm fees paid independent registered public accounting firm proposed ratification appointment independent registered public accounting firm preapproval independent registered public accounting firm services definitive proxy statement 2011 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services information required item contained captions “proposed ratification appointment independent registered public accounting firm fees paid independent registered public accounting firm” “proposed ratification appointment independent registered public accounting firm preapproval independent registered public accounting firm services” definitive proxy statement 2012 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services information required item contained caption “proposed ratification appointment independent registered public accounting firm” definitive proxy statement 2013 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services information required item contained caption “proposed ratification appointment independent registered public accounting firm” definitive proxy statement 2016 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services information required item contained caption “proposed ratification appointment independent registered public accounting firm” definitive proxy statement 2019 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services following table presents fees professional services rendered pricewaterhousecoopers llp audit consolidated financial statements fiscal years ended march 31 2020 march 31 2019 fees billed services rendered pricewaterhousecoopers llp periods 1 audit fees consisted fees annual audit including audit internal controls financial reporting quarterly reviews financial statements services provided statutory audits certain subsidiaries 2 auditrelated fees consisted fees assurance related services reasonably related performance audit review financial statements attest services related compliance investment performance standards fees reviews controls related certain processes asset management subsidiaries services provided connection statutory regulatory filings engagements including consents related sec filings 3 tax fees consisted primarily tax advice compliance domestic international matters 4 fees included custody audits certain subsidiaries audit tax services consolidated investment vehicles due diligence reviews part iv item 15item 14 principal accountant fees services information required item contained captions “proposed ratification appointment independent registered public accounting firm fees paid independent registered public accounting firm” “proposed ratification appointment independent registered public accounting firm preapproval independent registered public accounting firm services” definitive proxy statement 2008 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services information required item contained caption “proposed ratification appointment independent registered public accounting firm” definitive proxy statement 2014 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services information required item contained caption “proposed ratification appointment independent registered public accounting firm” definitive proxy statement 2015 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services information required item contained caption “proposed ratification appointment independent registered public accounting firm” definitive proxy statement 2017 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 following consolidated financial statements included item 8 report 2 financial statement schedules included pages s1 s5 report independent accountants financial statement schedules schedule condensed financial statement registrant schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitted exhibits management contracts compensatory plans arrangements b reports form 8k filed quarter ended march 31 1995 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer date june 28 1995 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicatednanitem 14 exhibits financial statement schedules reports form 8k documents filed part report 1 following consolidated financial statements included item 8 report page number report independent accountants 41 consolidated statements earnings 42 consolidated statements financial condition 43 consolidated statements changes stockholders equity 44 consolidated statements comprehensive income 45 consolidated statements cash flows 46 notes consolidated financial statements 4758 2 financial statement schedules included pages s1 s7 report independent accountants financial statement schedules schedule condensed financial statements registrant schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitted 3 exhibits 31 articles incorporation legg mason amended incorporated reference form 10q quarter ended september 30 2000 32 bylaws legg mason amended restated april 25 1988 incorporated reference legg masons annual report form 10k year ended march 31 1988 4 legg mason hereby agrees pursuant item 601b4iiia regulation sk furnish commission upon request copy instrument respect rights holders longterm debt legg mason subsidiaries 101 legg mason inc stock option plan nonemployee directors incorporated reference legg masons annual report form 10k year ended march 31 1998 102 form option agreement legg mason inc stock option plan nonemployee directors incorporated reference form 10q quarter ended june 30 1998 103 legg mason wood walker incorporated deferred compensationphantom stock plan june 1999 amending restatement amended july 2001 incorporated reference appendix definitive proxy statement legg masons 2001 annual meeting stockholders 104 legg mason inc 1991 omnibus longterm compensation plan incorporated reference exhibit definitive proxy statement legg masons 1991 annual meeting stockholders 105 form option agreement legg mason inc 1991 omnibus longterm compensation plan incorporated reference legg masons annual report form 10k year ended march 31 1993 106 legg mason inc executive incentive compensation plan incorporated reference appendix definitive proxy statement legg masons 2000 annual meeting stockholders 107 legg mason inc 1996 equity incentive plan incorporated reference registration statement 33308721 form s8 108 form option agreement legg mason inc 1996 equity incentive plan incorporated reference legg masons annual report form 10k year ended march 31 1996 109 form nonqualified stock option agreement legg mason inc 1996 equity incentive plan incorporated reference form 10q quarter ended september 30 1996 1010 executive stock purchase loan agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1011 restricted stock agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1012 promissory note executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1013 pledge agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1014 form restricted stock agreement legg mason inc 1996 equity incentive plan incorporated reference legg masons annual report form 10k year ended march 31 2001 1015 legg mason wood walker incorporated private client group deferred compensation plan incorporated reference legg masons annual report form 10k year ended march 31 2001 1016 legg mason wood walker incorporated financial advisor deferred compensation plan filed herewith 1017 form legg mason wood walker incorporated key employee phantom stock agreements incorporated reference registration statement 33359841 form s8 1018 form legg mason wood walker incorporated professional branch manager phantom stock agreements incorporated reference registration statement 33353102 form s8 1019 purchase agreement dated may 29 2001 among legg mason inc carnes capital corporation private capital management lp pcmgp inc mccpcm inc miles collier bruce sherman gregg j powers incorporated reference form 10q quarter ended june 30 2001 1020 stock purchase agreement dated july 16 2001 among legg mason inc royce associates inc shareholders royce associates inc royce management company incorporated reference form 10q quarter ended september 30 2001 12 computation consolidated ratios earnings fixed charges filed herewith 21 subsidiaries company filed herewith 23 consent independent accountants filed herewith exhibits management contracts compensatory plans arrangements b reports form 8k filed quarter ended march 31 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer date june 28 2002 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent accountants financial statement schedules report consolidated financial statements legg mason inc subsidiaries included page 41 form 10k connection audits financial statements also audited related financial statement schedules listed index page 61 form 10k opinion financial statement schedules referred considered relation basic financial statements taken whole present fairly material respects information required included therein pricewaterhousecoopers llp baltimore maryland may 3 2002 s1 schedule legg mason inc parent company statements financial condition dollars thousands see notes financial statements s2 schedule legg mason inc parent company statements earnings comprehensive income dollars thousands see notes financial statements s3 schedule legg mason inc parent company statements cash flows dollars thousands interest payments 20844 2002 6500 2001 6832 2000 income tax payments made 2002 2001 2000 see notes financial statements s4 legg mason inc parent company notes financial statements dollars thousands 1 basis presentation parent company financial statements include accounts legg mason inc parent company addition assets liabilities subsidiaries presented investments advances subsidiaries notes consolidated financial statements legg mason inc subsidiaries included item 8 report include disclosures respect parent company 2 transactions affiliates parent company interest income 2002 2001 2000 includes 6890 10324 6617 respectively arising promissory notes parent company subsidiaries notes 76027 march 31 2002 117369 march 31 2001 included investments advances subsidiaries fiscal year brokerdealer subsidiary parent company repaid 35000 subordinated loan income tax payments made legg mason wood walker inc whollyowned subsidiary 3 firm investments firm investments include investments marketable private equity securities limited partnerships make private equity investments unrealized gains losses marketable equity securities included accumulated comprehensive loss unless temporary impairment determined exist case unrealized loss charged earnings realized unrealized gains losses private equity securities included revenue parent company shares ratably income expenses investments limited partnerships records interest equity method 4 intangible assets goodwill july 2001 financial accounting standards board fasb issued statement financial accounting standards sfas 141 business combinations sfas 142 goodwill intangible sfas 141 requires business combinations initiated june 30 2001 accounted using purchase method addition provides cost acquired entity must allocated assets acquired including identifiable intangible assets liabilities assumed based estimated fair values date acquisition excess cost fair value net assets acquired must recognized goodwill sfas 142 provides goodwill longer amortized value identifiable intangible asset must amortized useful life unless asset determined indefinite useful life goodwill must tested impairment least annually testing goodwill completed impairment march 31 2002 intangible assets consisting asset management contracts reported cost net accumulated amortization 1073 440 march 31 2002 2001 respectively estimated amortization expense five years subsequent march 31 2002 633 per year carrying value goodwill 9200 11258 march 31 2002 2001 respectively attributable asset management reporting segment s5 5 longterm debt parent companys longterm debt march 31 2002 consists 423979 675 senior notes 255667 zerocoupon contingent convertible senior notes 99817 650 senior notes 2002 parent company issued longterm fixed rate debt fund acquisitions july 2 2001 parent company issued 425000 principal amount senior notes due july 2 2008 bear interest 675 notes sold discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs june 6 2001 parent company issued 567000 principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 resulting gross proceeds approximately 250000 convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year upon certain events including sale price parent companys common stock reaching certain thresholds convertible notes rated specified credit ratings convertible notes called redemption note convertible 77062 shares parent companys common stock subject adjustment parent company may redeem convertible notes cash june 6 2006 accreted value addition parent company may required repurchase convertible notes accreted value option holders june 6 2003 2005 2007 2011 every five years thereafter 2026 upon change control parent company repurchases paid cash shares parent companys common stock combination net proceeds offering 244375 payment debt issuance costs debt issuance costs included assets amortized twoyear period first repurchase option holders approximately 44 million shares common stock reserved issuance upon conversion parent company also outstanding 100000 principal amount senior notes due february 15 2006 bear interest 650 notes issued discount yield 657 march 31 2002 parent company 75000 available issuance additional debt convertible debt securities pursuant shelf registration march 31 2002 aggregate maturities longterm debt based contractual terms follows 2003 2004 2005 2006 100000 2007 thereafter 992000 1092000 6 deferred compensation stock trust accordance emerging issues task force eitf issue 9714 accounting deferred compensation arrangements amounts earned held rabbi trust invested assets rabbi trusts consolidated employer value employers stock held rabbi trusts classified stockholders equity generally accounted manner similar treasury stock therefore shares parent company issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held plan march 31 2002 2001 3044413 2855192 respectively s6 7 stock repurchase fiscal 2002 board directors approved stock repurchase plan parent company authorized repurchase 3 million shares open market discretion march 31 2002 parent company repurchased retired 136800 shares cost 7130 8 commitments contingencies march 31 2002 parent company contingent obligations 818400 related business acquisitions payable march 31 2007 addition parent company guarantor certain leases office facilities equipment noncancelable operating leases parent company also guarantees secured warehouse line credit used subsidiary fund commercial mortgage loans s7item 14 principal accounting fees services information required item contained captions “proposed ratification appointment independent registered public accounting firm fees paid independent registered public accounting firm” “proposed ratification appointment independent registered public accounting firm preapproval independent registered public accounting firm services” definitive proxy statement 2006 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services information required item contained captions proposed ratification appointment independent registered public accounting firm fees paid independent registered public accounting firm proposed ratification appointment independent registered public accounting firm preapproval independent registered public accounting firm services definitive proxy statement 2009 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services information required item contained captions proposed ratification appointment independent registered public accounting firm fees paid independent registered public accounting firm proposed ratification appointment independent registered public accounting firm preapproval independent registered public accounting firm services definitive proxy statement 2010 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15item 14 principal accountant fees services information required item contained caption “proposed ratification appointment independent registered public accounting firm” definitive proxy statement 2018 annual meeting stockholders information incorporated herein reference proxy statement part iv item 15 item 7 managements discussion analysis results operations financial condition legg mason inc subsidiaries company principally engaged providing securities brokerage investment advisory investment banking mortgage banking services individuals institutions corporations municipalities companys profitability sensitive variety factors including volume trading securities volatility general level market prices demand investment banking mortgage banking services favorable conditions securities industry including record underwriting levels increased commission revenues strong trading profits prevailed companys fiscal year ended march 31 1994 company achieved record net earnings fifth consecutive year generally lower interest rates contributed substantially higher revenues securities brokerage investment advisory investment banking activities however march 1994 quarter interest rates rose depressing bond stock prices adversely impacting companys investment banking revenues trading profits net earnings uncertain whether market conditions experienced march 1994 quarter continue fiscal 1995 longer companys investment advisory activities contribution profitability grown significantly past ten years assets management institutions companysponsored mutual funds private accounts 167 billion march 31 1994 27 131 billion year earlier 300 million ten years ago earnings investment advisory services tend stable securities brokerage investment banking activities less affected changes securities market conditions results individual period considered representative future profitability many companys activities fixed operating costs decline reduced levels volume company attempts reduce costs particularly periods low volume general rule attempt personnel reduction accordingly sustained periods unfavorable market conditions may adversely affect profitability results operations following table sets forth periods indicated items consolidated statements earnings percentages total revenues increase decrease item percentage amount previous period fiscal 1994 revenues net earnings reached record levels revenues 3975 million 18 increase revenues 3363 million fiscal 1993 net earnings increased 19 360 million 302 million prior fiscal year revenues derived securities transactions individual investors constituted approximately 50 companys total revenues company believes continue largest single source revenues foreseeable future revenues commissions rose 21 1414 million fiscal 1994 principally increases sales listed securities nonaffiliated mutual funds variable annuities overthecounter securities fiscal 1994 commission revenues benefited active rising stock market attributable part investors seeking higher investment returns available certificates deposit money market accounts fiscal 1993 commissions rose 4 levels fiscal 1992 principally increases listed securities transaction volume sales nonaffiliated mutual funds offset part decline overthecounter securities transaction volume prior years thenrecord levels principal transactions revenues principal transactions fell 2 539 million fiscal 1994 result lower sales taxable fixedincome securities decline profits firmowned securities positions declines substantially offset increased sales overthecounter securities fiscal 1993 principal transactions rose 3 550 million increases sales us government mortgagebacked overthecounter securities losses certain fixedincome securities positions reduced revenues secondarymarket municipal bond transactions partially offset gains category investment advisory related fees investment advisory related fees rose 29 19 fiscal 1994 1993 respectively growth assets management companysponsored mutual funds companys fixedincome advisory subsidiary well growth various types feebased brokerage accounts assets management mutual funds individual institutional accounts managed companys subsidiaries 167 billion march 31 1994 fees assets management feebased brokerage accounts accounted 165 total revenues fiscal 1994 graph depicts growth investment advisory related fee revenue assets management five fiscal periods ended march 31 1994 investment banking investment banking revenues rose 19 record 793 million fiscal 1994 result selling concessions management fees earned substantially higher level corporate underwritings particularly comanaged offerings real estate investment trusts fiscal 1993 investment banking revenues increased 57 666 million reflecting strong increases corporate municipal underwriting activity low interest rates higher securities valuations important factors growth investment banking revenues fiscal years 1994 1993 revenues rose 21 274 million fiscal 1994 primarily increased mortgage banking loan origination fees addition certain fees earned fairfield group subsequent acquisition april 1993 real estate industry gradually emerging prolonged downward cycle companys mortgage banking subsidiaries benefited increased volume loan originations fiscal 1993 revenues rose 43 226 million significant increase commercial mortgage banking origination servicing fees offset part reduction gains sales investment securities expenses compensation benefits compensation benefits rose 18 2290 million fiscal 1994 following 18 increase 1939 million fiscal 1993 increases years reflect higher sales compensation increased commissionbased revenues personnel additions certain product support areas higher profitabilitybased compensation substantial part compensation expense fluctuates proportion level business activity generally affect companys profit margins compensation costs primarily salaries benefits fixed may decline reduced levels volume therefore profitability may adversely affected sustained periods unfavorable market conditions slow revenue growth new acquired businesses product areas occupancy equipment rental occupancy equipment rental rose 15 269 million fiscal 1994 increased transactionrelated data processing costs higher rental payments corporate headquarters certain branch office locations fiscal 1993 occupancy equipment rental rose 3 principally additional investment banking brokerage office locations communications rose 14 12 fiscal 1994 1993 respectively reflecting increases telephone transaction related variable costs attributable increased business activity floor brokerage clearing fees floor brokerage clearing fees increased 4 58 million fiscal 1994 higher securities transaction volume fiscal 1993 floor brokerage clearing fees fell 19 reduction costs clearing services attributable part conversion selfclearing fixedincome securities transactions beginning june 1991 expense rose 17 383 million fiscal 1994 increased litigationrelated expenses higher promotional programming expenses fiscal 1993 expense rose 3 increased advertising expenses offset lower legal costs amortization intangibles interest revenue expense interest revenue increased 25 300 million fiscal 1994 result increased stock loan conduit activity larger customer margin account balances investment proceeds companys 680 million convertible subordinated debenture offering completed april 1993 increases partially offset lower interest revenues reduced holdings fixedincome securities interest expense increased 32 154 million primarily debt service convertible subordinated debentures increased stock loan conduit activity interest revenue declined 6 240 million fiscal 1993 result substantially lower interest rates offset part interest earned larger holdings fixedincome securities interest expense fell 13 substantially lower interest rates offset part interest higher shortterm borrowings result issuance convertible subordinated debentures april 1993 companys net interest margin declined fiscal 1994 487 515 fiscal 1993 income taxes income taxes increased 23 232 million fiscal 1994 higher pretax earnings companys effective tax rate increased 391 383 result higher corporate income tax rates following enactment 1993 omnibus budget reconciliation act companys effective tax rate declined 383 fiscal 1993 397 fiscal 1992 result lower effective state income tax rate liquidity capital resources substantial portion companys assets liquid consisting mainly cash assets readily convertible cash assets financed primarily free credit balances equity capital convertible debentures bank lines credit payables year ended march 31 1994 cash equivalents increased 152 million cash flow operating activities 733 million resulting primarily reductions companys securities inventories net earnings adjusted depreciation amortization company used 602 million cash investing activities principally purchase investment securities resale agreements quotation office equipment cash flow financing activities 21 million resulting issuance 680 million 525 convertible subordinated debentures offset cash used repayment shortterm borrowings repurchase agreements proceeds convertible debenture offering invested resale agreements investment securities proceeds intended use working capital general corporate purposes including expansion companys securities brokerage business continued expansion diversification investment advisory financial services businesses internal growth acquisition companys brokerdealer subsidiaries subject requirements secs net capital rule designed measure general financial soundness liquidity brokerdealers march 31 1994 brokerage subsidiaries aggregate net capital 1053 million exceeded minimum net capital requirements 992 million graph depicts growth regulatory net capital defined sec rule 15c31 five fiscal periods ended march 31 1994 principal sources companys funds investment advisory brokerdealer subsidiaries amount brokerdealers net assets may distributed subject restrictions applicable net capital rules addition company revolving bank line credit amount 230 million none currently outstanding companys subsidiaries committed bank lines credit aggregating 1163 million pursuant may borrow shortterm demand basis generally prevailing broker call rates management believes funds available operations lines credit sufficient meet present reasonably foreseeable capital needs although company may augment capital funds continued expansion internal growth acquisition company borrows lends securities normal course business facilitate settlement customer proprietary transactions addition company engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis effects inflation companys assets significantly affected inflation primarily monetary consisting cash resale agreements securities owned receivables however rate inflation affects various expenses including employee compensation occupancy communications may readily recoverable charges services provided company recent accounting development statement financial accounting standards 115 accounting certain investments debt equity securities issued financial accounting standards board may 1993 statement 115 effective fiscal years beginning december 15 1993 company adopt provisions statement 115 prospectively beginning fiscal 1995 impact adoption material companys financial position results operations item 8item 7 managements discussion analysis results operations financial condition legg mason inc subsidiaries company principally engaged providing securities brokerage investment advisory investment banking commercial mortgage banking services individuals institutions corporations municipalities companys profitability sensitive variety factors including volume trading securities volatility general level market prices demand investment banking mortgage banking services fiscal year ended march 31 1996 company benefited favorable conditions us securities markets us equity markets achieved record trading volumes price levels principally rising corporate profits declining interest rates low inflation result favorable environment healthy revenue gains companys business areassecurities brokerage investment advisory services investment mortgage bankingthe company achieved record earnings fiscal 1996 uncertain favorable conditions experienced fiscal 1996 continue fiscal 1997 longer companys investment advisory activities contribution operating results grown significantly internal growth acquisition past ten years fiscal 1996 company acquired bartlett co bartlett lehman brothers global asset management limited since renamed western asset global management limited western asset global described note 2 notes consolidated financial statements bartlett acquired january 1996 manages approximately 22 billion high net worth individuals family groups institutions western asset global acquired february 1996 manages assets approximately 27 billion invested principally international fixedincome securities currencies two additions assets management institutions companysponsored mutual funds private accounts managed companys subsidiaries 354 billion march 31 1996 44 246 billion year earlier 12 billion ten years ago earnings investment advisory services tend stable securities brokerage investment banking activities less affected changes securities market conditions companys financial statements periods presented restated include results bartlett acquired pooling interests basis january 1996 results individual period considered representative future profitability many companys activities fixed operating costs decline reduced levels volume company attempts reduce costs particularly periods low volume general rule attempt personnel reductions accordingly sustained periods unfavorable market conditions may adversely affect profitability results operations following table sets forth periods indicated items consolidated statements earnings percentages total revenues increase decrease item percentage amount previous period fiscal 1996 revenues net earnings reached record levels substantially higher prior fiscal year primary fully diluted earnings per share although records also rose significantly yearearlier amounts revenues 5160 million 33 increase revenues 3891 million fiscal 1995 net earnings 379 million 133 net earnings 163 million prior fiscal year primary earnings per share increased 112 248 117 fully diluted earnings per share 215 105 increase 105 fiscal 1995 fiscal year 1996 includes full years results batterymarch financial management batterymarch investment advisory firm manages international emerging market us equity portfolios institutional clients acquired january 1995 fiscal 1995 interest rate levels rose sharply adversely impacting companys investment banking securities brokerage revenues contrast fiscal 1994 results prior fiscal 1996 successful companys history achieved favorable corporate municipal finance environment revenues derived securities transactions individual investors constituted approximately 50 companys total revenues fiscal 1996 company believes continue largest single source revenues foreseeable future revenues commissions commission revenues rose 38 1692 million fiscal 1996 principally result increases sales listed securities nonaffiliated mutual funds overthecounter securities fiscal 1996 commission revenues benefited active rising stock market attributable part increased corporate profits declining interest rates fiscal 1995 commission revenues fell 14 1230 million levels fiscal 1994 lower sales nonaffiliated mutual funds listed overthecounter securities commission revenues adversely affected rising interest rates investor caution particularly part individual investors principal transactions revenues principal transactions increased 11 659 million principally result increased sales overthecounter stocks corporate debt securities higher trading profits firm proprietary positions partially offset decline sales municipal securities sales trading profits overthecounter securities impacted favorable equity securities markets sales corporate debt securities reflect full years results companys expansion taxable fixedincome marketing capability prior fiscal year fiscal 1995 principal transactions rose 10 595 million principally increased sales municipal corporate debt securities offset part lower sales mortgagebacked securities higher sales municipal securities secondary markets substantially offset sharp declines municipal new issue volume investment advisory related fees investment advisory related fees increased 41 1448 million result fees earned batterymarch coupled growth assets management companysponsored mutual funds companys fixedincome investment advisory subsidiary excluding fees earned batterymarch investment advisory related fees rose 26 fiscal 1996 fiscal 1995 investment advisory related fees rose 28 1025 million principally addition fees earned batterymarch gray seifert co gray seifert growth assets management companysponsored mutual funds companys fixedincome advisory subsidiary graph depicts growth assets management investment advisory related fees revenue five fiscal periods ended march 31 1996 investment banking investment banking revenues rose 25 433 million principally result increased fees private placement financial advisory engagements gains fees corporate stock offerings substantially offset decline number size comanaged offerings real estate investment trusts fiscal 1995 investment banking revenues declined 56 347 million record levels achieved prior fiscal year significantly higher interest rates led industrywide declines corporate municipal securities offerings revenues rose 20 358 million principally result increased loan origination fees companys commercial mortgage banking subsidiaries fiscal 1995 revenues increased 4 298 million primarily increased account maintenance fees rental income office building purchased fiscal 1995 partially offset gain sale exchange seat prior fiscal year expenses compensation benefits compensation benefits increased 30 2996 million reflecting higher sales profitabilitybased compensation personnel additions result increased business activity additionally current year includes expenses batterymarch fiscal 1995 compensation benefits fell 5 2305 million lower commission profitabilitybased compensation partially offset personnel additions certain product support areas twelve new branch office locations substantial part compensation expense fluctuates proportion level business activity compensation costs primarily salaries benefits fixed may decline reduced levels volume therefore profitability may adversely affected sustained periods unfavorable market conditions slow revenue growth acquired businesses new product areas occupancy equipment rental occupancy equipment rental increased 18 364 million increased rent depreciation expense related new branch office locations expanded product areas higher transaction volume processed companys data processing service bureau addition expenses batterymarch fiscal 1995 occupancy equipment rental rose 10 309 million inclusion expenses batterymarch gray seifert higher depreciation data processing expenses related branch office product area expansion communications communication costs increased 6 281 million principally increased quote service costs addition expenses batterymarch fiscal 1995 communication costs rose 13 265 million result higher quote service expenses branch offices product areas higher printing paper expenses floor brokerage clearing fees despite increased trading volume floor brokerage clearing fees fell 7 51 million reflecting lower execution expenses efficient order routing execution capabilities fiscal 1995 floor brokerage clearing fees fell 12 55 million reflecting decline securities transaction volume expense increased 12 569 million attributable addition batterymarch including amortization related intangible assets reduces net earnings operating cash flows addition fiscal 1996 includes expenses related acquisition bartlett offset lower litigationrelated expenses fiscal 1995 expense rose 26 508 million increased litigationrelated expenses including 20 million charge settlement class action lawsuit inclusion expenses batterymarch gray seifert subsequent acquisition higher promotional programming expense interest revenue expense interest revenue increased 44 571 million higher interest earned customer margin accounts conduit stock loan balances firm investments due larger account balance levels higher average interest rates interest expense increased 52 262 million higher interest paid larger customer credit conduit stock loan balances higher average interest rates fiscal 1995 interest revenue increased 31 397 million primarily result higher interest rates earned substantially larger customer margin account balances stock loan conduit activity offset part reduction interest earned proprietary securities positions interest expense increased 11 172 million higher interest rates paid customer credit conduit stock loan balances offset part decline interest paid shortterm borrowings result higher levels conduit stock loan activity companys net interest margin declined 542 fiscal 1996 566 fiscal 1995 graph depicts interest revenue interest expense five fiscal periods ended march 31 1996 income taxes income taxes rose 127 260 million principally increase pretax earnings companys effective tax rate declined 407 413 result lower effective state income tax rates fiscal 1995 income taxes fell 51 114 million lower pretax earnings companys effective tax rate increased 413 391 result federal tax law changes higher effective state income tax rates liquidity capital resources companys assets primarily liquid consisting mainly cash assets readily convertible cash assets financed primarily free credit balances equity capital senior notes payable subordinated borrowings bank lines credit payables year ended march 31 1996 cash equivalents increased 293 million cash flows financing activities provided 1033 million primarily result issuance 100 million principal amount senior notes cash flows operating activities 499 million attributable fiscal 1996 net earnings adjusted depreciation amortization company invested cash 1239 million provided financing operating activities investment securities resale agreements equipment february 1996 company issued 100 million 650 senior notes due february 15 2006 proceeds offering used general corporate purposes company available offering additional 50 million debt convertible debt securities pursuant shelf registration filed january 1996 july 1995 company called redemption 345 million aggregate principal amount outstanding 7 convertible subordinated debentures due june 15 2011 debentures substantially holders converted debentures common stock fiscal 1995 company acquired assets batterymarch financial management utilizing 541 million cash see note 2 notes consolidated financial statements regarding future payment may required business combination companys brokerdealer subsidiaries subject requirements secs net capital rule designed measure general financial soundness liquidity brokerdealers march 31 1996 brokerage subsidiaries aggregate net capital 1024 million exceeded minimum net capital requirements 929 million graph depicts regulatory net capital requirements required net capital 33196 9524 excess net capital 33196 92870 total net capital 33196 102394 principal sources companys funds investment advisory brokerdealer subsidiaries amount brokerdealers net assets may distributed subject restrictions applicable net capital rules addition 50 million available shelf registration company revolving bank line credit amount 50 million none currently outstanding companys subsidiaries bank lines credit aggregating 2723 million typically subject termination either partys discretion pursuant may borrow shortterm demand basis generally prevailing broker call rates management believes funds available operations lines credit sufficient meet present reasonably foreseeable capital needs although company may augment capital funds continued expansion internal growth acquisition company borrows lends securities normal course business facilitate settlement customer proprietary transactions addition company engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis effects inflation companys assets significantly affected inflation primarily monetary consisting cash resale agreements securities receivables however rate inflation affects various expenses including employee compensation occupancy communications may readily recoverable charges services provided company recent accounting developments fiscal 1996 financial accounting standards board issued statement 122 accounting mortgage servicing rights statement 123 accounting stockbased compensation effective fiscal years beginning december 15 1995 impact adopting statement 122 fiscal 1997 material companys financial position results operations company adopt statement 123 fiscal 1997 yet made determination whether adopt compensation disclosure provisions statement item 8item 7 managements discussion analysis results operations financial condition legg mason inc subsidiaries company principally engaged providing securities brokerage investment advisory investment banking commercial mortgage banking services individuals institutions corporations municipalities companys profitability sensitive variety factors including volume trading securities volatility general level market prices demand investment banking mortgage banking services favorable conditions us securities markets prevailed fiscal 1996 continued fiscal 1997 fiscal 1997 us equity markets achieved record trading volume price levels principally continuing economic growth gains corporate earnings modest inflation result companys core businesses securities brokerage investment advisory services investment banking contributed second consecutive year record earnings uncertain favorable conditions experienced past two fiscal years continue fiscal 1998 longer companys investment advisory activities contribution operating results grown significantly internal growth acquisition past ten years fiscal 1996 company acquired bartlett co bartlett lehman brothers global asset management limited since renamed western asset global management limited western asset global described note 2 notes consolidated financial statements bartlett acquired january 1996 manages approximately 24 billion high net worth individuals family groups institutions western asset global acquired february 1996 manages assets approximately 21 billion invested principally international fixedincome securities currencies total assets management institutions companysponsored mutual funds private accounts managed companys subsidiaries 438 billion march 31 1997 24 354 billion year earlier 52 billion ten years ago earnings investment advisory services tend stable securities brokerage investment banking activities less affected changes securities market conditions companys financial statements periods presented restated include results bartlett acquired pooling interests basis january 1996 results individual period considered representative future profitability many companys activities fixed operating costs decline reduced levels volume company attempts reduce costs particularly periods low volume general rule attempt personnel reductions accordingly sustained periods unfavorable market conditions may adversely affect profitability results operations following table sets forth periods indicated items consolidated statements earnings percentages total revenues increase decrease item percentage amount previous period fiscal 1997 revenues net earnings per share reached record levels substantially higher prior fiscal year revenues 6397 million 24 increase revenues 5160 million fiscal 1996 net earnings 566 million 49 net earnings 379 million prior fiscal year primary earnings per share increased 26 313 248 fully diluted earnings per share 297 38 increase 215 fiscal 1996 revenues commissions commission revenues rose 12 1900 million fiscal 1997 increases sales listed securities variable annuities nonaffiliated mutual funds fiscal 1996 commission revenues rose 38 1692 million levels fiscal 1995 increases sales listed securities nonaffiliated mutual funds overthecounter securities fiscal 1997 1996 commission revenues benefited active rising stock market principal transactions revenues principal transactions increased 11 732 million primarily higher sales overthecounter stocks fixedincome securities partially offset losses proprietary positions energyrelated equity securities sales overthecounter securities benefited favorable equity securities markets fiscal 1996 revenues principal transactions increased 11 659 million principally result increased sales overthe counter stocks corporate debt securities higher trading profits firm proprietary positions partially offset decline sales municipal securities sales corporate debt securities reflect full years results companys expansion taxable fixedincome marketing capability prior fiscal year investment advisory related fees investment advisory related fees increased 27 1834 million principally result growth assets management companysponsored mutual funds companys fixedincome investment advisory subsidiary feebased brokerage accounts addition fiscal 1997 includes full year fees earned western asset global fiscal 1996 investment advisory related fees rose 41 1448 million result fees earned batterymarch coupled growth assets management companysponsored mutual funds companys fixedincome investment advisory subsidiary excluding fees earned batterymarch investment advisory related fees rose 26 fiscal 1996 investment banking investment banking revenues rose 66 721 million principally result increased corporate finance activities particularly comanaged public offerings energy real estate investment trustrelated securities financial advisory services fiscal 1996 investment banking revenues rose 25 433 million principally result increased fees private placement financial advisory engagements gains fees corporate stock offerings substantially offset decline number size comanaged offerings real estate investment trusts revenues rose 3 370 million principally result higher transactionrelated fees partially offset decline loan origination fees companys commercial mortgage banking subsidiaries fiscal 1996 revenues rose 20 358 million principally result increased loan origination fees companys commercial mortgage banking subsidiaries expenses compensation benefits compensation benefits increased 21 3629 million reflecting higher sales profitabilitybased compensation personnel additions sales product support areas fiscal 1996 compensation benefits increased 30 2996 million reflecting higher sales profitabilitybased compensation personnel additions result increased business activity additionally fiscal 1996 includes expenses batterymarch substantial part compensation expense fluctuates proportion level business activity compensation costs primarily salaries benefits fixed may decline reduced levels volume therefore profitability may adversely affected sustained periods unfavorable market conditions slow revenue growth acquired businesses new product areas occupancy equipment rental occupancy equipment rental increased 18 430 million higher depreciation expense related increased investments technology higher transaction volume processed companys data processing service bureau addition expenses western asset global fiscal 1996 occupancy equipment rental increased 18 364 million increased rent depreciation expense related new branch office locations expanded product areas higher transaction volume processed companys data processing service bureau addition expenses batterymarch communications costs increased 9 305 million primarily higher printing office supply expense result increased business activity addition expenses western asset global fiscal 1996 communications costs increased 6 281 million principally increased quote service costs addition expenses batterymarch floor brokerage clearing fees floor brokerage clearing fees increased 17 59 million reflecting increase securities transaction volume fiscal 1996 despite increased trading volume floor brokerage clearing fees fell 7 51 million reflecting lower execution expenses efficient order routing execution capabilities implemented fiscal 1996 expense increased 3 588 million attributable increased promotional consulting expenses addition expenses western asset global offset part lower litigation related expenses fiscal 1996 expense increased 12 569 million attributable addition batterymarch including amortization related intangible assets reduces net earnings operating cash flows addition fiscal 1996 includes expenses related acquisition bartlett offset lower litigationrelated expenses interest revenue expense interest revenue increased 47 841 million larger firm investments predominantly funds segregated regulatory cash purposes customer margin account conduit stock loan balances interest expense increased 66 434 million larger interest bearing customer credit conduit stock loan balances additionally increased debt service related 100 million 650 senior notes issued february 1996 partially offset elimination debt service companys 525 convertible subordinated debentures converted common stock august 1996 fiscal 1996 interest revenue increased 44 571 million higher interest earned customer margin accounts conduit stock loan balances firm investments reflecting larger account balance levels higher average interest rates interest expense increased 52 262 million higher interest payments larger customer credit conduit stock loan balances higher average interest rates result substantially higher levels interest bearing customer credit balances companys net interest margin fell 484 fiscal 1997 542 fiscal 1996 income taxes income taxes rose 49 386 million fiscal 1997 127 260 million fiscal 1996 principally increases pretax earnings companys effective tax rate 406 407 413 fiscal 1997 1996 1995 respectively declines fiscal 1997 1996 attributable lower effective state income tax rates liquidity capital resources companys assets primarily liquid consisting mainly cash assets readily convertible cash assets financed primarily free credit balances equity capital senior notes payable bank lines credit payables year ended march 31 1997 cash equivalents increased 616 million cash flows operating activities 800 million attributable fiscal 1997 net earnings adjusted depreciation amortization company invested cash 216 million primarily purchases equipment cash flows financing activities provided 31 million primarily higher levels shortterm borrowings common stock issuance offset increased dividends common stock july 1996 company called redemption 680 million aggregate principal amount outstanding 525 convertible subordinated debentures due may 1 2003 debentures substantially holders converted debentures common stock february 1996 company issued 100 million 650 senior notes due february 15 2006 proceeds offering used general corporate purposes company available offering additional 50 million debt convertible debt securities pursuant shelf registration filed january 1996 july 1995 company called redemption 345 million aggregate principal amount outstanding 7 convertible subordinated debentures due june 15 2011 substantially holders converted 7 debentures common stock january 1995 company acquired assets batterymarch financial management utilizing 541 million cash additional payment due early 1998 based batterymarchs achievement specified revenue levels calendar 1997 could increase total consideration maximum 1200 million based current revenues anticipated additional payment required companys brokerdealer subsidiaries subject requirements secs net capital rule designed measure general financial soundness liquidity brokerdealers march 31 1997 brokerage subsidiaries aggregate net capital 1327 million exceeded minimum net capital requirements 1208 million regulatory net capital graph depicts regulatory net capital requirements required net capital 33197 11974 excess net capital 33197 120762 total net capital 33197 132736 principal sources companys funds investment advisory brokerdealer subsidiaries amount brokerdealers net assets may distributed subject restrictions applicable net capital rules company revolving bank line credit amount 50 million none currently outstanding companys subsidiaries lines credit aggregating 2925 million pursuant may borrow shortterm demand basis generally prevailing broker call rates management believes funds available operations lines credit sufficient meet present reasonably foreseeable capital needs although company may augment capital funds continued expansion internal growth acquisition company borrows lends securities normal course business facilitate settlement customer proprietary transactions addition company engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis effects inflation companys assets significantly affected inflation primarily monetary consisting cash resale agreements securities receivables however rate inflation affects various expenses including employee compensation occupancy communications may readily recoverable charges services provided company recent accounting developments june 1996 financial accounting standards board issued statement 125 accounting transfers servicing financial assets extinguishment liabilities effective transfers occurring december 31 1996 december 1996 statement 127 issued deferred effective date certain provisions statement 125 transactions occurring december 31 1997 impact adoption material companys financial position results operations february 1997 financial accounting standards board issued statement 128 earnings per share effective financial statements issued periods ending december 15 1997 including interim periods statement 128 simplifies standards computing earnings per share makes comparable international earnings per share standards statement also requires restatement priorperiod earnings per share data presented impact adopting statement 128 affect companys financial position results operations item 8item 7 managements discussion analysis results operations financial condition legg mason inc subsidiaries company principally engaged providing securities brokerage investment advisory investment banking commercial mortgage banking services individuals institutions corporations municipalities companys profitability sensitive variety factors including volume trading securities volatility general level market prices demand investment banking mortgage banking services us financial markets set records third consecutive fiscal year fiscal 1998 us equity markets achieved record trading volume price levels principally continuing economic growth stable interest rates gains corporate earnings modest inflation result companys core businessessecurities brokerage investment advisory investment banking contributed third consecutive year record revenues net earnings uncertain favorable conditions experienced past three fiscal years continue fiscal 1999 longer companys investment advisory activities contribution operating results grown significantly internal growth acquisition past ten years fiscal 1998 company acquired brandywine asset management inc brandywine described note 2 notes consolidated financial statements brandywine acquired january 1998 currently manages approximately 82 billion institutional clients high net worth individuals fiscal 1996 company acquired bartlett co bartlett lehman brothers global asset management limited since renamed western asset global management limited western asset global described note 2 notes consolidated financial statements bartlett acquired january 1996 currently manages approximately 31 billion high net worth individuals family groups institutions western asset global acquired february 1996 manages assets approximately 19 billion invested principally international fixedincome securities currencies total assets management institutions company sponsored mutual funds private accounts managed companys subsidiaries 710 billion march 31 1998 62 438 billion year earlier 62 billion ten years ago earnings investment advisory services tend stable securities brokerage investment banking activities less affected changes securities market conditions revenues investment advisory activities represent 33 companys total revenues 20 five years ago net interest income continued growing source earnings primarily result significant growth retail brokerage account balances companys financial statements periods presented restated include results brandywine bartlett acquired pooling interests basis january 1998 1996 respectively results individual period considered representative future profitability many companys activities fixed operating costs decline reduced levels volume company attempts reduce costs particularly periods low volume general rule attempt personnel reductions accordingly sustained periods unfavorable market conditions may adversely affect profitability results operations following table sets forth periods indicated items consolidated statements earnings percentages total revenues increase decrease item percentage amount previous period fiscal 1998 revenues net earnings per share reached record levels substantially higher prior fiscal year revenues 8891 million 34 increase revenues 6646 million fiscal 1997 net earnings 761 million 33 net earnings 572 million prior fiscal year basic earnings per share increased 25 280 224 diluted earnings per share increased 28 263 205 revenues commissions commission revenues rose 27 2413 million fiscal 1998 increases sales listed overthecounter securities nonaffiliated mutual funds variable annuities fiscal 1997 commission revenues rose 12 1900 million levels fiscal 1996 increases sales listed securities variable annuities nonaffiliated mutual funds fiscal 1998 1997 commission revenues benefited active rising equity market principal transactions revenues principal transactions increased 19 867 million principally increased sales fixed income overthecounter securities coupled reduction losses proprietary positions energyrelated equity securities fiscal 1997 revenues principal transactions increased 11 732 million primarily result higher sales overthecounter fixedincome securities partially offset losses proprietary positions energyrelated equity securities fiscal 1998 1997 sales overthecounter securities benefited favorable equity market investment advisory related fees investment advisory related fees increased 42 2956 million 28 2082 million fiscal 1998 1997 respectively result growth assets management companysponsored equity mutual funds companys fixedincome investment advisory subsidiary feebased brokerage accounts addition fiscal 1997 includes full year fees earned western asset global investment banking investment banking revenues rose 35 971 million primarily result increased corporate finance activities particularly comanaged public offerings real estate investment trusts fiscal 1997 investment banking revenues rose 66 721 million principally result increased corporate finance activities particularly comanaged public offerings energy real estate investment trustrelated securities financial advisory services revenues rose 11 410 million result increase loan origination fees companys commercial mortgage banking subsidiaries fiscal 1997 revenues rose 3 370 million principally result higher transactionrelated fees partially offset decline loan origination fees companys commercial mortgage banking subsidiaries expenses compensation benefits compensation benefits increased 34 5114 million 22 3829 million fiscal 1998 1997 respectively reflecting higher sales profitabilitybased compensation personnel additions sales product support areas substantial part compensation expense fluctuates proportion level business activity compensation costs primarily salaries benefits fixed may decline reduced levels volume therefore profitability may adversely affected sustained periods unfavorable market conditions slow revenue growth acquired businesses new product areas occupancy equipment rental occupancy equipment rental increased 30 567 million higher depreciation expense continued investments technology additional costs related companys relocation corporate headquarters completed february 1998 fiscal 1997 occupancy equipment rental increased 18 438 million higher depreciation expense related increased investments technology higher transaction volume processed companys data processing service bureau addition expenses western asset global communications costs increased 38 427 million result expansion companys data network higher business volume gave rise increased costs printed materials quote services postage telephone usage fiscal 1997 communications costs increased 9 311 million primarily higher printing office supply expense result increased business activity addition expenses western asset global floor brokerage clearing fees despite increased trading volume floor brokerage clearing fees declined 8 55 million reflecting lower execution costs efficient order routing fiscal 1997 floor brokerage clearing fees increased 17 59 million reflecting increase securities transaction volume expenses increased 15 706 million attributable higher promotional litigationrelated expenses fiscal 1997 expenses increased 4 613 million attributable increased promotional consulting expenses addition expenses western asset global offset part lower litigationrelated expenses interest revenue expense interest revenue increased 51 1273 million 47 841 million fiscal 1998 1997 respectively larger firm investments predominantly funds segregated regulatory purposes customer margin account conduit stock loan balances interest expense increased 70 737 million 66 434 million fiscal 1998 1997 respectively larger interestbearing customer credit conduit stock loan balances addition fiscal 1997 included full year debt service related 100 million 650 senior notes issued february 1996 partially offset elimination debt service companys 525 convertible subordinated debentures 525 debentures converted common stock august 1996 result significantly higher levels interest bearing customer credit balances companys net interest margin fell 421 fiscal 1998 485 fiscal 1997 principal sources companys funds investment advisory brokerdealer subsidiaries amount brokerdealers net assets may distributed subject restrictions applicable net capital rules company revolving bank line credit amount 50 million none currently outstanding companys subsidiaries lines credit aggregating 2975 million pursuant may borrow shortterm demand basis generally prevailing broker call rates management believes funds available operations lines credit sufficient meet present reasonably foreseeable capital needs although company may augment capital funds continued expansion internal growth acquisition company borrows lends securities normal course business facilitate settlement customer proprietary transactions addition company engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis year 2000 year 2000 issue affects ability computer systems correctly process dates december 31 1999 company evaluated internal third party software well service providers computer systems ability accurately process next millennium company identified assessed computer systems processes require modification utilizing internal external resources make necessary modifications addition internal testing company actively participate systems testing among securities brokerage firms securities exchanges clearing organizations vendors november 1997 company converted securities brokerage processing system vendor principal service provider type securities brokerage industry vendor substantially completed necessary coding modifications user testing begin summer 1998 confirmation received vendor modification testing plan schedule year 2000 compliance company pursuing similar confirmation vendors service providers company believes costs associated modifications internal systems material companys financial statements however company could adversely affected organizations including mentioned unsuccessful completing required year 2000 system modifications effects inflation companys assets significantly affected inflation primarily monetary consisting cash resale agreements securities receivables however rate inflation affects various expenses including employee compensation occupancy communications may readily recoverable charges services provided company recent accounting developments june 1997 financial accounting standards board issued statement 130 reporting comprehensive income effective fiscal years beginning december 15 1997 statement 130 establishes standards reporting display comprehensive income components revenues expenses gains losses full set generalpurpose financial statements statement requires disclosure amount represents total comprehensive income components comprehensive income financial statement june 1997 statement 131 disclosures segments enterprise related information issued effective financial statements periods beginning december 15 1997 statement 131 establishes standards determining entitys operating segments type level financial information disclosed annual interim financial statements also establishes standards related disclosures products services geographic areas major customers impact adoption statements 130 131 financial statement disclosure impact material affect companys financial statements item 8item 7 managements discussion analysis results operations financial condition business description legg mason inc subsidiaries company principally engaged providing investment advisory securities brokerage investment banking commercial mortgage banking services individuals institutions corporations municipalities companys profitability sensitive variety factors including volume trading securities volatility general level market prices demand investment banking mortgage banking services fiscal 1999 us equity markets achieved record trading volume price levels principally continuing economic growth stable interest rates gains corporate earnings modest inflation result company achieved fourth consecutive year record revenues net earnings attributable growth investment advisory securities brokerage businesses total assets management institutions companysponsored mutual funds private accounts managed companys subsidiaries 89 billion march 31 1999 25 71 billion year earlier earnings investment advisory services tend stable securities brokerage investment banking activities less affected changes securities market conditions revenues investment advisory activities represented 37 companys total revenues fiscal 1999 companys investment advisory activities contribution operating results grown significantly internal growth acquisition past ten years fiscal 1998 company acquired brandywine asset management inc brandywine described note 2 notes consolidated financial statements brandywine acquired january 1998 manages approximately 69 billion institutional clients high net worth individuals fiscal 1996 company acquired bartlett co bartlett lehman brothers global asset management limited since renamed western asset global management limited western asset global bartlett acquired january 1996 manages approximately 29 billion high net worth individuals family groups institutions western asset global acquired february 1996 manages assets approximately 33 billion invested principally international fixedincome securities march 31 1999 excluding assets managed legg mason funds net interest income continued stable growing source earnings primarily result significant growth retail brokerage margin loan credit account balances results individual period considered representative future profitability many companys activities fixed operating costs decline reduced levels volume company attempts reduce costs particularly periods low volume general rule attempt personnel reductions accordingly sustained periods unfavorable market conditions may adversely affect profitability company operates within four business segments investment advisory private client capital markets operations contained within business segment segments financial information recent fiscal years summarized investment advisory millions years ended march 31 1999 1998 1997 revenues 2667 2152 1624 pretax earnings 790 537 404 businesses contained within investment advisory segment primarily provide investment advisory services companysponsored mutual funds management assets institutional individual clients companys asset management subsidiaries private client millions years ended march 31 1999 1998 1997 revenues 6105 5136 3809 pretax earnings 670 533 445 private client distributes wide range financial products branch distribution network including equity fixedincome securities proprietary nonaffiliated mutual funds annuities net interest profit customers margin loan credit account balances included segment capital markets millions years ended march 31 1999 1998 1997 revenues 1310 1281 923 pretax earnings 120 204 102 capital markets segment includes companys equity fixedincome capital markets businesses including origination institutional sales trading millions years ended march 31 1999 1998 1997 revenues 378 322 290 pretax earnings 92 10 11 business segment primarily includes companys real estate service businesses unallocated corporate revenues expenses 1999 pretax earnings include noncash increase deferred compensation expense 104 million related change accounting treatment nonqualified deferred compensation stock plan related compensation arrangements see note 14 notes consolidated financial statements results operations following table sets forth periods indicated items consolidated statements earnings percentages total revenues increase decrease item percentage amount previous period nmnot meaningful fiscal 1999 compared fiscal 1998 fiscal 1999 revenues net earnings per share reached record levels substantially higher prior fiscal year revenues 105 billion increase 18 revenues 8891 million fiscal 1998 net earnings 893 million 17 net earnings prior fiscal year basic earnings per share increased 17 164 140 diluted earnings per share increased 18 155 131 accordance emerging issues task force eitf 9714 results fiscal 1999 include noncash increase deferred compensation expense 104 million related change accounting treatment nonqualified deferred compensation stock plan related compensation arrangements see note 14 notes consolidated financial statements revenues investment advisory related fees investment advisory related fees increased 32 3902 million result growth assets management companysponsored mutual funds fixedincome investment advisory accounts feebased brokerage accounts investment advisory revenues assets management bar chart appears depicting growth assets management investment advisory related fee revenues last five fiscal years investment advisory assets related fee revenues management millions billions b 1995 1177m 246b 1996 1621m 354b 1997 2082m 438b 1998 2956m 710b 1999 3902m 889b commissions commission revenues rose 16 2791 million fiscal 1999 primarily result increases securities transaction volume principal transactions revenues principal transactions increased 8 941 million principally result increases fixedincome sales equity trading operations investment banking investment banking revenues declined 22 761 million primarily result decreased public offerings equity securities particularly comanaged public offerings real estate investment trusts interest revenue expense millions dollars bar chart appears depicting interest revenue interest expense last five fiscal years interest expense interest revenue 1995 172 397 1996 262 571 1997 434 841 1998 737 1273 1999 949 1603 interest revenue expense interest revenue increased 26 1603 million result increased firm investments predominantly funds segregated regulatory purposes customer margin loan account balances interest expense increased 29 949 million primarily due larger interestbearing customer credit balances result significantly higher levels interestbearing customer credit balances companys net interest margin declined 408 fiscal 1999 421 fiscal 1998 companys net interest profit increased 22 654 million fiscal 1999 536 million fiscal 1998 revenues rose 13 461 million primarily result proceeds key man life insurance policy increase remarketing fees loan originations companys commercial mortgage banking subsidiaries expenses compensation benefits compensation benefits increased 14 5848 million result higher sales compensation increased revenues higher fixed compensation costs primarily attributable increased number employees substantial part compensation expense fluctuates proportion level business activity compensation costs primarily salaries benefits fixed may decline reduced levels volume therefore profitability may adversely affected sustained periods unfavorable market conditions slow revenue growth acquired businesses new product areas occupancy equipment rental occupancy equipment rental increased 13 643 million result continued investments technology full year expenses related companys new corporate headquarters additional expanded branch office locations communications expense increased 12 480 million due higher business volume gave rise increased costs telephone usage quote services printed materials postage floor brokerage clearing fees floor brokerage clearing fees increased 22 67 million reflecting higher securities transaction volume noncash deferred compensation fiscal 1999 accordance eitf 9714 company incurred noncash deferred compensation charge 104 million related change accounting treatment nonqualified deferred compensation stock plan related compensation arrangements see note 14 notes consolidated financial statements expenses increased 25 882 million attributable increased loss error litigation charges higher promotional expenses income taxes income taxes rose 14 594 million fiscal 1999 result increased pretax earnings companys effective tax rate 400 fiscal 1999 compared 407 prior year fiscal 1998 compared fiscal 1997 revenues investment advisory related fees investment advisory related fees increased 42 2956 million result growth assets management companysponsored mutual funds companys fixedincome investment advisory subsidiary feebased brokerage accounts commissions commission revenues rose 27 2413 million fiscal 1998 increases sales listed overthecounter securities nonaffiliated mutual funds variable annuities fiscal 1998 commission revenues benefited active rising equity market principal transactions revenues principal transactions increased 19 867 million principally increased sales fixedincome overthecounter securities coupled reduction losses proprietary positions energyrelated equity securities fiscal 1998 sales overthecounter securities benefited favorable equity market investment banking investment banking revenues rose 35 971 million primarily result increased corporate finance activities particularly comanaged public offerings real estate investment trusts interest revenue expense interest revenue increased 51 1273 million larger firm investments predominantly funds segregated regulatory purposes customer margin account conduit stock loan balances interest expense increased 70 737 million larger interestbearing customer credit conduit stock loan balances result significantly higher levels interestbearing customer credit balances companys net interest margin fell 421 fiscal 1998 485 fiscal 1997 revenues rose 11 410 million result increase loan origination fees companys commercial mortgage banking subsidiaries expenses compensation benefits compensation benefits increased 34 5114 million fiscal 1998 reflecting higher sales profitabilitybased compensation personnel additions sales product support areas occupancy equipment rental occupancy equipment rental increased 30 567 million higher depreciation expense continued investments technology additional costs related companys relocation corporate headquarters completed february 1998 communications expense increased 38 427 million result expansion companys data network higher business volume gave rise increased costs printed materials quote services postage telephone usage floor brokerage clearing fees despite increased trading volume floor brokerage clearing fees declined 8 55 million reflecting lower execution costs efficient order routing expenses increased 15 706 million attributable higher promotional litigationrelated expenses income taxes income taxes rose 34 523 million principally increased pretax earnings companys effective tax rate 407 fiscal 1998 406 fiscal 1997 liquidity capital resources companys assets primarily liquid consisting mainly cash assets readily convertible cash assets financed primarily customer credit balances equity capital senior notes bank lines credit payables year ended march 31 1999 cash equivalents increased 19 million cash flows financing activities provided 316 million attributable increases shortterm borrowings offset part dividends paid common stockholders investing activities provided 295 million result reduced investments resale agreements net sales maturities investment securities partially offset purchases equipment leasehold improvements operating activities utilized 592 million principally result higher levels segregated cash proprietary securities inventory positions offset part increased net customer payables net earnings adjusted depreciation amortization noncash deferred compensation company outstanding 100 million principal amount 65 senior notes due february 15 2006 proceeds notes used general corporate purposes company available offering additional 50 million debt convertible debt securities pursuant shelf registration filed january 1996 companys brokerdealer subsidiaries subject requirements securities exchange commissions uniform net capital rule designed measure general financial soundness liquidity brokerdealers march 31 1999 brokerage subsidiaries aggregate net capital 2060 million exceeded minimum net capital requirements 1865 million amount brokerdealers net assets may distributed subject restrictions applicable net capital rules principal sources companys funds investment advisory brokerdealer subsidiaries company revolving bank line credit amount 50 million none currently outstanding companys subsidiaries lines credit aggregating 2615 million pursuant may borrow shortterm demand basis varying rates based upon federal funds rate management believes funds available operations lines credit sufficient meet present reasonably foreseeable capital needs although company may augment capital funds continued expansion internal growth acquisition company borrows lends securities normal course business facilitate settlement customer proprietary transactions addition company engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis risk management 1997 securities exchange commission issued risk management disclosure requirements designed assist investors assessing market risks managed certain companys business activities expose market risk including securities inventory positions securities held investment companys market risk generally represents risk loss may result potential change value financial instrument result fluctuations interest rates equity prices changes credit ratings issuers debt securities interest rate risk arises exposure holding interest sensitive financial instruments government corporate municipal bonds certain preferred equities company manages exposure interest rate risk setting monitoring limits feasible hedging offsetting positions securities similar interest rate risk characteristics companys securities inventories marked market accordingly unrecorded gains losses value significant portion companys securities inventories contractual maturities excess five years inventories average turn excess twelve times per year accordingly exposure interest rate risk inherent companys securities inventories less similar financial instruments held firms industries march 31 1999 companys securities inventories comprised debt preferred equity securities owned securities sold yet purchased approximately 140 million 10 million respectively weighted average interest rates inventories excluding preferred equities 61 50 respectively additionally company held investments debt securities principally us treasury securities aggregating approximately 10 million average maturities less one year weighted average interest rate 59 company performed evaluation potential interest rate risk management opinion exposure interest rate risk would material financial position company also outstanding 100 million principal amount senior notes maturing february 2006 bear interest 65 fair value senior notes estimated using current market prices 100837 98958 march 31 1999 1998 respectively companys equity securities inventories exposed risk loss event unfavorable price movements companys equity securities inventories marked market unrecorded gains losses march 31 1999 balances companys equity securities positions excluding preferred equities owned sold yet purchased approximately 5 million 2 million respectively company also investments equity securities primarily seed money investments companysponsored mutual funds carrying value 72 million march 31 1999 opinion management potential exposure equity price risk would material companys financial position company also subject credit risk arising nonperformance trading counterparties customers issuers debt securities owned company manages risk imposing monitoring position limits monitoring trading counterparties reviewing security concentrations holding marking market collateral conducting business clearing organizations guarantee performance company trade positions complex derivative financial instruments owned approximately 4 million noninvestment grade debt securities march 31 1999 additional discussion risk see note 15 notes consolidated financial statements effects inflation companys assets significantly affected inflation primarily monetary consisting cash resale agreements securities receivables however rate inflation affects various expenses including employee compensation occupancy communications may readily recoverable charges services provided company recent accounting developments june 1998 financial accounting standards board fasb issued statement 133 accounting derivative instruments hedging activities statement 133 establishes standards accounting reporting derivative instruments hedging activities may 1999 fasb issued exposure draft delay effective date fiscal quarters fiscal years beginning june 15 2000 impact adopting statement 133 material companys consolidated financial statements year 2000 processing issue year 2000 issue affects ability computer systems correctly process dates december 31 1999 company completed inventory assessment phases year 2000 project plan evaluation internal third party software well service providers computer systems determine ability accurately process next millennium company also assessed year 2000 status noninformation technology systems equipment may contain embedded hardware software identified assessed computer systems processes equipment require modification company substantially completed remediation testing phases project plan company completed remediation testing critical internal applications systems addition internal testing company actively participated testing among securities brokerage firms securities exchanges clearing organizations vendors november 1997 company converted securities brokerage processing system vendor principal service provider type securities brokerage industry vendor confirmed company substantially completed necessary coding modifications testing plan schedule expected completion second quarter 1999 company received similar confirmation proprietary mutual funds vendors principal service providers mutual fund industry company also continuing communicate remaining vendors third parties including landlords utility suppliers determine likely extent company may affected third parties year 2000 plans target dates company expects critical third party vendors demonstrate provide assurances year 2000 compliance end second quarter 1999 failure correct material year 2000 problem could result interruption failure certain normal business activities operations company current expectation material loss result year 2000 issue assurance companys internal systems third parties company relies remediated timely basis failure remediate another party remediation conversion incompatible companys systems would material adverse effect company developed contingency plans event third parties fail achieve year 2000 plans target dates however assurance contingency plans fully mitigate effects failure based information currently available including information provided third party vendors company expects aggregate expenditures year 2000 project plan approximately 31 million estimated 16 million incurred march 31 1999 significant portion costs incremental costs company rather represent redeployment existing information technology operations resources primarily test remediation efforts companys third party vendors company expects fund year 2000 related costs operating cash flows reallocation companys overall information technology spending accordance generally accepted accounting principles year 2000 expenditures expensed incurred costs companys year 2000 project dates company plans complete year 2000 modifications based managements best current estimates derived utilizing numerous assumptions future events including continued availability certain resources third party compliance plans factors however assurance estimates prove correct actual results could differ materially plans forwardlooking statements information statements provided behalf company time including within fiscal 1999 annual report may contain certain forwardlooking information including information relating anticipated growth revenues earnings per share anticipated changes businesses amount client assets management anticipated expense levels expectations regarding financial market conditions company cautions readers forwardlooking information provided behalf company guarantee future performance actual results may differ materially forwardlooking information result various factors including limited discussed forwardlooking statements speak date statements made company undertakes obligation update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events addition factors discussed respect year 2000 processing issue companys future revenues may fluctuate due factors volume trading securities volatility general level market prices total value composition assets management relative investment performance companysponsored mutual funds compared competing offerings market indices sentiment investor confidence ability company maintain investment management administrative fees current levels competitive conditions companys business segments demand investment banking mortgage banking services companys future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred company result changes number total employees competitive factors reasons expenses capital costs including depreciation amortization noncash charges incurred company maintain administrative infrastructure including costs incurred respect readiness year 2000 processing unanticipated costs may incurred company time protect client goodwill thirdparty noncompliance year 2000 processing companys business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect companys business results operations item 7aitem 7 managements discussion analysis results operations financial condition business description legg mason inc parent subsidiaries collectively company principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities companys profitability sensitive variety factors including volume trading securities volatility general level securities prices demand investment banking mortgage banking services fiscal 2001 us equity markets volatile weakened unprecedented strong market economic conditions experienced fiscal 2000 despite weak us global markets company achieved sixth consecutive year record net revenues net earnings attributable growth asset management activities total assets management institutions companysponsored mutual funds private accounts managed companys subsidiaries 140 billion march 31 2001 25 112 billion year earlier excluding assets approximately 14 billion managed perigee investment counsel inc perigee revenues asset management activities tend stable private client capital markets activities affected less changes securities market conditions revenues asset management activities portions included asset management private client segments represented 48 companys net revenues fiscal 2001 companys asset management activities contribution operating results grown significantly internal growth acquisition past ten years february 5 2001 company acquired approximate 70 interest barrett associates inc barrett high net worth asset manager transaction accounted purchase may 26 2000 company acquired perigee one canadas leading institutional investment managers acquisition accounted pooling interests therefore financial statements restated though acquisition completed beginning period presented fiscal 2000 company acquired berkshire asset management inc berkshire leggmason investors holdings plc leggmason investors formerly johnson fry holdings plc entered joint venture bingham dana llp march 31 2001 berkshire managed assets approximately 500 million leggmason investors managed assets approximately 18 billion see note 2 notes consolidated financial statements additional information regarding acquisitions fiscal 2001 net interest income continued stable growing source earnings primarily result substantial growth retail brokerage margin loan customer credit balances larger firm investment balances however fourth fiscal quarter net interest income declined due lower retail brokerage margin loan balances results individual period considered representative future profitability many companys activities fixed operating costs decline reduced levels business activity company attempts reduce costs particularly periods low volume general rule attempt personnel reductions accordingly sustained periods unfavorable market conditions may affect profitability adversely company operates within four business segments asset management private client capital markets operations contained within business segment business segments financial information last three fiscal years summarized asset management provides investment advisory services companysponsored mutual funds asset management institutional individual clients private client distributes wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities net interest profit customers margin loan credit account balances included business segment capital markets consists companys equity fixed income institutional sales trading syndicate corporate public finance activities sales credits associated underwritten offerings reported private client sold retail distribution channels capital markets sold institutional distribution channels business segment also includes realized unrealized gains losses merchant banking activities private equity activities warrants acquired connection investment banking activities consists principally companys real estate service business 1999 pretax earnings included noncash deferred compensation expense 104 million related change accounting treatment nonqualified deferred compensation stock plan see note 13 notes consolidated financial statements results operations following table sets forth periods indicated items consolidated statements earnings percentages net revenues increase decrease item percentages amount previous period nmnot meaningful fiscal 2001 compared fiscal 2000 fiscal 2001 revenues net earnings per share higher prior fiscal year company achieved record levels sixth consecutive year net revenues increased 8 14 billion total revenues 15 billion increase 10 revenues 14 billion fiscal 2000 net earnings 1562 million 4 net earnings prior fiscal year basic earnings per share increased 1 245 243 diluted earnings per share increased 1 230 227 revenues investment advisory related fees investment advisory related fees increased 16 6540 million result growth average assets management fixed income investment advisory accounts feebased brokerage accounts companysponsored mutual funds addition fiscal 2001 includes full year fees earned leggmason investors acquired december 1999 investment advisory revenues assets management investment advisory related fee assets revenues management millions billions b 6540m 1399b 5635m 1118b 4147m 889b 3158m 710b 2216m 438b commissions commission revenues declined 1 3586 million fiscal 2001 primarily result decrease volume overthecounter retail securities transactions partially offset increase volume listed institutional securities transactions sales nonproprietary mutual funds principal transactions revenues principal transactions decreased 1 1246 million principally result lower equity trading profits investment banking investment banking revenues declined 4 659 million primarily result decline fees equity municipal underwritings interest revenue expense interest revenue increased 27 2822 million result increases customer margin loan balances firm investments predominantly funds segregated regulatory purposes higher average interest rates interest expense increased 31 1754 million primarily due larger interestbearing customer credit balances higher average interest rates companys net interest profit increased 21 1068 million fiscal 2001 886 million fiscal 2000 revenues declined 7 511 million primarily result unrealized gain recognized fiscal 2000 warrants acquired connection private placement company went public last year addition fiscal 2001 company recorded unrealized losses warrants reflecting decline market value periods also include gains sale merchant banking investments expenses compensation benefits compensation benefits expense increased 7 8048 million result higher fixed compensation costs primarily attributable increase number employees higher incentive sales compensation related asset management activities substantial part compensation expense fluctuates proportion level business activity compensation costs primarily salaries benefits fixed may decline reduced levels business activity therefore profitability may affected adversely sustained periods unfavorable market conditions slow revenue growth acquired businesses new product areas communications technology communications technology expense increased 16 1028 million due new expanded branch office locations increased investments technology increased quote telephone usage due increase number employees occupancy costs increased 7 517 million result additional costs new expanded branch office locations impact acquired companies floor brokerage clearing fees floor brokerage clearing fees decreased 2 77 million reflecting decline securities transaction volume expenses increased 9 1281 million increase primarily attributable impact full year expenses leggmason investors increased promotional expenses costs associated acquisition perigee increased intangible amortization expense related acquired companies income tax provision income tax provision rose 5 1096 million fiscal 2001 result increased pretax earnings increase companys effective tax rate 412 fiscal 2001 409 prior year increase effective tax rate primarily attributable nondeductible foreign losses higher statutory tax rates foreign jurisdictions fiscal 2000 compared fiscal 1999 fiscal 2000 revenues net earnings per share reached record levels substantially higher prior fiscal year net revenues increased 30 13 billion total revenues 14 billion increase 31 revenues 11 billion fiscal 1999 net earnings 1504 million 61 net earnings prior fiscal year basic earnings per share increased 55 243 157 diluted earnings per share increased 53 227 148 accordance emerging issues task force eitf 9714 results fiscal 2000 fiscal 1999 include noncash deferred compensation credit 11 million noncash expense 104 million respectively related change accounting treatment nonqualified deferred compensation stock plan related compensation arrangements see note 13 notes consolidated financial statements revenues investment advisory related fees investment advisory related fees increased 36 5635 million result growth assets management companysponsored mutual funds fee based brokerage accounts fixed income investment advisory accounts commissions commission revenues rose 30 3629 million fiscal 2000 primarily result increases listed overthecounter securities transactions increases sales nonaffiliated mutual funds annuity products principal transactions revenues principal transactions increased 34 1263 million principally result increases sales trading revenues equity fixed income securities investment banking investment banking revenues declined 9 689 million primarily result decline corporate banking advisory fees interest revenue expense interest revenue increased 39 2230 million result increased firm investments predominantly funds segregated regulatory purposes customer margin loan balances stock borrow balances interest expense increased 42 1344 million primarily due larger interestbearing customer credit balances stock loan balances result significantly higher levels stock borrow stock loan balances companys net interest margin declined 397 fiscal 2000 408 fiscal 1999 companys net interest profit increased 35 886 million fiscal 2000 655 million fiscal 1999 revenues rose 19 550 million primarily result unrealized gain warrants acquired connection private placement company went public fourth quarter gain sale merchant banking investment revenue recorded capitalizing mortgage servicing assets loans originated fiscal 2000 required statement financial accounting standards sfas 125 accounting transfers servicing financial assets extinguishments liabilities expenses compensation benefits compensation benefits expense increased 27 7502 million result higher sales incentive compensation increased revenues profits higher fixed compensation costs primarily attributable increase number employees communications technology communications technology expense increased 20 884 million due higher business volume gave rise increased costs trade processing quote services printed materials postage telephone usage increased investments technology occupancy costs increased 16 482 million result increased costs acquired companies additional expanded branch office locations floor brokerage clearing fees floor brokerage clearing fees increased 17 78 million reflecting higher securities transaction volume noncash deferred compensation fiscal 2000 fiscal 1999 accordance eitf 9714 company recorded noncash deferred compensation credit 11 million noncash deferred compensation charge 104 million respectively related change accounting treatment nonqualified deferred compensation stock plan related compensation arrangements see note 13 notes consolidated financial statements expenses increased 20 1172 million increase primarily attributable addition expenses leggmason investors increased intangible amortization expense related acquired companies higher loss error litigation charges income tax provision income tax provision rose 64 1040 million fiscal 2000 result increased pretax earnings companys effective tax rate increased 409 fiscal 2000 compared 405 prior year liquidity capital resources companys total assets decreased 47 billion march 31 2001 48 billion march 31 2000 primarily reflecting decline customer margin account balances securities borrowed companys assets consist primarily cash equivalents collateralized shortterm receivables securities collateralized receivables consist primarily margin loans securities purchased agreements resell securities borrowed secured us government agency securities corporate debt equity securities fiscal 2001 company shifted exess cash institutional money market funds included cash equivalents enhance yields previously companys excess cash invested securities purchased agreements resell highly liquid nature companys assets provides company flexibility financing managing business year ended march 31 2001 cash equivalents increased 3429 million cash flows operating activities provided 2236 million primarily attributable net earnings adjusted noncash charges investing activities include net payment 166 million acquisition barrett see note 2 notes consolidated financial statements 343 million capital expenditures enhancements technology relocation companys operations technology center additional branch offices opened fiscal 2001 addition decrease securities purchased agreements resell described provided 1706 million increase cash equivalents proceeds 1287 million primarily maturity portion investments held companys finance subsidiaries used repay related notes payable 1059 million became due fiscal 2001 primary objective companys capital structure funding practices appropriately support companys business strategies well regulatory capital requirements subsidiaries provide needed liquidity times company emphasizes diversification funding sources seeks manage exposure refinancing risk companys assets funded payables customers securities loaned bank loans longterm debt equity company obtains shortterm financing primarily secured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized us government agency securities corporate debt equity securities shortterm funding generally obtained rates related federal funds libor money market rates company maintains uncommitted credit facilities several banks financial institutions uncommitted facilities consist credit lines company advised available contractual lending obligations exist quarter ended june 30 2000 company arranged new threeyear committed unsecured 100 million credit facility replaced similar 50 million facility expired june facility restrictive covenants require company among things maintain specified levels net worth debttoequity ratios facility available used company general corporate purposes borrowings outstanding current facility march 31 2001 prior facility march 31 2000 company outstanding 100 million senior notes due february 15 2006 bear interest 65 notes originally issued discount yield 657 march 31 2001 company 500 million available issuance additional debt convertible debt securities pursuant shelf registration statement shelf filing permits company register securities advance sell financing needs arise market conditions favorable company intends use shelf general corporate purposes including expansion business described note 2 notes consolidated financial statements company completed acquisition perigee canadian money manager terms agreement company issued approximately 52 million exchangeable shares economic equivalent voting dividend rights companys common shares companys brokerdealer subsidiaries subject requirements securities exchange commissions uniform net capital rule designed measure general financial soundness liquidity broker dealers march 31 2001 brokerdealer subsidiaries aggregate net capital 2914 million exceeded minimum net capital requirements 2692 million amount brokerdealers net assets may distributed subject restrictions applicable net capital rules companys overall capital funding needs capital base continually reviewed support estimated needs businesses company continues explore potential acquisition opportunities means expanding businesses opportunities may involve acquisitions material size may require raising additional capital may 29 2001 company entered agreement acquire private capital management lp pcm privately owned high net worth investment management firm march 31 2001 pcm managed assets approximately 71 billion terms agreement company pay 682 million cash closing expected occur second quarter fiscal 2002 transaction also includes two contingent payments based pcms revenue growth third fifth anniversaries closing aggregate purchase price 1382 billion acquisition accounted purchase 682 million cash required closing 150 million available companys excess cash 250 million raised private offering zero coupon convertible notes described company currently assessing financing options respect remainder purchase price may 31 2001 company entered purchase agreement sale 567 million principal amount maturity zero coupon convertible notes due 2031 resulting gross proceeds approximately 250 million including amount covered exercised overallotment option convertible notes offered qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity issue price represents yield maturity 275 per annum initial conversion premium 25 market value companys common stock purchase date upon certain events note convertible 77062 shares companys common stock subject adjustment company may redeem convertible securities cash june 6 2006 accreted value addition company may required repurchase convertible securities accreted value option holders various dates beginning june 6 2003 repurchases paid cash shares companys common stock combination risk management risk inherent part companys business activities extent company properly effectively identifies assesses monitors manages various types risk involved activities critical soundness profitability company seeks identify assess monitor manage following principal risks involved companys business activities funding market credit operational legal risk management company multifaceted process requires communication judgment knowledge financial products markets companys senior management takes active role risk management process requires specific administrative business functions assist identification assessment control various risks companys risk management policies procedures methodologies evolutionary nature subject ongoing review modification funding risk discussed liquidity capital resources section managements discussion analysis results operations financial condition market risk potential changes value companys financial instruments owned referred market risk companys market risk generally represents risk loss may result change value financial instrument result fluctuations interest rates credit spreads equity prices correlation among along level volatility interest rate risks result primarily exposure changes yield curve volatility interest rates mortgage prepayments credit spreads equity price risks result exposure changes prices volatilities individual equities equity baskets equity indices company makes dealer markets equity debt securities facilitate customer order flow company may required equity debt securities trading inventory accounts company hedges exposure market risk managing net long short position example company may hedge municipal portfolio taking offsetting position related futures contract position limits trading inventory accounts established monitored ongoing basis day consolidated position exposure reports prepared distributed various levels company management enable management monitor inventory levels results trading groups company also monitors inventory aging pricing concentration securities ratings accordance securities exchange commissions risk disclosure requirements following table categorizes companys market risk sensitive financial instruments tables primarily represent trading inventory associated customer facilitation marketmaking activities include net long short fair values consistent way risk exposure managed see notes 4 5 notes consolidated financial statements related gross long short fair values financial instruments owned investments tables also include treasury securities segregated regulatory purposes 644 million 903 million march 31 2001 2000 respectively purpose leggmason investors finance subsidiaries see note 2 notes consolidated financial statements raise funds issuing secured fixedrate loan securities use proceeds invest portfolio bonds issued various financial institutions generally available public tranches small enough retail investor investments finance subsidiaries notes payable finance subsidiaries directly related offsetting risk characteristics represent material market risk company additionally claims note holders limited assets finance subsidiaries limits companys exposure default risk investments addition financial instruments included table company 100 million senior notes payable mature 2006 bear fixed coupon 65 notes issued discount yield 657 companys net investments foreign subsidiaries impacted fluctuations foreign exchange rates fluctuations recorded component stockholders equity material companys financial condition impact currency fluctuations companys results operations material credit risk credit risk represents loss company would incur counterparty issuer securities instruments held company fails perform contractual obligations company credit risk related various investing financing activities reduced industry practice obtaining maintaining collateral credit exposure associated companys private client business consists primarily customer margin accounts monitored daily company monitors exposure industry sectors individual securities performs sensitivity analysis regular basis connection margin lending activities company adjusts margin requirements believes risk exposure appropriate based market conditions operational risk operational risk generally refers risk loss resulting companys operations including limited improper unauthorized execution processing transactions deficiencies companys operating systems inadequacies breaches companys control process company operates different businesses diverse markets reliant ability employees systems process high numbers transactions event breakdown improper operation systems improper action employees company could suffer financial loss regulatory sanctions damage reputation order mitigate control operational risk company developed continues enhance specific policies procedures designed identify manage operational risk appropriate levels example company procedures require transactions accurately recorded properly reflected companys books records confirmed timely basis position valuations subject periodic independent review procedures collateral adequate documentation obtained counterparties appropriate circumstances disaster recovery plans exist critical systems redundancies built systems deemed appropriate company also uses periodic selfassessments internal audit reviews check operational risk legal risk legal risk includes risk noncompliance applicable legal regulatory requirements company generally subject extensive regulation different jurisdictions conducts business company various procedures addressing issues regulatory capital requirements sales trading practices use safekeeping customer funds credit granting collection activities moneylaundering record keeping effects inflation companys assets significantly affected inflation primarily monetary consisting cash equivalents securities receivables however rate inflation affects various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided company recent accounting developments effective april 1 2001 company adopted provisions sfas 133 accounting derivative instruments hedging activities sfas 133 requires company report derivative instruments assets liabilities balance sheet measure instruments fair value generally company engage derivative hedging activities except limited tradingrelated activities companys primary brokerdealer subsidiary since derivatives accounted marktomarket basis earnings adoption statement 133 impact companys financial statements september 2000 financial accounting standards board fasb released sfas 140 accounting transfers servicing financial assets extinguishments liabilities replacement fasb 125 fiscal year 2001 company adopted provisions sfas 140 require company classify financial assets owned pledged collateral secured party right sell repledge collateral see notes 4 14 notes consolidated financial statements adoption provisions sfas 140 material impact companys financial statements provisions sfas 140 required adopted march 31 2001 provisions provide guidance distinguishing whether transfer assets accounted sale secured borrowing impact adopting provisions sfas 140 became effective march 31 2001 material companys financial statements february 2001 fasb released proposed accounting standard adopted would change accounting goodwill standard adopted goodwill would longer amortized since goodwill represented approximately 65 unamortized intangible asset balance march 31 2001 similar circumstances future companys net income earnings per share may higher reason assurance standard adopted proposed form forwardlooking statements information statements provided behalf company time including within report may contain certain forwardlooking information including information relating anticipated growth revenues earnings per share anticipated changes businesses amount client assets management anticipated expense levels expectations regarding financial market conditions company cautions readers forwardlooking information provided behalf company guarantee future performance actual results may differ materially forwardlooking information result various factors including limited discussed elsewhere report forwardlooking statements speak date statements made company undertakes obligations update forward looking statement reflect events circumstances date statement made reflect occurrence unanticipated events companys future revenues may fluctuate due numerous factors volume trading securities volatility general level market prices total value composition assets management relative investment performance companysponsored mutual funds compared competing offerings market indices sentiment investor confidence ability company maintain investment management administrative fees current levels competitive conditions companys business segments demand investment banking mortgage banking services effects acquisitions companys future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred company result changes number total employees competitive factors reasons variations expenses capital costs including depreciation amortization noncash charges incurred company maintain administrative infrastructure unanticipated costs may incurred company time protect client goodwill connection litigation effects acquisitions companys business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect companys business results operations item 7aitem 7 management’s discussion analysis results operations financial condition business description legg mason inc “parent” holding company subsidiaries collectively parent “legg mason” principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities terms “we” “us” “our” “company” refer legg mason legg mason operations principally united states america united kingdom canada also offices spain switzerland singapore financial services industry legg mason operates competitive highly regulated profitability sensitive variety factors including amount composition assets management volume trading securities volatility general level securities prices interest rates level customer margin credit account balances demand investment banking services addition overall market conditions diversification services products offered investment performance client relations significant factors determining whether successful retaining attracting clients past decade experienced substantial expansion due internal growth strategic acquisition asset management firms provided among things broader range investment expertise additional product diversification increased assets management legg mason currently operates four business segments asset management private client capital markets business segments based upon factors services provided distribution channels utilized certain services offer provided clients one business segments revenue category may reflected multiple segments allocate certain common income expense items among business segments based upon various methodologies factors asset management segment provides asset management services institutional individual clients investment advisory services companysponsored investment funds investment advisory related fees earned asset management vary based upon factors type underlying investment product amount assets management type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution fees earned companysponsored investment funds reported private client sold branch distribution network private client segment distributes wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities march 31 2003 private client’s financial advisors operated 136 retail branch offices primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds fees earned feebased brokerage managed accounts net interest customers’ margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets segment consists equity fixed income institutional sales trading corporate public finance advisory underwriting activities well corporate structured financing activities fixed income institutional sales trading include transactions corporate municipal products although maintain securities inventory primarily facilitate customer transactions capital markets also realizes trading profits losses trading activities sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also include realized unrealized gains losses investments acquired connection merchant investment banking activities segment consists principally real estate service mortgage banking business unallocated corporate revenues expenses references fiscal 2003 2002 2001 refer march 31 fiscal year ended business environment weak us global financial market conditions experienced prior fiscal year continued fiscal 2003 uncertainty surrounding economic outlook remained equity markets plagued slow economic activity corporate governance regulatory accounting issues concerns terrorism growing tension ultimate war middle east domestically dow jones industrial average nasdaq composite index sp 500 23 28 26 respectively year ended march 31 2003 fixed income markets benefited year due declining interest rates volatility equity markets fiscal 2003 us federal reserve lowered interest rates 050 125 lowest level since 1961 sarbanesoxley act 2002 “act” well regulations established various market exchanges response corporate governance accounting scandals act provides additional oversight protect investors’ interests addresses many issues including independence public accountants boards directors managements’ responsibility fair accurate disclosures addition regulatory proceedings investigations relationships research analysts investment banking operations financial services companies created uncertainty whether companies industry required make significant changes research investment banking operations difficult regulatory environment coupled uncertain economic outlook provided challenging business environment despite difficult market conditions able achieve strong results operations primarily result addition subsequent growth revenues entities acquired fiscal 2002 robust fixed income environment benefit full year cost savings efficiency initiatives results operations financial position results operations materially affected overall trends conditions financial markets particularly united states results individual period considered representative future results many activities fixed operating costs decline reduced levels business activity accordingly sustained periods unfavorable market conditions likely affect profitability adversely following table sets forth periods indicated items consolidated statements earnings percentage net revenues increase decrease item percentage amount previous period fiscal 2003 compared fiscal 2002 financial overview net revenues net earnings diluted earnings per share 5 153 billion 25 1909 million 24 278 respectively august 1 2001 acquired private capital management lp “pcm” high net worth investment manager naples florida acquisition pcm managed 86 billion assets primarily small midcap stocks october 1 2001 acquired royce associates inc “royce” investment manager located new york city acquisition royce managed 47 billion assets primarily small microcap mutual funds march 31 2003 pcm royce managed 115 billion 82 billion assets respectively benefit full year results growth royce pcm increased net revenues approximately 800 million net interest expense additionally net earnings increased result lower compensation costs percentage net revenues decreases litigationrelated costs benefit full year cost savings initiatives implemented prior year net revenues investment advisory related fees including distribution fees investment funds increased 10 8603 million primarily result additional investment advisory fees 905 million royce pcm growth 409 million fixed income institutional investment advisor excluding acquisitions increases offset part declines investment advisory distribution fees companysponsored equity investment funds 427 million lower fees certain nonus based investment advisors 102 million investment advisory revenues assets management securities brokerage revenues including commissions principal transactions increased 1 4749 million result increases volume institutional retail fixed income transactions sales annuities impact full year commissions earned pcm’s brokerage operations increases offset part declines listed retail equity transaction volume sales nonproprietary mutual funds investment banking revenues increased 7 1090 million primarily due increases new issue underwriting revenues increased merger advisory fees revenues increased 8 623 million primarily result 31 million increase annual retirement account fees due accounts charged fee increases fee rates higher loan origination fees mortgage banking subsidiary 13 million realized gain sale certain contracts bank brokerage network offset part unrealized losses firm investments net interest profit declined 47 216 million primarily result decrease 531 million interest revenue due lower average interest rates earned customer account firm investment balances partially offset decrease interest expense 428 million result lower average interest rates paid customer credit account balances addition interest expense increased 92 million result acquisitionrelated debt net interest profit accounted 70 consolidated pretax profits significantly 161 prior fiscal year noninterest expenses compensation benefits increased 2 8975 million primarily due full year’s impact pcm royce resulted increase 324 million compensationrelated expenses higher profitabilitybased asset management incentive expense offset part decline sales distribution fee commissions 276 million compensation percentage net revenues decreased 587 fiscal 2003 609 fiscal 2002 primarily due private client capital market segments substantial part compensation expense fluctuates proportion level business activity compensation costs primarily salaries benefits fixed typically decline reduced levels business activity communications technology expense declined 7 920 million primarily result declines costs quote services consulting fees leased computer equipment occupancy increased 5 652 million primarily due impact full year expenses acquired entities higher operating expenses corporate headquarters addition office space leased fixed income institutional investment advisor amortization intangible assets increased 32 249 million primarily result 55 million increase related full year amortization asset management contracts acquired pcm acquisition adopted provisions statement financial accounting standards “sfas” 142 “goodwill intangible assets” effective april 1 2001 goodwill indefinite life intangible assets longer amortized see note 6 notes consolidated financial statements expenses increased 4 1403 million primarily result impact full year commissions paid third party distributors royce funds addition expenses acquired entities increase 21 million reserves recruitingrelated advances financial advisors increases offset part decline litigationrelated expenses approximately 57 million lower promotional expenses provision income taxes increased 17 1174 million fiscal 2003 primarily result increase pretax earnings effective tax rate declined 381 396 prior year due lower average effective state income tax rates resulting changes state apportionment factors 26 million onetime net state income tax refunds lower average effective foreign tax rate result realizing tax benefits uk net operating loss carryforwards expect changes state apportionment factors continue reduce effective state tax rates results segment asset management net revenues asset management increased 16 6481 million pretax earnings increased 12 1787 million principally result impact full year results growth pcm royce well growth fixed income institutional investment advisor revenues asset management tend stable private client capital markets less affected changes securities market conditions compensation percentage net revenues increased 483 fiscal 2003 467 fiscal 2002 pretax profit margin decreased 276 fiscal 2003 285 fiscal 2002 higher percentage revenues generated subsidiaries retain larger percentage revenues revenuesharing agreements incentive compensation asset management represented 424 consolidated net revenues fiscal 2003 increase 384 fiscal 2002 fiscal 2003 pcm royce contributed additional 905 million investment advisory fees 313 million pretax earnings addition investment advisory fees grew 409 million fixed income institutional investment advisor increases offset part declines 192 million advisory fees companysponsored equity investment funds 102 million advisory fees certain nonus based investment advisors addition net interest profit decreased 119 million primarily result lower average interest rates earned firm investment balances increase acquisitionrelated debt included current fiscal year charges 28 million related writedowns previously acquired asset management contracts total assets management 1922 billion march 31 2003 increase 152 billion 9 march 31 2002 march 31 2003 approximately 1321 billion 687 assets management fixed income related products 601 billion 313 equity related products assets management mix follows institutional1368 billion 712 mutual funds359 billion 187 wealth management195 billion 101 private client despite decline private client’s net revenues 5 5886 million pretax earnings increased 46 776 million compensation percentage net revenues decreased 581 fiscal 2003 619 fiscal 2002 result lower effective commission payout rates incentive compensation pretax profit margin increased 132 fiscal 2003 86 fiscal 2002 private client represented 385 consolidated net revenues fiscal 2003 decrease 426 prior year net revenues declined primarily due decrease 198 million distribution fee revenues companysponsored investment funds principally equity funds lower retail transaction volume improved pretax earnings profit margin attributable decline noninterest expenses driven cost savings initiatives implemented last year including impact branch consolidations reduction number fulltime employees lower costs communication services net interest profit private client decreased 12 499 million primarily due decline average interest rates earned firm investment balances capital markets net revenues capital markets increased 7 2597 million pretax earnings increased 34 525 million compensation percentage net revenues declined 564 fiscal 2003 606 fiscal 2002 due lower effective percentage payouts incentive compensation higher revenues pretax profit margin increased 202 fiscal 2003 162 fiscal 2002 capital markets represented 170 consolidated net revenues fiscal 2003 167 fiscal 2002 increase net revenues primarily attributable higher institutional fixed income transaction volume trading profits well increases municipal banking fees offset part decline corporate banking fees unrealized losses related warrants acquired connection private placements consists principally results real estate service mortgage banking business unallocated corporate revenues expenses net revenues pretax earnings declined 12 million 19 million respectively prior year reflecting reduction net interest profit real estate service mortgage banking subsidiary partially offset increased mortgage banking fees fiscal 2002 compared fiscal 2001 financial overview fiscal 2002 net revenues reached thenrecord levels increased 7 145 billion primarily result increase investment advisory related fees despite increase net revenues fiscal 2002 net earnings declined 2 1529 million fiscal 2001 result increased expenses including profitabilitybased incentive compensation addition expenses acquired entities litigationrelated costs fiscal 2002 diluted earnings per share declined 3 224 230 fiscal 2001 results fiscal 2002 also include effect adopting sfas 142 resulted expense reduction 78 million 67 million net tax expense reduction increased basic diluted earnings per share 010 fiscal 2002 net revenues investment advisory related activities rose 1266 million 19 7806 million fiscal 2002 primarily result acquisitions pcm royce contributed 971 million increase remainder increase primarily attributable growth assets management fixed income investment advisory accounts revenues securities brokerage activities declined 3 4698 million result decrease retail securities transactions nonaffiliated mutual fund variable annuity sales declines offset part increases fixed income equity institutional securities transaction volume revenues investment banking activities increased 55 1022 million primarily due 342 million increase new issue sales concessions increased municipal banking fees revenues increased 14 580 million primarily result realized unrealized gains firm investments increase loan origination fees partially offset sale merchant banking related investment prior fiscal year net interest profit declined 62 408 million 1068 million prior fiscal year primarily result decrease 920 million interest revenue due lower average interest rates earned customer margin account firm investment balances increase interest expense 302 million result increase acquisitionrelated debt decreases net interest profit partially offset decrease interest expense 693 million result lower average interest rates paid customer credit account balances net interest profit accounted 161 consolidated pretax profits significantly 402 prior fiscal year noninterest expenses compensation benefits expense increased 10 8834 million primarily attributable significantly higher profitabilitybased incentive compensation increased 369 million addition 282 million expenses result acquisitions pcm royce increase vested deferred compensation 108 million fiscal 2002 increases offset part decline variable sales commissions 106 million communications technology expense declined 4 990 million result decreased costs telephone usage quote services printing offset part addition expenses acquired entities occupancy costs increased 20 622 million fiscal 2002 517 million fiscal 2001 result full year impact prior year expansion including operations center new branch offices well addition expenses acquired entities amortization intangible assets increased 64 million 52 188 million prior fiscal year primarily attributable 110 million amortization pcm’s asset management contracts offset part impact adopting sfas 142 goodwill indefinite life intangible assets longer amortized see note 6 notes consolidated financial statements expenses increased 9 1347 million primarily attributable increase litigationrelated costs 127 million net recoveries 98 million fiscal 2002 net litigationrelated costs 151 million compared 24 million fiscal 2001 income tax provision decreased 9 1003 million fiscal 2002 due lower pretax earnings lower state income taxes legg mason’s effective income tax rate 396 fiscal 2002 412 fiscal 2001 due lower average effective state income tax rates impact adopting sfas 142 eliminated nondeductible amortization goodwill book purposes results segment asset management net revenues asset management increased 25 5579 million pretax earnings increased 20 1592 million primarily result acquisitions pcm royce pretax profit margin decreased 285 fiscal 2002 297 fiscal 2001 asset management represented 384 consolidated net revenues fiscal 2002 increase 327 fiscal 2001 fiscal 2002 pcm royce contributed fees 971 million internal growth core fixed income institutional manager increased revenues 292 million performance fees included investment advisory related fees increased 206 million fiscal 2002 60 million fiscal 2001 principally due fees earned pcm royce well additional fees earned subsidiaries interest expense asset management increased 446 million fiscal 2002 primarily due increase acquisitionrelated debt increase noninterest expenses primarily attributable addition expenses acquired entities increase profitabilitybased incentives fixed income institutional investment advisor total assets management 1770 billion march 31 2002 increase 371 billion 27 march 31 2001 march 31 2002 approximately 672 billion 380 assets management equity related products 1098 billion 620 fixed income related products private client difficult market conditions fiscal 2002 well significantly lower interest rates lower retail transaction volume negatively impacted private client accordingly net revenues decreased 13 6182 million fiscal 2002 pretax earnings declined 53 533 million pretax profit margin declined 86 fiscal 2002 160 fiscal 2001 private client represented 426 consolidated net revenues fiscal 2002 decrease 520 prior fiscal year net interest profit private client decreased 39 567 million fiscal 2002 significantly lower average interest rates lower average margin account balances offset part increase average firm investment balances principally funds segregated regulatory purposes commissions retail securities transactions including listed overthecounter trading decreased approximately 386 million 26 fiscal 2002 prior year net revenues also declined decreases retail generated principal transactions sales nonaffiliated mutual funds annuities noninterest expenses decreased 5 5649 million primarily result lower variable sales commissions capital markets capital markets achieved thenrecord net revenues fiscal 2002 net revenues increased 39 2422 million fiscal 2002 primarily result higher institutional equity fixed income transaction volume pretax earnings increased 154 393 million pretax profit margin increased 162 fiscal 2002 89 fiscal 2001 capital markets represented 167 consolidated net revenues fiscal 2002 increase 128 fiscal 2001 noninterest expenses increased 28 2029 million driven increased compensation costs including variable sales commissions incentives consists principally results real estate service mortgage banking business unallocated corporate revenues expenses net revenues slightly fiscal year 342 million 330 million primarily due decrease interest income resulting lower interest rates liquidity capital resources primary objective capital structure funding practices appropriately support legg mason’s business strategies well regulatory capital requirements certain subsidiaries provide needed liquidity times liquidity access liquidity essential success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses continue explore potential acquisition opportunities means diversifying strengthening business opportunities may time involve acquisitions material size may require among things raising additional capital andor issuance additional debt part liquidity strategy emphasize diversification funding sources seek manage exposure refinancing risk legg mason available committed shortterm financing secured unsecured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized shortterm us government agency securities highly rated corporate debt money market funds equity securities shortterm funding generally obtained rates based upon benchmarks federal funds prime rates libor money market rates maintain committed unsecured revolving credit facility 100 million matures june 30 2003 general corporate purposes facility restrictive covenants require us among things maintain specified levels net worth debttoequity ratios borrowings outstanding facility march 31 2003 2002 process negotiating new 100 million threeyear revolving credit facility substantially terms current facility expect new facility place june 30 2003 real estate service mortgage banking subsidiary two committed shortterm financing facilities mature september 15 2003 used connection business operations first 50 million warehouse line credit national bank 248 million 36 million outstanding march 31 2003 2002 respectively used provide interim financing funding commercial mortgage loans parent guarantor credit facility weighted average interest rates fiscal 2003 2002 203 380 respectively second credit facility financing agreement national bank allows borrowing funds shortterm investing 125 million interest rate 080 based upon amount available customer escrow funds deposit bank credit facility collateralized securities purchased funds primarily shortterm us government agency securities highly rated corporate commercial paper money market funds outstanding balances line march 31 2003 2002 maintained compliance applicable covenants facilities throughout year event fail meet covenants specified credit facilities lines credit may available us legg mason also maintains uncommitted credit facilities numerous banks financial institutions uncommitted facilities consist lines credit advised available contractual lending obligation exists uncommitted facilities would likely unavailable us material adverse effect financial condition occurred relied issuance shortterm commercial paper fund operating needs utilize unconsolidated special purpose entities provide operating liquidity legg mason’s assets consist primarily cash equivalents collateralized shortterm receivables investment advisory fee receivables securities owned borrowed intangible assets goodwill assets principally funded payables customers securities loaned bank loans longterm debt equity collateralized shortterm receivables consist primarily margin loans securities purchased agreements resell securities borrowed collateralized us government agency securities corporate debt equity securities investment advisory fee receivables although collateralized shortterm nature collectibility reasonably certain excess cash generally invested institutional money market funds securities purchased agreements resell highly liquid nature assets provides us flexibility financing managing anticipated operating needs legg mason’s total assets increased 1278 million 61 billion march 31 2003 principally result net increase cash 2224 million offset maturity investments finance subsidiaries 973 million maturity investments offset corresponding decrease longterm notes payable finance subsidiaries 977 million cash securities segregated regulatory purposes deposited clearing organizations increased 818 million primarily reflecting decrease customer margin account balances 622 million customer credit account balances remained relatively unchanged securities borrowed securities loaned decreased 692 million 597 million respectively reflecting decline demand equity securities stemming weak equity market conditions march 31 2003 stockholders’ equity 125 billion 15 increase march 31 2002 fiscal 2003 cash flows operating activities provided approximately 3057 million primarily attributable net earnings adjusted noncash charges expect cash flows provided operating activities primary source working capital next year march 31 2003 legg mason three longterm fixed rate debt facilities outstanding balance 7867 million increase 73 million prior year due accretion zerocoupon notes outstanding 1000 million principal amount senior notes due february 15 2006 bear interest stated rate 65 balance march 31 2003 999 million notes originally issued february 1996 discount yield 657 also outstanding 5670 million principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 resulted net proceeds 2444 million balance march 31 2003 2627 million convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year upon certain events including sale price stock reaching certain thresholds convertible notes rated specified credit ratings convertible notes called redemption note convertible 77062 shares common stock subject adjustment may redeem convertible notes cash june 6 2006 accreted value addition may required repurchase convertible notes accreted value option holders june 6 2005 2007 2011 every five years thereafter 2026 upon change control legg mason occurs june 6 2006 repurchases paid cash shares common stock combination approximately 44 million shares common stock reserved issuance upon conversion also outstanding 4250 million principal amount senior notes due july 2 2008 bear interest 675 notes issued discount yield 680 balance march 31 2003 4241 million proceeds longterm debt used fund acquisition asset management entities debt ratings march 31 2003 bbb standard poor’s rating services a3 moody’s investor service inc moody’s investor service inc rating increased november 2002 baal august 1 2001 legg mason purchased pcm cash approximately 6820 million excluding acquisition costs transaction includes two contingent payments based pcm’s revenue growth years ending third fifth anniversaries closing aggregate purchase price 14 billion may required make maximum payments amount 4000 million august 1 2004 3000 million august 1 2006 certain conditions met based upon current level assets management associated revenue growth pcm anticipate likely significant contingent payment made august 1 2004 october 1 2001 completed acquisition royce cash 1150 million excluding acquisition costs transaction includes three contingent payments based royce’s revenue growth years ending third fourth fifth anniversaries closing aggregate purchase price 2150 million may therefore required make maximum payment amount 1000 million october 1 2004 part acquisition certain conditions met option pay much 50 remaining purchase price royce common stock based upon current level assets management associated revenue growth royce anticipate likely significant contingent payment form cash stock combination made october 1 2004 expect fund commitments cash available operations available lines credit raising funds capital markets march 31 2003 5750 million available issuance additional debt equity securities pursuant shelf registration statement shelf filing permits us register securities advance sell financing needs arise market conditions favorable intend use shelf registration general corporate purposes including expansion business assurances terms securities may issued pursuant shelf registration since dependent market conditions interest rates time issuance fiscal 2002 board directors authorized legg mason discretion purchase 3 million shares common stock fiscal 2003 2002 repurchased 884900 shares 420 million 136800 shares 71 million respectively fiscal 2003 2002 paid cash dividends 282 million 251 million respectively anticipate continue pay quarterly dividends repurchase shares discretionary basis parent’s brokerdealer subsidiaries subject requirements securities exchange commission’s uniform net capital rule designed measure general financial soundness liquidity brokerdealers march 31 2003 brokerdealer subsidiaries aggregate net capital 3634 million exceeded minimum net capital requirements 3428 million amount brokerdealers’ net assets may distributed subject restrictions applicable net capital rules parent’s trust subsidiary subject requirements office thrift supervision requires compliance regulatory capital standards march 31 2003 trust subsidiary met capital adequacy requirements subject contractual obligations contingent payments legg mason contractual obligations make future payments connection short longterm debt noncancelable lease agreements forward purchase agreement addition noted liquidity capital resources may required make contingent payments business purchase agreements certain future events occur see notes 2 7 8 9 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual contingent obligations fiscal year included payments 2006 2789 reflecting amounts may due holders zero coupon convertible senior notes represents accreted value next possible date holders may require us purchase notes legg mason option pay purchase price cash common stock combination b see note 1 notes consolidated financial statements “derivative instruments” c amount contingent payments reflected year represents maximum amount could payable earliest possible date terms business purchase agreements table include approximately 275 capital commitments investment partnerships legg mason limited partner obligations funded required end commitment periods range fiscal 2004 2011 capital commitments also include 13 commitments lend employees funds invest one partnerships risk management risk inherent part business activities extent properly effectively identify assess monitor manage various types risk involved activities critical soundness profitability seek identify assess monitor manage following principal risks involved business activities funding market credit operational legal risk management legg mason multifaceted process requires communication judgment knowledge financial products markets senior management takes active role risk management process requires specific administrative business functions assist identification assessment control various risks formal risk management committees review extensions credit capital markets commitments equity fixed income market making activities new product business proposals risk management policies procedures methodologies fluid nature subject ongoing review modification funding risk discussed “liquidity capital resources” market risk potential changes value financial instruments referred market risk market risk generally represents risk loss may result change value financial instrument result fluctuations interest rates credit spreads equity prices correlation among along level volatility interest rate risks result primarily exposure changes yield curve volatility interest rates mortgage prepayments credit spreads equity price risks result exposure changes prices volatilities individual equities equity baskets equity indices legg mason makes dealer markets equity debt securities facilitate customer orders may required equity debt securities trading inventory accounts majority trading inventory accounts consist debt instruments attempt reduce exposure market risk managing net long short position example may hedge municipal portfolio taking offsetting position related futures contract due imperfections correlations gains losses occur even positions hedged position limits trading inventory accounts established monitored ongoing basis day consolidated position exposure reports prepared distributed various levels management enable management monitor inventory levels results trading groups also monitor inventory aging pricing concentration securities ratings following tables categorize legg mason’s market risk sensitive financial instruments type security maturity date fair value trading securities reflects trading assets net trading liabilities consistent way manage risk exposure see note 4 notes consolidated financial statements related gross long short fair values trading securities fair value financial instruments includes investment securities addition treasury securities 826 million 1229 million march 31 2003 2002 respectively included cash securities segregated regulatory purposes deposited clearing organizations financial instruments market risk march 31 2003 financial instruments market risk march 31 2002 addition financial instruments included table three longterm debt facilities described “liquidity capital resources” net investments foreign subsidiaries impacted fluctuations foreign exchange rates fluctuations recorded component stockholders’ equity material financial condition impact currency fluctuations results operations material credit risk credit risk represents loss would incur client counter party issuer securities instruments held legg mason fails perform contractual obligations us follow industry practice reduce credit risk related various investing financing activities obtaining maintaining collateral credit exposure associated private client business consists primarily customer margin accounts monitored daily monitor exposure industry sectors individual securities perform sensitivity analyses regular basis connection margin lending activities adjust margin requirements believe risk exposure appropriate based market conditions operational risk operational risk generally refers risk loss resulting operations including limited improper unauthorized execution processing transactions deficiencies operating systems business disruptions inadequacies breaches internal control processes operate different businesses diverse markets reliant ability employees systems process high numbers transactions often within short time frames event breakdown improper operation systems human error improper action employees legg mason could suffer financial loss regulatory sanctions damage reputation order mitigate control operational risk developed continue enhance policies procedures designed identify manage operational risk appropriate levels example procedures requiring securities transactions must confirmed timely basis position valuations subject periodic independent review procedures collateral adequate documentation obtained counter parties appropriate circumstances also use periodic selfassessments internal audit reviews independent consultants check operational risk exposure disaster recovery plans exist critical systems redundancies built systems deemed appropriate believe disaster recovery program including offsite backup technology operational facilities adequate handle reasonable business disruption however assurances disaster directly affecting headquarters operations centers would material adverse impact insurance safeguards might partially reimburse us losses legal risk legal risk includes risk noncompliance applicable legal regulatory requirements legg mason subject extensive regulation different jurisdictions conduct business various procedures addressing issues regulatory capital requirements sales trading practices use safekeeping customer funds credit granting protection client information collection activities moneylaundering record keeping critical accounting policies accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position legg mason see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following among legg mason’s current accounting policies involve significant estimates judgments valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value cash securities segregated regulatory purposes deposited clearing organizations securities purchased agreements resell trading assets investment securities investments finance subsidiaries trading liabilities consolidated statements financial condition include forms financial instruments unrealized gains losses related financial instruments reflected net earnings comprehensive income depending underlying purpose instrument available use prices independent sources listed market prices broker dealer price quotations investments illiquid privately held securities readily determinable fair values determination fair value requires management estimate value securities based upon available information instances security subject transfer restrictions value security based primarily quoted price security without restriction may reduced amount estimated reflect restrictions addition even value security derived independent market price broker dealer quote certain assumptions may required determine fair value instance generally assume size positions securities hold would large enough affect quoted price securities sell sale would occur orderly manner however assumptions may incorrect actual value realized upon disposition could different current carrying value evaluate nontrading securities “other temporary” impairment may exist fair value investment security adjusted cost extended period time “other temporary” impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined march 31 2003 owned approximately 53 million financial instruments valued solely assumptions estimates additionally less 01 million unrealized losses investment securities march 31 2003 intangible assets goodwill effective april 1 2001 adopted provisions financial accounting standards board “fasb” sfas 141 “business combinations” sfas 142 sfas 141 requires business combinations initiated june 30 2001 accounted using purchase method addition provides cost acquired entity must allocated assets acquired including identifiable intangible assets liabilities assumed based estimated fair values date acquisition excess cost fair value net assets acquired must recognized goodwill sfas 142 provides goodwill longer amortized value identifiable intangible asset must amortized useful life unless asset determined indefinite useful life allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired primarily asset management contracts trade names based upon certain estimates assumptions including projected future cash flows growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates investment performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination dates renewed value contracts manage assets mutual funds value trade names classified indefinitelife intangible assets assignment indefinite lives mutual fund contracts based upon assumption foreseeable limit contract period manage mutual funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely significant acquisitions pcm royce engage services third party consultants perform independent valuations assets acquired liabilities assumed march 31 2003 4545 million goodwill 1592 million indefinitelife intangible assets 3112 million amortizable intangible assets generally estimated useful lives amortizable intangible assets range 5 20 years review intangible assets goodwill quarterly basis considering factors projected cash flows revenue multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs intangible assets subject amortization reviewed impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level one level operating segment deemed impaired carrying amount reporting unit exceeds implied fair value reporting unit estimating fair value reporting unit use valuation techniques based multiples revenues discounted cash flows similar models employed analyzing purchase price acquisition target substantially goodwill assigned asset management operating segment defined asset management reporting units wealth management institutional mutual funds fiscal 2003 legg mason recorded impairment charge 28 million 20 million represented fair value asset management contracts acquired prior business combination deemed impaired due declining profit margins remainder impairment charge represented fair value asset management contracts acquired prior business combination terminated period actual results vary estimates assumptions used determine fair values assigned assets may required recognize impairment charge could material results business acquisitions pcm royce involved closely held companies certain key employees also owners companies establishing overall purchase price may include contingent consideration whereby portion purchase price paid acquisition date determination contingent payments consistent methods valuing establishing purchase price record payments additional purchase price compensation contingencies met generally contingent payments recorded additional goodwill see note 6 notes consolidated financial statements additional information regarding intangible assets goodwill reserves losses contingencies legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency investigations proceedings accordance sfas 5 “accounting contingencies” established reserves potential losses complaints legal actions investigations proceedings establishing reserves use judgment determine probability losses incurred reasonable estimate amount losses making decisions base judgments knowledge situations consultations legal counsel experience judgments prove incorrect reserves may accurately reflect actual losses result actions could materially affect results period expenses ultimately determined see note 9 notes consolidated financial statements additional disclosures regarding contingencies special purpose entities special purpose entities “spes” trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse utilize spes form financing provide liquidity recognized gains sale assets spes primary relationship spes involves one asset management subsidiaries collateral manager four collateralized debt obligations “cdos” first cdo established fiscal 2002 vehicle investors issued approximately 3830 million debt acquired portfolio consisting primarily high quality assetbacked securities sell assets cdo services collateral manager receive senior management fees may eligible certain circumstances receive subordinated management fees approximately 15 million annually may removed collateral manager certain conditions currently equity interest entity however entered cash flow hedge whereby may purchase 42 million equity interest approximately 1 assets entity three years since march 31 2002 became collateral manager three additional cdos vehicles investors issued total approximately 11 billion debt proceeds used acquire portfolios consisting primarily high quality assetbacked securities legg mason sell assets cdos services collateral manager entitled receive senior management fees may eligible certain circumstances receive subordinated management fees approximately 22 million annually may removed collateral manager certain conditions currently equity interest cdos cash flow hedge described financial commitments guarantees cdos underlying debt nonrecourse us collateral manager cdos consolidated march 31 2003 recorded unrealized loss 15 million net tax related cash flow hedge january 2003 fasb issued fasb interpretation number “fin” 46 “consolidation variable interest entitiesan interpretation arb 51” fin 46 provides guidance respect consolidation spes deemed variable interest entities “vies” vie entity equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support investors believe cdos described vies accordingly primary beneficiary would required consolidate vies primary beneficiary entity absorb majority vie’s expected losses receive majority vie’s residual returns currently process assessing impact fin 46 cdos however believe reasonably possible consolidate assets liabilities results cdos described quarter ended september 30 2003 required consolidate four cdos estimate would record additional assets liabilities consolidated statement financial condition approximately 18 billion liabilities required recorded would disclose liabilities without recourse legg mason role collateral manager cdo pools expose us risk loss addition normal course business activities become general partner cases limited partner investment partnerships investment manager andor managing member limited liability companies currently process assessing impact fin 46 entities however believe unlikely consolidate entities see “recent accounting developments” additional details regarding requirements fin 46 stockbased compensation stockbased compensation plans include stock options stock purchase plans restricted stock awards deferred compensation payable stock account stockbased compensation accordance intrinsic value method prescribed accounting principles board “apb” 25 “accounting stock issued employees” permitted sfas 123 “accounting stockbased compensation” amended grant stock option awards exercise price equal market price date grant accordingly recognize compensation expense stock option awards stock purchase plan shares common stock purchased open market behalf participating employees provide 10 contribution towards purchases charged stockholders’ equity restricted stock awards deferred compensation payable stock recognized expense vesting periods accordance provisions sfas 123 provide disclosure notes consolidated financial statements pro forma results fair value based method compensation expense associated stock option grants stock purchase plan recognized vesting period fair value option grant determined using blackscholes optionpricing model accounted stock option grants stock purchase plan fair value based method net earnings would reduced 226 million 205 million 151 million 2003 2002 2001 respectively december 31 2002 fasb issued sfas 148 “accounting stockbased compensationtransition disclosure amendment sfas 123” sfas 148 permits three alternative methods transition voluntary change fair value based method addition statement amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased compensation effect applied method reported results currently process determining whether make voluntary change fair value based method accounting stockbased employee compensation earnings per share basic earnings per share “eps” calculated dividing net earnings weighted average number common shares outstanding diluted eps similar basic eps adjusts effect potential common shares diluted eps include 44 million shares may issued upon conversion zerocoupon contingent convertible senior notes due contingent nature conversion feature provides conversion limited circumstances including sale price common stock reaching certain thresholds notes rated specified credit ratings notes called redemption notes converted april 1 2002 diluted eps fiscal 2003 would negatively impacted approximately 008 per share forwardlooking statements information statements provided behalf legg mason time including within annual report form 10k may contain certain “forwardlooking information” including information relating anticipated growth revenues earnings per share anticipated change businesses amount client assets management anticipated expense levels changes expenses expected effects acquisitions expectations regarding financial market conditions caution readers forwardlooking information provided behalf legg mason guarantee future performance actual results may differ materially forwardlooking information result various factors outside control including limited discussed elsewhere annual report form 10k forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events legg mason’s future revenues may fluctuate due numerous factors total value composition assets management volume trading securities volatility general level securities prices interest rates relative investment performance companysponsored investment funds asset management products compared competing offerings market indices investor sentiment confidence general economic conditions ability legg mason maintain investment management administrative fees current levels level margin customer account balances competitive conditions business segments demand investment banking services ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred legg mason result changes number total employees competitive factors changes percentages net revenues paid compensation reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill connection litigation effects acquisitions legg mason’s business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation based today’s low inflationary rates assets primarily monetary nature consisting cash equivalents securities receivables believe assets significantly affected inflation rate inflation however affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us recent accounting developments following pronouncements issued fasb fiscal year sfas no143 “accounting asset retirement obligations” requires fair value liability recorded costs associated retirement tangible longlived assets period liability incurred reasonably estimated sfas 144 “accounting impairment disposal longlived assets” supersedes sfas 121 “accounting impairment longlived assets longlived assets disposed of” statement principally addresses implementation issues sfas 121 including developing single accounting model longlived assets disposed sale sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections april 2002” primarily provides guidance reporting gains losses extinguishments debt saleleaseback transactions sfas 146 “accounting costs associated exit disposal activities” standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan sfas 146 replaces existing guidance provided eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” sfas 146 applied prospectively exit disposal activities initiated december 31 2002 sfas 147 “acquisitions certain financial institutionsan amendment fasb statements 72 144 fasb interpretation 9” statement provides guidance accounting acquisition financial institution previously addressed sfas 72 “accounting certain acquisitions banking thrift institutions” requires transactions accounted accordance sfas 141 sfas 142 addition statement amends sfas 144 include longterm customerrelationship intangible assets indefinite lives would require assets subject undiscounted cash flow recoverability impairment test sfas 144 requires longlived assets held used sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also amends sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results disclosure requirements sfas 148 effective march 31 2003 financial statements interim periods thereafter fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness othersan interpretation fasb statements 5 57 107 rescission fasb interpretation 34” expands disclosure requirements made guarantor interim annual financial statements regarding obligations certain guarantees issued guarantees issued modified december 31 2002 fin 45 also requires certain circumstances recognition inception guarantee liability fair value obligation result issuing guarantee guarantees entity’s future performance within scope fin 45 previously discussed special purpose entities “critical accounting policies” fin 46 requires consolidation assets liabilities results operations vies primary beneficiary fin 46 also requires disclosure information concerning vies entities hold significant variable interests may primary beneficiary provisions fin 46 apply immediately vies created january 31 2003 effective interim periods beginning june 15 2003 interests vies acquired february 1 2003 fin 46 also requires disclosure nature purpose size activities vies well maximum exposure loss connection vies financial statements issued january 31 2003 reasonably possible entity consolidate disclose information vie sfas nos 143 148 fin 45 46 became effective fiscal year materially impact consolidated financial statements march 31 2003 process evaluating certain provisions fin 46 effective subsequent periods november 2002 emerging issues task force “eitf” reached consensus issue 023 “issues involved accounting derivative contracts held trading purposes contracts involved energy trading risk management activities” eitf 023 precludes marktomarket accounting energytrading contracts derivatives pursuant sfas 133 amended “accounting derivative instruments hedging activities” provisions statement effective contracts entered subsequent november 22 2002 materially impact consolidated financial statements november 2002 eitf reached consensus issue 0021 “accounting revenue arrangements multiple deliverables” eitf issue 0021 addresses accounting arrangements vendor perform multiple revenuegenerating activities provisions statement effective revenue arrangements entered fiscal periods beginning june 15 2003 expect statement materially impact consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations executive overview legg mason inc “parent” holding company subsidiaries collectively parent “legg mason” principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities operations principally united states america united kingdom canada also offices spain switzerland singapore terms “we” “us” “our” “company” refer legg mason legg mason currently operates three business segments asset management private client capital markets business segment classifications based upon factors services provided distribution channels utilized certain services legg mason offers provided clients one business segments therefore revenue categories allocated multiple segments legg mason allocates certain common income expense items among business segments based upon various methodologies factors methodologies nature subjective reviewed periodically management business segment results future may reflect reallocations revenues expenses result changes methodologies reallocations effect legg mason’s consolidated results operations asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue asset management investment advisory distribution administrative fees typically calculated percentage assets account vary based upon factors type underlying investment product amount assets management type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution fees earned companysponsored investment funds reported asset management fund sold direct marketing channels private client segment fund sold branch distribution network revenues asset management tend stable private client capital markets less affected changes securities market conditions private client distributes wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds fees earned feebased brokerage managed accounts net interest customers’ margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets consists legg mason’s equity fixed income institutional sales trading corporate public finance investment banking primary sources revenue equity fixed income institutional sales trading include commissions principal credits transactions corporate municipal products legg mason maintains proprietary fixed income equity securities inventory primarily facilitate customer transactions realizes trading profits losses proprietary trading activities investment banking revenues include underwriting fees advisory fees private placements mergers acquisitions sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also include realized unrealized gains losses investments acquired connection merchant investment banking activities september 2003 sold mortgage banking servicing operations legg mason real estate services inc “lmres” previously reported fourth segment also included certain unallocated corporate revenues expenses consolidated results restated reflect historical results sold business discontinued operations remaining operations lmres capital markets corporate revenues expenses allocated business segments reported separately corporate significant component cost structure compensation benefits majority variable nature includes sales commissions based upon certain revenues incentive bonuses based upon production levels andor profitability certain operating costs fixed nature occupancy depreciation amortization equipment leasing minimum contract commitments market data communication technology services may decline reduced levels business activity conversely may rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly united states results individual period considered representative future results profitability sensitive variety factors including amount composition assets management volume trading securities volatility general level securities prices interest rates level customer margin credit account balances demand investment banking services among things sustained periods unfavorable market conditions likely affect profitability adversely addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients past decade experienced substantial expansion due internal growth strategic acquisition asset management firms provided among things broader range investment expertise additional product diversification increased assets management financial services businesses engaged extremely competitive competition includes numerous national regional local asset management firms brokerdealers commercial banks industry affected consolidation financial services firms mergers acquisitions increasing competitive pressures require us offer customers many services provided much larger firms industry operate also subject extensive regulation federal state laws securities exchanges selfregulatory authorities like firms impacted regulatory legislative changes postenron era addition financial services industry subject number regulatory proceedings requirements last two years including changes relationships research analysts investment banking proceedings regarding number mutual funds sales practices sarbanesoxley act 2002 required us implement new policies review existing policies respect corporate governance auditor independence disclosure controls addition various regulatory organizations adopted changes rules policies response certain abuses corporate scandals references fiscal 2004 2003 2002 refer march 31 fiscal year ended business environment fiscal 2004 began continued economic uncertainty fueled conflict iraq continued focus corporate governance regulatory accounting issues despite factors equity markets improved substantially fiscal 2004 dow jones industrial average nasdaq composite index sp 500 30 49 33 respectively fiscal year ended march 31 2004 fiscal 2004 us federal reserve lowered federal funds rate 100 lowest level 45 years however increased volatility longterm yields investor sentiment shifted fears deflation fears inflation recent economic growth led speculation federal reserve likely raise shortterm interest rates calendar 2004 result equity fixed income markets continue volatile uncertain begin fiscal 2005 unable predict impact results financial services industry continues impacted legislative regulatory changes regulatory investigations mutual fund trading practices within financial services industry uncovered instances conflicts interest insufficient internal controls related mutual funds resulted negative public perception mutual fund industry numerous regulatory rule proposals strict regulatory environment significant fines penalties fee reductions number financial services companies like numerous firms starting september 2003 received subpoena office new york attorney general “ny ag” inquiries securities exchange commission “sec” relating investigations sales practices late trading market timing selective disclosure portfolio holdings connection mutual funds responded ny ag subpoena sec inquiries cooperating two separate sec investigations currently able determine whether regulators initiate enforcement actions result investigations predict effect mutual fund investigations business results operations assets management results operations following table sets forth periods indicated items consolidated statements earnings percentage net revenues increase decrease item percentage amount previous period nmnot meaningful fiscal 2004 compared fiscal 2003 financial overview legg mason reported record net revenues net earnings diluted earnings per share fiscal 2004 net revenues increased 29 1941 billion primarily due increased revenues higher assets management assets management increased 49 2864 billion result approximately equal increases net client cash flows market appreciation net earnings increased 56 2978 million diluted earnings per share 406 increase 46 pretax profit margin increased 243 205 included fiscal 2004 single litigation award charge 175 million earnings also affected impact sale mortgage servicing operations lmres increased net earnings 65 million diluted earnings per share included impact 44 million shares would issuable upon conversion zerocoupon contingent convertible senior notes became convertible january 2004 stock price reached convertibility threshold prior quarter reducing diluted earnings per share 009 net revenues investment advisory related fees including distribution fees companysponsored mutual offshore funds increased 42 1217 billion primarily result combined growth assets managed private capital management lp “pcm” western asset management company “western asset” royce associates llc “royce” legg mason funds management inc “lmfm” distribution fees proprietary investment funds increased 530 million 1901 million investment advisory related fees represented 63 consolidated net revenues 57 prior year investment advisory revenues assets management assets management march 31 2004 2864 billion 49 march 31 2003 changes business environment fiscal 2004 gave rise improvements equity markets resulted dramatic growth equity assets management 50 billion 94 billion increase assets equity assets earn higher fees equity products pretax earnings rose 77 asset management segment assets management march 31 2004 2003 type follows billions assets management division billions securities brokerage revenues including commissions principal transactions increased 7 5090 million primarily result increases retail client transaction volume particularly listed overthecounter equities nonaffiliated mutual funds commission revenues fiscal 2004 reduced 74 million reimbursements clients legg mason wood walker’s failure provide breakpoint discounts connection client purchases nonproprietary frontend load mutual fund shares 56 million result impact sale bank brokerage network fiscal 2003 investment banking revenues 1501 million increase 38 prior year primarily result increases retail institutional selling concessions corporate banking management fees new issues revenues increased 22 438 million primarily result net gains firm investments net interest profit 212 million increased 5 202 million prior year interest revenue declined 21 843 million result significantly lower interest rates earned higher average customer firm investment balances interest expense declined 27 632 million result significantly lower interest rates paid customer credit account balances lower amortized issue costs relating zerocoupon contingent convertible senior notes fully amortized quarter ended june 30 2003 net interest profit margin current period increased 251 190 prior year accounted 45 earnings income tax provision 66 prior year noninterest expenses compensation benefits increased 24 1087 billion result increases profitabilitybased incentive costs primarily asset management related increased retail financial advisor sales compensation however compensation percentage net revenues declined 560 587 prior year result impact fixed compensation costs increased revenues lower percentage pretax profits accrued corporate executive incentive compensation lower effective compensation rates communications technology expense 925 million relatively unchanged prior year increased investments technology offset impact lower depreciation result assets became fully depreciated prior year occupancy expense rose 6 665 million current year primarily result increased rent equipment depreciation relocation costs 17 million related western asset’s move new office location also incurred 10 million additional costs consolidate two investment advisory subsidiary office locations new york city amortization intangible assets declined 7 218 million primarily result asset management contracts fully amortized year fiscal 2004 recorded litigation award charge 175 million result judgment copyright infringement lawsuit see note 9 notes consolidated financial statements distribution service fees increased 94 478 million primarily result increase distribution fees paid thirdparty distributors sales offshore royce funds expenses increased 20 1354 million current fiscal year primarily due increase 80 million audit consulting fees result stringent legislative regulatory environment legal fees litigation 23 million fine levied sec national association securities dealers “nasd” result failure provide certain clients benefit breakpoint discounts connection purchases nonproprietary frontend load mutual fund shares stockbased compensation expense 21 million stock option grants nonemployee directors increase 20 million contributions legg mason charitable foundation increases partially offset lower expenses related advances financial advisors impairment charges taken intangible assets fiscal 2003 income tax provision increased 55 1817 million primarily result increase pretax earnings effective tax rate 385 current fiscal year 383 prior year current year reflects lower average effective foreign tax rate prior year benefited 26 million state income tax refunds results segment asset management net revenues asset management increased 50 9693 million pretax earnings increased 77 3163 million principally result increased revenues higher levels assets management investment advisory revenues pcm western asset royce lmfm combined accounted 2245 million 73 increase including performance fees performance fees rose 200 million 415 million compensation percentage net revenues 466 fiscal 2004 485 prior fiscal year profit margin increased 326 276 prior year result greater portion revenues generated subsidiaries retain lower percentage revenues revenue sharing agreements asset management represented 499 consolidated net revenues year ended march 31 2004 increase 432 prior year net revenues division within asset management millions private client private client net revenues increased 15 6778 million 5886 million prior year pretax earnings increased 56 1207 million principally result increases distribution fees companysponsored mutual funds corporate selling concessions increased volume listed overthecounter securities transactions additionally increased commissions sales nonaffiliated mutual funds fees earned feebased brokerage accounts contributed increase net revenues increases partially offset impact sale contracts bank brokerage network prior year 99 million impact 74 million reduction mutual fund commissions breakpoint reimbursements clients compensation percentage net revenues declined 574 fiscal 2004 581 fiscal 2003 primarily result lower commission rates paid distribution fees companysponsored mutual funds elimination bank brokerage commissions result sale bank brokerage network prior year profit margin rose 178 132 prior year result increased revenues lower effective compensation costs private client represented 349 consolidated net revenues year ended march 31 2004 decrease 392 prior year due significant increase asset management net revenues net interest profit private client declined 2 489 million capital markets capital markets net revenues increased 12 2958 million 2642 million prior year result higher corporate banking management fees selling concessions new issues higher corporate advisory fees increased institutional equity overthecounter transaction volume compensation percentage net revenues 569 compared 568 prior year profit margin decreased 186 195 prior year result increased direct allocated support costs capital markets represented 152 consolidated net revenues year ended march 31 2004 decrease 176 prior year primarily due significant increase net revenues asset management segment corporate nmnot meaningful corporate includes unallocated revenues expenses primarily gains losses certain firm investments 175 million litigation award charge fiscal 2003 compared fiscal 2002 financial overview net revenues net earnings diluted earnings per share 5 150 billion 25 1909 million 24 278 respectively august 1 2001 acquired pcm acquisition date managed 86 billion assets october 1 2001 acquired royce acquisition date managed 47 billion assets march 31 2003 pcm royce managed 115 billion 82 billion assets respectively benefit full year results growth royce pcm increased net revenues approximately 800 million net interest expense additionally net earnings increased result lower compensation costs percentage net revenues decreases litigationrelated costs benefit full year cost savings initiatives implemented prior year net revenues investment advisory related fees including distribution fees investment funds increased 10 8603 million primarily result additional investment advisory fees 905 million royce pcm growth 409 million western asset increases offset part declines investment advisory distribution fees companysponsored equity investment funds 427 million lower fees certain nonus based investment advisors 102 million securities brokerage revenues increased 1 4749 million result increases volume institutional retail fixed income transactions sales annuities impact full year commissions earned pcm’s brokerage operations increases offset part declines listed retail equity transaction volume sales nonproprietary mutual funds investment banking revenues increased 7 1090 million primarily due increases new issue underwriting revenues increased merger advisory fees revenues increased 9 358 million primarily result 31 million increase annual retirement account fees due accounts charged fee increases fee rates 13 million realized gain sale certain contracts bank brokerage network offset part unrealized losses firm investments net interest profit declined 47 202 million primarily result decrease 531 million interest revenue due lower average interest rates earned customer account firm investment balances partially offset decrease interest expense 428 million result lower average interest rates paid customer credit account balances addition interest expense increased 92 million result acquisitionrelated debt net interest profit accounted 66 consolidated pretax profits significantly 152 prior fiscal year noninterest expenses compensation benefits increased 2 8801 million primarily due full year’s impact pcm royce resulted increase 324 million compensationrelated expenses higher profitabilitybased asset management incentive expense offset part decline sales distribution fee commissions 276 million compensation percentage net revenues decreased 587 fiscal 2003 608 fiscal 2002 primarily due private client capital market segments communications technology expense declined 7 905 million primarily result declines costs quote services consulting fees leased computer equipment occupancy increased 5 627 million primarily due impact full year expenses acquired entities higher operating expenses corporate headquarters addition office space leased western asset amortization intangible assets increased 34 233 million primarily result 55 million increase related full year amortization asset management contracts acquired pcm acquisition adopted provisions statement financial accounting standards “sfas” 142 “goodwill intangible assets” effective april 1 2001 goodwill indefinite life intangible assets longer amortized see note 6 notes consolidated financial statements distribution service fees increased 49 246 million primarily result impact full year commissions paid thirdparty distributors royce funds expenses decreased 3 1125 million primarily result decline litigationrelated expenses approximately 57 million lower promotional expenses decreases offset part addition expenses acquired entities increase 21 million allowances recruitingrelated advances financial advisors income tax provision increased 18 1174 million fiscal 2003 primarily result increase pretax earnings effective tax rate declined 383 396 prior year due lower average effective state income tax rates resulting changes state apportionment factors 26 million onetime net state income tax refunds lower average effective foreign tax rate result realizing tax benefits uk net operating loss carryforwards results segment asset management net revenues asset management increased 16 6481 million pretax earnings increased 12 1787 million principally result impact full year results growth pcm royce well growth western asset compensation percentage net revenues increased 483 fiscal 2003 467 fiscal 2002 pretax profit margin decreased 276 fiscal 2003 285 fiscal 2002 higher percentage revenues generated subsidiaries retain larger percentage revenues revenuesharing agreements incentive compensation asset management represented 432 consolidated net revenues fiscal 2003 increase 392 fiscal 2002 fiscal 2003 pcm royce contributed additional 905 million investment advisory fees 313 million pretax earnings addition investment advisory fees grew 409 million western asset increases offset part declines 192 million advisory fees companysponsored equity investment funds 102 million advisory fees certain nonus based investment advisors addition net interest profit decreased 119 million primarily result lower average interest rates earned firm investment balances increase acquisitionrelated debt included current fiscal year charges 28 million related writedowns previously acquired asset management contracts net revenues division within asset management millions private client despite decline private client’s net revenues 5 5886 million pretax earnings increased 46 776 million compensation percentage net revenues decreased 581 fiscal 2003 619 fiscal 2002 result lower effective commission payout rates incentive compensation pretax profit margin increased 132 fiscal 2003 86 fiscal 2002 private client represented 392 consolidated net revenues fiscal 2003 decrease 434 prior year net revenues declined primarily due decrease 198 million distribution fee revenues companysponsored investment funds principally equity funds lower retail transaction volume improved pretax earnings profit margin attributable decline noninterest expenses driven cost savings initiatives implemented last year including impact branch consolidations reduction number fulltime employees lower costs communication services net interest profit private client decreased 12 499 million primarily due decline average interest rates earned firm investment balances capital markets net revenues capital markets increased 7 2642 million pretax earnings increased 32 516 million compensation percentage net revenues declined 568 fiscal 2003 609 fiscal 2002 due lower effective percentage payouts incentive compensation higher revenues pretax profit margin increased 195 fiscal 2003 158 fiscal 2002 capital markets represented 176 consolidated net revenues fiscal 2003 174 fiscal 2002 increase net revenues primarily attributable higher institutional fixed income transaction volume trading profits well increases municipal banking fees offset part decline corporate banking fees unrealized losses related warrants acquired connection private placements corporate nmnot meaningful corporate includes unallocated revenues expenses including gains losses certain firm investments liquidity capital resources primary objective capital structure funding practices appropriately support legg mason’s business strategies well regulatory capital requirements certain subsidiaries provide needed liquidity times liquidity access liquidity essential success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses continue explore potential acquisition opportunities means diversifying strengthening business opportunities may time involve acquisitions material size may require among things raising additional capital andor issuance additional debt part liquidity strategy emphasize diversification funding sources seek manage exposure refinancing risk legg mason available committed shortterm financing secured unsecured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized shortterm us government agency securities highly rated corporate debt money market funds equity securities shortterm funding generally obtained rates based upon benchmarks federal funds prime rates libor money market rates maintain committed unsecured revolving credit facility 100 million matures june 30 2006 general corporate purposes may include shortterm funding needs facility restrictive covenants require us among things maintain specified levels net worth debttoequity ratios borrowings outstanding facility march 31 2004 2003 legg mason also maintains uncommitted credit facilities numerous banks financial institutions uncommitted facilities consist lines credit advised available contractual lending obligation exists uncommitted facilities would likely unavailable us material adverse effect financial condition occurred relied issuance shortterm commercial paper fund operating needs utilize unconsolidated special purpose entities provide operating liquidity september 30 2003 sold certain assets liabilities comprising commercial mortgage banking mortgage servicing operations wholly owned subsidiary lmres continue operate real estate investment advisory group cash received closing sale assets approximately 635 million included 409 million used repay outstanding balance secured warehouse line credit cash closing excluded 69 million noninterest bearing note due four years closing addition shortterm investments securing outstanding borrowings committed secured compensating balance line credit liquidated line credit used mortgage banking servicing operations repaid lines credit longer part lmres’s continuing operations pretax earnings cash flows operations lmres sold material consolidated results operations financial results operations sold reflected discontinued operations consolidated statement earnings legg mason’s assets consist primarily cash equivalents collateralized shortterm receivables investment advisory fee receivables securities owned borrowed intangible assets goodwill assets principally funded payables customers securities loaned bank loans longterm debt equity collateralized shortterm receivables consist primarily margin loans securities purchased agreements resell securities borrowed collateralized us government agency securities corporate debt equity securities investment advisory fee receivables although collateralized shortterm nature collectibility reasonably certain excess cash generally invested institutional money market funds commercial paper securities purchased agreements resell highly liquid nature assets provides us flexibility financing managing anticipated operating needs legg mason’s total assets increased 12 billion 73 billion march 31 2004 primarily result increases securities borrowed 3132 million cash securities segregated regulatory purposes deposited clearing organizations 2930 million cash 1773 million increase receivables customers 1709 million increase securities borrowed accompanied corresponding increase securities loaned 2678 million reflecting higher demand equity securities increase securities segregated regulatory purposes deposited clearing organizations accompanied corresponding increase payables customers 3298 million march 31 2004 stockholders’ equity 1560 billion 25 increase march 31 2003 primarily results operations year fiscal 2004 cash flows operating activities provided approximately 1894 million primarily attributable net earnings adjusted noncash charges expect cash flows provided operating activities primary source working capital next year march 31 2004 legg mason three longterm fixed rate debt facilities outstanding balance 7942 million increase 75 million prior year due accretion zerocoupon notes outstanding 1000 million principal amount senior notes due february 15 2006 bear interest stated rate 65 balance march 31 2004 999 million notes originally issued february 1996 discount yield 657 also outstanding 5670 million principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 resulted net proceeds 2444 million balance march 31 2004 2700 million convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year quarter ended december 31 2003 price common stock exceeded conversion trigger price 7315 least 20 trading days last 30 trading days quarter result note became convertible 77062 shares common stock 44 million shares aggregate subject adjustment commencing january 2 2004 may redeem convertible notes cash june 6 2006 accreted value however notes may converted prior redemption addition may required repurchase convertible notes accreted value option holders june 6 2005 2007 2011 every five years thereafter 2026 upon change control legg mason occurs june 6 2006 repurchases paid cash shares common stock combination also outstanding 4250 million principal amount senior notes due july 2 2008 bear interest 675 notes issued discount yield 680 balance march 31 2004 4243 million proceeds longterm debt used fund acquisition asset management entities debt ratings march 31 2004 bbb standard poor’s rating services a3 moody’s investor service inc standard poor’s rating services rating increased november 2003 bbb august 1 2001 legg mason purchased pcm cash approximately 6820 million excluding acquisition costs transaction includes two contingent payments based pcm’s revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion based current revenue levels pcm required make third anniversary payment 4000 million additionally pcm’s revenues remain current levels increase likely required make fifth anniversary payment 3000 million october 1 2001 completed acquisition royce cash 1150 million excluding acquisition costs transaction includes three contingent payments based royce’s revenue growth years ending third fourth fifth anniversaries closing aggregate purchase price 2150 million based current revenue levels royce required make additional payment remaining 1000 million fiscal 2005 option pay much 50 remaining purchase price royce common stock currently expect fund fiscal 2005 commitments available cash march 31 2004 5750 million available issuance additional debt equity securities pursuant shelf registration statement shelf filing permits us register securities advance sell financing needs arise market conditions favorable intend use shelf registration general corporate purposes including expansion business assurances terms securities may issued pursuant shelf registration since dependent market conditions interest rates time issuance fiscal 2002 board directors authorized legg mason discretion purchase three million shares common stock fiscal 2004 2003 2002 repurchased 789300 shares 654 million 884900 shares 420 million 136800 shares 71 million respectively fiscal 2004 2003 2002 paid cash dividends 352 million 282 million 215 million respectively anticipate continue pay quarterly dividends repurchase shares discretionary basis parent’s brokerdealer subsidiaries subject requirements securities exchange commission’s uniform net capital rule designed measure general financial soundness liquidity brokerdealers march 31 2004 brokerdealer subsidiaries aggregate net capital 4086 million exceeded minimum net capital requirements 3833 million amount brokerdealers’ net assets may distributed subject restrictions applicable net capital rules parent’s trust subsidiary subject requirements office thrift supervision requires compliance regulatory capital standards march 31 2004 trust subsidiary met capital adequacy requirements subject offbalance sheet arrangements offbalance sheet arrangements defined sec include certain contractual arrangements pursuant company obligation contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations contingent payments section follows special purposes entities critical accounting policies connection sale certain assets lmres provided customary indemnifications purchaser believe material obligations indemnifications addition brokerdealer subsidiaries enter transactions normal course business expose us offbalance sheet risk described note 15 notes consolidated financial statements contractual obligations contingent payments legg mason contractual obligations make future payments connection longterm debt noncancelable lease agreements addition described liquidity capital resources expect make contingent payments business purchase agreements see notes 2 7 8 9 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual contingent obligations fiscal year contractual contingent obligations march 31 2004 risk management risk inherent part business extent properly effectively identify assess monitor manage various types risk involved activities critical soundness profitability primary risks seek manage market credit operational legal funding risk management legg mason multifaceted process requires communication judgment knowledge financial products markets senior management takes active role risk management process utilizes specific administrative business functions assist identification assessment control various risks utilize variety committees risk management framework risk management committee “rmc” sets broadbased risk policies consistent business objectives legg mason also committees report rmc representation senior management relevant business units support control functions within legg mason committees intended ensure risk policies procedures exceptions risk limits new products businesses transactions risk elements undergo thorough review equity fixed income commitment committees approve participation underwriting equity fixed income securities pcg capital markets new business products “nbp” committee evaluates approves proposed new business initiatives proposed changes existing businesses may increase risk profile firm evaluating proposed new initiative business change nbp committee assisted legg mason support units legal compliance operations finance regulatory information technology asset management risk management committee evaluates approves proposed new business initiatives proposed changes existing businesses asset management segment also establishes monitors procedures control operational compliance market credit legal risks specific asset management segment credit committee establishes policies monitors related risks counterparty credit market risk exposure created margin lending equity fixed income proprietary trading securities lending correspondent clearing institutional sales addition credit committee establishes policies including size aging limits trading securities owned firm used facilitate customer securities transactions risk management policies procedures methodologies fluid nature subject ongoing review modification risk management continuous process seeks manage rather eliminate risks assurance given effect legg mason risk risks actually properly managed funding risk discussed “liquidity capital resources” market risk market risk refers risk change level one market prices interest rates indices implied volatilities correlations market factors liquidity result losses position portfolio make dealer markets variety debt equity securities accordingly hold securities inventory accounts also hold security positions inventory facilitate customer orders holdings subject us market risk majority trading security inventory consists debt instruments attempt hedge reduce market risk holding offsetting positions trading securities similar characteristics financial instruments options futures due imperfections correlations trading security hedged hedging instrument gains losses occur even security positions hedged equity securities trading security inventory primarily result acting market maker certain securities traded nasdaq executing clearing large blocks equity securities clients virtually trading inventory denominated us dollars therefore minimizing foreign exchange risk deal hold interest rate currency swaps similar offbalance sheet instruments generally deal hold commodity futures sound market risk management integral part culture established variety limits business unit trading desk levels lessen exposure market risk limits include aggregate long market value aggregate short market value aging concentration various business units trading desks responsible ensuring market risk exposures wellmanaged intraday basis within limits set management compliance limits also monitored daily basis support area independent business units limit exceptions communicated applicable business unit senior management daily basis credit committee following tables categorize legg mason’s market risk sensitive financial instruments type security maturity date fair value trading securities reflects trading assets net trading liabilities excluding consolidated variable interest entities consistent way manage risk exposure see note 4 notes consolidated financial statements related gross long short fair values trading securities fair value financial instruments includes investment securities addition treasury securities 2422 million 826 million march 31 2004 2003 respectively included cash securities segregated regulatory purposes deposited clearing organizations financial instruments market risk march 31 2004 addition financial instruments included table three longterm debt facilities described “liquidity capital resources” net investments foreign subsidiaries impacted fluctuations foreign exchange rates fluctuations recorded component stockholders’ equity material financial condition impact currency fluctuations year results operations material credit risk credit risk represents loss would incur client counterparty issuer securities instruments held legg mason fails perform contractual obligations us follow industry practice reduce credit risk related various investing financing activities obtaining maintaining collateral credit exposure associated private client business consists primarily customer margin accounts monitored daily monitor exposure industry sectors individual securities perform sensitivity analyses regular basis connection margin lending activities adjust margin requirements believe risk exposure appropriate based market conditions operational risk operational risk generally refers risk loss resulting operating activities including limited improper unauthorized execution processing transactions deficiencies operating systems business disruptions inadequacies breaches internal control processes operate different businesses diverse markets reliant ability employees systems process high volumes transactions often within limited time frames event breakdown improper operation systems human error improper action employees could suffer financial loss regulatory sanctions damage reputation order mitigate control operational risk developed continue enhance policies procedures designed identify manage operational risk appropriate levels example procedures requiring securities transactions must confirmed timely basis position valuations subject periodic independent review procedures collateral adequate documentation obtained counterparties appropriate circumstances also use periodic selfassessments internal audit reviews independent consultants check operational risk exposure disaster recovery plans exist critical systems redundancies built systems deemed appropriate believe disaster recovery program including offsite backup technology operational facilities adequate handle reasonable business disruption however assurances disaster directly affecting headquarters operations centers would material adverse impact insurance safeguards might partially reimburse us losses legal risk legal risk includes risk noncompliance applicable legal regulatory requirements subject extensive regulation different jurisdictions conduct business various procedures addressing issues regulatory capital requirements sales trading practices use safekeeping customer funds credit granting protection client information collection activities moneylaundering record keeping critical accounting policies accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position legg mason see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following among current accounting policies involve significant estimates judgments valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value cash securities segregated regulatory purposes deposited clearing organizations securities purchased agreements resell trading assets investment securities trading liabilities consolidated statements financial condition include forms financial instruments unrealized gains losses related financial instruments reflected net earnings comprehensive income depending underlying purpose instrument available use prices independent sources listed market prices broker dealer price quotations external pricing sources investments illiquid privately held securities market prices quotations readily available determination fair value requires management estimate value securities based upon available information instances security subject transfer restrictions value security based primarily quoted price security without restriction may reduced amount estimated reflect restrictions addition even value security derived independent market price broker dealer quote certain assumptions may required determine fair value generally assume size positions securities hold would large enough affect quoted price securities sold sale would occur orderly manner however assumptions may incorrect actual value received upon disposition could different current carrying value evaluate nontrading securities “other temporary” impairment may exist fair value investment security adjusted cost extended period time “other temporary” impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined march 31 2004 2003 owned approximately 32 million 53 million respectively nontrading financial instruments valued assumptions estimates additionally approximately 01 million unrealized losses investment securities march 31 2004 2003 intangible assets goodwill sfas 141 “business combinations” requires business combinations initiated june 30 2001 accounted using purchase method addition provides cost acquired entity must allocated assets acquired including identifiable intangible assets liabilities assumed based estimated fair values date acquisition excess cost fair value net assets acquired must recognized goodwill sfas 142 “goodwill intangible assets” provides goodwill longer amortized value identifiable intangible asset must amortized useful life unless asset determined indefinite useful life allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired primarily asset management contracts trade names based upon certain estimates assumptions including projected future cash flows growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates investment performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination dates renewed value contracts manage assets proprietary mutual funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary mutual fund contracts based upon assumption foreseeable limit contract period manage proprietary mutual funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely march 31 2004 4662 million goodwill 1599 million indefinitelife intangible assets 2845 million amortizable intangible assets generally estimated useful lives amortizable intangible assets range 5 20 years review intangible assets goodwill quarterly basis considering factors projected cash flows revenue multiples determine whether value assets impaired amortization periods appropriate asset determined impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs intangible assets subject amortization reviewed impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level one level operating segment deemed impaired carrying amount reporting unit exceeds implied fair value reporting unit estimating fair value reporting unit use valuation techniques based multiples revenues discounted cash flows similar models employed analyzing purchase price acquisition target substantially goodwill assigned asset management operating segment defined asset management reporting units wealth management institutional mutual funds fiscal 2003 legg mason recorded impairment charge 28 million 20 million represented fair value asset management contracts acquired prior business combination deemed impaired due declining profit margins remainder impairment charge represented fair value asset management contracts acquired prior business combination terminated period actual results vary estimates assumptions used determine fair values assigned assets may required recognize impairment charge could material results business acquisitions pcm royce involved closely held companies certain key employees also owners companies establishing purchase price may include contingent consideration whereby portion purchase price paid acquisition date determination contingent payments consistent methods valuing establishing purchase price record payments additional purchase price compensation contingencies met generally contingent payments recorded additional goodwill see note 6 notes consolidated financial statements additional information regarding intangible assets goodwill reserves losses contingencies legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency investigations proceedings accordance sfas 5 “accounting contingencies” established reserves potential losses complaints legal actions investigations proceedings establishing reserves use judgment determine probability losses incurred reasonable estimate amount losses making decisions base judgments knowledge situations consultations legal counsel experience judgments prove incorrect reserves may accurately reflect actual losses result actions could materially affect results period expenses ultimately determined march 31 2004 2003 reserves losses contingencies 318 million 92 million respectively substantial amount increase due copyright infringement lawsuit see note 9 notes consolidated financial statements additional disclosures regarding contingencies special purpose entities special purpose entities “spes” trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse march 31 2004 utilize spes form financing provide liquidity recognized gains losses sale assets spes january 2003 financial accounting standards board “fasb” issued fasb interpretation number “fin” 46 fin 46 requires spes designated either voting interest entity variable interest entity “vie” vies subject consolidation party deemed primary beneficiary vie entity sufficient equity risk finance activities without additional subordinate financial support equity investors characteristics controlling financial interest primary beneficiary entity absorb majority vie’s expected losses entity receive majority vie’s expected residual returns initial implementation fin 46 required periods beginning june 15 2003 however october 2003 fasb deferred effective date interests vies created february 1 2003 end first interim period ending december 15 2003 december 2003 fasb revised fin 46 “fin 46r” incorporate certain modifications among things removed requirement include gross fees paid decision maker determination expected residual returns result unlikely primary beneficiary vies created manage assets clients unless ownership interest vies substantial company adopted provisions fin 46r december 31 2003 normal course business activities obtain variable interests vies manage primarily clients collateral manager collateralized debt obligation entities general partner cases limited partner investment partnerships investment manager andor managing member limited liability companies trusts offshore investment vehicles entities investment vehicles include many types investment strategies including real estate equity fixed income portfolios services entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees sell transfer assets vies exposure risk entities generally limited equity investment made required make earned uncollected management fees issue performance guarantees vies investors uncollected management fees vies immaterial march 31 2004 determining whether primary beneficiary vies consider qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid us related party ownership guarantees determining primary beneficiary must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit risks assumptions estimates significant bearing determination primary beneficiary assumptions estimates materially incorrect might required consolidate additional vies consolidation vies would result increase assets corresponding increase liabilities consolidated statements financial condition increase net revenues corresponding increase expenses consolidated statements earnings result adoption fin 46r march 31 2004 required consolidate one investment partnership two investment trusts total assets 131 million solely due underlying ownership entities comprised employees’ interests see note 4 notes consolidated financial statements trading assets liabilities consolidated vies ownership interest entities net equity entities reflected minority interest liabilities consolidated statements financial condition assets exclusive assets consolidated vies subject claims creditors consolidated vies likewise assets consolidated vies available creditors addition results operations consolidated vies immaterial march 31 2004 following table summary vies significant variable interest primary beneficiary dollars millions stockbased compensation stockbased compensation plans include stock options employee stock purchase plans restricted stock awards deferred compensation retention bonuses payable stock compensation plans issue stock options officers key employees nonemployee members board directors prior april 1 2003 accounted stockbased employee compensation plans accordance accounting principles board opinion “apb” 25 “accounting stock issued employees” permitted sfas 123 “accounting stockbased compensation” amended accordance apb 25 compensation expense recognized stock options intrinsic value exercise price less market price date grant prior fiscal 2004 fiscal 2004 adopted fair value method sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure” prospectively stock options granted stock purchase plan transactions april 1 2003 using blackscholes option pricing model prospective method allowed sfas 148 compensation expense recognized based fair value stock options granted april 1 2003 applicable vesting period compensation expense recognized stock options granted prior april 1 2003 therefore expense related stockbased employee compensation included determination net income march 31 2004 less would included fair value method applied awards stock purchase plan shares common stock purchased open market behalf participating employees provide 10 contribution towards purchases recognized expense restricted stock awards deferred compensation payable stock recognized expense vesting periods accordance provisions sfas 148 provide disclosure note 1 notes consolidated financial statements pro forma results modified prospective fair value based method compensation expense associated prior years’ stock option grants recognized vesting period fair value option grant determined using blackscholes optionpricing model accounted prior years’ stock option grants modified prospective fair value based method net earnings would reduced 173 million 221 million 209 million fiscal 2004 2003 2002 respectively income taxes make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes also assess likelihood able recover deferred tax assets recovery likely must increase income tax provision recording valuation allowance deferred tax assets estimate ultimately recoverable recorded valuation allowance related us state net operating loss carryforwards nonus net operating capital loss carryforwards since unlikely benefits realized addition calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due determine estimates changed income tax provision adjusted period determination made forwardlooking statements information statements provided behalf legg mason time including within report form 10k may contain certain “forwardlooking information” including information relating anticipated growth revenues earnings per share anticipated changes businesses amount client assets management anticipated expense levels changes expenses expected effects acquisitions expectations regarding financial market conditions caution readers forwardlooking information provided behalf legg mason guarantee future performance actual results may differ materially forwardlooking information result various factors outside control including limited discussed heading “factors affecting company financial services industry” discussed elsewhere report form 10k forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events future revenues may fluctuate due numerous factors total value composition assets management volume trading securities volatility general level securities prices interest rates relative investment performance companysponsored investment funds asset management products compared competing offerings market indices investor sentiment confidence general economic conditions ability maintain investment management administrative fees current levels level margin customer account balances competitive conditions business segments demand investment banking services ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred result changes number total employees competitive factors changes percentages net revenues paid compensation reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill connection litigation regulatory proceedings effects acquisitions business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation based today’s low inflationary rates assets primarily monetary nature consisting cash equivalents securities receivables believe assets significantly affected inflation rate inflation however affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us recent accounting developments fasb issued following pronouncements fiscal 2004 april 2003 fasb issued sfas 149 “amendment statement 133 derivative instruments hedging activities” sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities addition statement clarifies contract derivative contains financing component warrants special reporting statement cash flows sfas 149 generally effective prospectively contracts entered modified hedging relationships designated june 30 2003 adoption sfas 149 materially impact consolidated financial statements may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” sfas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity imposes certain additional disclosure requirements provisions sfas 150 generally effective financial instruments entered modified may 31 2003 adoption sfas 150 materially impact consolidated financial statements november 2003 emerging issues task force “eitf” reached consensus issue 0301 “the meaning otherthantemporary impairment application certain investments” relates disclosures sfas 115 securities addition disclosures already required sfas 115 eitf issue 0301 requires quantitative qualitative disclosures marketable equity debt securities new disclosure requirements required applied financial statements fiscal years ending december 15 2003 adoption eitf 0301 materially impact consolidated financial statements december 2003 fasb issued fin 46r previously discussed adoption fin 46r except added disclosure materially impact consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations executive overview legg mason inc “parent” holding company subsidiaries collectively parent “legg mason” principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities operations principally united states america united kingdom canada also offices spain switzerland singapore terms “we” “us” “our” “company” refer legg mason currently operate following business segments asset management private client capital markets corporate revenues expenses allocated business segments reported separately corporate business segment classifications based upon factors services provided distribution channels utilized certain services offer provided clients one business segments allocate certain common income expense items among business segments based upon various methodologies factors methodologies nature subjective reviewed periodically management business segment results may reflect reallocations revenues expenses result changes methodologies reallocations effect consolidated results operations material changes methodologies fiscal 2005 asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue asset management investment advisory distribution administrative fees typically calculated percentage assets account vary based upon factors type underlying investment product amount assets management type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution fees earned companysponsored investment funds reported asset management fund sold marketing channels private client segment fund sold branch distribution network revenues asset management tend stable private client capital markets less affected changes securities market conditions private client distributes wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds feebased account fees net interest customers’ margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets consists equity fixed income institutional sales trading corporate public finance investment banking primary sources revenue equity fixed income institutional sales trading include commissions principal credits transactions corporate municipal products maintain proprietary fixed income equity securities inventory primarily facilitate customer transactions result recognize trading profits losses proprietary trading activities investment banking revenues include underwriting fees advisory fees private placements mergers acquisitions sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also include realized unrealized gains losses investments acquired connection merchant investment banking activities september 2003 sold mortgage banking servicing operation legg mason real estate services inc “lmres” previously reported also included certain unallocated corporate revenues expenses consolidated results fiscal 2003 restated reflect historical results sold business discontinued operations remaining operations lmres capital markets corporate revenues expenses allocated business segments reported separately corporate significant component cost structure employee compensation benefits majority variable nature includes sales commissions based upon certain revenues incentive bonuses primarily based upon production levels andor profitability certain operating costs fixed nature occupancy depreciation amortization equipment leasing fixed contract commitments market data communication technology services may decline reduced levels business activity conversely may rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly united states results individual period considered representative future results profitability sensitive variety factors including amount composition assets management volume trading securities volatility general level securities prices interest rates level customer margin credit account balances demand investment banking services among things sustained periods unfavorable market conditions likely affect profitability adversely addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients past decade experienced substantial expansion due internal growth strategic acquisition asset management firms provided among things broader range investment expertise additional product diversification increased assets management financial services businesses engaged extremely competitive competition includes numerous national regional local asset management firms brokerdealers commercial banks industry affected consolidation financial services firms mergers acquisitions increasing competitive pressures may require us offer customers many services provided much larger firms industry operate also subject extensive regulation federal state laws securities exchanges selfregulatory authorities like firms impacted regulatory legislative changes postenron era addition financial services industry subject number regulatory proceedings requirements last three years including changes relationships research analysts investment banking proceedings regarding number mutual funds sales practices sarbanesoxley act 2002 required us implement new policies review existing policies respect corporate governance auditor independence internal controls financial reporting addition various regulatory organizations adopted changes rules policies response certain abuses corporate scandals responding changes required us add employees incur costs impacted profitability references fiscal 2005 2004 2003 refer fiscal year ended march 31 year business environment fiscal 2005 began uncertainty us presidential first iraqi elections approached us federal reserve indicated plans increase federal funds rate measured pace fiscal 2005 us federal reserve implemented seven 025 increases bring federal funds rate 275 fiscal 2004’s 10 lowest level 45 years major equity markets exhibited volatility throughout fiscal 2005 dow jones industrial average1 nasdaq2 composite index sp 5003 4 9 8 respectively december 31 2004 ended fiscal year 1 unchanged 5 respectively market environment fixed income investments remained extremely challenging interest rates overall remained volatile though upside bias fixed income investors generally remain cautious overall flows activity bond markets slowed significantly thus equity fixed income markets continue uncertain unable predict impact future results financial services industry continues impacted legislative regulatory changes participants industry responded reacted numerous regulatory investigations inquiries proposals adoptions new regulations revised enhanced interpretations existing laws regulations regulatory investigations mutual fund trading practices within financial services industry uncovered instances conflicts interest insufficient internal controls related mutual funds resulted negative public perception mutual fund industry numerous regulatory proposals strict regulatory environment significant fines penalties fee reductions number financial services companies dow jones industrial average trademark dow jones company affiliated legg mason nasdaq trademark nasdaq stock market inc affiliated legg mason sp 500 trademark standard poor’s division mcgrawhill companies inc affiliated legg mason results operations following table sets forth periods indicated items consolidated statements earnings percentage net revenues increase decrease item percentage amount previous period nmnot meaningful calculated based change actual amounts fiscal years percentage prior year amount fiscal 2005 compared fiscal 2004 financial overview legg mason reported record net revenues net earnings diluted earnings per share fiscal 2005 net revenues increased 24 billion primarily due increased revenues higher assets management assets management increased 30 3729 billion primarily result positive net client cash flows net earnings increased 37 4084 million diluted earnings per share 353 increase 33 pretax profit margin increased 273 243 earnings per share fiscal 2005 included weighted impact 46 million shares issued underwritten offering common stock december 2004 net proceeds approximately 311 million share earnings per share numbers restated appropriate 3 2 stock split effective september 24 2004 included fiscal 2004 single litigation award charge 190 million resulting jury verdict subsequent judgment civil copyright infringement lawsuit net revenues investment advisory related fees including distribution fees companysponsored mutual offshore funds increased 36 17 billion primarily result combined growth assets managed private capital management lp “pcm” western asset management company “western asset” royce associates llc “royce” legg mason capital management “lmcm” includes combined operations legg mason capital management legg mason funds management distribution fees proprietary investment funds increased 511 million 2412 million investment advisory related fees represented 69 consolidated net revenues 63 prior year investment advisory revenues assets management assets management march 31 2005 3729 billion 865 billion 30 march 31 2004 net client cash flows responsible 75 increase market performance including currency translation accounting 20 december 31 2004 acquisition four offices scudder private investment counsel responsible remainder strong increase assets management western asset principal fixed income manager primary driver equity assets’ declining percentage total managed assets 39 year ago 38 march 31 2005 institutional asset management division responsible 66 total managed assets yearend mutual funds division responsible 21 wealth management division responsible 13 assets management march 31 2005 2004 type follows billions assets management division billions legg mason investments holdings limited moved institutional division mutual funds division fiscal 2005 reflect change focus business managing assets distributing investment funds change material impact assets management presented securities brokerage revenues including commissions principal transactions increased 2 5199 million primarily result increases distribution fees nonproprietary mutual funds partially offset decreases institutional fixed income trading volume commission revenues fiscal 2004 reduced 74 million reimbursements certain clients failure provide breakpoint discounts connection client purchases nonproprietary frontend load mutual fund shares investment banking revenues 1373 million decrease 9 prior year primarily result 44 decrease retail selling concessions partially offset increases municipal banking corporate advisory fees revenues increased 31 574 million primarily result increased values firm investments revenue sharing payments nonproprietary mutual funds customer account service fees net interest profit 379 million increased 79 212 million prior year interest revenue increased 41 1187 million result substantially higher interest rates earned customer margin account balances firm investments interest expense increased 28 808 million result significantly higher interest rates paid customer credit balances net interest profit margin current period increased 319 251 prior year net interest profit accounted 57 earnings income tax provision 45 prior year noninterest expenses compensation benefits increased 21 13 billion result increases profitabilitybased incentive costs primarily asset management related fixed salaries benefits primarily result increased number fulltime employees however compensation percentage net revenues declined 546 560 prior year primarily result significant increase revenues asset management segment overall lower compensation ratio impact fixed compensation costs significantly higher revenues communications technology expense increased 18 1136 million prior year primarily result higher technology equipment depreciation consulting costs quote service relocation western asset new office facility significant contributor increases technology equipment depreciation consulting costs occupancy expense rose 4 692 million current year primarily result increased rent operating expenses related western asset’s relocation amortization intangible assets increased 4 225 million primarily attributable acquisition four wealth management offices scudder private investment counsel legg mason investment counsel december 2004 prior fiscal year recorded litigation award charge 190 million result jury verdict subsequent judgment copyright infringement lawsuit see note 9 notes consolidated financial statements distribution service fees increased 57 752 million primarily result increase distribution fees paid thirdparty distributors increased sales subsequent growth offshore royce funds expenses increased 18 1537 million current fiscal year primarily result higher promotional costs increases management fees related international equity sales offices increase professional fees principally audit consulting fees result increased legislative regulatory requirements prior year included 23 million fine levied securities exchange commission “sec” national association securities dealers “nasd” result failure provide certain clients benefit breakpoint discounts connection purchases nonproprietary frontend load mutual fund shares provision income taxes increased 38 2503 million primarily result increase pretax earnings effective tax rate declined 380 385 prior year’s period due lower provision income tax uncertainties current year impact nondeductible breakpoint fines prior year fiscal 2004 compared fiscal 2003 financial overview legg mason achieved record net revenues net earnings diluted earnings per share fiscal 2004 net revenues increased 29 19 billion primarily due increased revenues higher assets management assets management increased 49 2864 billion result approximately equal increases net client cash flows market appreciation net earnings increased 56 2978 million diluted earnings per share 265 increase 49 pretax profit margin increased 243 205 included fiscal 2004 single litigation award charge 190 million fiscal 2004 earnings also affected impact sale mortgage servicing operations lmres increased net earnings 65 million diluted earnings per share weighted average diluted shares outstanding restated required eitf 048 “the effect contingently convertible instruments diluted earnings per share” therefore diluted earnings per share fiscal years include impact 66 million shares issuable upon conversion zerocoupon contingent convertible senior notes previously senior notes included notes became convertible january 2004 net revenues investment advisory related fees including distribution fees companysponsored mutual offshore funds increased 42 12 billion primarily result combined growth assets managed pcm western asset royce lmcm distribution fees proprietary investment funds increased 530 million 1901 million investment advisory related fees represented 63 consolidated net revenues 57 fiscal 2003 assets management march 31 2004 2864 billion 49 march 31 2003 changes business environment fiscal 2004 gave rise improvements equity markets resulted dramatic growth equity assets management 50 billion 94 billion increase assets equity assets earn higher fees equity products pretax earnings rose 77 asset management segment securities brokerage revenues increased 7 5090 million primarily result increases retail client transaction volume particularly listed overthecounter equities nonaffiliated mutual funds commission revenues fiscal 2004 reduced 74 million reimbursements certain clients failure provide breakpoint discounts connection client purchases nonproprietary frontend load mutual fund shares 56 million result impact sale bank brokerage network fiscal 2003 investment banking revenues 1501 million increase 38 prior year primarily result increases retail institutional selling concessions corporate banking management fees new issues revenues increased 22 438 million primarily result net gains firm investments net interest profit 212 million increased 5 202 million fiscal 2003 interest revenue declined 21 843 million result significantly lower interest rates earned higher average customer firm investment balances interest expense declined 27 632 million result significantly lower interest rates paid customer credit account balances lower amortized issue costs relating zerocoupon contingent convertible senior notes fully amortized quarter ended june 30 2003 net interest profit margin fiscal 2004 increased 251 190 prior year accounted 45 earnings income tax provision 66 prior year noninterest expenses compensation benefits increased 24 11 billion result increases profitabilitybased incentive costs primarily asset management related increased retail financial advisor sales compensation however compensation percentage net revenues declined 560 587 prior year result impact fixed compensation costs increased revenues lower percentage pretax profits accrued corporate executive incentive compensation lower effective compensation rates communications technology expense 963 million increased 3 934 million fiscal 2003 increased investments technology partially offset impact lower depreciation result assets became fully depreciated prior year occupancy expense rose 6 665 million fiscal 2004 primarily result increased rent equipment depreciation relocation costs 17 million related western asset’s move new office location also incurred 10 million additional costs consolidate two investment advisory subsidiary office locations new york city amortization intangible assets declined 6 218 million primarily result asset management contracts fully amortized fiscal 2004 fiscal 2004 recorded litigation award charge 190 million result jury verdict subsequent judgment copyright infringement lawsuit see note 9 notes consolidated financial statements distribution service fees increased 94 478 million primarily result increase distribution fees paid thirdparty distributors sales offshore royce funds expenses increased 19 1301 million fiscal 2004 primarily due increase 80 million audit consulting fees result increased legislative regulatory requirements legal fees litigation 23 million fine related failure provide certain clients benefit breakpoint discounts stockbased compensation expense 21 million stock option grants nonemployee directors increase 20 million contributions legg mason charitable foundation increases partially offset lower expenses related advances financial advisors impairment charges taken intangible assets fiscal 2003 income tax provision increased 55 1817 million primarily result increase pretax earnings effective tax rate 385 fiscal 2004 383 fiscal 2003 fiscal 2004 reflects lower average effective foreign tax rate prior year benefited 26 million state income tax refunds results segment asset management nmnot meaningful fiscal 2005 compared fiscal 2004 net revenues asset management increased 40 14 billion pretax earnings increased 47 4649 million principally result higher revenues significantly increased levels assets management investment advisory related revenues including performance fees increased 3813 million pcm western royce lmcm combined accounting 2993 million 78 increase performance fees rose 74 million 489 million fiscal 2005 compensation benefits expense increased 40 result increased incentives subsidiaries operating revenue sharing arrangements compensation percentage net revenues 471 fiscal 2005 relatively unchanged 470 fiscal 2004 expenses increased 549 million included 236 million increase distribution service fees primarily paid thirdparty distributors increased sales subsequent growth offshore royce funds addition expenses included increase 136 million communication technology occupancy expenses primarily related western asset’s relocation new office space increase allocated overhead costs pretax profit margin increased 343 326 prior year asset management represented 563 consolidated net revenues year ended march 31 2005 increase 499 prior year 706 pretax earnings 670 fiscal 2004 compared fiscal 2003 net revenues asset management increased 50 9693 million pretax earnings increased 77 3163 million principally result higher revenues increased levels assets management investment advisory related revenues pcm western asset royce lmcm combined accounted 2384 million 74 increase including performance fees performance fees rose 200 million 415 million compensation benefits expense increased 1377 million 43 result increased incentives subsidiaries operating revenue sharing arrangements compensation percentage net revenues 470 fiscal 2004 491 fiscal 2003 expenses increased 459 million included 237 million increase distribution service fees primarily paid thirdparty distributors increased sales subsequent growth offshore royce funds pretax profit margin increased 326 276 fiscal 2003 asset management represented 499 consolidated net revenues fiscal 2004 increase 432 fiscal 2003 net revenues division within asset management millions private client fiscal 2005 compared fiscal private client net revenues increased 9 7403 million 6778 million prior year pretax earnings increased 13 1364 million investment advisory related fees increased 593 million principally result increases distribution fees companysponsored mutual funds fees earned feebased brokerage accounts commissions increased 51 million increased sales nonaffiliated mutual funds impact 74 million reduction mutual fund commissions breakpoint reimbursements clients prior year partially offset lower listed commissions investment banking revenues decreased 210 million due decline retail corporate selling concessions net interest profit private client rose 23 603 million result higher average interest rates earned segregated customer margin account balances higher levels customer margin account balances partially offset increase interest rates paid customer credit account balances compensation benefits expense increased 273 million primarily due increased commissions paid higher distribution fees companysponsored mutual funds feebased brokerage revenues offset part decline commissions corporate selling concessions compensation percentage net revenues declined 570 fiscal 2005 583 fiscal 2004 expenses increased 195 million primarily result increase allocated overhead costs pretax profit margin rose 184 178 prior fiscal year period ended march 31 2005 private client represented 307 consolidated net revenues decrease 349 prior year 207 pretax earnings 256 primarily due significant increase asset management net revenues higher profit margin fiscal 2004 compared fiscal 2003 private client net revenues increased 15 6778 million 5886 million fiscal 2003 pretax earnings increased 56 1207 million investment advisory related fees increased 463 million principally result increases distribution fees companysponsored mutual funds fees earned feebased brokerage accounts commissions increased 205 million primarily due increased volume listed overthecounter securities transactions increased commissions sales nonaffiliated mutual funds increases commissions partially offset impact sale contracts bank brokerage network fiscal 2003 99 million impact 74 million reduction mutual fund commissions breakpoint reimbursements clients additionally investment banking revenues increased 208 million result increases retail corporate selling concessions compensation benefits expense increased 492 million primarily due increased commissions paid higher distribution fees companysponsored mutual funds commissions feebased brokerage revenues compensation percentage net revenues decreased slightly 583 fiscal 2004 587 fiscal 2003 pretax profit margin rose 178 132 fiscal 2003 private client represented 349 consolidated net revenues fiscal 2004 decrease 392 fiscal 2003 due significant increase asset management net revenues capital markets nmnot meaningful fiscal 2005 compared fiscal 2004 capital markets net revenues increased 5 3114 million 2958 million prior year pretax earnings increased 2 562 million commissions increased 76 million primarily result increased institutional equity transaction volume principal transactions decreased 57 million primarily due decline institutional taxable municipal fixed income trading volume investment banking revenues increased 82 million primarily result higher corporate advisory underwriting fees higher municipal advisory fees partially offset decline corporate banking management fees revenue increased 55 million primarily due increased values firm investments compensation benefits expense increased 43 million primarily result increase fixed salaries benefits partially offset decrease taxable fixed income commissions impact deferring portion commission payouts new restricted stock program compensation percentage net revenues decreased 570 586 prior year expenses increased 102 million primarily due increase management fees related international equity sales offices increase allocated overhead costs pretax profit margin 180 fiscal 2005 compared 186 prior year capital markets represented 129 consolidated net revenues fiscal 2005 decrease 153 prior year 85 pretax earnings 116 primarily due significant increase net revenues asset management segment higher profit margin fiscal 2004 compared fiscal capital markets net revenues increased 12 2958 million 2642 million fiscal 2003 pretax earnings increased 7 551 million principal transactions increased 46 million primarily due higher overthecounter trading volume investment banking revenues increased 200 million primarily result higher corporate banking management fees selling concessions new issues higher corporate advisory fees compensation benefits expense increased 12 primarily result increased incentive compensation institutional equity commissions compensation percentage net revenues 586 compared 583 fiscal 2003 expenses increased 90 million result increased allocated overhead communication technology costs pretax profit margin decreased 186 195 fiscal 2003 capital markets represented 153 consolidated net revenues fiscal 2004 decrease 176 fiscal 2003 primarily due significant increase net revenues asset management segment corporate nmnot meaningful fiscal 2005 compared fiscal 2004 2003 corporate includes unallocated revenues expenses primarily gains losses certain firm investments fiscal 2004 included 175 190 million litigation award charge representing additional amount recorded september 2003 result jury verdict subsequent judgment rendered copyright infringement lawsuit addition september 2003 sold mortgage banking servicing operation lmres previously reported corporate consolidated results restated reflect historical results sold business discontinued operations remaining operations lmres capital markets liquidity capital resources primary objective capital structure funding practices appropriately support business strategies well regulatory capital requirements certain subsidiaries provide needed liquidity times liquidity access liquidity essential success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses continue explore potential acquisition opportunities means diversifying strengthening business opportunities may time involve acquisitions material size may require among things raising additional equity capital andor issuance additional debt december 21 2004 legg mason sold 46 million shares common stock 7030 per share less underwriting fees net proceeds approximately 311 million intend use proceeds general corporate purposes may include acquisitions part liquidity strategy emphasize diversification funding sources seek manage exposure refinancing risk legg mason available committed shortterm financing secured unsecured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized shortterm us government agency securities highly rated corporate debt money market funds equity securities shortterm funding generally obtained rates based upon benchmarks federal funds prime libor money market rates maintain committed unsecured revolving credit facility 100 million matures june 30 2006 general corporate purposes may include shortterm funding needs facility restrictive covenants require us among things maintain specified levels net worth debttoequity ratios borrowings outstanding facility march 31 2005 2004 time utilize uncommitted credit facilities numerous banks financial institutions consist lines credit advised available contractual lending obligation exists uncommitted facilities would likely unavailable us material adverse effect financial condition occurred relied issuance shortterm commercial paper fund operating needs utilize unconsolidated special purpose entities provide operating liquidity assets consist primarily cash equivalents collateralized shortterm receivables investment advisory fee receivables securities owned borrowed intangible assets goodwill assets principally funded payables customers securities loaned bank loans longterm debt equity collateralized shortterm receivables consist primarily margin loans securities purchased agreements resell securities borrowed collateralized us government agency securities corporate debt equity securities investment advisory fee receivables although collateralized shortterm nature collectibility reasonably certain excess cash generally invested institutional money market funds commercial paper securities purchased agreements resell highly liquid nature assets provides us flexibility financing managing anticipated operating needs total assets increased 9370 million 82 billion march 31 2005 primarily result increases goodwill 5272 million securities borrowed 2163 million trading assets 1758 million increases partially offset decrease cash securities segregated regulatory purposes deposited clearing organizations 2991 million reflecting overall decrease payables customers march 31 2005 stockholders’ equity 23 billion 47 increase march 31 2004 primarily results operations year december 2004 equity offering offset part dividends declared stock repurchases fiscal 2005 cash flows operating activities provided approximately 4115 million primarily attributable net earnings adjusted noncash charges expect cash flows provided operating activities primary source working capital next year march 31 2005 four longterm fixed rate debt facilities outstanding balance 8112 million increase 170 million prior year primarily attributable addition 200 million term loan agreement western asset bears interest 419 outstanding 1000 million principal amount senior notes due february 15 2006 bear interest stated rate 65 notes originally issued february 1996 discount yield 657 also outstanding 5453 million principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 fiscal 2005 holders notes aggregating 220 million principal amount maturity converted notes 254304 shares common stock convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year accreted balance march 31 2005 2667 million quarter ended december 31 2003 price common stock exceeded conversion trigger price result note became convertible 115593 shares common stock 66 million shares aggregate subject adjustment commencing january 2 2004 may redeem convertible notes cash june 6 2006 accreted value however notes may converted prior redemption addition may required repurchase convertible notes accreted value option holders june 6 2005 2007 2011 every five years thereafter 2026 upon change control legg mason occurs june 6 2006 repurchases paid cash shares common stock combination based upon current price stock expect convertible notes tendered repurchase june 6 2005 however notes tendered elected pay cash also outstanding 4250 million principal amount senior notes due july 2 2008 bear interest 675 notes issued discount yield 680 accreted balance march 31 2005 4245 million except western asset debt used fund tenant improvements new office location proceeds longterm debt primarily used fund acquisition asset management entities debt ratings march 31 2005 bbb standard poor’s rating services a3 moody’s investor service inc august 1 2001 legg mason purchased pcm cash approximately 6820 million excluding acquisition costs transaction included two contingent payments based pcm’s revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion fiscal 2005 made maximum third anniversary payment 4000 million former owners pcm additionally pcm’s revenues remain current levels increase required make fifth anniversary payment 3000 million october 1 2001 completed acquisition royce cash 1150 million excluding acquisition costs transaction included contingent payments based royce’s revenue growth aggregate purchase price 2150 million fiscal 2005 made contingent payment 1000 million former owners royce represented maximum contingent amount due contingent payments recorded additional goodwill july 20 2004 legg mason declared threefortwo stock split paid dividend september 24 2004 stockholders record september 8 2004 accordingly share per share information retroactively restated appropriate reflect stock split december 21 2004 equity offering reduced gross proceeds amount available issuance additional debt equity securities pursuant shelf registration statement march 2005 filed 10 billion shelf registration statement increased approximately 125 billion march 31 2005 amount available issuance additional debt equity securities shelf filing permits us register securities advance sell financing needs arise market conditions favorable intend use shelf registration general corporate purposes including expansion business assurances terms securities may issued pursuant shelf registration since dependent market conditions interest rates time issuance fiscal 2002 board directors authorized legg mason discretion purchase 45 million shares common stock fiscal 2005 2004 2003 repurchased 734700 shares 407 million 1183950 shares 654 million 1327350 shares 420 million respectively march 31 2005 maximum amount shares may yet purchased program 1048800 fiscal 2005 2004 2003 paid cash dividends 517 million 352 million 282 million respectively anticipate continue pay quarterly dividends repurchase shares discretionary basis parent’s brokerdealer subsidiaries subject requirements securities exchange commission’s uniform net capital rule designed measure general financial soundness liquidity brokerdealers march 31 2005 brokerdealer subsidiaries aggregate net capital 3889 million exceeded minimum net capital requirements 3646 million amount brokerdealers’ net assets may distributed subject restrictions applicable net capital rules net capital brokerdealer subsidiary exceeded required net capital parent’s trust subsidiary subject requirements office thrift supervision requires compliance regulatory capital standards march 31 2005 trust subsidiary met capital adequacy requirements subject certain foreign subsidiaries also subject requirements local regulatory agencies subsidiaries met respective capital adequacy requirements offbalance sheet arrangements offbalance sheet arrangements defined sec include certain contractual arrangements pursuant company obligation contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations contingent payments section follows special purposes entities note 1 notes consolidated financial statements addition brokerdealer subsidiaries enter transactions normal course business expose us offbalance sheet risk described note 15 notes consolidated financial statements contractual obligations contingent payments legg mason contractual obligations make future payments connection longterm debt noncancelable lease agreements addition described liquidity capital resources expect make contingent payments business purchase agreements see notes 7 8 9 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual contingent obligations fiscal year contractual contingent obligations march 31 2005 table included payments 2008 2831 reflecting amounts may due holders zerocoupon convertible senior notes represents accreted value next date holders may require us purchase notes legg mason option pay purchase price cash common stock combination based upon current price stock expect convertible notes tendered repurchase june 6 2005 however notes tendered elected pay cash b amount contingent payments reflected year represents maximum amount could payable earliest possible date terms business purchase agreements c table include approximately 92 capital commitments investment partnerships legg mason limited partner obligations funded required end commitment periods range fiscal 2006 2011 capital commitments also include 02 commitments lend employees funds invest one partnerships risk management risk inherent part business extent properly effectively identify assess monitor manage various types risks involved activities critical soundness profitability primary risks seek manage market credit operational legal funding risk management legg mason multifaceted process requires communication judgment knowledge financial products markets senior management takes active role risk management process utilizes specific administrative business functions assist identification assessment control various risks utilize variety committees risk management framework risk management committee “rmc” sets broadbased risk policies consistent business objectives legg mason also committees report rmc representation senior management relevant business units support control functions within legg mason committees intended provide thorough review risk policies procedures exceptions risk limits new products businesses transactions risk elements committees include • equity fixed income commitment committees approve participation underwriting equity fixed income securities • private client capital markets new business products committee evaluates approves proposed new business initiatives proposed changes existing businesses may increase risk profile firm • asset management risk management committee evaluates approves proposed new business initiatives proposed changes existing businesses asset management segment may increase risk profile firm • credit committee establishes policies monitors related risks counterparty credit market risk exposure created margin lending equity fixed income proprietary trading securities lending correspondent clearing institutional sales addition credit committee establishes policies including limits trading securities owned firm used facilitate customer securities transactions risk management policies procedures methodologies fluid nature subject ongoing review modification risk management continuous process seeks manage rather eliminate risks assurance given effect legg mason risk risks actually properly managed funding risk discussed “liquidity capital resources” market risk market risk refers risk change level one market prices interest rates indices implied volatilities correlations market factors liquidity result losses position portfolio make dealer markets variety debt equity securities accordingly hold securities inventory accounts also hold security positions inventory facilitate customer orders holdings subject us market risk majority trading securities inventory consists debt instruments hedge market risk holding offsetting positions trading securities similar characteristics financial instruments options futures hedges designed reduce rather eliminate market risk equity securities trading security inventory primarily result acting market maker certain securities traded nasdaq executing clearing large blocks equity securities clients virtually entire trading inventory denominated us dollars therefore foreign exchange risk inventory minimal deal hold interest rate currency swaps similar offbalance sheet instruments generally deal hold commodity futures sound market risk management integral part culture established variety limits business unit trading desk levels lessen exposure market risk limits include aggregate long market value aggregate short market value aging concentration various business units trading desks responsible managing market risk exposures intraday basis within limits set management compliance limits also monitored daily basis support area independent business units limit exceptions communicated applicable business unit senior management daily basis credit committee following tables categorize legg mason’s market risk sensitive financial instruments type security maturity date fair value trading securities reflects trading assets net trading liabilities excluding consolidated variable interest entities trading securities table also include fair value forward transactions trading securities settle beyond normal settlement date consistent way manage risk exposure march 31 2005 contract value forward purchase sales trading securities 36 million 546 million respectively value forward transactions march 31 2004 immaterial see note 4 notes consolidated financial statements related gross long short fair values trading securities fair value financial instruments includes investment securities addition treasury securities 807 million 2422 million march 31 2005 2004 respectively included cash securities segregated regulatory purposes deposited clearing organizations following table categorizes legg mason’s market risk sensitive financial instruments financial instruments market risk march 31 2005 addition financial instruments included table four longterm debt facilities described “liquidity capital resources” net investments foreign subsidiaries impacted fluctuations foreign exchange rates fluctuations recorded component stockholders’ equity material financial condition impact currency fluctuations year results operations material credit risk credit risk represents loss would incur client counterparty issuer securities instruments held legg mason fails perform contractual obligations us follow industry practice reduce credit risk related various investing financing activities obtaining maintaining collateral credit exposure associated private client business consists primarily customer margin accounts monitored daily monitor exposure industry sectors individual securities perform sensitivity analyses regular basis connection margin lending activities adjust margin requirements believe risk exposure appropriate based market conditions operational risk operational risk generally refers risk loss resulting operating activities including limited improper unauthorized execution processing transactions deficiencies operating systems business disruptions inadequacies breaches internal control processes operate different businesses diverse markets reliant ability employees systems process high volumes transactions often within limited time frames event breakdown improper operation systems human error improper action employees could suffer financial loss regulatory sanctions damage reputation order mitigate control operational risk developed continue enhance policies procedures designed identify manage operational risk appropriate levels example procedures requiring securities transactions must confirmed timely basis position valuations subject periodic independent review procedures collateral adequate documentation obtained counterparties appropriate circumstances conduct periodic selfassessments internal audits compliance department examinations assess design operational effectiveness internal controls disaster recovery plans exist critical systems redundancies built systems deemed appropriate believe disaster recovery program including site backup technology operational facilities adequate handle reasonable business disruption however assurances disaster directly affecting headquarters operations centers would material adverse impact insurance safeguards might partially reimburse us losses legal risk legal risk includes risk noncompliance applicable legal regulatory requirements subject extensive regulation different jurisdictions conduct business various procedures addressing issues regulatory capital requirements sales trading practices use safekeeping customer funds credit granting protection client information collection activities moneylaundering record keeping critical accounting policies accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following among current accounting policies involve significant estimates judgments valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value cash securities segregated regulatory purposes deposited clearing organizations securities purchased agreements resell trading assets investment securities trading liabilities consolidated statements financial condition include forms financial instruments unrealized gains losses related financial instruments reflected net earnings comprehensive income depending underlying purpose instrument trading assets trading liabilities value equity securities using prices independent sources external pricing services broker dealer price quotations closing market prices listed instruments available fixed income securities valued using external pricing services thirdparty broker dealer price quotations traders’ estimates based spreads actively traded benchmark debt instruments readily available market prices traders’ estimates compared external pricing services verify material variations either individually aggregate verified comparison actual values realized instances security subject transfer restrictions value restricted security based primarily price security without restriction may reduced amount estimated reflect restrictions addition even value security derived independent market price broker dealer quote certain assumptions may required determine fair value generally assume size positions securities hold would large enough affect quoted price securities sold sale would occur orderly manner however assumptions may incorrect actual value received upon disposition could different current carrying value evaluate nontrading investment securities “other temporary” impairment may exist fair value investment security adjusted cost extended period time “other temporary” impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined investments illiquid privately held securities market prices quotations readily available determination fair value requires us estimate value securities based upon available information march 31 2005 2004 owned approximately 53 million 32 million respectively nontrading financial instruments valued assumptions estimates march 31 2005 2004 also approximately 332 million 262 million respectively investments investment partnerships included assets consolidated statements financial condition investments generally accounted cost equity method intangible assets goodwill sfas 141 “business combinations” requires business combinations initiated june 30 2001 accounted using purchase method addition provides cost acquired entity must allocated assets acquired including identifiable intangible assets liabilities assumed based estimated fair values date acquisition excess cost fair value net assets acquired must recognized goodwill sfas 142 “goodwill intangible assets” provides goodwill amortized value identifiable intangible asset must amortized useful life unless asset determined indefinite useful life identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds trade names management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely goodwill represents residual amount acquisition cost identified tangible intangible assets assumed liabilities allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired primarily asset management contracts proprietary mutual fund management contracts trade names based upon certain estimates assumptions including projected future cash flows growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates investment performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination dates renewed march 31 2005 9934 million goodwill 1601 million indefinitelife intangible assets 2960 million amortizable intangible assets generally estimated useful lives amortizable intangible assets range 5 20 years goodwill evaluated quarterly reporting unit level one level operating segment deemed impaired carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted cash flows multiples revenues similar models employed analyzing purchase price acquisition target substantially goodwill assigned asset management operating segment defined asset management reporting units institutional mutual funds wealth management divisions significant assumptions used assessing fair value goodwill discounted cash flow method include projected cash flows generated reporting unit growth rate used projecting cash flows discount rate used determine present value cash flows projected cash flows based annualized fiscal year date cash flows reporting unit projected forward forty years annual cash flow growth rates based historical growth rates realized reporting unit wealth management reporting unit represents approximately 80 goodwill wealth management’s cash flows assumed grow 10 annually next five years longterm annual growth rate 5 projected cash flows discounted 16 determine present value annual cash flows would fall 50 discount rate increased 25 cash flow growth would fall zero percent asset deemed impaired review fair value intangible assets quarterly basis considering factors projected cash flows revenue multiples determine whether value assets impaired amortization periods appropriate asset determined impaired difference value asset reflected financial statements current fair value recognized expense period impairment determined amortization periods appropriate lives adjusted impact fair value assessed fair values intangible assets subject amortization determined reporting period using undiscounted cash flow analysis significant assumptions used assessing fair value management contract intangible assets include projected cash flows generated contracts attrition rate contracts remaining life contracts projected cash flows based fees generated current assets management levels applicable contracts assumed turnover evenly throughout life intangible asset expected life asset based upon factors average client retention client turnover rates management contract intangible asset related pcm represents approximately 80 total amortizable intangible assets contracts expected life 18 years represents annual contract turnover rate 6 expected remaining life 14 years march 31 2005 current expected client attrition rates cash flows generated underlying management contracts held pcm would decline approximately 70 asset become impaired similarly change profitability contracts client attrition would accelerate rate estimated useful life would decline approximately 75 asset would deemed impaired intangible assets lives indeterminable indefinite fair value determined based anticipated discounted cash flows two primary types indefinitelife intangible assets proprietary mutual fund contracts trade names significant assumptions used assessing fair value indefinitelife intangible assets related proprietary mutual fund contracts include projected cash flows generated contracts discount rate used determine present value cash flows projected cash flows based annualized fiscal year date cash flows applicable contracts projected forward twenty years assuming annual cash flow growth approximating market returns contracts within family funds reviewed aggregate considered interchangeable investors freely exchange funds similarly cash flows generated new funds added fund family included determining fair value intangible asset royce represents approximately 95 proprietary mutual fund contract intangible assets cash flows mutual fund contracts assumed grow 10 annually approximates longterm average annual return russell 20004 index projected cash flows discounted 14 determine present value significant changes assumptions increased discount rate declining cash flows could result impairment current profitability levels cash flows generated royce mutual funds contracts would fall approximately 85 discount rate used test would raised 50 asset deemed impaired significant assumptions used assessing fair value indefinitelife intangible assets related trade names include projected cash flows generated applicable entities discount rate used determine present value cash flows royalty fee rate projected cash flows based implied royalty fees determined applying 3 royalty rate annualized fiscal year date revenues applicable entities projected forward perpetuity pcm represents approximately 85 trade name indefinitelife intangible assets pcm’s revenues assumed grow 10 annually approximates longterm average annual return russell 20004 index projected cash flows discounted 16 determine present value cash flows revenue growth rate assumption reduced less 3 discount rate increased 20 royalty rate lowered approximately 1 asset would deemed impaired russell 2000 index trademark frank russell company affiliated legg mason business acquisitions pcm royce involved closely held companies certain key employees also owners companies establishing purchase price may include contingent consideration whereby portion purchase price paid acquisition date determination contingent payments consistent methods valuing establishing purchase price record payments additional purchase price compensation contingencies met generally contingent payments recorded additional goodwill see note 6 notes consolidated financial statements additional information regarding intangible assets goodwill liabilities losses contingencies legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency investigations proceedings accordance sfas 5 “accounting contingencies” established liabilities potential losses complaints legal actions investigations proceedings establishing liabilities use judgment determine probability losses incurred reasonable estimate amount losses making decisions base judgments knowledge situations consultations legal counsel historical experience resolving similar matters many lawsuits arbitrations regulatory proceedings possible determine whether liability incurred estimate amount liability matter close resolution however accruals reviewed monthly adjusted reflect estimates impact developments rulings advice counsel information pertinent particular matter inherent difficulty predicting ultimate outcome legal regulatory actions cannot predict certainty eventual loss range loss related matters judgments prove incorrect liability losses contingencies may accurately reflect actual losses result actions could materially affect results period expenses ultimately determined march 31 2005 2004 liability losses contingencies 270 million 318 million respectively significant component liability balance periods reflects approximate 200 million verdict rendered october 2003 confirmed subsequent judgment copyright infringement lawsuit appealed see note 9 notes consolidated financial statements additional disclosures regarding contingencies stockbased compensation stockbased compensation plans include stock options employee stock purchase plans restricted stock awards deferred compensation retention bonuses payable stock compensation plans issue stock options officers key employees nonemployee members board directors prior april 1 2003 accounted stockbased employee compensation plans accordance accounting principles board opinion “apb” 25 “accounting stock issued employees” permitted sfas 123 “accounting stockbased compensation” amended accordance apb 25 prior fiscal 2004 compensation expense recognized stock options intrinsic value date grant since exercise price options equal market value underlying common stock fiscal 2004 adopted fair value method sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure” prospectively stock options granted stock purchase plan transactions april 1 2003 using blackscholes option pricing model prospective method allowed sfas 148 compensation expense recognized based fair value stock options granted april 1 2003 applicable vesting period compensation expense recognized stock options granted prior april 1 2003 therefore expense related stockbased employee compensation included determination net income march 31 2005 less would included fair value method applied awards accordance provisions sfas 148 provide disclosure note 1 notes consolidated financial statements pro forma results modified prospective fair value based method compensation expense associated stock option grants recognized respective vesting period accounted prior years’ stock option grants modified prospective fair value based method net earnings would reduced 140 million 173 million 227 million fiscal 2005 2004 2003 respectively reduction amounts result decrease number stock options granted impact inclusion additional years expense actual results operations since adoption fiscal 2004 granted 574035 914475 2243835 stock options fiscal 2005 2004 2003 respectively determine fair value option grant using blackscholes option pricing model requires management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate except grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal vesting period options estimate volatility based upon historical prices stock period equal expected life option expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zero coupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes model used different type option pricing model fair value option grants may different december 2004 fasb revised sfas 123 “sfas 123r” requiring companies record sharebased payment transactions compensation expense fair market value either modified prospective modified retrospective transition method april 2004 sec delayed effective date sfas 123r fiscal 2007 income taxes make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes also assess likelihood able recover deferred tax assets likely deferred tax asset recovered must establish valuation allowance increase deferred tax provision recorded valuation allowance 230 million 253 million march 31 2005 2004 respectively related us state net operating loss carryforwards nonus net operating capital loss carryforwards since likely benefits realized addition calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due determine estimates changed income tax provision adjusted period determination made forwardlooking statements information statements provided behalf legg mason time including within 2005 annual report form 10k may contain certain “forwardlooking information” including information relating anticipated growth revenues earnings per share anticipated changes businesses amount client assets management anticipated future performance business anticipated expense levels changes expenses expected effects acquisitions expectations regarding financial market conditions caution readers forwardlooking information provided behalf legg mason guarantee future performance actual results may differ materially forwardlooking information result various factors outside control including limited discussed heading “factors affecting company financial services industry” elsewhere annual report form 10k forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events future revenues may fluctuate due numerous factors total value composition assets management volume trading securities volatility general level securities prices interest rates relative investment performance companysponsored investment funds asset management products compared competing offerings market indices investor sentiment confidence general economic conditions ability maintain investment management administrative fees current levels level margin customer account balances competitive conditions business segments demand investment banking services ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred result changes number total employees competitive factors changes percentages net revenues paid compensation reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill connection litigation regulatory proceedings effects acquisitions business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation based today’s low inflationary rates assets primarily monetary nature consisting cash equivalents securities receivables believe assets significantly affected inflation rate inflation however affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us recent accounting developments fasb issued following pronouncements fiscal 2005 december 2004 fasb issued sfas 123r “sharebased payment” requires sharebased payment transactions valued using fair value method sfas 123r eliminates ability account sharebased compensation using intrinsic value method accounting principles board opinion “apb” 25 originally sfas 123r effective interim periods beginning june 15 2005 april 2005 sec amended date compliance allowing effective date annual reporting period beginning june 15 2005 sfas 123r effective fiscal 2007 see table stock based compensation note 1 notes consolidated financial statements additional information potential impact legg mason’s consolidated financial statements december 2004 fasb issued fasb staff position fas 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” american jobs creation act signed law october 22 2004 provides onetime dividends received deduction repatriation certain foreign earnings us taxpayers historically legg mason reinvested cumulative undistributed earnings non us subsidiaries accordingly deferred us federal income taxes undistributed earnings recorded legg mason currently evaluating income tax effects foreign earnings repatriation provision within act cannot reasonably estimate income tax effects time emerging issues task force “eitf” reached consensus regarding issue 048 “the effect contingently convertible instruments diluted earnings per share” guidance eitf requires contingently convertible instruments dilutive included retroactively diluted earnings per share computations date issuance instruments effective date eitf reporting periods ending december 15 2004 result adoption eitf contingently convertible senior notes included diluted earnings per share computation fiscal 2004 2003 resulted reduction diluted earnings per share 006 007 respectively periods eitf reached consensus topic d108 “use residual method value acquired assets goodwill” companies applied residual method valuation intangible assets purposes impairment testing perform impairment test applying guidance later beginning first fiscal year beginning december 15 2004 impairments intangible assets recognized upon application direct value method entities previously applying residual method reported cumulative effect change accounting principle requirements applied business combinations completed september 29 2004 adoption eitf d108 impact legg mason’s consolidated financial statements eitf reached consensus issue 0410 “determining whether aggregate operating segments meet quantitative thresholds” eitf requires individual operating segments meet quantitative thresholds set forth sfas 131 “disclosure segments enterprise related information” separate reporting may aggregated segments meet certain requirements applicable fiscal years ending october 13 2004 adoption eitf 0410 impact legg mason’s identified segments eitf reached consensus issue 0316 “accounting investments limited liability companies” eitf requires investment limited liability company “llc” maintains “specific ownership account” investor similar partnership capital account structure viewed similar investment limited partnership purposes determining whether noncontrolling investment llc accounted using cost method equity method requirements applicable reporting periods beginning june 15 2004 adoption eitf 0316 materially impact legg mason’s consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations executive overview legg mason inc holding company subsidiaries collectively comprise “legg mason” global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally united states america united kingdom also offices australia bahamas brazil canada chile china dubai france germany japan luxembourg poland singapore spain taiwan december 1 2005 completed strategic acquisition become pure asset management company transferred private client capital markets businesses “pccm” citigroup inc “citigroup” portion consideration exchange substantially citigroup’s asset management business “cam” prior closing transaction reported pccm businesses separate business segments however businesses included discontinued operations periods presented effective november 1 2005 also purchased permal group ltd “permal” leading global fundsofhedge funds manager expand global asset management business see notes 2 3 notes consolidated financial statements additional information related transaction citigroup acquisition permal result sale pccm businesses citigroup portion parent company interest income expense general corporate overhead costs previously allocated businesses included continuing operations addition distribution fees earned companysponsored investment funds reported continuing operations distribution fee revenue substantial portion passed third parties including parties related prior sale distribution servicing expense periods presented restated reflect changes operate one reportable business segment asset management three divisions managed investments institutional wealth management managed investments primarily engaged providing investment advisory services proprietary investment funds retail separately managed account programs institutional focuses providing asset management services institutional clients wealth management primarily focused providing asset management services high net worth individuals families endowments includes fundsofhedge funds business see note 18 notes consolidated financial statements additional information regarding aggregation operating segments financial reporting purposes operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution service fees received distributing investment products services providing support services investment portfolios generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level assets management thus affected factors securities market conditions ability attract maintain assets management key investment personnel investment performance fees charge investment services vary based upon factors type underlying investment product amount assets management type services investment objectives provided fees charged equity asset management services generally higher fees charged fixed income liquidity asset management services accordingly revenues affected composition assets management addition revenue sharing agreements subsidiaries retain different percentages revenues cover costs including compensation net income profit margin compensation percentage operating revenues impacted based subsidiaries generate revenues change assets management one subsidiary dramatically different effect revenues earnings equal change another subsidiary significant component cost structure employee compensation benefits majority variable nature includes incentive compensation primarily based upon revenue levels profits next largest component cost structure distribution servicing fees primarily fees paid third party distributors selling asset management products services largely variable nature certain operating costs fixed nature occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly united states increasingly countries operate results individual period considered representative future results profitability sensitive variety factors including amount composition assets management volatility general level securities prices interest rates among things sustained periods unfavorable market conditions likely affect profitability adversely addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients past decade experienced substantial expansion due internal growth strategic acquisition asset management firms provided among things broader range investment expertise additional product diversification increased assets management financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms brokerdealers commercial banks industry affected consolidation financial services firms mergers acquisitions industry operate also subject extensive regulation federal state foreign laws like firms impacted regulatory legislative changes postenron era addition financial services industry subject number regulatory proceedings requirements last years including proceedings regarding number mutual funds sales practices sarbanesoxley act continues require us review existing policies respect corporate governance auditor independence internal controls financial reporting responding changes required us incur costs continue impact profitability discontinued operations result sale pccm businesses fiscal 2006 results private client capital markets segments reflected discontinued operations private client distributed wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds feebased account fees net interest customers’ margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets consisted equity fixed income institutional sales trading corporate public finance primary sources revenue equity fixed income institutional sales trading included commissions principal credits transactions corporate municipal products maintained proprietary fixed income equity securities inventories primarily facilitate customer transactions result recognized trading profits losses trading activities corporate finance revenues included underwriting fees advisory fees private placements mergers acquisitions sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also included realized unrealized gains losses investments acquired connection merchant investment banking activities references fiscal 2007 2006 2005 refer fiscal year ended march 31 year terms “we” “us” “our” “company” refer legg mason 1 dow jones industrial average trademark dow jones company affiliated legg mason 2 nasdaq trademark nasdaq stock market inc affiliated legg mason 3 sp trademark standard poor’s division mcgrawhill companies inc affiliated legg mason business environment results operations financial environment united states fiscal 2007 mixed despite investor concerns rising interest rates high fuel prices downturn housing markets turbulence middle east weakening us dollar major currencies three major market indexes rose fiscal year dow jones industrial average1 nasdaq composite index2 sp 5003 11 3 10 respectively fiscal year fiscal 2007 us federal reserve raised federal funds rate 025 two times bring federal funds rate 525 following table sets forth periods indicated items consolidated statements income percentage operating revenues increase decrease item percentage amount previous period nm meaningful calculated based change actual amounts fiscal years percentage prior year amount fiscal 2007 compared fiscal 2006 financial overview since strategic transaction citigroup completed december 1 2005 acquired cam business sold pccm businesses retroactively reflected results operations pccm businesses discontinued operations fiscal 2006 2005 effective november 1 2005 completed acquisition permal result acquisitions results continuing operations fiscal year ended march 31 2007 include full year results cam permal results continuing operations fiscal year ended march 31 2006 include four months results cam five months results permal fiscal year net income diluted earnings per share declined 43 6468 million 49 448 respectively prior year result aftertax gain sale pccm businesses 6440 million 494 per diluted share recognized prior year income continuing operations totaled 6462 million 49 prior year income continuing operations per diluted share increased 34 448 despite 11 increase weighted average diluted shares outstanding operating revenues increased 43 billion 26 billion increase 64 company’s revenues expenses income continuing operations increased primarily result addition full year’s results cam permal pretax profit margin continuing operations declined 240 270 prior year primarily result addition full year’s results cam permal increases distribution revenues substantial portion passed third parties distribution servicing expense increase noncompensation related expenses offset part decreases compensation benefits percent revenue due part higher revenue sharebased incentive expense higher revenues certain subsidiaries retain lower percentage revenues compensation transactionrelated compensation nonoperating income pretax profit margin continuing operations adjusted see supplemental nongaap financial information declined 332 343 prior year primarily result increase noncompensation related expenses decrease nonoperating income offset part reduced compensation benefits percent total revenue transactionrelated compensation prior year income discontinued operations net tax totaled 664 million diluted earnings per share discontinued operations 051 prior year assets management assets management “aum” march 31 2007 9685 billion 1009 billion 12 march 31 2006 net client cash flows fiscal year 442 billion representing 5 aum march 31 2006 driven approximately 27 billion fixed income liquidity flows negative client cash flows equity assets resulting part lower relative investment performance approximately 10 billion generally earn higher fees profit margins equity aum outflows asset class disproportionately impact revenues net income components changes aum billions years ended march 31 follows average aum years ended march 31 2007 2006 9058 billion 5469 billion respectively aum asset class billions march 31 follows aum division aum division billions march 31 follows components changes aum division billions year ended march 31 2007 follows assets managed us domiciled clients accounted 67 68 total assets managed nonus domiciled clients represented 33 32 total assets managed march 31 2007 2006 respectively assets managed nonus domiciled clients march 31 2006 revised include 193 billion assets previously included assets managed us domiciled clients principally nonus domiciled feeder funds following discussion separately addresses results continuing operations discontinued operations results continuing operations operating revenues continuing operations year ended march 31 2007 43 billion 64 26 billion prior year primarily result including full year’s results cam permal including permal’s growth since acquisition combined accounted approximately 90 increase revenues higher average aum reflecting favorable market conditions net client cash flows also contributed increase investment advisory fees separate accounts increased 31 14 billion primarily result acquisition cam accounted approximately 80 increase well higher aum western asset management company “western asset” brandywine global investment management llc “brandywine” legg mason capital management inc “lmcm” offset part decline advisory fees due lower average assets managed private capital management lp “pcm” investment advisory fees funds increased 103 20 billion approximately 90 increase attributable acquisitions cam permal including permal’s growth since acquisition performance fees increased 40 1422 million fiscal 2007 primarily result 319 million increased fees earned permal distribution service fees increased 68 7164 million approximately 75 increase due addition fees earned cam addition distribution service fees permal contributed approximately 10 increase revenues division operating revenues division millions years ended march 31 follows 1 fiscal year 2006 includes reclassification approximately 294 million 46 million institutional wealth management divisions respectively managed investments division reflect change whereby revenues generated proprietary funds except managed permal included managed investments division increase operating revenues managed investments institutional divisions primarily due including full year’s results cam increase operating revenues wealth management division primarily due including full year’s results permal including growth since acquisition offset part decreases pcm operating expenses compensation benefits increased 39 16 billion primarily result addition compensation costs acquired businesses increased revenue sharebased incentive expense higher revenues certain subsidiaries compensation percentage operating revenues 361 year ended march 31 2007 426 primarily result higher revenues revenue share entities including revenues transferred acquired entities retain lower percentage revenues compensation decrease transactionrelated compensation transactionrelated compensation costs primarily include recognition previously deferred compensation cam employees prior citigroup plans accruals retention compensation transitional cam employees costs severance cam included purchase price allocation reflected results operations compensation percentage revenues also decreased result significant increase fund revenues substantial portion passed third parties distribution servicing expense distribution servicing expenses increased 113 12 billion approximately 80 increase resulting addition acquired businesses majority distribution servicing expenses paid citigroup primary distributor communications technology occupancy amortization intangible assets expenses increased primarily result full year expenses related cam operations increase expenses primarily travel professional fees advertising costs litigation award settlement fiscal 2006 reflects reversal 82 million charges recorded fiscal 2004 result settlement civil copyright infringement lawsuit income expense interest income increased 109 million 589 million primarily result higher average interest rates earned higher average firm investment account balances interest expense increased 188 million 715 million primarily due impact full year interest expense 700 million term loan issued finance acquisition cam offset part repayment maturity 100 million senior notes fiscal 2006 conversion zerocoupon contingent convertible senior notes common stock income decreased 123 million 281 million result investments held variable interest entities “vies” longer consolidated offset part corresponding minority interests provision income taxes provision income taxes increased 443 3976 million primarily result increase income continuing operations effective tax rate decreased 381 385 prior year primarily reflecting increased revenues earnings foreign jurisdictions lower effective tax rates supplemental nongaap financial information cash income continuing operations rose 59 fiscal year 8454 million 586 per diluted share 5321 million 410 per diluted share primarily due including full year’s results cam permal pretax profit margin continuing operations adjusted distribution servicing expense fiscal years 2007 2006 332 343 respectively cash income continuing operations supplemental information providing performance measure based methodology generally accepted accounting principles “nongaap” “cash income continuing operations” management uses benchmark evaluating comparing periodtoperiod operating performance legg mason inc subsidiaries define “cash income continuing operations” income continuing operations plus amortization deferred taxes related intangible assets believe cash income continuing operations provides good representation operating performance adjusted noncash acquisition related items facilitates comparison results asset management firms engaged significant acquisitions also believe cash income continuing operations important metric estimating value asset management business considering acquisitions often calculate target firm’s cash earnings metric estimating value measure provided addition income continuing operations substitute income continuing operations may comparable nongaap performance measures including measures cash earnings cash income companies cash income operations liquidity measure used place cash flow measures determined gaap legg mason considers cash income continuing operations useful investors important metric measuring economic performance asset management companies indicator value facilitates comparisons legg mason’s operating results asset management firms engaged significant acquisitions calculating cash income continuing operations add impact amortization intangible assets acquisitions management contracts income continuing operations reflect fact noncash expense represent actual decline value intangible assets deferred taxes intangible assets including goodwill represent actual tax benefits realized gaap absent impairment charge disposition related business actually receive tax benefits add income calculation cash income continuing operations disposition impairment charge occur impact cash income continuing operations may distort actual changes operating performance value firm accordingly monitor changes intangible assets goodwill related impact cash income continuing operations distorting effects ensure appropriate explanations accompany disclosures cash income continuing operations although depreciation amortization fixed assets noncash expenses add charges calculating cash income continuing operations charges related assets ultimately require replacement revised definition cash income continuing operations changes relate treatment stockbased compensation expense timing tax effects associated amortization intangibles calculating cash income continuing operations longer adjust stockbased compensation expense addition consistently reflect timing tax effects nongaap adjustments add back income continuing operations amortization expense intangible assets taxes rather adding expense net taxes applied changes periods presented however adjustments significant aggregate impact amount cash income continuing operations periods presented reconciliation income continuing operations cash income continuing operations thousands except per share follows 1 increase prior year primarily relates deferred income taxes intangible assets goodwill acquired entities full fiscal year pretax profit margin continuing operations adjusted believe pretax profit margin continuing operations adjusted distribution servicing expense useful measure performance indicates margins would without distribution revenues passed third parties direct cost selling products thus shows effect revenues margins measure provided addition company’s pretax profit margin continuing operations calculated gaap substitute calculations margin gaap may comparable nongaap performance measures including measures adjusted margins companies reconciliation pretax profit margin continuing operations adjusted distribution servicing expense thousands follows results discontinued operations income discontinued operations net tax year ended march 31 2006 664 million 051 per diluted share gain sale discontinued operations net tax fiscal 2007 2006 06 million 6440 million respectively gain sale discontinued operations impact earnings per share fiscal 2007 responsible 494 per diluted share fiscal 2006 fiscal 2006 compared fiscal 2005 financial overview result acquisitions permal cam results continuing operations fiscal 2006 include five months results permal four months results cam operating revenues increased 68 26 billion result higher revenues significantly increased levels aum primarily cam permal acquisitions net income diluted earnings per share year ended march 31 2006 also increased significantly compared prior year net income increased 11 billion 4084 million 180 diluted earnings per share increased 880 353 149 primarily due net gain sale discontinued operations 6440 million 494 per share income continuing operations totaled 4337 million 47 prior year primarily due acquisitions cam permal higher levels aum western asset lmcm also contributed increase pretax profit margin continuing operations 27 30 fiscal 2005 decrease pretax profit margin primarily due significant increase fund revenues substantial portion passed third parties distribution servicing expense transactionrelated compensation costs related cam acquisition pretax profit margin continuing operations adjusted see supplemental nongaap financial information declined 343 357 fiscal 2005 primarily result transactionrelated compensation costs related cam acquisition diluted earnings per share continuing operations 335 increase 31 256 weighted average diluted shares increased 11 1303 million due primarily issuance common nonvoting convertible preferred shares connection acquisition cam income discontinued operations net tax totaled 664 million 41 prior year primarily due sale pccm businesses december 1 2005 diluted earnings per share discontinued operations 051 decrease 47 097 prior year share earnings per share numbers restated fiscal 2005 appropriate 3 2 stock split effective september 24 2004 assets management aum march 31 2006 8676 billion 4931 billion 132 march 31 2005 acquisitions cam permal responsible approximately 4261 billion 86 net increase net client cash flows responsible 356 billion 7 increase components changes aum billions years ended march 31 follows aum asset class billions march 31 follows 1 certain accounts totaling 125 billion average maturities excess 90 days included fixed income rather liquidity conform current period presentation aum division aum division billions march 31 follows 1 65 billion managed assets reclassified managed investments institutional cam’s fixed income international equity separate accounts included institutional division us equity separate accounts mutual proprietary fund aum included managed investments division permal’s aum included wealth management division components changes aum division billions years ended march 31 2006 follows assets managed usdomiciled clients accounted 68 75 total assets managed nonus domiciled clients represented 32 25 total assets managed march 31 2006 2005 respectively following discussion separately addresses results continuing operations results discontinued operations results continuing operations operating revenues continuing operations year ended march 31 2006 26 billion 68 16 billion prior year result growth aum including increases acquisitions cam permal acquisitions accounted 70 increase revenues strong growth aggregate aum experienced western asset lmcm also contributed increase investment advisory fees separate accounts increased 43 11 billion primarily result acquisition cam growth assets managed western asset cam western asset accounted 41 28 increase respectively collectively pcm brandywine lmcm accounted 23 increased investment advisory fees separate accounts investment advisory fees funds increased 116 10 billion primarily result acquisitions cam permal cam permal accounted 86 increase investment advisory fees funds increases fund assets managed royce associates llc “royce” lmcm accounted 7 increase performance fees rose 527 million 1016 million fiscal 2006 primarily attributable acquisition permal distribution service fees increased 63 4256 million 1205 million 73 increase due addition cam operating revenues decreased 18 226 million primarily result declines commissions earned pcm’s related brokerdealer revenue division operating revenues division millions years ended march 31 follows 1 fiscal years 2006 2005 include reclassifications approximately 294 million 136 million respectively institutional division 46 million 29 million respectively wealth management division managed investments division reflect change whereby revenues generated proprietary funds except managed permal included managed investments division increases operating revenues managed investments institutional divisions primarily due acquisition cam increase operating revenues wealth management division primarily due inclusion permal’s revenues operating expenses compensation benefits increased 70 11 billion primarily result addition transactionrelated compensation costs acquired businesses including compensation related cam acquisition increased revenue sharebased incentive expense higher revenues certain subsidiaries compensation percentage operating revenues 426 year ended march 31 2006 421 resulting transactionrelated compensation discussed offset part significant increase fund revenues substantial portion passed third parties distribution servicing expense distribution servicing expenses increased 122 5618 million primarily result addition 1834 million distribution service fee expense cam permal also contributed increase communications technology occupancy amortization intangible assets expense increased primarily result addition expenses related cam acquisition litigation award settlement reflects reversal 82 million charges recorded fiscal 2004 result settlement civil copyright infringement lawsuit current period expenses increased 49 1060 million primarily due increased promotional costs cam professional fees connection acquisition cam sale pccm businesses legg mason citigroup entered mutual transition services agreements provide certain administrative services investment advisory services provided seller transferred business ordinary course prior date sale agreement respective services provided eighteen months provision additional sixmonth renewal service recipient may terminate services individual basis notice four months ended march 31 2006 expenses include approximately 149 million costs services provided cam operations citigroup 168 million expense reductions cost services provided citigroup support sold businesses income expense interest income increased 279 million 480 million primarily result higher average interest rates higher average firm investment account balances interest expense increased 79 million 526 million due additional debt incurred connection cam acquisition offset part conversion 4799 million principal amount maturity zerocoupon contingent convertible senior notes common stock income increased 340 million 404 million result net gains firm investments gains trading investments held consolidated vies result permal acquisition offset part corresponding minority interests allocation provision income taxes provision income taxes increased 57 2756 million primarily result increase income continuing operations effective tax rate increased 385 372 prior year’s period primarily due higher provision state income taxes result acquisition cam operates state local jurisdictions higher tax rates supplemental nongaap financial information cash income continuing operations rose 45 fiscal year 5321 million 410 per diluted share 3670 million 317 per diluted share primarily increase income continuing operations due acquisitions cam permal pretax profit margin continuing operations adjusted distribution servicing expense fiscal years 2006 2005 343 357 respectively see supplemental nongaap financial information fiscal 2007 compared fiscal 2006 section regarding nongaap disclosures reconciliation income continuing operations cash income continuing operations thousands except per share follows reconciliation pretax profit margin continuing operations adjusted distribution servicing expense thousands follows results discontinued operations since announcement transaction sell pccm businesses june 2005 businesses reflected discontinued operations periods presented see notes 2 3 notes consolidated financial statements additional information related transaction citigroup prior sale december 1 2005 pccm businesses business segments due sale pccm businesses december 1 2005 fiscal 2006 reflects results eight months compared twelve months fiscal 2005 results discontinued operations fiscal 2006 also negatively affected announcement transaction result net revenues discontinued operations year ended march 31 2006 decreased 3107 million 36 5457 million income discontinued operations income tax decreased 785 million 42 diluted earnings per share discontinued operations 051 decrease 47 097 prior year financial results discontinued operations business segment thousands follows 1 represents distribution fees proprietary mutual funds historically reported private client reclassified asset management distribution fee revenue corresponding distribution expense reflect legg mason’s continuing role funds’ distributor liquidity capital resources primary objective capital structure funding practices appropriately support legg mason’s business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may time involve acquisitions material size may require among things raising additional equity capital andor issuance additional debt december 1 2005 completed acquisition cam exchange outstanding stock legg mason subsidiaries constituted pccm businesses ii 5393545 shares common stock 13346632 shares nonvoting legg mason convertible preferred stock convertible upon transfer 13346632 shares common stock iii 512 million cash borrowed 700 million fiveyear syndicated term loan facility terms agreement paid postclosing purchase price adjustment 847 million citigroup september 2006 based retention certain aum nine months closing since contingent payment paid available cash unsecured 5year 300 million floatingrate credit agreement entered fund obligation terminated accordance terms fiscal 2006 legg mason issued approximately 496 million common shares upon conversion approximately 496 shares convertible preferred stock issued cam acquisition following table summarizes credit facilities executed connection cam acquisition credit facilities include agreements fund working capital needs general corporate purposes including acquisitions facilities restrictive covenants require us among things maintain specific leverage ratios maintained compliance applicable covenants borrowing facilities 1 terminated fiscal 2007 borrowings fiscal 2007 2 loan denominated chilean pesos floating rate linked bank chile offering rate 3 matured fiscal 2007 october 14 2005 legg mason entered syndicated fiveyear 700 million unsecured floatingrate term loan agreement primarily fund cash portion purchase price citigroup transaction closing borrowed 600 million 512 million used fund cash portion purchase remainder used fund acquisitionrelated expenses remaining 100 million 700 million loan facility drawn february 2006 additional acquisition related costs 650 million remains outstanding march 31 2007 effective closing citigroup transaction entered 400 million threeyear amortizing interest rate swap “swap” hedge portion 700 million floating rate term loan fixed rate 49 march 2007 quarter swap began unwind repaid corresponding 50 million debt currently intend repay minimum 50 million per quarter current 650 million outstanding balance loan order match amortization swap also connection citigroup transaction one subsidiaries borrower 364day promissory note 832 million fiscal year ended march 31 2007 paid available cash balance outstanding note effective november 1 2005 acquired 80 outstanding equity permal concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares resulting legg mason owning 100 outstanding voting common stock permal right purchase preference shares four years subsequent closing right exercised holders equity interests right require legg mason purchase interests general time frame approximately consideration aggregate consideration paid legg mason closing 800 million 200 million form 1889322 newly issued shares legg mason common stock remainder cash funded cash portion acquisition existing cash anticipated acquire remaining 20 ownership interest permal purchases made two four years initial closing prices based permal’s revenues maximum aggregate price including earnout payments related purchase based upon future revenue levels equity interests permal 1386 billion 961 million minimum price excluding acquisition costs dividends based upon current performance levels march 31 2007 130 million 161 million difference minimum purchase price consideration paid closing classified contractual acquisition payable current liability may elect deliver 25 future payments form shares common stock addition fiscal 2007 paid approximately 12 million dividends preference shares pay minimum 27 million dividends preference shares next 3 years assets consist primarily intangible assets goodwill cash equivalents investment advisory related fees receivables assets principally funded equity capital longterm debt investment advisory fee receivables shortterm nature collectibility reasonably certain excess cash generally invested institutional money market funds commercial paper highly liquid nature current assets provides us flexibility financing managing anticipated operating needs march 31 2007 total assets stockholders’ equity 96 billion 65 billion respectively fiscal 2007 stockholders’ equity increased approximately 6914 million primarily due net income year ended march 31 2007 cash equivalents increased 1601 million 102 billion march 31 2006 118 billion march 31 2007 cash flows operating activities provided 9055 million primarily attributable net income cash flows investing activities used 5421 million primarily attributable contingent earnout payment previous owners pcm payments fixed assets purchase price adjustment paid citigroup financing activities used 2094 million primarily due payment cash dividends repayment shortterm longterm borrowings expect cash flows provided operating activities primary source working capital next year march 31 2007 outstanding debt balance 11 billion addition 6500 million fiveyear term loan discussed previously included outstanding debt 4250 million principal amount senior notes due july 2 2008 bear interest 675 notes issued discount yield 680 accreted balance march 31 2007 4248 million fiscal 2006 holders zerocoupon contingent convertible notes aggregating 4799 million principal amount maturity converted notes approximately 55 million shares common stock fiscal 2007 remaining outstanding zerocoupon contingent convertible senior notes converted 756 thousand shares common stock proceeds longterm debt primarily used fund acquisition asset management entities september 21 2006 moody’s investor service inc upgraded rating senior unsecured debt a3 a2 debt ratings march 31 2007 standard poor’s rating services fitch ratings bbb respectively august 1 2001 legg mason purchased pcm cash approximately 6820 million excluding acquisition costs transaction included two contingent payments based pcm’s revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion fiscal 2005 made maximum third anniversary payment 4000 million former owners pcm quarter ended september 30 2006 paid available cash maximum fifth anniversary payment 3000 million accrued liability corresponding increase goodwill march 31 2006 payment subject certain limited clawback provisions maintain unsecured revolving credit facility 500 million matures october 1 2010 fund working capital needs general corporate purposes borrowings outstanding facility march 31 2007 2006 available shelf registration statement approximately 125 billion issuance additional debt equity securities shelf filing permits us register securities advance sell financing needs arise market conditions favorable intend use shelf registration general corporate purposes including expansion business assurances terms securities may issued pursuant shelf registration since dependent market conditions interest rates time issuance board directors previously authorized us discretion purchase 30 million shares common stock repurchases fiscal 2007 2006 fiscal 2005 repurchased 734700 shares 407 million march 31 2007 maximum amount shares may yet purchased program 666200 fiscal 2007 2006 2005 paid cash dividends 1099 million 786 million 517 million respectively anticipate continue pay quarterly dividends repurchase shares discretionary basis certain asset management subsidiaries maintain various credit facilities general operating purposes see notes 7 8 notes consolidated financial statements additional information certain subsidiaries also subject capital requirements various regulatory agencies subsidiaries met respective capital adequacy requirements offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission “sec” include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations contingent payments section follows special purpose variable interest entities notes 1 17 notes consolidated financial statements contractual obligations contingent payments legg mason contractual obligations make future payments connection longterm debt noncancelable lease agreements addition described liquidity capital resources made expect make contingent payments business purchase agreements see notes 7 8 10 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual contingent obligations fiscal year contractual contingent obligations march 31 2007 1 coupon interest floating rate longterm debt based rates outstanding march 31 2007 2 amount contingent payments reflected year represents maximum amount could payable earliest possible date terms business purchase agreements 3 table include approximately 393 capital commitments investment partnerships legg mason limited partner obligations funded required end commitment periods range fiscal 2008 2011 restructuring charges prior consummation cam transaction senior management assessed formulated plans restructuring business combined entities included reductions acquired workforce rationalization realignment acquired mutual funds evaluation office lease obligations assumed transaction several geographic regions costs associated reductions acquired work force accrued acquisition date time specific plans communication plans finalized costs associated mutual fund realignment office space rationalization accrued fiscal 2007 management finalized plans amounts could reasonably estimated part fund realignment certain domestic funds merged funds similar strategy certain funds redomiciled liquidated approved boards directors funds fund shareholders fund realignment costs associated incurred generate revenues combined entity consummation date incremental costs incurred conduct activities prior transaction date incurred direct result plan exit certain cam activities determination excess office space several geographic regions resulted staff reductions business integrations excess office space costs include amounts incurred existing contractual obligations cam continue economic benefit penalties incurred cancel contractual obligations acquired business costs workforce reductions mutual fund realignment excess office space aggregating 854 million associated integration acquired cam business costs reflected additional goodwill impact future earnings extent recorded goodwill becomes impaired summary accrued restructuring costs millions follows purchase price allocation completed fiscal 2007 expect remaining accrued costs paid incurred contractual terms future years market risk following describes certain aspects business sensitive market risk revenues net income majority revenue based market value aum accordingly decline prices securities generally may cause aum decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts performance fees may earned certain investment advisory contracts exceeding performance benchmarks declines market values aum underperformance advisory contracts versus applicable performance benchmarks result reduced fee revenues net income investments legg mason invests sponsored mutual funds limited partnerships limited liability companies certain investment products investments classified heldtomaturity march 31 2007 legg mason also made certain availableforsale investments 83 million march 31 2007 declines market values investments may negatively impact legg mason’s revenues net income comprehensive income trading assets securities owned 2732 million 1422 million march 31 2007 2006 respectively classified trading assets approximately 1537 million assets march 31 2007 substantially assets march 31 2006 related longterm incentive compensation plans subsidiaries corresponding liabilities accordingly fluctuation market value assets related liabilities impact operating revenues material effect net income liquidity however may impact compensation expense corresponding offset nonoperating income approximately 353 million assets seed capital investments economically hedged fluctuations market value assets material impact net income approximately 842 million assets including approximately 379 million related longterm incentive compensation represent investments fluctuations market value may impact nonoperating income net income foreign exchange sensitivity legg mason operates primarily united states provides services earns revenues incurs expenses outside united states accordingly fluctuations foreign exchange rates currencies principally united kingdom canada brazil australia may impact comprehensive net income certain subsidiaries entered forward contracts manage impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect comprehensive net income liquidity interest rate risk exposure interest rate changes outstanding debt material substantial portion debt fixed interest rates addition significant portion outstanding floating rate debt hedged interest rate swap reduces exposure rising interest rate environment gains losses market value swap recorded component comprehensive income long hedge effective cash flow hedge see note 8 notes consolidated financial statements additional disclosures regarding debt critical accounting policies accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following among current accounting policies involve significant estimates judgments intangible assets goodwill identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon certain estimates assumptions including projected future cash flows growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates investment performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination dates renewed march 31 2007 approximately 24 billion goodwill 39 billion indefinitelife intangible assets 5535 million net amortizable intangible assets estimated useful lives amortizable intangible assets currently range 5 20 years march 31 2007 amortizable intangible assets amortized remaining weightedaverage life 11 years goodwill evaluated quarterly reporting unit level considered impaired carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted cash flows similar techniques employed analyzing purchase price acquisition target defined reporting units managed investments institutional wealth management divisions operating segments allocations goodwill divisions acquisitions dispositions based relative fair values businesses added sold divisions see note 18 notes consolidated financial statements additional information related business segments significant assumptions used assessing implied fair value goodwill discounted cash flow method include projected cash flows generated reporting unit growth rate used projecting cash flows discount rate used determine present value cash flows annual cash flow growth rates based historical growth rates wealth management managed investments reporting units represent approximately 51 44 respectively goodwill wealth management goodwill principally attributable pcm managed investments goodwill principally attributable cam projected cash flows divisions assumed grow 10 annually next five years longterm annual growth rate 5 projected cash flows discounted 16 determine present value discount rate based riskadjusted estimated weighted average cost capital wealth management reporting unit annual cash flows would decline 35 discount rate increase 20 goodwill deemed impaired managed investments reporting unit annual cash flows would decline 50 discount rate increase 25 goodwill deemed impaired review fair value intangible assets quarterly basis considering projected cash flows determine whether assets impaired amortization periods appropriate asset determined impaired difference value asset reflected financial statements current implied fair value recognized expense period impairment determined temporary amortization periods appropriate expected lives adjusted impact fair value assessed implied fair values intangible assets subject amortization determined reporting period using undiscounted cash flow analysis significant assumptions used assessing implied fair value management contract intangible assets include projected cash flows generated contracts attrition rates remaining lives contracts projected cash flows based fees generated current aum applicable contracts assumed turnover evenly throughout life intangible asset expected life asset based upon factors average client retention client turnover rates management contract intangible assets related retail separately managed accounts acquired cam acquisition client contracts acquired pcm represent approximately 48 37 respectively total amortizable intangible assets cam intangible asset expected life 12 years represents annual contract turnover rate 8 cam contracts impaired contract cash flows would decline approximately 70 client attrition would accelerate rate estimated life decreases 65 pcm intangible asset related client contracts original expected life 18 years represents annual contract turnover rate 6 expected remaining life 12 years march 31 2007 current expected client attrition rates cash flows generated underlying management contracts held pcm would decline approximately 50 asset become impaired similarly change profitability contracts client attrition would accelerate rate estimated useful life would decline approximately 35 asset would deemed impaired intangible assets lives indeterminable indefinite fair value determined based anticipated discounted cash flows two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names significant assumptions used assessing fair value proprietary fund contracts include projected cash flows generated contracts discount rate used determine present value cash flows projected cash flows based annualized cash flows applicable contracts projected forward forty years assuming annual cash flow growth approximating market returns contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund family included determining fair value intangible asset domestic mutual fund contracts acquired cam acquisition permal fundsofhedge funds contracts account approximately 65 25 respectively indefinite life intangible assets cash flows cam permal contracts assumed grow longterm annual rates 5 8 respectively approximates expected average market returns projected cash flows cam permal funds discounted 13 14 respectively based estimated weighted average cost capital respective businesses changes assumptions increased discount rate declining cash flows could result impairment current profitability levels cash flows generated cam mutual fund contracts would fall approximately 13 discount rate used test would raised 14 asset deemed impaired likewise cash flows generated permal fundsofhedge funds contracts would decline approximately 36 discount rate raised 20 asset deemed impaired business acquisitions pcm royce permal involved closely held companies certain key employees also owners companies establishing purchase price may include contingent consideration whereby portion purchase price paid acquisition date determination contingent payments consistent methods valuing establishing purchase price record payments additional purchase price compensation contingencies met historically contingent payments recorded additional goodwill see note 6 notes consolidated financial statements additional information regarding intangible assets goodwill loss contingencies legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency inquiries investigations proceedings sale private client capital markets businesses agreed indemnify citigroup customer complaints litigation regulatory liabilities result preclosing events similarly citigroup agreed liable legg mason customer complaints litigation regulatory liabilities cam business result preclosing events accordance statement financial accounting standards “sfas” 5 “accounting contingencies” established liabilities potential losses complaints legal actions investigations proceedings exclusive legal fees establishing liabilities use judgment determine probability losses incurred reasonable estimate amount losses making decisions base judgments knowledge situations consultations legal counsel historical experience resolving similar matters many lawsuits arbitrations regulatory proceedings possible determine whether liability incurred estimate amount liability matter close resolution however accruals reviewed monthly adjusted reflect estimates impact developments rulings advice counsel information pertinent particular matter inherent difficulty predicting ultimate outcome legal regulatory actions cannot predict certainty eventual loss range loss related matters judgments prove incorrect liability losses contingencies may accurately reflect actual losses result actions could materially affect results period expenses ultimately determined march 31 2007 2006 liability losses contingencies 26 million 43 million respectively see note 10 notes consolidated financial statements additional disclosures regarding contingencies stockbased compensation stockbased compensation plans include stock options employee stock purchase plans restricted stock awards deferred compensation payable stock compensation plans issue stock options officers key employees nonemployee members board directors fiscal year 2007 legg mason adopted sfas 123 r “sharebased payment” related pronouncements using modifiedprospective method related transition election method compensation expense year ended march 31 2007 includes compensation cost nonvested sharebased awards grantdate fair value amortized respective vesting periods straightline method described legg mason determines fair value stockbased compensation using blackscholes option pricing model exception marketbased performance grants valued monte carlo optionpricing model prior fiscal 2007 awards also accounted grantdate fair value except awards granted prior april 1 2003 recorded intrinsic value result prior adoption sfas 123 r related compensation expense recognized awards granted prior april 1 2003 expense related stockbased employee compensation included determination net income fiscal years 2006 2005 less would included fair value method applied awards modifiedprospective method results years ended march 31 2006 2005 restated additionally unamortized deferred compensation previously classified separate component stockholders’ equity reclassified reduction additional paidin capital also sfas 123 r cash flows related income tax deductions excess stockbased compensation expense classified financing cash flows year ended march 31 2007 years ended march 31 2006 2005 amount 92376 18972 respectively continues classified operating cash inflows accordance provisions sfas 123 r provide disclosure note 13 notes consolidated financial statements pro forma results compensation expense associated stock option grants recognized grantdate fair value respective vesting period accounted prior years’ stock option grants grantdate fair value net income continuing operations would reduced 32 million 79 million fiscal 2006 2005 respectively net income discontinued operations would reduced 40 million 61 million fiscal 2006 2005 respectively reductions result including additional expenses grants made prior april 2003 granted 1037380 1101105 579104 stock options including nonemployee directors fiscal 2007 2006 2005 respectively additional information sharebased compensation see note 13 notes consolidated financial statements determine fair value option grant using blackscholes optionpricing model except performance marketbased grants use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate except grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal vesting period options estimate volatility part based upon historical prices stock period equal expected life option part upon implied volatility marketlisted options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued marketbased performance option grants use monte carlo optionpricing model estimate fair value used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different income taxes legg mason subsidiaries subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes management assesses likelihood legg mason able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due determine estimates changed income tax provision adjusted period determination made see note 9 notes consolidated financial statements additional disclosures regarding income taxes july 2006 financial accounting standards board “fasb” issued fasb interpretation 48 “accounting uncertainty income taxes” “fin 48” prescribe recognition measurement thresholds financial statements tax positions noted new accounting pronouncement expected material impact consolidated financial statements recent accounting developments following relevant accounting pronouncements recently issued fasb issued fin 48 july 2006 fin 48 clarifies previously issued fasb statement 109 “accounting income taxes” prescribing recognition threshold measurement attribute financial statements tax positions taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties interim accounting disclosure transition effective fiscal year 2008 substantially completed analysis adopting provisions fin 48 based analysis currently expect adjustment opening retained earnings existing income tax reserves april 1 2007 material consolidated financial statements september 2006 fasb issued statement 157 “fair value measurements” “sfas 157” provide consistent definition fair value establish framework measuring fair value generally accepted accounting principles sfas 157 additional disclosure requirements effective fiscal year 2009 evaluating adoption sfas 157 cannot estimate impact consolidated financial statements time september 2006 fasb issued statement 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132 r” “sfas 158” sfas 158 requires employer business entity sponsors one singleemployer defined benefit plans recognize funded status plans balance sheet balance sheet date sfas 158 also requires gains losses prior service costs credits components net periodic benefit costs cycled comprehensive income recognized net periodic benefit cost sfas 158 additional disclosure requirements effective march 31 2007 adoption sfas 158 material impact consolidated financial statements september 2006 sec staff issued staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” “sab 108” eliminate diversity registrants quantify financial statement misstatements prior sab 108 registrants used one two widely recognized methods quantify financial statement misstatements “rollover” method “iron curtain” method iron curtain method quantifies uncorrected misstatements based effects correcting misstatements existing balance sheet current year irrespective year origination misstatement rollover method quantifies uncorrected misstatements based amount misstatements originating current year income statement ignores effects correcting portion relating balance sheet misstatements prior years sab 108 requires registrant consider iron curtain rollover methods evaluating uncorrected misstatements uncorrected misstatements previously deemed immaterial one method may material new “dual approach” require correction current year financial statements sab 108 additional disclosure requirements sab 108 adopted march 31 2007 impact consolidated financial statements february 2007 fasb issued statement 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” “sfas 159” sfas 159 permits companies measure many financial instruments certain items fair value provisions sfas 159 mandatory option adopt sfas 159 fiscal 2008 fiscal 2009 process evaluating potential future effect sfas 159 consolidated financial statements forwardlooking statements made annual report form 10k time may otherwise make public filings press releases statements management “forwardlooking statements” within meaning private securities litigation reform act 1995 including information relating anticipated growth revenues earnings per share anticipated changes businesses amount client aum anticipated future performance business anticipated future investment performance subsidiaries expected future net client cash flows anticipated expense levels changes expenses expected effects acquisitions expectations regarding financial market conditions words phrases “can be” “may be” “expects” “may affect” “may depend” “believes” “estimate” “project” “anticipate” similar words phrases intended identify forwardlooking statements forwardlooking statements subject various known unknown risks uncertainties caution readers forward looking information provided behalf legg mason guarantee future performance actual results may differ materially forwardlooking information result various factors beyond control including limited discussed heading “risk factors” elsewhere annual report form 10k public filings press releases statements management due risks uncertainties factors caution person receiving forwardlooking information place undue reliance statements forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events future revenues may fluctuate due numerous factors total value composition aum volatility general level securities prices interest rates relative investment performance companysponsored investment funds asset management products compared competing offerings market indices investor sentiment confidence general economic conditions ability maintain investment management administrative fees current levels competitive conditions business ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred result changes number total employees competitive factors changes percentages revenues paid compensation reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill connection litigation regulatory proceedings effects acquisitions dispositions business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible goodwill values see discussion “market risksrevenues net income” “critical accounting policiesintangibles goodwill” previously discussed item 7aitem 7 managements discussion analysis financial condition results operations executive overview legg mason inc holding company subsidiaries collectively comprise legg mason global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally united states america united kingdom also offices australia bahamas brazil canada chile china dubai france germany italy japan luxembourg poland singapore spain taiwan currently operate one reportable business segment asset management manage business two divisions operating segments americas international primarily based geographic location advisor domicile fund families manage americas division consists usdomiciled fund families separate account businesses usbased investment affiliates domestic distribution organization similarly international division consists fund complexes distribution teams investment affiliates located outside us december 2010 announced realignment executive management team among things eliminate previous separation americas international divisions one global asset management business fiscal 2012 believe new structure allow us function global organization single purpose allow us focus future growth opportunities march 31 2011 change internal executive management reporting continued operate one reportable business segment asset management two divisions americas international operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution service fees received distributing investment products services providing support services investment portfolios generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level assets management thus affected factors securities market conditions ability attract maintain assets management key investment personnel investment performance assets management primarily vary period due inflows outflows client assets market performance client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services fees charge investment services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions fees charge investment services vary based upon factors type underlying investment product amount assets management type services investment objectives provided fees charged equity asset management services generally higher fees charged fixed income liquidity asset management services accordingly revenues affected composition assets management addition ordinary course business may reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets revenue sharing agreements certain affiliates retain different percentages revenues cover costs including compensation net income attributable legg mason inc operating margin compensation percentage operating revenues impacted based affiliates generate revenues change assets management one subsidiary dramatically different effect revenues earnings equal change another subsidiary addition time may agree changes revenue sharing agreements arrangements asset management personnel may impact compensation expenses profitability significant component cost structure employee compensation benefits majority variable nature includes incentive compensation primarily based upon revenue levels profits next largest component cost structure distribution servicing fees primarily fees paid thirdparty distributors selling asset management products services largely variable nature certain operating costs fixed nature occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly united states increasingly countries operate results individual period considered representative future results profitability sensitive variety factors including amount composition assets management volatility general level securities prices interest rates among things sustained periods unfavorable market conditions likely affect profitability adversely addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients economic downturn fiscal years 2008 2009 contributed significant contraction business experienced improvement past two years although recovered predownturn levels financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms brokerdealers commercial banks industry impacted continued economic uncertainty prior years consolidation financial services firms mergers acquisitions industry operate also subject extensive regulation federal state foreign laws like firms impacted regulatory legislative changes responding changes required continue require us incur costs continue impact profitability references fiscal 2011 2010 2009 refer fiscal year ended march 31 year terms us company refer legg mason business environment results operations financial environment globally united states continued rebound fiscal 2011 challenging conditions persisted throughout fiscal year due uncertainties surrounding strength economic recovery continued concerns budget deficits high levels unemployment impact earthquake occurred japan march 2011 along political unrest middle east created new uncertainties spite global concerns markets continued increase due steady improvement consumer confidence stabilization still elevated unemployment rates improved performance corporate earnings across many sectors fiscal 2011 federal reserve board held discount rate 025 lowest history financial environment operate continues challenging moving fiscal 2012 three major us equity market indices well barclays capital us aggregate bond index barclays capital global aggregate bond index increased significantly past two fiscal years illustrated table 1indices trademarks dow jones company mcgrawhill companies inc nasdaq stock market inc barclays capital respectively affiliated legg mason following table sets forth periods indicated amounts consolidated statements income percentage operating revenues increase decrease item percentage amount previous period nmnot meaningful 1calculated based change actual amounts fiscal years percentage prior year amount fiscal 2011 compared fiscal 2010 financial overview net income attributable legg mason inc year ended march 31 2011 totaled 2539 million 163 per diluted share compared 2044 million 132 per diluted share prior year increase net income primarily due net impact increased operating revenues reflecting favorable asset mix increased performance fees reduced interest expense change uk tax rate increases offset part impact transitionrelated compensation impact gains fund support recognized prior year increase costs associated closedend fund launches items discussed results operations adjusted income see supplemental nongaap financial information 4392 million 283 per diluted share compared 3813 million 245 per diluted share prior year increase primarily due increase net income previously discussed excluding impact current year uk tax rate change fund support gains prior year operating margin increased 139 122 prior year operating margin adjusted see supplemental nongaap financial information increased 232 207 prior year assets management components changes assets management aum billions years ended march 31 follows 1subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2includes impact foreign exchange aum march 31 2011 678 billion decrease 7 billion 1 march 31 2010 decrease aum attributable net client outflows 61 billion partially offset market appreciation 56 billion approximately 17 resulted impact foreign currency exchange fluctuation dispositions 2 billion relating sale singaporebased asian equity manager majority outflows fixed income 37 billion 61 outflows followed liquidity outflows equity outflows 16 billion 8 billion respectively majority fixed income outflows products managed western asset management company western asset experienced outflows fixed income asset class since fiscal 2008 equity outflows primarily experienced products managed clearbridge advisors llc clearbridge legg mason capital management inc lmcm permal group ltd permal royce associates royce net inflows due part investment performance issues experienced net annual equity outflows since fiscal 2007 however rate outflows asset class lower year generally earn higher fees profits equity aum outflows asset class negatively impact revenues net income would outflows asset classes first quarter fiscal 2012 morgan stanley smith barney amended certain historical smith barney brokerage programs providing investment liquidity funds asset managers manage resulted reduction approximately 16 billion liquidity aum currently waiving much management fees generated assets loss aum year would reduced net advisory revenue 8 million material impact net income due impact revenue sharing arrangements income taxes addition expect amendments result additional 7 billion liquidity assets transferred next 15 months investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds manage may redeem investments funds time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients thirdparty distributors relationships loss key investment management personnel financial market performance aum asset class aum asset class billions march 31 follows component changes aum asset class billions fiscal year ended march 31 2011 follows average aum asset class billions year ended march 31 follows aum division aum division billions march 31 follows component changes aum division billions year ended march 31 2011 follows investment performance1 investment performance assets management year ended march 31 2011 mixed compared relevant bench marks prior year equity markets worked difficult year recent political upheaval middle east driving significant increase oil prices earthquake japan subsequent nuclear crisis raising questions future nuclear power industry despite global concerns us indices produced positive returns fourth fiscal quarter full fiscal year driven corporate earnings growth resulting increases dividends share buybacks mergers acquisitions activity fixed income markets relatively strong economic data combined continued accommodative monetary fiscal policy continued alleviate fears doubledip recession caused us treasury yields rise across yield curve yield curve slightly flattened quarter year federal reserve kept funds rate 025 reiterated rates would kept low extended period worst performing fixed income sector year government bonds measured barclays us government bond index returning 428 contrast high yield bonds measured barclays high yield bond index returned 1431 followed us tips measured barclays us tips index returned 791 year following table presents summary percentage marketed composite assets2 outpaced benchmarks march 31 2011 2010 trailing 1year 3year 5year 10year periods 1index performance section includes reinvestment dividends capital gains 2a composite aggregation discretionary portfolios separate accounts investment funds single group represents particular investment objective strategy asset managers specific guidelines including portfolios marketed composites assets management managed accordance guidelines included composite march 31 2011 2010 89 87 equity assets management respectively period 89 82 fixed income assets management respectively marketed composites following table presents summary percentage us mutual fund assets3 outpaced lipper category averages march 31 2011 2010 trailing 1year 3year 5year 10year periods revenue division operating revenues division millions years ended march 31 follows increase operating revenues americas division primarily due increased mutual fund advisory fees assets managed royce increase operating revenues international division primarily due increased mutual fund advisory fees performance fees assets managed international operations western asset increased fund revenues permal 3source lipper inc includes openend closedend variable annuity funds march 31 2011 2010 us longterm mutual fund assets represented data accounted 17 16 respectively total assets management performance us longterm mutual fund assets included marketed composites business model streamlining initiative may 2010 announced initiative streamline business model drive increased profitability growth includes transitioning certain shared services investment affiliates closer actual client relationships ii sharing affiliate revenue americas distribution group project initiative result 130 million 150 million expense reductions fully realized annualized basis fourth quarter fiscal 2012 expense savings consist approximately 75 million compensation benefits cost reductions eliminating positions certain corporate shared services functions result transitioning functions affiliates charging affiliates centralized services continue provided without corresponding adjustment revenue sharing compensation arrangements ii approximately 50 million noncompensation costs eliminating streamlining activities corporate distribution business units including savings associated consolidating office space iii approximately 15 million americas distribution group sharing affiliate revenues retail assets management without corresponding adjustment revenue sharing compensation arrangements initiative involves approximately 115 million 135 million transitionrelated costs primarily include charges employee termination benefits incentives retain employees transition period transitionrelated costs also include charges consolidating leased office space early contract terminations asset disposals professional fees fiscal 2011 transitionrelated costs totaled 544 million net related costsavings reduced operating income 42 million substantially remaining costs accrued fiscal 2012 nature amount transition costs savings based estimates management expects total costs savings within ranges disclosed actual results may differ amount nature estimates achievement projected cost savings margin improvements well amount nature transitionrelated costs subject many factors including market conditions factors affecting financial results affiliates rate aum growth addition business dynamic may require us incur incremental expenses timetotime grow better support business see note 16 notes consolidated financial statements additional information business streamlining initiative results operations effective april 1 2010 adoption new accounting standard consolidation consolidate separately identify certain sponsored investment vehicles significant collateralized loan obligation entity clo consolidation investment vehicles impact net income attributable legg mason inc material impact consolidated operating results also hold investments certain consolidated sponsored investment funds change value investments recorded nonoperating income expense reflected net income net amounts allocated noncontrolling interests impact consolidation investment vehicles presented consolidated statements income excluding consolidated investment vehicles see supplemental nongaap financial information also see notes 1 18 notes consolidated financial statements additional information regarding consolidation investment vehicles operating revenues total operating revenues year ended march 31 2011 28 billion increase 6 26 billion prior year despite 1 decrease average aum reflecting increased revenue yields due favorable asset mix higher performance fees increases offset part increase fee waivers certain liquidity funds order maintain certain yields investors investment advisory fees separate accounts relatively flat 8156 million decrease 254 million resulting lower average fixed income assets western asset offset 186 million increase due higher average equity assets managed batterymarch financial management inc batterymarch royce 51 million increase due higher average fixed income assets managed brandywine global management llc brandywine 22 million increase due subordinate fees received certain clos managed western asset investment advisory fees funds increased 1193 million 9 15 billion increase 1115 million result higher average equity assets managed royce permal clearbridge 844 million result higher average fixed income assets managed western asset increases offset part 457 million decrease due lower average liquidity assets managed western asset 360 million decrease result fee waivers liquidity funds managed western asset primarily maintain certain yields investors performance fees increased 35 252 million 967 million fiscal 2011 driven fees earned assets managed western asset permal brandywine distribution service fees increased 1 3792 million primarily result increase average mutual fund aum subject distribution servicing fees offset part impact increased fee waivers related liquidity funds managed western asset operating expenses total compensation benefits increased 741 million 12 billion compensation benefits excluding transitionrelated compensation 450 million represents severance retention incentive costs increased 290 million 3 114 billion increase driven 686 million increase revenue sharebased compensation resulting higher revenues reduction operating expenses revenue sharebased affiliates fiscal 2011 75 million increase incentive compensation nonrevenue sharebased affiliates administrative sales personnel increases offset part 457 million reduction deferred compensation obligations due impact reduced market gains assets invested deferred compensation plans recorded nonoperating income expense well 61 million reduction deferred compensation expense nonrevenue sharebased affiliates impact reduced headcount primarily related business streamlining initiatives also reduced compensation benefits 60 million compensation percentage operating revenues increased 426 422 prior fiscal year primarily due impact increased revenues revenue sharebased affiliates retain higher percentage revenues compensation transitionrelated compensation increases substantially offset impact compensation decreases related reduced market gains assets invested deferred compensation plans seed capital investments impact lower corporate compensation increased revenues arrangement affiliate affiliates incentive compensation pool revenue sharing agreement reduced last two years reimburse parent company certain expenses time parent company provided equivalent amount deferred compensation affiliates employees portion deferred compensation granted form restricted stock awards remainder cash awards granted nonqualified plan vest periods three four years amount affiliates incentive compensation reduced fiscal 2012 arrangement significantly less reduction fiscal 2011 addition increase amount noncash amortization expense associated vesting deferred compensation awards prior years combined impact result 74 million increase compensation benefits fiscal 2012 recognized ratably year arrangement continue subsequent five years however incremental effect compensation expense year far less significant distribution servicing expenses increased 3 7128 million primarily result increase average aum certain products pay fees thirdparty distributors increase 145 million structuring fees related closedend fund launches offset part impact liquidity fund fee waivers reduce amounts paid distributors communications technology expense decreased 1 1620 million 92 million resulted full depreciation certain assets prior current year offset part 66 million increase technology consulting outsourcing fees primarily related business streamlining initiatives occupancy expense decreased 12 1379 million primarily due impact 193 million charge prior year result subleasing space corporate headquarters fiscal 2010 amortization intangibles remained relatively flat 229 million expenses increased 89 million 1766 million primarily result 103 million increase travel entertainment advertising costs 56 million increase state franchise taxes 42 million increase professional fees 54 million increase charges related trading errors expense reimbursements paid certain mutual funds increases offset part impact 190 million investor settlement prior year nonoperating income expense interest income increased 26 92 million driven higher average interest rates offset part 09 million decrease due lower average investment balances interest expense decreased 27 922 million primarily result exchange equity units august 2009 repayment 550 million outstanding term loan balance january 2010 reduced interest expense 148 million 122 million respectively march 31 2010 fund support arrangements expired terminated accordance terms fund support gains 232 million prior year gains primarily represent reversal unrealized noncash losses recorded fiscal 2009 liquidity fund support arrangements offshore funds nonoperating income expense decreased 273 million primarily result 467 million reduction unrealized market gains assets invested deferred compensation plans substantially offset corresponding compensation decreases discussed 43 million reduction unrealized market gains investments proprietary fund products decreases offset part impact 220 million charges related exchange equity units prior year nonoperating income expense civs decreased 156 million gain 17 million due losses associated increase fair value debt related civ income tax provision income taxes 1194 million compared 1187 million prior year fiscal 2011 uk finance bill 2010 enacted reduced corporate tax rate 28 27 periods beginning april 1 2011 impact tax rate change certain existing deferred tax liabilities resulted tax benefit approximately 89 million effective tax rate 327 compared 360 prior year effective tax rate excluding impact civs 320 367 march 31 2011 2010 respectively decrease primarily driven revaluation certain deferred tax assets liabilities result enactment uk tax rate reduction adjustments state tax rates impacted apportionment changes addition current period benefited adjustments resulting finalization prior period tax positions although yet enacted additional proposed reductions uk corporate tax rate 26 fiscal 2012 25 fiscal 2013 expected one percentage point reduction uk corporate tax rate result tax benefit approximately 89 million time enactment based amount deferred tax assets liabilities march 31 2011 revalued new rate supplemental nongaap financial information consolidated statements income excluding consolidated investment vehicles effective april 1 2010 adoption new financial accounting standard consolidation consolidate separately identify certain sponsored investment vehicles significant clo presenting consolidated statements income excluding consolidated investment vehicles add back investment advisory distribution servicing fees eliminated upon consolidation investment vehicles exclude operating expenses impact nonoperating income expense noncontrolling interests civs believe important provide consolidated statements income excluding consolidated investment vehicles present underlying economic performance core asset management operations include results investment funds manage may equity invested deconsolidating civs consolidated statements income investment advisory distribution fees earned legg mason civs added back reflect actual revenues similarly operating expenses impact nonoperating income expense noncontrolling interests civs removed gaap basis statements income since activity actually belong us deconsolidation investment vehicles impact net income attributable legg mason inc period presented consolidated statements income excluding consolidated investment vehicles presented addition gaap basis consolidated statements income substitutes gaap basis consolidated statements income may comparable consolidated statements income presented nongaap basis companies following tables present reconciliation consolidated statements income presented gaap basis consolidated statements income excluding consolidated investment vehicles years ended march 31 2011 2010 adjusted income supplemental information providing performance measure based methodology generally accepted accounting principles nongaap adjusted income management uses benchmark evaluating comparing periodtoperiod operating performance legg mason inc subsidiaries define adjusted income net income loss attributable legg mason inc plus amortization deferred taxes related intangible assets goodwill imputed interest tax benefits contingent convertible debt less deferred income taxes goodwill indefinitelife intangible asset impairment also adjust noncore items reflective economic performance impairment charges impact tax rate adjustments certain deferred tax liabilities related indefinitelife intangible assets goodwill net money market fund support losses gains believe adjusted income provides useful representation operating performance adjusted noncash acquisition related items facilitate comparison results asset management firms issued contingent convertible debt made significant acquisitions engaged money market fund support transactions also believe adjusted income important metric estimating value asset management business adjusted income considers adjustments certain items relate operating performance comparability therefore readily reconcilable net income determined gaap measure provided addition net income substitute net income may comparable nongaap performance measures including measures adjusted earnings adjusted income companies adjusted income liquidity measure used place cash flow measures determined gaap consider adjusted income useful investors important metric measuring economic performance asset management companies indicator value facilitates comparison operating results asset management firms engaged significant acquisitions issued contingent convertible debt engaged money market fund support transactions calculating adjusted income add impact amortization intangible assets acquisitions management contracts net income reflect fact noncash expenses distort comparisons operating results asset management firms engaged significant acquisitions deferred taxes indefinitelife intangible assets goodwill include actual tax benefits amortization deductions realized gaap absent impairment charge disposition related business fully expect realize economic benefit current period tax amortization add benefit net income calculation adjusted income however net operating loss carryforward receive benefit current tax amortization time conversely subtract noncash income tax benefits goodwill indefinitelife intangible asset impairment charges uk tax rate adjustments excess book basis certain acquired indefinitelife intangible assets recognized gaap also add back imputed interest contingent convertible debt noncash expense well actual tax benefits related contingent convertible debt realized gaap also add subtract noncore items net money market fund support losses gains net losses sale underlying structured investment vehicle siv securities applicable adjustments reflect items distort comparisons operating results prior periods results asset management firms engaged money market fund support transactions significant acquisitions including related impairments disposition impairment charge noncore item occur impact adjusted income may distort actual changes operating performance value firm also realized losses money market fund support transactions reflective changes operating performance value firm accordingly monitor items related impact including taxes adjusted income ensure appropriate adjustments explanations accompany disclosures although depreciation amortization fixed assets noncash expenses add charges calculating adjusted income charges related assets ultimately require replacement reconciliation net income attributable legg mason inc adjusted income thousands except per share amounts follows 1net income taxes operating margin adjusted calculate operating margin adjusted dividing operating income adjusted exclude impact compensation expense gains losses investments made fund deferred compensation plans impact compensation expense gains losses seed capital investments affiliates revenue sharing agreements transitionrelated costs streamlining business model income loss civs impairment charges ii operating revenues adjusted add back net investment advisory fees eliminated upon consolidation investment vehicles less distribution servicing expenses use approximate measure revenues passed third parties refer adjusted operating revenues compensation items transitionrelated costs removed operating income calculation offset equal amount nonoperating income expense thus impact net income transitionrelated costs income loss civs removed operating income calculation items reflective core asset management operations use adjusted operating revenues calculation show operating margin without distribution servicing expenses use approximate distribution revenues passed third parties direct cost selling products although distribution servicing expenses may include commissions paid connection launching closedend funds corresponding revenue period adjusted operating revenues also include advisory revenues receive civs eliminated consolidation gaap believe operating margin adjusted useful measure performance provides measure core business activities excluding items impact net income indicates operating margin would without distribution revenues passed third parties direct cost selling products transitionrelated costs impact consolidation certain investment vehicles described consolidation investment vehicles impact net income attributable legg mason inc measure provided addition operating margin calculated gaap substitute calculations margins gaap may comparable nongaap performance measures including measures adjusted margins companies calculation operating margin operating margin adjusted follows fiscal 2010 compared fiscal 2009 financial overview net income attributable legg mason inc year ended march 31 2010 totaled 2044 million 132 per diluted share compared net loss attributable legg mason inc 197 billion 1399 per diluted share prior year increase primarily due impact 14 billion losses net income tax benefits compensation related adjustments related elimination exposure sivs liquidity funds managed subsidiary prior fiscal year impact impairment charges related goodwill intangible assets primarily former wealth management division see note 5 notes consolidated financial statements 8634 million net income tax benefits recorded prior fiscal year also contributed increase adjusted income see supplemental nongaap financial information 3813 million 245 per diluted share compared adjusted loss 12 billion 847 per diluted share prior year increase primarily due impact 17 billion net realized losses sale siv securities prior fiscal year operating margin increased 122 199 prior year primarily due impact impairment charges related goodwill intangible assets recorded prior fiscal year operating margin adjusted see supplemental nongaap financial information decreased 207 239 prior year assets management components changes aum billions years ended march 31 follows 1subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2includes impact foreign exchange aum march 31 2010 685 billion increase 52 billion 8 march 31 2009 increase aum attributable market appreciation 134 billion approximately 6 resulted impact foreign currency exchange fluctuation partially offset net client outflows 82 billion majority outflows fixed income 64 billion 78 outflows followed equity outflows liquidity outflows 15 billion 3 billion respectively majority fixed income outflows products managed western asset brandywine experienced past investment underperformance although performance improved significantly fiscal 2010 equity outflows primarily experienced products managed clearbridge batterymarch permal lmcm aum asset class aum asset class billions march 31 follows component changes aum asset class billions fiscal year ended march 31 2010 follows average aum asset class billions year ended march 31 follows aum division aum division billions march 31 follows component changes aum division billions year ended march 31 2010 follows investment performance1 investment performance assets management year ended march 31 2010 improved compared relevant benchmarks prior year although unemployment rate remains high us economy continued slowly show signs recovery strong rebound corporate earnings improvements existing home sales consumer spending stabilization financial services industry helped restore level investor confidence however uncertainty markets remained best evidenced may 6 2010 intraday selloff subsequent rebound concerns regarding credit quality certain european nations government stimulus initiatives continued globally debates inflation deflation loomed fixed income markets government yields continued rise investors grew concerned need finance growing federal deficit demand government bonds decreased due investors returning appetite risk sector spreads declined 2009 investors returned riskier securities highyield bonds emerging market debt securities investment grade corporate bonds delivered strongest performance record 2000 basis points excess returns treasuries 2009 1year period treasury yield curve historically steep federal reserve continued keep federal funds close 0 worst performing fixed income sector government bonds measured barclays us government bond returning 370 contrast high yield bonds returned 5821 2009 following table presents summary percentage marketed composite assets2 outpaced benchmarks march 31 2010 2009 trailing 1year 3year 5year 10year periods following table presents summary percentage us mutual fund assets3 outpaced lipper category march 31 2010 2009 trailing 1year 3year 5year 10year periods revenue division operating revenues division millions years ended march 31 follows decrease operating revenues americas division primarily due decreased mutual fund advisory fees assets managed western asset lmcm clearbridge decreased separate account advisory fees assets managed western asset clearbridge decreased distribution service fee revenues us retail equity funds decrease operating revenues international division primarily due decreased fund revenues permal 1index performance section includes reinvestment dividends capital gains 2as march 31 2010 2009 87 85 equity assets management respectively period 82 84 fixed income assets management respectively marketed composites 3source lipper inc includes openend closedend variable annuity funds march 31 2010 2009 us longterm mutual fund assets represented data accounted 16 12 respectively total assets management performance us longterm mutual fund assets included marketed composites results operations operating revenues total operating revenues year ended march 31 2010 26 billion 22 34 billion prior year primarily result 17 decrease average aum shift mix average aum higher fee equity assets greater percentage liquidity fixed income assets also contributed revenue decline investment advisory fees separate accounts decreased 2024 million 20 8148 million decrease 1043 million result lower average equity assets clearbridge private capital management lp pcm lmcm brandywine 955 million result lower average fixed income assets managed western asset investment advisory fees funds decreased 4691 million 26 14 billion decrease 3092 million result lower average equity assets managed primarily permal lmcm clearbridge 731 million result fee waivers related liquidity funds managed western asset primarily maintain certain yields investors 669 million result lower average liquidity assets managed western asset performance fees increased 310 540 million 715 million fiscal 2010 driven fees earned assets managed western asset permal distribution service fees decreased 21 3753 million primarily result decline average mutual fund aum impact increased fee waivers related liquidity funds managed western asset operating expenses result substantial declines revenues fiscal 2009 due challenging market conditions actions taken reduce corporate cost structure costsaving measures primarily included reductions fulltime employees discretionary incentive compensation business support functions significant reductions utilization consultants technology projects substantial curtailment promotional costs operating expenses fiscal 2010 continued benefit cost reduction initiatives implemented fiscal 2009 many significant actions implemented december 2008 quarter discussion operating expenses identifies amount variance attributable cost savings achieved fiscal 2010 applicable compensation benefits decreased 2 11 billion decrease driven 1391 million decrease revenue sharebased compensation primarily resulting lower revenues fiscal 2010 impact offset part reductions operating expenses revenue sharebased affiliates net impact workforce reductions lowered compensation approximately 275 million reductions substantially offset increase deferred compensation revenue sharebased incentive obligations 1503 million resulting market gains assets invested deferred compensation plans seed capital investments offset gains nonoperating income expense compensation percentage operating revenues increased 422 337 prior fiscal year primarily result compensation increases related unrealized market gains assets invested deferred compensation plans investments proprietary fund products impact fixed compensation costs directly vary revenues distribution servicing expenses decreased 29 6919 million primarily result decrease average aum certain products pay fees thirdparty distributors impact liquidity fund fee waivers reduce amounts paid distributors communications technology expense decreased 13 1631 million primarily result cost savings initiatives contributed 136 million reduction technology consulting fees telecommunications market data services reductions printing costs lower technology depreciation expense resulted full depreciation certain assets prior fiscal 2010 77 million 45 million respectively also contributed decrease occupancy expense decreased 25 1570 million primarily due recognition 701 million lease charges related office vacancies recorded prior year offset part 193 million charge primarily resulting subleasing space corporate headquarters fiscal 2010 amortization intangible assets decreased 38 228 million primarily due impact intangible asset impairments fiscal 2009 reduced amortization expense 135 million impairment charges 13 billion fiscal 2009 approximately 12 billion total impairment charges related goodwill intangible assets former wealth management division result significant declines aum projected cash flows within division remaining 146 million related certain acquired management contracts result accelerated rate client attrition impairment trade name expenses decreased 144 million 1676 million primarily result cost savings initiatives contributed reductions travel entertainment costs 156 million advertising costs 77 million decreases partially offset increase 115 million charges related impact investor settlement trading errors nonoperating income expense interest income decreased 87 74 million primarily result decline average interest rates lower average investment balances reduced interest income 362 million 129 million respectively interest expense decreased 31 1263 million primarily result exchange equity units august 2009 reduced interest expense 365 million 246 million decrease due repayment 250 million outstanding borrowings revolving credit facility march 2009 repayment 675 senior notes july 2008 repayment 550 million outstanding balance 700 million term loan january 2010 well lower interest rates paid term loan fiscal 2010 decreases partially offset increase 50 million amortization debt issuance costs primarily related early repayment 700 million term loan due increases net asset values previously supported liquidity funds fiscal 2010 reversed unrealized noncash losses recorded fiscal 2009 206 million related liquidity fund support arrangements offshore funds involve sivs fiscal 2009 fund support losses 17 billion primarily result siv price deterioration elimination siv exposure see note 19 notes consolidated financial statements additional information fund support nonoperating income expense increased 2039 million income 869 million primarily result increase 1337 million unrealized market gains assets invested deferred compensation plans substantially offset corresponding compensation increases discussed 869 million unrealized market gains investments proprietary fund products partially offset corresponding compensation increases discussed increases offset part impact 220 million charges related exchange substantially equity units fiscal 2010 income tax provision benefit provision income taxes 1187 million compared benefit 12 billion prior year primarily result increased earnings due absence losses related liquidity fund support goodwill impairment charges effective tax rate 360 compared benefit rate 384 prior year current year rate beneficially impacted lower effective tax rates foreign jurisdictions prior years benefit rate driven impact sivrelated charges lower state tax benefits impact nondeductible portion goodwill impairment charge offset tax benefits associated restructuring foreign subsidiary supplemental nongaap financial information consolidated statements income excluding consolidated investment vehicles following tables present reconciliation consolidated statements income presented gaap basis consolidated statements income excluding consolidated investment vehicles years ended march 31 2010 2009 adjusted income reconciliation net income attributable legg mason inc adjusted income thousands except per share amounts follows 1includes related adjustments operating expenses applicable income tax provision benefit increase adjusted income primarily due impact net realized losses 17 billion sale siv securities prior fiscal year operating margin adjusted liquidity capital resources primary objective capital structure appropriately support business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may timetotime involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt consolidation variable interest entities april 1 2010 new accounting guidance discussed critical accounting policies impact liquidity capital resources rights benefits bear risks associated assets liabilities civs beyond investments investment advisory fees generated vehicles eliminated consolidation additionally creditors civs recourse general credit beyond level investment consider liabilities obligations assets consist primarily intangible assets cash equivalents goodwill investment securities investment advisory related fee receivables assets principally funded equity capital longterm debt results operations march 31 2011 cash equivalents total assets longterm debt stockholders equity 14 billion 83 billion 12 billion 58 billion respectively total assets total liabilities civs march 31 2011 437 million 337 million respectively following table summarizes consolidated statements cash flows years ended march 31 millions fiscal 2011 cash flows operating activities 4121 million primarily attributable current year net income adjusted noncash items cash outflows investing activities fiscal 2011 444 million primarily attributable payments made fixed assets cash outflows financing activities 4685 million driven repurchase 146 million common shares 445 million see note 13 notes consolidated financial statements additional information fiscal 2010 cash flows operating activities 14131 million 10 billion reflects receipt income tax refunds resulting net operating loss carrybacks remainder attributable net income adjusted noncash items cash outflows investing activities fiscal 2010 2767 million primarily attributable cash payments 180 million made connection acquisition permal payments fixed assets 841 million principally associated relocation corporate headquarters partially offset fund support collateral received 389 million due amendment termination expiration certain capital support arrangements cash outflows financing activities 7467 million primarily due repayment january 2010 remaining 550 million outstanding balance 700 million fiveyear term loan 1350 million cash consideration paid equity units exchange offer payment cash dividends fiscal 2009 cash flows operations 3820 million primarily attributable revenue declines cash outflows investing activities 11 billion fiscal 2009 primarily attributable purchase siv securities liquidity funds used 29 billion outflows offset part proceeds sale securities purchased agreements resell siv securities 11 billion cash proceeds received sale implementation overlay business legg mason private portfolio group lmppg 181 million return portion contingent earnout payment acquisition pcm 120 million previously funded escrow cash flows financing activities provided 3292 million fiscal 2009 primarily due 11 billion net proceeds offering equity units offset part repayment 425 million 675 senior notes 250 million repayment 500 million unsecured revolving credit facility financing transactions table reflects primary sources financing thousands march 31 2011 january 2008 increased capital base 125 billion sale 25 convertible senior notes proceeds strengthened balance sheet provided additional liquidity used general corporate purposes including purchase siv securities liquidity funds senior notes bear interest 25 payable semiannually cash accreting carrying value principal amount maturity using imputed interest rate 65 effective borrowing rate nonconvertible debt time issuance expected life seven years resulting additional interest expense fiscal 2011 2010 approximately 367 million 344 million respectively connection financing entered economic hedging transactions increase effective conversion price notes hedging transactions net cost us 83 million paid proceeds notes transactions closed january 31 2008 may 2008 issued 23 million equity units 115 billion 50 million used pay issuance costs unit consists 5 interest 1000 principal amount 56 senior notes due june 30 2021 purchase contract purchase varying number shares common stock june 30 2011 notes purchase contracts separate distinct instruments terms structured simulate conversion debt equity potentially remarketed debt approximately three years issuance september 2009 quarter completed exchange offer equity units form corporate units order increase equity capital levels reduce amount outstanding debt related interest expense exchanged 91 outstanding corporate units 08881 share common stock 625 cash per corporate unit equating 186 million shares legg mason common stock 1350 million cash including cash paid lieu fractional shares transaction costs connection transaction incurred transaction costs approximately 22 million 157 million cash approximately 21 million equity units 103 million 56 senior notes remain outstanding process evaluating options remarketing senior notes june 30 2011 see note 7 notes consolidated financial statements additional information november 2007 borrowed aggregate 500 million unsecured revolving credit facility general corporate purposes march 2009 repaid 250 million outstanding borrowings credit facility may prepaid time contains customary covenants default provisions facility scheduled mature october 14 2010 however fiscal 2010 credit agreement amended extend maturity date february 11 2013 modify covenants discussed october 2005 borrowed 700 million syndicated fiveyear unsecured floatingrate term loan agreement primarily fund cash portion purchase price citigroup transaction fiscal 2010 repaid remaining 550 million outstanding balance debt agreements entered part january 2008 issuance 125 billion 25 convertible senior notes prevent us incurring additional debt exceptions debt ebitda ratio defined documents exceeds 25 order complete may 2008 issuance equity units received waiver covenant prevented issuing 250 million additional debt time debt ebitda ratio exceeds 25 upon expiration waiver june 30 2011 unable incur additional debt ebitda ratio exceeds 25 march 31 2011 debt ebitda ratio 26 thus new debt could incurred would allowed covenant exceptions march 31 2011 financial covenants bank agreements include maximum net debt ebitda ratio 25 minimum ebitda interest expense ratio 40 debt defined include obligations borrowed money excluding debt incurred equity units offering nonrecourse debt capital leases net debt covenants debt reduced amount unrestricted cash excess greater subsidiary cash 375 million ebitda defined consolidated net income plusminus tax expense interest expense depreciation amortization intangibles extraordinary expenses losses noncash charges defined march 31 2011 net debt ebitda ratio 11 ebitda interest expense ratio 129 maintained compliance covenants times fiscal 2011 net income significantly declines spend available cash may impact ability maintain compliance covenants determine compliance covenants may pressure may elect take number actions including reducing expenses order increase ebitda using available cash repay portion 250 million outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt anticipate available cash repay bank debt necessary using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments outstanding debt currently impacted ratings two rating agencies event downgrade rating agencies interest rate revolving line credit may increase transactions fiscal 2010 connection acquisition permal paid aggregate 171 million cash acquire remaining 625 outstanding preference shares also elected purchase 9 million rights sellers preference shares receive earnout payment 149 million two years result transaction payments permal acquisition addition fiscal 2010 2009 paid aggregate amount 150 million dividends preference shares payments preference shares including dividends recognized additional goodwill fiscal 2010 announced plan terminate exchangeable share arrangement related acquisition legg mason canada inc accordance terms may 2010 11 million shares representing remaining outstanding exchangeable shares exchanged shares common stock fiscal 2007 connection acquisition pcm paid escrow maximum fifth anniversary payment 300 million 150 million remained escrow subject certain limited clawback provisions july 2009 fiscal 2009 contingency settled time 30 million released escrow sellers 120 million returned us recorded reduction goodwill april 2008 completed sale citigroup global markets inc affiliate citigroup acquired majority overlay implementation business lmppg including managed account trading technology platform sale produced cash proceeds approximately 181 million certain asset management affiliates maintain various credit facilities general operating purposes see notes 6 7 notes consolidated financial statements additional information certain affiliates also subject capital requirements various regulatory agencies affiliates met respective capital adequacy requirements liquidity fund support fiscal 2009 arrangements provide financial support certain liquidity funds fiscal 2009 purchased subsequently sold reimbursed funds portion losses incurred selling outstanding securities issued sivs held various liquidity funds managed one affiliates majority previously supported arrangements fiscal 2009 also sold canadian conduit securities purchased one liquidity funds fiscal 2008 fiscal 2009 provided additional support liquidity funds related siv securities march 31 2010 support arrangements terminated expired fiscal 2009 paid 29 billion aggregate 30 billion principal amount plus 24 million accrued interest nonbank sponsored siv securities certain liquidity funds previously supported various capital support agreements csas letters credit locs upon purchase securities csas locs terminated accordance terms collateral 20 billion returned included return 13 billion collateral provided fiscal 2009 support new amended csas locs fiscal 2009 30 billion purchased securities sold along 355 million securities previously supported total return swap trs 76 million canadian conduit securities held balance sheet third parties 6273 million net transaction costs trs terminated accordance terms upon sale securities 209 million collateral returned fiscal 2009 also paid 1812 million reimburse two funds portion losses incurred selling siv securities fiscal 2010 four remaining csas provide 42 million support two liquidity funds terminated expired accordance terms amounts drawn thereunder 42 million collateral returned future outlook expect next 12 months operating activities adequate support operating cash needs addition ordinary operating cash needs described anticipate cash needs next 12 months connection announced plan streamline business model expect incur transitionrelated costs range 115 million 135 million march 2012 approximately 15 noncash charges fiscal 2011 544 million costs accrued substantially remaining costs accrued fiscal 2012 significant portion accrued costs paid fiscal 2012 project initiative result annual cost savings approximately 130 million 150 million excluding costs achieve savings expect achieve savings run rate basis fourth quarter fiscal 2012 see note 16 notes consolidated financial statements information regarding transitionrelated costs recorded fiscal 2011 currently intend utilize available resources number potential activities including seed capital investments new products repurchase shares common stock discussed repayment outstanding debt payment increased dividends acquisitions described currently project available cash flows operating activities sufficient fund iquidity needs also currently approximately 10 billion cash excess working capital requirements portion intend utilize repurchase 400 million common stock end fiscal 2012 subject market conditions performance actual cash flows capital needs repurchases made current board directors authorization repurchase 1 billion common stock announced may 2010 555 million remains unused march 31 2011 accordingly currently expect raise additional debt equity financing next 12 months however assurances expectations projections could prove incorrect unexpected events may occur require additional liquidity acquisition opportunity refinance indebtedness market conditions might significantly worsen affecting results operations generation available cash events resulted operations available cash insufficient fund liquidity needs would likely seek manage available resources taking actions reducing future share repurchases additional costcutting reducing expected expenditures investments selling assets investment securities repatriating earnings foreign affiliates modifying arrangements affiliates andor employees types actions prove insufficient large acquisition refinancing opportunity arise may seek raise additional equity debt credit liquidity risk cash equivalent deposits involve certain credit liquidity risks maintain cash equivalents limited number high quality financial institutions time may concentrations one institutions balances financial institutions credit quality monitored ongoing basis offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations section follows consolidation liquidity fund support discussed critical accounting policies notes 1 18 19 notes consolidated financial statements previously discussed fiscal 2009 various offbalance sheet arrangements provide support certain liquidity funds arrangements terminated expired prior march 31 2010 included letters credit capital support agreements trs january 2008 entered hedge warrant transactions convertible notes certain financial institution counterparties increase effective conversion price convertible senior notes see note 6 notes consolidated financial statements contractual contingent obligations contractual obligations make future payments principally connection longterm debt noncancelable lease agreements see notes 6 7 9 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual obligations millions fiscal year 1represents borrowing revolving line credit expire february 2013 however may elect repay debt sooner management elects utilize portion available cash purpose 2excludes longterm borrowings consolidated clo 2783 million interest longterm borrowings applicable amount thereafter contractually due fiscal 2022 subject potential remarketing described note 7 notes consolidated financial statements 3interest floating rate shortterm debt based rates march 31 2011 4in connection restructuring plans longer intend exercise putpurchase option land building treated capital lease remaining rental commitment facility included minimum rental service commitments 5the table include approximately 234 million capital commitments investment partnerships legg mason limited partner obligations funded required end commitment periods fiscal 2018 6the table include amounts uncertain tax positions 602 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated 7the table include amounts related business streamlining initiatives market risk company maintains enterprise risk management program oversee coordinate risk management activities legg mason subsidiaries program certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income majority revenue calculated market value aum accordingly decline value securities cause aum decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts ordinary course business may also reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets performance fees may earned certain investment advisory contracts exceeding performance benchmarks declines market values aum result reduced fee revenues net income generally earn higher fees equity assets fees charged fixed income liquidity assets declines market values aum asset class disproportionately impact revenues addition revenue sharing agreements certain affiliates retain different percentages revenues cover costs including compensation net income profit margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary trading nontrading assets trading nontrading assets comprised investment securities including seed capital sponsored mutual funds products limited partnerships limited liability companies certain investment products trading current investments excluding civs march 31 2011 2010 subject risk security price fluctuations summarized thousands approximately 960 million 1498 million trading current investments related longterm incentive compensation plans march 31 2011 2010 respectively offsetting liabilities fluctuation market value assets related liabilities material effect net income liquidity however impact compensation expense corresponding offset nonoperating income expense trading current investments 726 million 173 million march 31 2011 2010 respectively relate longterm incentive plans related liabilities completely offset due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income net income approximately 2319 million 1677 million trading current investments march 31 2011 2010 respectively investments proprietary fund products investments fluctuations market value impact nonoperating income amounts fluctuations market value approximately 309 million 330 million proprietary fund products march 31 2011 2010 respectively offsetting compensation expense revenue share agreements fluctuations market value approximately 398 193 million proprietary fund products march 31 2011 2010 respectively substantially offset gains losses market hedges therefore materially impact net income attributable legg mason inc investments proprietary fund products liquidated related fund establishes track record investors decision made longer pursue strategy nontrading assets excluding civs march 31 2011 2010 subject risk security price fluctuations summarized thousands equity method investments partnerships llcs march 31 2011 2010 includes approximately 919 million 557 million respectively investments related involvement us treasurys public private investment program ppip investment securities civs totaled 828 million 372 million march 31 2011 2010 respectively investments civs totaled 3128 million 137 million march 31 2011 2010 respectively march 31 2011 2010 held equity investments civs 537 million 619 million respectively fluctuations market value investments civs excess equity investment impact net income attributable legg mason inc however may impact nonoperating income expense civs corresponding offset net income loss attributable noncontrolling interests valuation trading nontrading investments described within critical accounting policies heading valuation financial instruments see notes 1 15 notes consolidated financial statements discussion derivatives following summary effect 20 increase decrease market values financial instruments subject market valuation risks march 31 2011 1gains losses related certain investments deferred compensation plans proprietary fund products directly offset corresponding adjustment compensation expense related liability addition investments proprietary fund products approximately 398 million hedged limit market risk result 20 increase decrease unrealized market value financial instruments subject market valuation risks would result 703 million increase decrease pretax earnings march 31 2011 foreign exchange sensitivity operate primarily united states provide services earn revenues incur expenses outside united states accordingly fluctuations foreign exchange rates currencies principally brazil japan united kingdom singapore australia may impact comprehensive income net income certain affiliates entered forward contracts manage impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect net income liquidity interest rate risk exposure interest rate changes outstanding debt mitigated substantial portion debt fixed interest rates march 31 2011 2010 approximately 2500 million 2536 million respectively outstanding floating rate debt subject fluctuations interest rates impact nonoperating income net income march 31 2011 estimate 1 change interest rates would result net annual change interest expense 25 million see notes 6 7 notes consolidated financial statements additional disclosures regarding debt critical accounting policies estimates accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following critical accounting policies involve significant estimates judgments consolidation effective april 1 2010 adopted new accounting guidance accounting standards codification asc topic 810 consolidation statement financial accounting standards 167 amendments financial accounting standards board interpretation 46r sfas 167 relating consolidation variable interest entities vies includes new approach determining consolidate vie changes necessary reassess consolidate vie changes assessment entities vies application new accounting guidance deferred certain investment funds including money market funds investment funds qualify deferral continue assessed consolidation prior guidance financial accounting standards board interpretation 46r consolidation variable interest entities interpretation arb 51 fin 46r normal course business sponsor manager various types investment vehicles certain investment vehicles considered vies others considered voting rights entities vres subject traditional consolidation concepts based ownership rights services entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees vies material march 31 2011 issued investment performance guarantees vies vres investors investment vehicles considered vres consolidated controlling financial interest investment vehicle fin 46r sponsored investment funds including money market funds qualify deferral new accounting guidance determine whether primary beneficiary vie absorb majority vies expected losses receive majority vies expected residual returns determination expected residual returns excludes gross fees paid decision maker unlikely primary beneficiary vies created manage assets clients qualify deferral unless ownership interest including interests related parties substantial unless may earn significant performance fees vie unless considered material implied variable interest vie determining whether primary beneficiary vie qualifies deferral consider qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid us related party ownership guarantees implied relationships determining primary beneficiary must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks determining whether vie significant disclosure purposes consider factors used determination primary beneficiary sfas 167 sponsor manager collateralized debt obligation entities cdos clos qualify deferral assessed new accounting guidance follows determine whether variable interest vie considering among things obligation absorb losses right receive benefits expected significant vie consider management fee structure including seniority level fees current expected economic performance entity well provisions included governing documents might restrict guarantee expected loss residual return significant variable interest determine whether primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits could potentially significant vie evaluating whether obligation absorb losses right receive benefits could potentially significant vie consider factors regarding design terms characteristics investment vehicles including following qualitative factors involvement investment vehicle beyond providing management services hold equity debt interests investment vehicle transferred assets investment vehicle potential aggregate fees future periods insignificant relative potential cash flows investment vehicle variability expected fees relation potential cash flows investment vehicle insignificant new accounting guidance prior guidance legg mason must consolidate vies deemed primary beneficiary see note 18 notes consolidated financial statements additional discussion civs vies revenue recognition vast majority revenues calculated percentage fair value aum underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager brokerdealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost designed approximate fair value vast majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs management fees aum fair values based unobservable inputs material march 31 2011 equity fixed income liquidity aum values aggregated 1896 billion 3566 billion 1314 billion respectively vast majority aum valued independent pricing services based upon observable market prices inputs believe market risk significant risk underlying valuation aum economic events financial market turmoil increased market price volatility however valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2011 less 1 total aum valued based unobservable inputs valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except legg masons longterm debt trading investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income comprehensive income depending underlying purpose instrument equity investments control investee primary beneficiary variable interest entity exert significant influence financial operating policies investee follow equity method accounting evaluation whether exert control significant influence financial operational policies investees requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence may governing board investee legal rights investors entity pursuant funds operating documents relationship us investors entity substantially equity method investees investment companies record underlying investments fair value therefore equity method accounting share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense investments value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices evaluate nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined fiscal 2009 place various credit support arrangements certain liquidity funds managed subsidiary qualified derivative transactions fair values derivative instruments based managements estimates expected outcomes derived pricing data underlying securities andor detailed collateral analyses fiscal 2009 purchased subsequently sold supported securities issued sivs held liquidity funds effectively eliminating exposure sivs various support arrangements terminated accordance terms upon purchase march 31 2009 four capital support arrangements supported investments nonasset backed securities remained outstanding fiscal 2010 four remaining capital support arrangements terminated expired accordance terms previously recorded unrealized losses 206 million recovered none derivative transactions designated hedge accounting defined accounting guidance derivative instruments hedging activities related gains losses included fund support consolidated statement operations fiscal 2010 2009 investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2011 2010 excluding investments civs owned approximately 238 million 360 million respectively financial investments valued assumptions estimates unobservable inputs march 31 2011 2010 also approximately 1775 million 1232 million respectively investments investment partnerships included noncurrent assets consolidated balance sheets approximately 1554 million 1002 million respectively accounted equity method remainder accounted cost method addition march 31 2011 2010 763 million 743 million respectively equity method investments included investment securities consolidated balance sheets accounting guidance fair value measurements disclosures defines fair value establishes framework measuring fair value accounting guidance defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance accounting guidance fair value measurements establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category may include repurchase agreements fixed income securities certain proprietary fund products category also includes clo loans liabilities civ level 3 financial instruments values based unobservable inputs including little market activity category includes derivative assets liabilities related investments partnerships limited liability companies private equity funds previously category included derivative assets related fund support agreements certain owned securities issued sivs category may also include certain proprietary fund products redemption restrictions clo debt civ valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products certain investments held civs valued nav determined fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 fair values clo loans bonds determined based prices wellrecognized thirdparty pricing services utilize available market data therefore classified level 2 legg mason established controls designed assess reasonableness prices provided fair value clo debt valued using discounted cash flow methodology inputs used determine expected cash flows include assumptions forecasted default recovery rates market participant would use determining fair value clos underlying collateral assets given significance unobservable inputs fair value measurement clo debt valuation classified level 3 exchange traded options valued using last sale price absence sale last offering price options traded counter valued using dealer supplied valuations options classified level 1 futures contracts valued last settlement price end day exchange upon traded classified level 1 index single name credit default swaps interest rate swaps valued based valuations furnished pricing services classified level 2 practical expedient rely navs certain investments fair value navs provided investees derived fair values underlying investments reporting date march 31 2011 approximately 3 total assets 13 financial assets measured fair value 10 total liabilities meet definition level 3 excluding assets liabilities civs approximately 2 total assets 13 financial assets measured fair value liabilities meet definition level 3 transfers categories measured beginning period see note 3 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2011 follows identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weightedaverage cost capital takes consideration premium representing degree risk inherent asset fully described indefinitelife intangible assets goodwill project impact net client flows market appreciationdepreciation cash flows nearterm generally first five years based yearbyyear assessment considers current market conditions past experience relevant publicly available statistics projections internal budgets discussions market experts beyond five years projections net client flows market performance migrate towards relevant longterm rates line results industry growth statistics believe growth assumptions reasonable given consideration multiple inputs including internal external sources described however continues uncertainty markets assumptions subject change based fluctuations actual results market conditions goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events triggering event occurred perform tests include critical reviews significant assumptions determine intangible assets goodwill impaired minimum perform tests indefinitelife intangible assets goodwill annually december 31 completed annual impairment tests goodwill indefinitelife intangible assets december 31 2010 determined impairment value assets december 31 2010 impairment value amortizable intangible assets recognized year ended march 31 2011 estimates related future cash flows exceeded asset carrying values also determined triggering events occurred march 31 2011 therefore additional indefinitelife intangible asset goodwill impairment testing necessary amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates amortization periods appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows estimated useful lives amortizable intangible assets currently range 1 7 years weightedaverage life approximately 36 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined market participants perspective based projected discounted cash flows two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names determine fair value intangible assets based upon discounted projected cash flows take consideration estimates profit margins growth rates discount rates asset determined impaired current implied fair value less recorded carrying value asset impaired difference current implied fair value carrying value asset reflected financial statements recognized expense period impairment determined temporary projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth estimated net client flows projected market performance contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows domestic mutual fund contracts acquired citigroup asset management cam acquisition 2502 million permal fundsofhedge funds contracts 947 million account approximately 65 25 respectively indefinitelife intangible assets december 31 2010 annual impairment test cash flows domestic mutual fund contracts assumed annual growth rates average approximately 8 cash flows permal contracts assumed annual growth rates average approximately 9 projected cash flows domestic mutual fund permal funds discounted 132 145 respectively assuming factors remain actual results changes assumptions domestic mutual fund permal fundofhedge funds contracts would cause cash flow projections longterm deviate 20 25 respectively previous projections discount rate would raised 150 170 respectively asset deemed impaired approximate fair values assets exceed carrying values 628 million 321 million respectively trade names account 2 indefinitelife intangible assets primarily related permal tested intangible assets using assumptions similar described indefinitelife contracts goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows similar techniques employed analyzing purchase price acquisition target defined reporting units americas international divisions operating segments allocations goodwill divisions changes management structure acquisitions dispositions based relative fair values businesses added sold divisions see note 17 notes consolidated financial statements additional information related business segments significant assumptions used assessing implied fair value reporting unit discounted cash flow method include projected cash flows generated reporting unit including profit margins expected cash flow growth rates discount rate used determine present value cash flows cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income liquidity investment manager reporting unit based upon among things historical experience expectations future market performance internal external sources impact net client flows market performance cash flows projected nearterm generally first five years based yearbyyear assessment considers current market conditions experience internal financial projections relevant publicly available statistics projections discussions market experts actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows discount rates based appropriately weighted estimated costs debt capital using market participant perspective estimate cost debt based published debt rates estimate cost capital based capital asset pricing model considers riskfree interest rate market risk size premiums peergroup betas unsystematic risk discount rates also calibrated based assessment relevant market values goodwill americas reporting unit principally originated acquisitions cam royce value reporting unit based projected net cash flows assets managed us mutual funds closed end funds proprietary funds addition separate account assets us managers goodwill international reporting unit principally originated acquisitions permal international cam businesses december 31 2010 annual impairment test projected cash flows discounted 132 140 respectively americas international divisions determine present value cash flows december 31 2010 implied fair values materially exceeded carrying values americas international divisions projected cash flows aggregate basis across asset classes americas division assumed fiveyear average annual growth rate approximately 10 longterm annual growth rate approximately 8 projected cash flows aggregate basis across asset classes international division assumed fiveyear average annual growth rate approximately 8 longterm annual growth rate approximately 9 cash flow growth americas international divisions next five years based separate factors equity fixed income liquidity products equity product growth projections based historical trends context longterm growth experience budgets current market conditions fixed income product growth projections based past experience primary fixed income manager budgets market influences relevant business longterm growth based historical experience available historic market statistics estimates future expectations believe growth assumptions reasonable given consideration multiple inputs including internal external sources described however assumptions subject change based fluctuations actual results market conditions assuming factors remain actual results changes assumptions americas international reporting units would cause cash flow projections reporting units longterm deviate approximately 47 50 respectively previous projections discount rate would increase approximately 59 70 percentage points respectively goodwill considered impairment december 31 2010 considering relevant prices common shares market capitalization along reasonable control premium exceeds aggregate carrying values reporting units december 2010 announced realignment executive management team among things eliminate previous separation americas international divisions one global asset management business fiscal 2012 however march 31 2011 internal management reporting changed result americas international operating segments continued reporting units stockbased compensation stockbased compensation plans include stock options employee stock purchase plans marketbased performance share awards restricted stock awards deferred compensation payable stock compensation plans issue equity awards directors officers key employees accordance applicable accounting guidance compensation expense years ended march 31 2011 2010 2009 includes compensation cost nonvested sharebased awards grant date fair value amortized respective vesting periods straightline method unamortized deferred compensation recognized reduction additional paidin capital also accounting guidance cash flows related income tax deductions excess less stockbased compensation expense classified financing cash flows granted 07 million 15 million 15 million stock options fiscal 2011 2010 2009 respectively additional information sharebased compensation see note 12 notes consolidated financial statements determine fair value option grant using blackscholes optionpricing model except marketbased grants use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate except grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal vesting period options estimate volatility equally weighted historical prices stock period equal expected life option implied volatility market listed options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different income taxes subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes management assesses likelihood able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision substantially deferred tax assets relate us united kingdom uk taxing jurisdictions march 31 2011 us federal deferred tax assets aggregated 683 million realization expected require 46 billion future us earnings approximately 129 million must form foreign sourced income deferred tax assets generated us jurisdictions resulting net operating losses generally expire 20 years generated resulting foreign tax credits generally expire 10 years generated based estimates future taxable income using assumptions consistent used goodwill impairment testing likely current federal tax benefits relating net operating losses realizable valuation allowance necessary time respect resulting foreign tax credits likely tax benefits relating 31 million foreign tax credits realizable valuation allowance established respect thereto march 31 2011 us state deferred tax assets aggregated 222 million due limitations net operating loss capital loss carryforwards taking consideration certain state tax planning strategies valuation allowance established state capital loss net operating loss benefits certain jurisdictions amount 07 million fiscal 2011 due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary march 31 2011 uk deferred tax assets net valuation allowances material additional valuation allowance recorded 30 million foreign deferred tax assets relating various jurisdictions principally relating foreign currency translation adjustments recorded equity extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets tax planning may enhance positions realization current tax benefits dependent significant tax strategies event determine portion deferred tax assets already subject valuation allowance realizable required establish valuation allowance charge income tax provision period determination made depending facts circumstances charge could material earnings calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements forwardlooking statements made report form 10k time may otherwise make public filings press releases statements management forwardlooking statements within meaning private securities litigation reform act 1995 including information relating anticipated growth revenues margins earnings per share anticipated changes business amount client aum anticipated future performance business including expected earnings per share future periods anticipated future investment performance affiliates expected future net client cash flows anticipated expense levels changes expenses expected effects acquisitions expectations regarding financial market conditions words phrases may expects may affect may depend believes estimate project anticipate similar words phrases intended identify forwardlooking statements forwardlooking statements subject various known unknown risks uncertainties caution readers forwardlooking information provided behalf legg mason guarantee future performance actual results may differ materially forwardlooking information result various factors beyond control including limited discussed heading risk factors elsewhere report form 10k public filings press releases statements management due risks uncertainties factors caution person receiving forwardlooking information place undue reliance statements forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events future revenues may fluctuate due numerous factors total value composition aum mix aum among affiliates volatility general level securities prices interest rates relative investment performance companysponsored investment funds asset management products compared competing offerings market indices investor sentiment confidence general economic conditions ability maintain investment management administrative fees current levels competitive conditions business ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred result changes number total employees competitive factors changes percentages revenues paid compensation reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill otherwise support investment products connection litigation regulatory proceedings effects acquisitions dispositions business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risks revenues net income critical accounting policies intangible assets goodwill previously discussed item 7aitem 7 managements discussion analysis financial condition results operations executive overview legg mason inc holding company subsidiaries collectively comprise legg mason global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally united states america us united kingdom uk also offices australia bahamas brazil canada chile china dubai france germany italy japan luxembourg poland singapore spain switzerland taiwan references fiscal 2012 2011 2010 refer fiscal year ended march 31 year terms us company refer legg mason connection realignment executive management team fiscal 2011 longer manage business two divisions fiscal 2012 eliminated previous separation americas international divisions combined one operating segment global asset management believe structure allows us function global organization single purpose result change longer present assets management aum revenues division operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution service fees received distributing investment products services providing support services investment portfolios generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level aum fee rates thus affected factors securities market conditions ability attract maintain aum key investment personnel investment performance aum primarily vary period due inflows outflows client assets well market performance client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services fees charge investment services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions fees charge investment services vary based upon factors type underlying investment product amount assets management asset management affiliate provides services type services investment objectives provided fees charged equity asset management services generally higher fees charged fixed income liquidity asset management services accordingly revenues affected composition aum addition ordinary course business may reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets revenue sharing agreements certain asset management affiliates retain different percentages revenues cover costs including compensation net income attributable legg mason inc operating margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one affiliate dramatically different effect revenues earnings equal change another affiliate addition time may agree changes revenue sharing agreements arrangements asset management personnel may impact compensation expenses profitability significant component cost structure employee compensation benefits majority variable nature includes incentive compensation primarily based upon revenue levels noncompensation related operating expense levels revenue sharebased affiliates profits next largest component cost structure distribution servicing expense primarily fees paid thirdparty distributors selling asset management products services largely variable nature certain operating costs fixed nature occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly united states also countries operate results individual period considered representative future results profitability sensitive variety factors including amount composition aum volatility general level securities prices interest rates among things periods unfavorable market conditions likely affect profitability adversely addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients last years industry seen flows products currently garner significant market share addition economic downturn fiscal years 2008 2009 contributed significant contraction business recovered predownturn levels financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms brokerdealers commercial banks industry impacted continued economic uncertainty prior years consolidation financial services firms mergers acquisitions industry operate also subject extensive regulation federal state foreign laws like firms impacted regulatory legislative changes responding changes required continue require us incur costs continue impact profitability strategy focused three primary areas listed management keeps strategic priorities mind evaluates operating performance financial condition consistent approach also listed important matters management currently focuses evaluating performance financial condition • outstanding independent investment managers • investment performance asset management products services compared benchmarks performance competitive products trailing 1year 3year 5year 10year periods • aum components changes aum amid continued market uncertainty longterm trend outflows aum resulting impact changes aum revenues • corporate center delivers strategic value • promote revenue growth strategic marketing products institutional clients supported retail instividual eg 401k plans distribution globally • management expenses • allocating capital diversified growth returning capital shareholders appropriate • amount excess capital generate deployment capital share repurchases investments proprietary fund products dividends targeted acquisitions following discussion analysis provides additional information regarding financial condition results operations business environment results operations although financial environment globally us continued rebound fiscal 2012 challenging volatile conditions persisted throughout portion fiscal year economic uncertainties related european debt crisis slowed global economy unprecedented downgrade us credit rating august 2011 contributed sharp decline equity markets first half fiscal 2012 spite challenging conditions first half fiscal year economic interventions eased european debt crisis continuing improvement us employment rates consumer confidence resulted equity market increases second half fiscal year offset earlier market declines fiscal 2012 federal reserve board held federal funds rate 025 lowest history economic outlook positive recent years financial environment operate continues challenging move fiscal 2013 three major us equity market indices well barclays capital us aggregate bond index barclays capital global aggregate bond index increased significantly past two fiscal years illustrated table 1 indices trademarks dow jones company mcgrawhill companies inc nasdaq stock market inc barclays capital respectively affiliated legg mason following table sets forth periods indicated amounts consolidated statements income percentage operating revenues increase decrease item percentage amount previous period nmnot meaningful 1 calculated based change actual amounts fiscal years percentage prior year amount fiscal 2012 compared fiscal 2011 financial overview net income attributable legg mason inc year ended march 31 2012 totaled 2208 million 154 per diluted share compared 2539 million 163 per diluted share prior year decrease net income primarily due increase incentive compensation changes expense reimbursement arrangement western asset management company western asset impact net market losses proprietary fund products assets invested deferred compensation plans offset compensation benefits net impact decreased operating revenues decreases offset part impact cost savings due business streamlining initiative impact tax benefits associated restructuring foreign subsidiary uk tax rate changes items discussed results operations adjusted income see supplemental nongaap financial information decreased 3970 million 277 per diluted share year ended march 31 2012 4392 million 283 per diluted share prior year primarily due decrease net income previously discussed excluding impact uk tax rate adjustments operating margin decreased 127 139 prior year operating margin adjusted see supplemental nongaap financial information years ended march 31 2012 2011 213 232 respectively assets management components changes aum billions years ended march 31 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 includes impact foreign exchange reinvestment dividends aum march 31 2012 6433 billion decrease 343 billion 5 march 31 2011 decrease aum attributable net client outflows 275 billion dispositions 239 billion partially offset market performance 171 billion including negative impact foreign currency exchange fluctuations majority dispositions liquidity assets 199 billion resulted amendment historical smith barney brokerage programs discussed also 40 billion dispositions divestiture two small affiliates longterm asset classes accounted net client outflows 213 billion 186 billion equity fixed income outflows respectively partially offset liquidity inflows 124 billion equity outflows primarily experienced products managed legg mason capital management inc lmcm clearbridge advisors llc clearbridge batterymarch financial management inc “batterymarch” royce associates “royce” due part investment performance issues experienced net annual outflows equity asset class since fiscal 2007 majority fixed income outflows products managed western asset including 127 billion outflows single low fee global sovereign mandate expect continue experience outflows mandate approximately 1 billion per month fiscal 2013 exception june 2011 quarter experienced outflows fixed income asset class since fiscal 2008 generally earn higher fees profits equity aum outflows asset class negatively impact revenues net income would outflows asset classes first quarter fiscal 2012 morgan stanley smith barney mssb amended certain historical smith barney brokerage programs providing investment liquidity funds asset managers manage resulted reduction 199 billion liquidity aum year ended march 31 2012 significant portion management fees generated assets waived prior disposition liquidity aum resulted reduction operating revenue 523 million net related fee waivers year ended march 31 2012 compared year ended march 31 2011 disposition aum also resulted reductions distribution servicing expenses 414 million year ended march 31 2012 compared year ended march 31 2011 expect amendments result additional 6 billion liquidity assets transferred next four months investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds manage may redeem investments funds time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients thirdparty distributors relationships loss key investment management personnel financial market performance aum asset class aum asset class billions march 31 follows component changes aum asset class billions fiscal year ended march 31 2012 follows average aum asset class billions year ended march 31 follows investment performance1 overall investment performance assets management year ended march 31 2012 generally positive compared relevant benchmarks equity markets ended difficult year positive note responding favorably improving unemployment figures conclusion bank stress tests resulting certain banks increasing dividends reduced fears european debt fallout result us indices produced positive returns full fiscal year notable nasdaq composite returning 112 year ended march 31 2012 fixed income markets improved economic data suggested recovery strengthening flightstosafety ebbed european debt crisis eased allowing us treasury rates climb historically low levels yield curve steepened year economic releases federal reserve board painted increasingly optimistic picture talk third round quantitative easing diminished worst performing fixed income sector year high yield bonds measured barclays high yield index returning 65 best performing fixed income sector year treasury inflation protected securities tips measured barclays us tips index returning 122 march 31 2012 following table presents summary percentage marketed composite assets2 outpaced benchmarks march 31 2012 2011 trailing 1year 3year 5year 10year periods following table presents summary percentage us mutual fund assets3 outpaced lipper category averages march 31 2012 2011 trailing 1year 3year 5year 10year periods 1 index performance section includes reinvestment dividends capital gains 2 composite aggregation discretionary portfolios separate accounts investment funds single group represents particular investment objective strategy asset managers specific guidelines including portfolios marketed composites assets management managed accordance guidelines included composite march 31 2012 2011 91 89 equity assets management 88 89 fixed income assets management respectively marketed composites 3 source lipper inc includes openend closedend variable annuity funds march 31 2012 2011 us longterm mutual fund assets represented data accounted 18 17 respectively total assets management performance us longterm mutual fund assets included marketed composites business model streamlining initiative may 2010 announced initiative streamline business model drive increased profitability growth primarily involved transitioning certain shared services investment affiliates closer actual client relationships initiative resulted 140 million cost savings fully realized annual basis beginning fiscal 2013 cost savings consist 80 million compensation benefits cost reductions eliminating positions certain corporate shared services functions result transitioning functions affiliates charging affiliates centralized services continue provided without corresponding adjustment revenue sharing compensation arrangements ii approximately 50 million noncompensation costs eliminating streamlining activities corporate distribution business units including savings associated consolidating office space iii approximately 10 million global distribution group sharing affiliate revenues retail assets management without corresponding adjustment revenue sharing compensation arrangements initiative involved 1275 million transitionrelated costs primarily included charges employee termination benefits incentives retain employees transition period transitionrelated costs also included charges consolidating leased office space early contract terminations accelerated depreciation fixed assets asset disposals professional fees years ended march 31 2012 2011 transitionrelated costs totaled 731 million 544 million respectively transitionrelated costs accrued march 31 2012 significant events fiscal 2012 related initiative included transition shared services affiliates well reductionsinforce made three phases year ended march 31 2012 achieved total estimated transitionrelated savings approximately 97 million expect total annual savings approximately 140 million beginning fiscal 2013 compared similar expenses prior commencement streamlining initiative majority estimated transitionrelated savings first achieved fiscal 2012 noted applicable results operations discussion follow see note 16 notes consolidated financial statements additional information business streamlining initiative results operations accordance financial accounting standards consolidation consolidate separately identify certain sponsored investment vehicles significant collateralized loan obligation entity clo consolidation investment vehicles impact net income attributable legg mason inc material impact consolidated operating results also hold investments certain consolidated sponsored investment funds change value investments recorded nonoperating income expense reflected net income net amounts allocated noncontrolling interests impact consolidation investment vehicles presented consolidated statements income excluding consolidated investment vehicles see supplemental nongaap financial information also see notes 1 18 notes consolidated financial statements additional information regarding consolidation investment vehicles operating revenues total operating revenues year ended march 31 2012 27 billion decrease 44 28 billion prior year primarily due 4 decrease average aum 472 million decrease performance fees decrease offset part increase average aum revenue yields 344 basis points year ended march 31 2011 352 basis points year ended march 31 2012 resulting favorable average asset mix previously discussed disposition liquidity aum related mssb relationship resulted reduction operating revenues 523 million net related fee waivers fiscal 2012 compared fiscal 2011 significant portion management fees generated assets waived prior disposition investment advisory fees separate accounts decreased 401 million 49 7755 million decrease 259 million primarily result lower average equity assets managed lmcm batterymarch clearbridge legg mason investment counsel trust company lmic 80 million primarily due divestiture singaporebased asset manager fiscal 2011 decreases offset part increase 67 million due higher average fixed income assets managed brandywine global management llc brandywine investment advisory fees funds remained essentially flat 15 billion periods higher average equity assets managed royce clearbridge higher average fixed income assets primarily managed western asset resulted increase 413 million 411 million respectively increases offset decrease 513 million net related fee waivers due lower average liquidity assets managed western asset primarily result previously discussed disposition liquidity aum related mssb relationship well 315 million decrease result lower average equity assets managed lmcm permal group ltd permal performance fees decreased 488 472 million 495 million year ended march 31 2012 primarily result lower fees earned assets managed permal western asset offset slightly increase performance fees earned assets managed brandywine distribution service fees decreased 382 million 101 3410 million primarily due disposition liquidity aum related mssb relationship well decline average mutual fund aum subject distribution service fees operating expenses total compensation benefits decreased 410 million 11 billion transitionrelated compensation decreased 104 million 346 million represents accruals severance retention costs related business streamlining initiative compensation benefits excluding transitionrelated compensation decreased 306 million 27 11 billion primarily driven 498 million decrease corporate compensation primarily due headcount reductions resulting business streamlining initiative well 432 million net decrease compensation revenue sharebased affiliates additionally decrease deferred compensation revenue sharebased incentive obligations 225 million primarily resulting reduced gains assets invested deferred compensation plans seed capital investments offset corresponding decreases nonoperating income expense decreases offset part increase incentives changes expense reimbursement arrangement western asset including increase noncash amortization expense associated certain related deferred compensation awards totaling 718 million well additional costs approximately 205 million associated marketbased compensation increases among retained staff new employees primarily global distribution group support ongoing growth initiatives compensation percentage operating revenues increased 430 426 prior fiscal year primarily due impact change expense reimbursement arrangement western asset marketbased compensation increases among retained staff new employees discussed increases offset part impact lower corporate compensation costs primarily attributable business streamlining initiative impact compensation decreases related reduced market gains assets invested deferred compensation plans seed capital investments decrease transitionrelated compensation distribution servicing expenses decreased 89 6497 million principally driven 414 million decrease due previously discussed disposition liquidity aum related mssb relationship well 69 million decrease servicing expenses result business streamlining initiative 58 million decline structuring fees related closedend fund launches also contributed decrease communications technology expense increased 17 1647 million driven increases principally data processing costs market data costs consulting fees totaling 122 million primarily due transitionrelated costs incurred result business streamlining initiative increases offset part 93 million cost savings result streamlining changes including reduced depreciation technology hardware software consulting fees occupancy expense increased 123 1548 million primarily due 147 million net increase lease reserves recorded fiscal 2012 primarily related permanently abandoning certain office space part business streamlining initiative addition 103 million increase result acceleration depreciation related space permanently abandoned fiscal 2012 also related business streamlining initiative increases offset part impact writeoff 41 million real estate escrow deposit prior year 33 million reduction depreciation furniture leasehold improvements resulting business streamlining initiative amortization intangibles decreased 146 196 million primarily due full amortization certain management contracts fiscal 2012 expenses increased 141 million 80 1907 million primarily result increase expense reimbursements paid certain mutual funds current year expense cap arrangements nonoperating income expense interest income increased 242 115 million driven higher yields earned investment balances interest expense decreased 50 876 million primarily result retirement equity units fiscal 2012 reduced interest expense 41 million nonoperating income decreased 375 million 221 million primarily result 560 million net market losses investments proprietary fund products partially offset corresponding compensation decreases discussed 118 million due reduced gains assets invested deferred compensation plans substantially offset corresponding compensation decreases described decreases offset part 113 million increase dividend income partially offset corresponding compensation increase revenuesharing agreements gain 86 million related assigned bankruptcy claim gain 75 million sale small affiliate nonoperating income consolidated investment vehicles civs increased 166 million 183 million due net market gains investments certain civs income tax provision income taxes 721 million compared 1194 million prior year fiscal 2012 uk finance act 2011 act enacted act reduced main uk corporate income tax rate 27 26 effective april 1 2011 25 effective april 1 2012 impact tax rate changes revaluation certain existing deferred tax liabilities resulted tax benefit 183 million current year prior year also included similar tax benefit 89 million revaluation deferred tax liabilities addition restructuring australian business partially offset adjustments net value certain deferred tax assets resulted net tax benefit 101 million current year effective tax rate 238 compared 327 prior year changes uk tax rate impacted effective tax rate 60 25 percentage points years ended march 31 2012 2011 respectively addition restructuring australian business partially offset adjustments net value certain deferred tax assets impacted effective tax rate 33 percentage points current year supplemental nongaap financial information supplemental information providing performance measures based methodologies generally accepted accounting principles “nongaap” “consolidated statements income excluding consolidated investment vehicles” adjusted income operating margin adjusted management uses benchmarks evaluating comparing periodtoperiod operating performance consolidated statements income excluding consolidated investment vehicles accordance financial accounting standards consolidation consolidate separately identify certain sponsored investment vehicles significant clo presenting consolidated statements income excluding consolidated investment vehicles add back investment advisory distribution servicing fees eliminated upon consolidation investment vehicles exclude operating expenses impact nonoperating income expense noncontrolling interests civs believe important provide consolidated statements income excluding consolidated investment vehicles present underlying economic performance core asset management operations include results investment funds manage may equity invested deconsolidating civs consolidated statements income investment advisory distribution fees earn civs added back reflect actual revenues similarly operating expenses impact nonoperating income expense noncontrolling interests civs removed gaap basis consolidated statements income since activity actually belong us deconsolidation investment vehicles impact net income attributable legg mason inc period presented consolidated statements income excluding consolidated investment vehicles presented addition gaap basis consolidated statements income substitutes gaap basis consolidated statements income may comparable consolidated statements income presented nongaap basis companies following table presents reconciliation consolidated statements income presented gaap basis consolidated statements income excluding consolidated investment vehicles years ended march 31 2012 2011 thousands adjusted income define adjusted income net income attributable legg mason inc plus amortization deferred taxes related intangible assets goodwill imputed interest tax benefits contingent convertible debt less deferred income taxes goodwill indefinitelife intangible asset impairment also adjust noncore items reflective economic performance impact tax rate adjustments certain deferred tax liabilities related indefinitelife intangible assets net money market fund support losses gains believe adjusted income provides useful representation operating performance adjusted noncash acquisition related items facilitate comparison results asset management firms issued contingent convertible debt made significant acquisitions engaged money market fund support transactions also believe adjusted income important metric estimating value asset management business adjusted income considers adjustments certain items relate operating performance comparability therefore readily reconcilable net income attributable legg mason inc determined gaap measure provided addition net income attributable legg mason inc substitute net income attributable legg mason inc may comparable nongaap performance measures including measures adjusted earnings adjusted income companies adjusted income liquidity measure used place cash flow measures determined gaap consider adjusted income useful investors important metric measuring economic performance asset management companies indicator value facilitates comparison operating results asset management firms issued contingent convertible debt engaged significant acquisitions engaged money market fund support transactions calculating adjusted income add impact amortization intangible assets acquisitions management contracts net income attributable legg mason inc reflect fact noncash expenses distort comparisons operating results asset management firms engaged significant acquisitions deferred taxes indefinitelife intangible assets goodwill include actual tax benefits amortization deductions realized gaap absent impairment charge disposition related business fully expect realize economic benefit current period tax amortization add benefit net income attributable legg mason inc calculation adjusted income however net operating loss carryforward receive benefit current tax amortization time conversely subtract noncash income tax benefits goodwill indefinitelife intangible asset impairment charges united kingdom tax rate adjustments excess book basis certain acquired indefinitelife intangible assets applicable recognized gaap also add back imputed interest contingent convertible debt noncash expense well actual tax benefits related contingent convertible debt realized gaap also add subtract noncore items net money market fund support losses gains net losses sale underlying structured investment vehicle siv securities applicable adjustments reflect items distort comparisons operating results prior periods results asset management firms engaged money market fund support transactions significant acquisitions including related impairments disposition impairment charge noncore item occur impact adjusted income may distort actual changes operating performance value firm also realized losses money market fund support transactions reflective changes operating performance value firm accordingly monitor items related impact including taxes adjusted income ensure appropriate adjustments explanations accompany disclosures although depreciation amortization fixed assets noncash expenses add charges calculating adjusted income charges related assets ultimately require replacement reconciliation net income attributable legg mason inc adjusted income thousands except per share amounts follows operating margin adjusted calculate operating margin adjusted dividing operating income adjusted exclude impact compensation expense gains losses investments made fund deferred compensation plans impact compensation expense gains losses seed capital investments affiliates revenue sharing agreements transitionrelated costs streamlining business model income loss civs impairment charges ii operating revenues adjusted add back net investment advisory fees eliminated upon consolidation investment vehicles less distribution servicing expenses use approximate measure revenues passed third parties refer operating revenues adjusted compensation items transitionrelated costs removed operating income calculation offset equal amount nonoperating income expense thus impact net income attributable legg mason inc transitionrelated costs income loss civs removed operating income calculation items reflective core asset management operations use operating revenues adjusted calculation show operating margin without distribution servicing expenses use approximate distribution revenues passed third parties direct cost selling products although distribution servicing expenses may include commissions paid connection launching closedend funds corresponding revenue period operating revenues adjusted also include advisory revenues receive civs eliminated consolidation gaap believe operating margin adjusted useful measure performance provides measure core business activities excluding items impact net income attributable legg mason inc indicates operating margin would without distribution revenues passed third parties direct cost selling products transitionrelated costs impact consolidation certain investment vehicles described consolidation investment vehicles impact net income attributable legg mason inc measure provided addition operating margin calculated gaap substitute calculations margins gaap may comparable nongaap performance measures including measures adjusted margins companies calculation operating margin operating margin adjusted follows dollars thousands fiscal 2011 compared fiscal 2010 financial overview net income attributable legg mason inc year ended march 31 2011 totaled 2539 million 163 per diluted share compared 2044 million 132 per diluted share prior year increase net income primarily due net impact increased operating revenues reflecting favorable asset mix increased performance fees reduced interest expense change uk tax rate increases offset part impact transitionrelated compensation impact gains fund support recognized prior year increase costs associated closedend fund launches items discussed results operations adjusted income see supplemental nongaap financial information 4392 million 283 per diluted share compared 3813 million 245 per diluted share prior year increase primarily due increase net income previously discussed excluding impact current year uk tax rate change fund support gains prior year operating margin increased 139 122 prior year operating margin adjusted see supplemental nongaap financial information increased 232 207 prior year assets management components changes aum billions years ended march 31 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 includes impact foreign exchange reinvestment dividends aum march 31 2011 678 billion decrease 7 billion 1 march 31 2010 decrease aum attributable net client outflows 61 billion partially offset market appreciation 56 billion approximately 17 resulted impact foreign currency exchange fluctuation dispositions 2 billion relating sale singaporebased asian equity manager majority outflows fixed income 37 billion 61 outflows followed liquidity outflows equity outflows 16 billion 8 billion respectively majority fixed income outflows products managed western asset equity outflows primarily experienced products managed clearbridge lmcm permal royce net inflows aum asset class aum asset class billions march 31 follows component changes aum asset class billions fiscal year ended march 31 2011 follows average aum asset class billions year ended march 31 follows investment performance1 investment performance assets management year ended march 31 2011 mixed compared relevant benchmarks prior year equity markets worked difficult year political upheaval middle east late fiscal year driving significant increase oil prices earthquake japan subsequent nuclear crisis raising questions future nuclear power industry despite global concerns us indices produced positive returns full fiscal year driven corporate earnings growth resulting increases dividends share buybacks mergers acquisitions activity fixed income markets relatively strong economic data combined continued accommodative monetary fiscal policy continued alleviate fears doubledip recession caused us treasury yields rise across yield curve yield curve slightly flattened year federal reserve kept funds rate 025 reiterated rates would kept low extended period worst performing fixed income sector year government bonds measured barclays us government bond index returning 428 contrast high yield bonds measured barclays high yield bond index returned 1431 followed us tips measured barclays us tips index returned 791 year following table presents summary percentage marketed composite assets2 outpaced benchmarks march 31 2011 2010 trailing 1year 3year 5year 10year periods following table presents summary percentage us mutual fund assets3 outpaced lipper category march 31 2011 2010 trailing 1year 3year 5year 10year periods 1 index performance section includes reinvestment dividends capital gains 2 march 31 2011 2010 89 87 equity assets management respectively period 89 82 fixed income assets management respectively marketed composites 3 source lipper inc includes openend closedend variable annuity funds march 31 2011 2010 us longterm mutual fund assets represented data accounted 17 16 respectively total assets management performance us longterm mutual fund assets included marketed composites results operations operating revenues total operating revenues year ended march 31 2011 28 billion increase 6 26 billion prior year despite 1 decrease average aum reflecting increased revenue yields due favorable asset mix higher performance fees increases offset part increase fee waivers certain liquidity funds order maintain certain yields investors investment advisory fees separate accounts relatively flat 8156 million decrease 254 million resulting lower average fixed income assets western asset offset 186 million increase due higher average equity assets managed batterymarch royce 51 million increase due higher average fixed income assets managed brandywine 22 million increase due subordinate fees received certain clos managed western asset investment advisory fees funds increased 1193 million 9 15 billion increase 1115 million result higher average equity assets managed royce permal clearbridge 844 million result higher average fixed income assets managed western asset increases offset part 457 million decrease due lower average liquidity assets managed western asset 360 million decrease result fee waivers liquidity funds managed western asset primarily maintain certain yields investors performance fees increased 35 252 million 967 million fiscal 2011 driven fees earned assets managed western asset permal brandywine distribution service fees increased 1 3792 million primarily result increase average mutual fund aum subject distribution servicing fees offset part impact increased fee waivers related liquidity funds managed western asset operating expenses total compensation benefits increased 741 million 12 billion compensation benefits excluding transitionrelated compensation 450 million represents severance retention incentive costs increased 290 million 3 11 billion increase driven 686 million increase revenue sharebased compensation resulting higher revenues reduction operating expenses revenue sharebased affiliates fiscal 2011 75 million increase incentive compensation nonrevenue sharebased affiliates administrative sales personnel increases offset part 457 million reduction deferred compensation obligations due impact reduced market gains assets invested deferred compensation plans recorded nonoperating income expense well 61 million reduction deferred compensation expense nonrevenue sharebased affiliates impact reduced headcount primarily related business streamlining initiatives also reduced compensation benefits 60 million compensation percentage operating revenues increased 426 422 prior fiscal year primarily due impact increased revenues revenue sharebased affiliates retain higher percentage revenues compensation transitionrelated compensation increases substantially offset impact compensation decreases related reduced market gains assets invested deferred compensation plans seed capital investments impact lower corporate compensation increased revenues distribution servicing expenses increased 3 7128 million primarily result increase average aum certain products pay fees thirdparty distributors increase 145 million structuring fees related closed end fund launches offset part impact liquidity fund fee waivers reduce amounts paid distributors communications technology expense decreased 1 1620 million 92 million resulted full depreciation certain assets prior fiscal 2011 offset part 66 million increase technology consulting outsourcing fees primarily related business streamlining initiatives occupancy expense decreased 12 1379 million primarily due impact 193 million charge prior year result subleasing space corporate headquarters fiscal 2010 amortization intangibles remained relatively flat 229 million expenses increased 89 million 1766 million primarily result 103 million increase travel entertainment advertising costs 56 million increase state franchise taxes 42 million increase professional fees 54 million increase charges related trading errors expense reimbursements paid certain mutual funds increases offset part impact 190 million investor settlement prior year nonoperating income expense interest income increased 26 92 million driven higher average interest rates offset part 09 million decrease due lower average investment balances interest expense decreased 27 922 million primarily result exchange equity units august 2009 repayment 550 million outstanding term loan balance january 2010 reduced interest expense 148 million 122 million respectively march 31 2010 fund support arrangements expired terminated accordance terms fund support gains 232 million prior year gains primarily represent reversal unrealized noncash losses recorded fiscal 2009 liquidity fund support arrangements offshore funds nonoperating income expense decreased 273 million primarily result 467 million reduction unrealized market gains assets invested deferred compensation plans substantially offset corresponding compensation decreases discussed 43 million reduction unrealized market gains investments proprietary fund products decreases offset part impact 220 million charges related exchange equity units prior year nonoperating income expense civs decreased 156 million gain 17 million due losses associated increase fair value debt related civ income tax provision income taxes 1194 million compared 1187 million prior year fiscal 2011 uk finance 2 act 2010 enacted reduced corporate tax rate 28 27 periods beginning april 1 2011 impact tax rate change certain existing deferred tax liabilities resulted tax benefit approximately 89 million effective tax rate 327 compared 360 prior year decrease primarily driven revaluation certain deferred tax assets liabilities result enactment uk tax rate reduction adjustments state tax rates impacted apportionment changes addition current period benefited adjustments resulting finalization prior period tax positions supplemental nongaap financial information consolidated statements income excluding consolidated investment vehicles following table presents reconciliation consolidated statements income presented gaap basis consolidated statements income excluding consolidated investment vehicles years ended march 31 2011 2010 thousands adjusted income reconciliation net income attributable legg mason inc adjusted income thousands except per share amounts follows 1 net income taxes operating margin adjusted calculation operating margin operating margin adjusted follows dollars thousands liquidity capital resources primary objective capital structure appropriately support business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may timetotime involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt consolidation variable interest entities discussed impact liquidity capital resources rights benefits bear risks associated assets liabilities civs beyond investments investment advisory fees generated vehicles eliminated consolidation additionally creditors civs recourse general credit beyond level investment consider liabilities obligations assets consist primarily intangible assets cash equivalents goodwill investment securities investment advisory related fee receivables assets principally funded equity capital longterm debt results operations march 31 2012 cash equivalents total assets longterm debt stockholders equity 14 billion 82 billion 11 billion 57 billion respectively total assets total liabilities civs march 31 2012 354 million 280 million respectively following table summarizes consolidated statements cash flows years ended march 31 millions cash inflows provided operating activities fiscal 2012 4968 million primarily related net income adjusted noncash items cash inflows provided investing activities fiscal 2012 23 million primarily related 202 million net activity related civs release restricted cash required market hedge arrangements offset part payments made fixed assets cash outflows used financing activities fiscal 2012 4818 million primarily due repurchase 136 million shares common stock 4003 million dividends paid 436 million remains 155 million current board directors authorization repurchase 1 billion common stock announced may 2010 intend utilize fiscal 2013 subject market conditions performance actual cash flows capital needs cash inflows provided operating activities fiscal 2011 4121 million primarily attributable net income adjusted noncash items cash outflows used investing activities fiscal 2011 444 million primarily attributable payments made fixed assets cash outflows used financing activities fiscal 2011 4685 million primarily attributable repurchase 146 million common shares 445 million fiscal 2010 cash inflows provided operating activities 14 billion 10 billion reflects receipt income tax refunds resulting net operating loss carrybacks remainder primarily attributable net income adjusted noncash items cash outflows used investing activities fiscal 2010 2767 million primarily attributable cash payments 180 million made connection acquisition permal payments fixed assets 841 million principally associated relocation corporate headquarters partially offset fund support collateral received 389 million due amendment termination expiration certain capital support arrangements cash outflows used financing activities 7467 million primarily due repayment january 2010 remaining 550 million outstanding balance 700 million fiveyear term loan 1350 million cash consideration paid exchange offer outstanding equity units payment cash dividends financing transactions table reflects primary sources financing thousands march 31 2012 january 2008 increased capital base 125 billion sale 25 convertible senior notes proceeds strengthened balance sheet provided additional liquidity used general corporate purposes including purchase siv securities liquidity funds senior notes bear interest 25 payable semiannually cash accreting carrying value principal amount maturity using imputed interest rate 65 effective borrowing rate nonconvertible debt time issuance expected life seven years resulting additional interest expense fiscal 2012 2011 2010 approximately 391 million 367 million 344 million respectively connection financing entered economic hedging transactions increase effective conversion price notes hedging transactions net cost us 83 million paid proceeds notes transactions closed january 31 2008 may 2008 issued 23 million equity units 115 billion 50 million used pay issuance costs unit consisted 5 interest 1000 principal amount 56 senior notes due june 30 2021 purchase contract purchase varying number shares common stock june 30 2011 september 2009 quarter completed exchange offer equity units form corporate units order increase equity capital levels reduce amount outstanding debt related interest expense exchanged 91 outstanding corporate units 08881 share common stock 625 cash per corporate unit equating 186 million shares legg mason common stock 1350 million cash including cash paid lieu fractional shares transaction costs connection transaction incurred transaction costs approximately 22 million 157 million cash june 2011 1030 million outstanding debt remaining 56 senior notes equity units retired part remarketing concurrently issued 18 million shares legg mason common stock upon exercise purchase contracts equity units november 2007 borrowed aggregate 500 million unsecured revolving credit facility general corporate purposes march 2009 repaid 250 million outstanding borrowings credit facility may prepaid time contains customary covenants default provisions facility matures february 11 2013 october 2005 borrowed 700 million syndicated fiveyear unsecured floatingrate term loan agreement primarily fund cash portion purchase price citigroup transaction fiscal 2010 repaid remaining 550 million outstanding balance debt agreements entered part january 2008 issuance 125 billion 25 convertible senior notes prevent us incurring additional debt exceptions gross debt ebitda ratio defined documents exceeds 25 1 march 31 2012 gross debt ebitda ratio 27 1 thus covenant prohibits us borrowing additional amounts date 25 convertible senior notes extinguished may 2012 described note 20 notes consolidated financial statements financial covenants bank agreements include maximum net debt ebitda ratio 25 1 minimum ebitda interest expense ratio 40 1 debt defined include obligations borrowed money excluding nonrecourse debt capital leases net debt covenants debt reduced amount unrestricted cash excess greater subsidiary cash 375 million ebitda defined consolidated net income plusminus tax expense interest expense depreciation amortization intangibles extraordinary expenses losses noncash charges defined march 31 2012 net debt ebitda ratio 11 1 ebitda interest expense ratio 138 1 maintained compliance covenants times fiscal 2012 net income significantly declines spend available cash may impact ability maintain compliance covenants determine compliance covenants may pressure may elect take number actions including reducing expenses order increase ebitda using available cash repay portion 250 million outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt anticipate available cash repay bank debt necessary using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments certain outstanding debt currently impacted ratings two rating agencies interest rate revolving line credit based higher credit rating two rating agencies june 2011 rating one agencies downgraded one notch agency downgrade rating absent upgrade former agency interest costs rise modestly transactions fiscal 2010 connection acquisition permal paid aggregate 171 million cash acquire remaining 625 outstanding preference shares issued permal held permals preacquisition owners also elected purchase 9 million rights sellers preference shares receive earnout payment 149 million two years result transaction payments permal acquisition addition fiscal 2010 paid aggregate amount 75 million dividends preference shares payments preference shares including dividends recognized additional goodwill may 2010 terminated exchangeable share arrangement related acquisition legg mason canada inc accordance terms transaction 11 million shares representing remaining outstanding exchangeable shares exchanged shares common stock oneforone basis certain asset management affiliates maintain various credit facilities general operating purposes certain affiliates also subject capital requirements various regulatory agencies affiliates met respective capital adequacy requirements periods presented see notes 6 7 20 notes consolidated financial statements additional information related financing transactions liquidity fund support fiscal 2010 four capital support agreements provide 42 million support two liquidity funds terminated expired accordance terms amounts drawn thereunder prior termination 42 million collateral returned future outlook expect next 12 months operating activities adequate support operating cash needs currently intend utilize available resources number potential activities including seed capital investments new products repurchase shares common stock repayment outstanding debt payment increased dividends acquisitions fiscal 2012 completed business model streamlining initiative began may 2010 incurred transitionrelated costs approximately 128 million march 31 2012 approximately 25 noncash charges approximately 80 million costs paid date substantially 168 million remaining costs represent lease obligations paid lease terms initiative resulted annual cost savings 140 million fully realized annual basis beginning fiscal 2013 see note 16 notes consolidated financial statements information regarding transitionrelated costs recorded fiscal 2012 2011 described currently project cash flows operating activities sufficient fund liquidity needs march 31 2012 1 billion cash equivalents excess working capital requirements portion intend utilize repurchase 155 million common stock fiscal 2013 previously discussed currently expect raise additional debt equity financing next 12 months refinance existing facilities however assurances expectations projections could prove incorrect events may occur require additional liquidity acquisition opportunity refinance indebtedness market conditions might significantly worsen affecting results operations generation available cash events result operations available cash insufficient fund liquidity needs would likely seek manage available resources taking actions reducing future share repurchases additional costcutting reducing expected expenditures investments selling assets investment securities repatriating earnings foreign affiliates modifying arrangements affiliates andor employees types actions prove insufficient large acquisition refinancing opportunity arise may seek raise additional equity debt march 31 2012 total cash equivalents 14 billion included 600 million held foreign subsidiaries amounts held foreign subsidiaries may subject material repatriation tax effects prior year initiated plans repatriate accumulated earnings approximately 225 million approximately 100 million repatriated march 31 2012 current plans intend repatriate 100 million 150 million foreign earnings order utilize foreign tax credits may otherwise expire unutilized make cash available us amounts planned repatriation adequately provided repatriation accumulated prior period foreign earnings beyond range currently planned however may repatriate future earnings extent required fund domestic operations tax previously provided would provide pay additional us taxes connection repatriation funds practical time determine income tax liability would result repatriation foreign earnings beyond currently planned see note 20 notes consolidated financial statements subsequent events related new capital plan including 650 million issuance 55 senior notes 125 billion repayment 25 convertible senior notes credit liquidity risk cash equivalent deposits involve certain credit liquidity risks maintain cash equivalents limited number high quality financial institutions time may concentrations one institutions balances financial institutions credit quality monitored ongoing basis offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations section follows consolidation discussed critical accounting policies notes 1 18 notes consolidated financial statements january 2008 entered hedge warrant transactions convertible notes certain financial institution counterparties increase effective conversion price convertible senior notes see note 7 notes consolidated financial statements contractual obligations contingent payments contractual obligations make future payments principally connection short longterm debt noncancelable lease agreements service agreements see notes 6 7 9 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual obligations millions fiscal year excludes contractual obligations civs responsible liable obligations 1 represents borrowing revolving line credit expire february 2013 however may elect repay debt sooner management elects utilize portion available cash purpose 2 excludes longterm borrowings consolidated clo 2717 million interest longterm borrowings applicable 3 interest floating rate shortterm debt based rates march 31 2012 4 table include approximately 367 million capital commitments investment partnerships legg mason limited partner obligations funded required end commitment periods fiscal 2018 5 table include amounts uncertain tax positions 691 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated 6 table include redeemable noncontrolling interests 240 million timing related cash outflows cannot reliably estimated market risk maintain enterprise risk management program oversee coordinate risk management activities legg mason subsidiaries program certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income majority revenue calculated market value aum accordingly decline value securities cause aum thus revenues decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts ordinary course business may also reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets performance fees may earned certain investment advisory contracts exceeding performance benchmarks declines market values aum result reduced fee revenues net income generally earn higher fees equity assets fees charged fixed income liquidity assets declines market values aum asset class disproportionately impact revenues addition revenue sharing agreements certain affiliates retain different percentages revenues cover costs including compensation net income profit margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary trading nontrading assets trading nontrading assets comprised investment securities including seed capital sponsored mutual funds products limited partnerships limited liability companies certain investment products trading current investments excluding civs march 31 2012 2011 subject risk security price fluctuations summarized thousands approximately 800 million 960 million trading current investments related longterm incentive compensation plans march 31 2012 2011 respectively offsetting liabilities fluctuation market value assets related liabilities material effect net income liquidity however impact compensation expense corresponding offset nonoperating income expense trading current investments 862 million 726 million march 31 2012 2011 respectively relate longterm incentive plans related liabilities completely offset due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income expense net income approximately 2459 million 2319 million trading current investments march 31 2012 2011 respectively investments proprietary fund products investments fluctuations market value impact nonoperating income amounts fluctuations market value approximately 126 million 309 million proprietary fund products march 31 2012 2011 respectively offsetting compensation expense revenue share agreements fluctuations market value approximately 118 million 398 million proprietary fund products march 31 2012 2011 respectively substantially offset gains losses market hedges therefore materially impact net income attributable legg mason inc investments proprietary fund products liquidated related fund establishes track record investors decision made longer pursue strategy nontrading assets excluding civs march 31 2012 2011 subject risk security price fluctuations summarized thousands equity method investments partnerships llcs march 31 2012 2011 includes approximately 893 million 919 million respectively investments related involvement us treasurys public private investment program fluctuations market value investments offsetting compensation expense revenuesharing agreements investment securities civs totaled 316 million 828 million march 31 2012 2011 respectively investments civs totaled 2949 million 3128 million march 31 2012 2011 respectively march 31 2012 2011 held equity investments civs 389 million 537 million respectively fluctuations market value investments civs excess equity investment impact net income attributable legg mason inc however may impact nonoperating income expense civs corresponding offset net income loss attributable noncontrolling interests valuation trading nontrading investments described within critical accounting policies heading valuation financial instruments see notes 1 15 notes consolidated financial statements discussion derivatives following summary effect 20 increase decrease market values financial instruments subject market valuation risks march 31 2012 1 gains losses related certain investments deferred compensation plans proprietary fund products directly offset corresponding adjustment compensation expense related liability addition investments proprietary fund products approximately 118 million economically hedged limit market risk result 20 increase decrease unrealized market value financial instruments subject market valuation risks would result 815 million increase decrease pretax earnings march 31 2012 foreign exchange sensitivity operate primarily united states provide services earn revenues incur expenses outside united states accordingly fluctuations foreign exchange rates currencies principally brazil poland australia canada united kingdom may impact comprehensive income net income certain affiliates entered forward contracts manage impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect net income liquidity interest rate risk exposure interest rate changes outstanding debt mitigated substantially debt fixed interest rates march 31 2012 2011 approximately 2500 million outstanding floating rate debt subject fluctuations interest rates impact nonoperating income net income march 31 2012 estimate 1 change interest rates would result net annual change interest expense 25 million see notes 6 7 notes consolidated financial statements additional disclosures regarding debt critical accounting policies estimates accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following critical accounting policies involve significant estimates judgments consolidation effective april 1 2010 adopted revised accounting guidance accounting standards codification asc topic 810 consolidation statement financial accounting standards 167 amendments financial accounting standards board interpretation 46r sfas 167 relating consolidation variable interest entities vies includes new approach determining consolidate vie changes necessary reassess consolidate vie changes assessment entities vies application revised accounting guidance deferred certain investment funds including money market funds investment funds qualify deferral continue assessed consolidation prior guidance financial accounting standards board interpretation 46r consolidation variable interest entities interpretation arb 51 fin 46r normal course business sponsor manager various types investment vehicles certain investment vehicles considered vies others considered voting rights entities vres subject traditional consolidation concepts based ownership rights services entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees vies material march 31 2012 issued investment performance guarantees vies vres investors investment vehicles considered vres consolidated controlling financial interest investment vehicle financial accounting standards board interpretation 46r accounting standards update 201010 amendments statement 167 certain investment funds sponsored investment funds including money market funds determine whether primary beneficiary vie absorb majority vies expected losses receive majority vies expected residual returns determination expected residual returns excludes gross fees paid decision maker certain criteria met determining whether primary beneficiary vie consider qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid us related party ownership guarantees implied relationships determining primary beneficiary must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks determining whether vie significant disclosure purposes consider factors used determination primary beneficiary statement financial accounting standards 167 accounting standards codification topic 810 consolidation sponsor manager collateralized debt obligation entities cdos clos qualify deferral assessed revised accounting guidance follows determine whether variable interest vie considering among things obligation absorb losses right receive benefits expected significant vie consider management fee structure including seniority level fees current expected economic performance entity well provisions included governing documents might restrict guarantee expected loss residual return significant variable interest determine whether primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits potentially could significant vie evaluating whether obligation absorb losses right receive benefits could potentially significant vie consider factors regarding design terms characteristics investment vehicles including following qualitative factors involvement investment vehicle beyond providing management services hold equity debt interests investment vehicle transferred assets investment vehicle potential aggregate fees future periods insignificant relative potential cash flows investment vehicle variability expected fees relation potential cash flows investment vehicle insignificant legg mason must consolidate vies deemed primary beneficiary see note 18 notes consolidated financial statements additional discussion civs vies revenue recognition vast majority revenues calculated percentage fair value aum underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager brokerdealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost designed approximate fair value vast majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs management fees aum fair values based unobservable inputs material march 31 2012 equity fixed income liquidity aum values aggregated 1634 billion 3561 billion 1238 billion respectively vast majority aum valued independent pricing services based upon observable market prices inputs believe market risk significant risk underlying valuation aum economic events financial market turmoil increased market price volatility however valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2012 less 1 total aum valued based unobservable inputs valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except longterm debt trading investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income comprehensive income depending underlying purpose instrument equity investments control investee primary beneficiary variable interest entity exert significant influence financial operating policies investee follow equity method accounting evaluation whether exert control significant influence financial operational policies investees requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence may governing board investee legal rights investors entity pursuant funds operating documents relationship us investors entity substantially equity method investees investment companies record underlying investments fair value therefore equity method accounting share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense investments value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices evaluate nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2012 2011 excluding investments civs owned approximately 119 million 238 million respectively financial investments valued assumptions estimates unobservable inputs march 31 2012 2011 also approximately 2042 million 1775 million respectively investments investment partnerships included noncurrent assets consolidated balance sheets approximately 1692 million 1554 million respectively accounted equity method remainder accounted cost method considers factors indicate may impairment value investments addition march 31 2012 2011 783 million 763 million respectively equity method investments included investment securities consolidated balance sheets accounting guidance fair value measurements disclosures defines fair value establishes framework measuring fair value accounting guidance defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance accounting guidance fair value measurements establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category may include repurchase agreements fixed income securities certain proprietary fund products category also includes clo loans liabilities civ previously included certain derivative assets liabilities civs level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds category may also include certain proprietary fund products redemption restrictions clo debt civ valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products certain investments held civs valued net asset value nav determined fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 fair values clo loans bonds determined based prices wellrecognized thirdparty pricing services utilize available market data therefore classified level 2 legg mason established controls designed assess reasonableness prices provided fair value clo debt valued using discounted cash flow methodology inputs used determine expected cash flows include assumptions forecasted default recovery rates market participant would use determining fair value clos underlying collateral assets given significance unobservable inputs fair value measurement clo debt valuation classified level 3 exchange traded options valued using last sale price absence sale last offering price options traded counter valued using dealer supplied valuations options classified level 1 futures contracts valued last settlement price end day exchange upon traded classified level 1 index single name credit default swaps interest rate swaps previously held valued based valuations furnished pricing services classified level 2 practical expedient rely navs certain investments fair value navs provided investees derived fair values underlying investments reporting date march 31 2012 approximately 3 total assets 13 financial assets measured fair value 10 total liabilities meet definition level 3 excluding assets liabilities civs approximately 2 total assets 13 financial assets measured fair value liabilities meet definition level 3 transfers categories measured beginning period see note 3 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2012 follows identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weightedaverage cost capital takes consideration premium representing degree risk inherent asset fully described indefinitelife intangible assets goodwill project impact net client flows market appreciationdepreciation cash flows nearterm generally first five years based yearbyyear assessment considers current market conditions past experience relevant publicly available statistics projections internal budgets discussions market experts beyond five years projections net client flows market performance migrate towards relevant longterm rates line results industry growth statistics believe growth assumptions reasonable given consideration multiple inputs including internal external sources described however continues uncertainty markets assumptions subject change based fluctuations actual results market conditions goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events triggering event occurred perform tests include critical reviews significant assumptions determine intangible assets goodwill impaired minimum perform tests indefinitelife intangible assets goodwill annually december 31 completed annual impairment tests goodwill indefinitelife intangible assets december 31 2011 determined impairment value assets date impairment value amortizable intangible assets recognized year ended march 31 2012 estimates related future cash flows exceeded asset carrying values also determined triggering events occurred march 31 2012 therefore additional indefinitelife intangible asset goodwill impairment testing necessary amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates amortization periods appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows estimated useful lives amortizable intangible assets currently range one five years weightedaverage life approximately 29 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined market participants perspective based projected discounted cash flows two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names determine fair value intangible assets based upon discounted projected cash flows take consideration estimates profit margins growth rates discount rates asset determined impaired current implied fair value less recorded carrying value asset impaired difference current implied fair value carrying value asset reflected financial statements recognized expense period impairment determined temporary projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth estimated net client flows projected market performance contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows domestic mutual fund contracts acquired citigroup asset management cam acquisition 2502 million account approximately 65 indefinitelife intangible assets managed primarily clearbridge western asset permal fundsofhedge funds contracts 947 million account approximately 25 indefinitelife intangible assets december 31 2011 annual impairment test cash flows domestic mutual fund contracts assumed annual growth rates average approximately 7 cash flows permal fundsofhedge funds contracts assumed annual growth rates average approximately 9 projected cash flows domestic mutual fund permal funds discounted 130 145 respectively assuming factors remain actual results changes assumptions domestic mutual fund permal fundsofhedge funds contracts would cause cash flow projections longterm deviate 5 35 respectively previous projections discount rate would raised 135 195 respectively asset deemed impaired given current uncertainty regarding future market conditions reasonably possible fund performance flows aum levels may decrease near term actual cash flows domestic mutual fund contracts could deviate projections 5 asset could deemed impaired material amount approximate fair values assets exceed carrying values 124 million 606 million respectively trade names account 2 indefinitelife intangible assets primarily related permal tested intangible assets using assumptions similar described indefinitelife contracts resulting fair values significantly exceeded related carrying amounts goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows similar techniques employed analyzing purchase price acquisition target december 2010 announced realignment executive management team fiscal 2012 resulted combination americas international divisions one operating segment global asset management internal management reporting modified consistent realignment discrete financial information regularly received chief operating decision maker chief executive officer consolidated global asset management business level result former americas international operating segments longer reporting units subsequently goodwill recorded evaluated one global asset management reporting unit level see note 17 notes consolidated financial statements additional information related business segments significant assumptions used assessing implied fair value reporting unit discounted cash flow method include projected cash flows generated reporting unit including profit margins expected cash flow growth rates discount rate used determine present value cash flows cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income liquidity investment manager based upon among things historical experience expectations future market performance internal external sources impact net client flows market performance cash flows projected nearterm generally first five years based yearbyyear assessment considers current market conditions experience internal financial projections relevant publicly available statistics projections discussions market experts actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows discount rates based appropriately weighted estimated costs debt capital using market participant perspective estimate cost debt based published debt rates estimate cost capital based capital asset pricing model considers riskfree interest rate market risk size premiums peergroup betas unsystematic risk discount rates also calibrated based assessment relevant market values goodwill principally originated acquisitions cam permal royce value reporting unit based projected net cash flows assets managed mutual funds closedend funds proprietary funds addition separate account assets managers annual december 31 impairment test projected cash flows discounted 140 determine present value cash flows december 31 2011 implied fair value significantly exceeds carrying value projected cash flows aggregate basis across asset classes assumed average annual growth rate approximately 8 cash flow growth based separate factors equity fixed income liquidity products equity product growth projections based longterm growth experience current market conditions fixed income product growth projections based past experience primary fixed income manager current market influences relevant business available historical experience market statistics estimates future expectations believe growth assumptions reasonable given consideration multiple inputs including internal external sources described however assumptions subject change based fluctuations actual results market conditions assuming factors remain actual results changes assumptions would cause cash flow projections longterm deviate approximately 51 previous projections discount rate would increase approximately eight percentage points goodwill considered impairment december 31 2011 considering relevant prices common shares market capitalization along reasonable control premium exceeds aggregate carrying values reporting unit stockbased compensation stockbased compensation plans include stock options employee stock purchase plans marketbased performance share awards restricted stock awards deferred compensation payable stock compensation plans issue equity awards directors officers key employees accordance applicable accounting guidance compensation expense years ended march 31 2012 2011 2010 includes compensation cost nonvested sharebased awards grant date fair value amortized respective vesting periods straightline method also accounting guidance cash flows related income tax deductions excess less stockbased compensation expense classified financing cash flows granted 08 million 07 million 15 million stock options fiscal 2012 2011 2010 respectively additional information sharebased compensation see note 12 notes consolidated financial statements determine fair value option grant using blackscholes optionpricing model except marketbased grants would use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate except grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal vesting period options estimate volatility equally weighted historical prices stock period equal expected life option implied volatility market listed options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different income taxes subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes management assesses likelihood able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision substantially deferred tax assets relate us uk taxing jurisdictions march 31 2012 us federal deferred tax assets aggregated 718 million realization expected require 41 billion future us earnings approximately 169 million must form foreign sourced income deferred tax assets generated us jurisdictions resulting net operating losses generally expire 20 years generated resulting foreign tax credits generally expire 10 years generated based estimates future taxable income using assumptions consistent used goodwill impairment testing likely current federal tax benefits relating net operating losses realizable valuation allowance necessary time respect resulting foreign tax credits likely tax benefits relating 104 million foreign tax credits realizable valuation allowance 34 million recorded fiscal 2012 respect thereto tax planning may enhance positions realization current tax benefits dependent significant tax strategies march 31 2012 us state deferred tax assets aggregated 237 million due limitations net operating loss capital loss carryforwards taking consideration certain state tax planning strategies valuation allowance established state capital loss net operating loss benefits certain jurisdictions amount 121 million fiscal 2012 due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary net release 73 million fiscal 2012 full valuation allowance foreign deferred tax assets related various jurisdictions primarily uk japan extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets event determine portion deferred tax assets already subject valuation allowance realizable required establish valuation allowance charge income tax provision period determination made depending facts circumstances charge could material earnings calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements forwardlooking statements made report form 10k time may otherwise make public filings press releases statements management forwardlooking statements within meaning private securities litigation reform act 1995 including information relating anticipated growth revenues margins earnings per share anticipated changes business amount client aum anticipated future performance business including expected earnings per share future periods anticipated future investment performance affiliates expected future net client cash flows anticipated expense levels changes expenses expected effects acquisitions expectations regarding financial market conditions words phrases may expects may affect may depend believes estimate project anticipate similar words phrases intended identify forwardlooking statements forwardlooking statements subject various known unknown risks uncertainties caution readers forwardlooking information provided behalf legg mason guarantee future performance actual results may differ materially forwardlooking information result various factors beyond control including limited discussed heading risk factors elsewhere report form 10k public filings press releases statements management due risks uncertainties factors caution person receiving forwardlooking information place undue reliance statements forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events future revenues may fluctuate due numerous factors total value composition aum mix aum among affiliates revenue yield aum volatility general level securities prices interest rates relative investment performance companysponsored investment funds asset management products absolute terms relative competing offerings market indices investor sentiment confidence general economic conditions ability maintain investment management administrative fees current levels competitive conditions business ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred result changes number total employees competitive factors changes percentages revenues paid compensation reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill otherwise support investment products connection litigation regulatory proceedings effects acquisitions dispositions business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risks revenues net income critical accounting policies intangible assets goodwill previously discussed item 7aitem 7 managements discussion analysis financial condition results operations executive overview legg mason inc holding company subsidiaries collectively comprise legg mason global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally united states america us united kingdom uk also offices australia bahamas brazil canada chile china dubai france germany italy japan luxembourg poland singapore spain switzerland taiwan references fiscal 2013 2012 2011 refer fiscal year ended march 31 year terms us company refer legg mason connection realignment executive management team fiscal 2011 longer manage business two divisions fiscal 2012 eliminated previous separation americas international divisions combined one operating segment global asset management believe structure allows us function global organization single purpose result change longer present assets management aum revenues division operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks largest portion performance fees earned based 12month performance periods end differing quarters year portion based quarterly performance periods distribution service fees received distributing investment products services providing support services investment portfolios generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level aum fee rates thus affected factors securities market conditions ability attract maintain aum key investment personnel investment performance aum primarily vary period due inflows outflows client assets well market performance client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services fees charge investment services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions fees charge investment services vary based upon factors type underlying investment product amount assets management asset management affiliate provides services type services investment objectives provided fees charged equity asset management services generally higher fees charged fixed income liquidity asset management services accordingly revenues average aum advisory revenue yields affected composition aum changes relative level equity assets significantly impacting revenues average aum advisory revenue yields average aum advisory revenue yields calculated ratio annualized investment advisory fees excluding performance fees average aum addition ordinary course business may reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets place revenue sharing agreements asset management affiliates specified percentages affiliates revenues required distributed us balance revenues retained pay operating expenses including compensation expenses excluding certain expenses income taxes agreements asset management affiliates retain different percentages revenues cover costs net income loss attributable legg mason inc operating margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one affiliate dramatically different effect revenues earnings equal change another affiliate addition time may agree changes revenue sharing agreements arrangements asset management personnel may impact compensation expenses profitability significant component cost structure employee compensation benefits majority variable nature includes incentive compensation primarily based upon revenue levels noncompensation related operating expense levels revenue sharebased affiliates profits next largest component cost structure distribution servicing expense primarily fees paid thirdparty distributors selling asset management products services largely variable nature certain operating costs quasifixed nature occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly united states also countries operate results individual period considered representative future results profitability sensitive variety factors including amount composition aum volatility general level securities prices interest rates among things periods unfavorable market conditions likely adversely affect profitability addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients last years industry seen flows products currently garner significant market share addition economic downturn fiscal 2008 2009 contributed significant contraction business recovered predownturn levels financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms brokerdealers commercial banks industry impacted continued economic uncertainty prior years consolidation financial services firms mergers acquisitions industry operate also subject extensive regulation federal state foreign laws like firms impacted regulatory legislative changes responding changes required continue require us incur costs continue impact profitability strategy focused four primary areas listed management keeps strategic priorities mind evaluates operating performance financial condition consistent approach also presented table important matters management currently focuses evaluating performance financial condition net loss attributable legg mason inc fiscal 2013 3533 million 265 per diluted share compared net income attributable legg mason inc 2208 million 154 per diluted share fiscal 2012 current year loss primarily attributable 7340 million 381 per diluted share noncash impairment charges related intangible assets 690 million 034 per diluted share nonoperating charge extinguishment debt average aum total revenues remained relatively flat fiscal year 2013 compared fiscal year 2012 strong overall performance improvement global distribution function contributed continued reduction outflows modest outflows mostly offset increases aum due market performance acquisition new product launches fiscal 2013 following discussion analysis provides additional information regarding financial condition results operations business environment results operations business environment fiscal 2013 marked uneven growth continued heightened sensitivity economic news major economic events news year included uneven domestic growth periodic developments ongoing european sovereign debt crisis fiscal cliff sequestration actions federal reserve maintain low interest rates including beginning third round quantitative easing continued support secondary mortgage market events led challenging financial environment globally united states however fiscal 2013 us indices produced positive returns record highs equity markets march 2013 economic outlook remained positive recent years financial environment operate still reflects heightened level sensitivity move fiscal 2014 three major us equity market indices well barclays capital us aggregate bond index barclays capital global aggregate bond index increased past two fiscal years illustrated table 1 indices trademarks dow jones company mcgrawhill companies inc nasdaq stock market inc barclays capital respectively affiliated legg mason following table sets forth periods indicated amounts consolidated statements income loss percentage operating revenues increase decrease item percentage amount previous period nmnot meaningful 1 calculated based change actual amounts fiscal years percentage prior year amount fiscal 2013 compared fiscal 2012 assets management aum primarily managed across following asset classes equity fixed income liquidity  large cap growth  us intermediate investment grade  us managed cash  small cap core  global government  us municipal cash  large cap value  us municipal  equity income  us long duration  mid cap core  global opportunistic fixed income  global emerging market equity  us credit aggregate  global equity  us limited duration  international equity  global fixed income  us government intermediate  governmentcredit components changes aum billions years ended march 31 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 includes impact foreign exchange reinvestment dividends aum march 31 2013 6646 billion increase 213 billion 3 march 31 2012 increase aum attributable market performance 342 billion including negative impact foreign currency exchange fluctuations 83 billion 54 billion related acquisition fauchier partners management limited fauchier increases offset part net client outflows 117 billion dispositions 66 billion dispositions liquidity assets resulted amendment historical smith barney brokerage programs providing investment liquidity funds asset managers manage longterm asset classes accounted net client outflows 204 billion 110 billion equity fixed income outflows respectively partially offset liquidity inflows 197 billion equity outflows primarily experienced products managed batterymarch financial management inc “batterymarch” royce associates “royce” permal group ltd permal legg mason capital management llc lmcm due part investment performance issues experienced net annual outflows equity asset class since fiscal 2007 majority fixed income outflows products managed western asset management company western asset including 64 billion outflows single low fee global sovereign mandate expect continue experience outflows mandate approximately 500 million per month fiscal 2014 fixed income outflows offset part inflows brandywine global investment management llc brandywine experienced outflows fixed income asset class two quarters since fourth quarter fiscal 2008 generally earn higher fees profits equity aum outflows equity asset class negatively impact revenues net income loss attributable legg mason inc would outflows asset classes experienced liquidity outflows approximately 13 billion sovereign wealth client month ended april 30 2013 however expect outflow material impact revenues net income investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds manage may redeem investments funds time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients thirdparty distributors relationships loss key investment management personnel financial market performance aum asset class aum asset class billions years ended march 31 follows component changes aum asset class billions fiscal year ended march 31 2013 follows average aum asset class billions years ended march 31 follows aum distribution channel two principal distribution channels global distribution affiliateother sell variety investment products services global distribution consists centralized global distribution operations principally sells us international mutual funds commingled vehicles retail separately managed account programs subadvisory accounts insurance companies similar clients affiliateother consists distribution operations within asset managers principally sells institutional separate accounts liquidity money market funds component changes aum distribution channel billions year ended march 31 2013 follows years ended march 31 2013 2012 overall effective fee rate across asset classes distribution channels 34 35 basis points respectively fees managing equity assets generally higher averaging approximately 75 basis points years ended march 31 2013 2012 compares fees managing fixed income assets averaged approximately 25 basis points years ended march 31 2013 2012 liquidity assets averaged 10 basis points reflecting impact current advisory fee waivers due low interest rate environment years ended march 31 2013 2012 equity assets primarily managed clearbridge royce batterymarch permal fixed income assets primarily managed western asset brandywine liquidity assets primarily managed western asset fee rates assets distributed legg mason global distribution predominately retail nature averaged approximately 50 basis points years ended march 31 2013 2012 fee rates assets distributed affiliateother channel averaged approximately 20 basis points years ended march 31 2013 2012 decline higher yielding equity assets impacted revenues discussed investment performance overall investment performance assets management year ended march 31 2013 generally positive compared relevant benchmarks year ended march 31 2013 us indices produced positive returns best performing sp 400 mid cap index returning 178 year ended march 31 2013 returns achieved economic environment characterized uneven domestic growth heightened sensitivity economic news included improving unemployment housing figures anticipation implementation sequestration concerns surrounding fiscal cliff periodic developments continuing european sovereign debt crisis fixed income markets federal reserve affirmed commitment hold federal funds rate historic lows beginning third round quantitative easing continuing support secondary mortgage market actions taken keep interest rates low stimulate economic growth resulted downward shift yield curve year lowest yielding fixed income sector year us government bonds measured barclays us government bond index returning 30 best performing fixed income sector year high yield bonds measured barclays us high yield bond index returning 131 march 31 2013 following table presents summary percentages aum strategy1 outpaced respective benchmarks march 31 2013 2012 trailing 1year 3year 5year 10year periods following table presents summary percentages us mutual fund assets2 outpaced lipper category averages march 31 2013 2012 trailing 1year 3year 5year 10year periods 1 purposes investment performance comparisons strategies aggregation discretionary portfolios separate accounts investment funds products single group represents particular investment objective case separate accounts investment performance account based upon performance strategy account assigned asset managers specific guidelines including portfolios strategies managers manage separate accounts investment funds strategy performance comparison assets based upon performance separate account march 31 2013 2012 90 91 total aum included strategy aum respectively although strategies three five tenyear histories total strategy aum includes liquidity assets certain assets included reported performance comparisons include accounts managed accordance guidelines outlined accounts strategies marketed potential clients accounts yet assigned strategy certain smaller products affiliates past performance indicative future results aum included institutional retail separate accounts investment funds included strategy separate accounts performance comparisons based grossoffee performance investment funds including fundofhedge funds managed separate account format performance comparisons based netoffee performance comparisons reflect actual performance specific separate account investment fund individual separate account investment fund performance may differ certain prior year amounts updated conform current year presentation 2 source lipper inc includes openend closedend variable annuity funds march 31 2013 2012 us longterm mutual fund assets represented data accounted 19 18 respectively total aum performance us longterm mutual fund assets included strategies following table presents summary absolute relative performance compared applicable benchmark representative sample funds within aum net management fees end period presented 1year 3year 5year 10year periods funds inception table includes representative sample funds significant subclass investment strategies ie large cap equity small cap equity etc funds within group representative performance significant investment strategies offer march 31 2013 constituted aggregate approximately 393 billion approximately 59 aum meaningful exclusions fundsofhedge funds strategies involve privately placed hedge funds represent 3 total assets management march 31 2013 investment performance made publicly available providing investment returns funds provides relevant representation performance avoiding many complexities relating factors multiple fee structures bundled pricing asset level break points would arise reporting performance strategies product aggregations 1 absolute performance actual performance ie rate return fund relative performance difference variance performance fund strategy stated benchmark business model streamlining initiative may 2010 announced initiative streamline business model drive increased profitability growth primarily involved transitioning certain shared services investment affiliates closer actual client relationships initiative resulted 140 million annual cost savings substantially cash savings cost savings consist 80 million compensation benefits cost reductions eliminating positions certain corporate shared services functions result transitioning functions affiliates charging affiliates centralized services continue provided without corresponding adjustment revenue sharing compensation arrangements ii approximately 50 million noncompensation costs eliminating streamlining activities corporate distribution business units including savings associated consolidating office space iii approximately 10 million global distribution group sharing affiliate revenues retail assets management without corresponding adjustment revenue sharing compensation arrangements initiative involved 1275 million transitionrelated costs primarily included charges employee termination benefits incentives retain employees transition period transitionrelated costs also included charges consolidating leased office space early contract terminations accelerated depreciation fixed assets asset disposals professional fees years ended march 31 2012 2011 transitionrelated costs totaled 731 million 544 million respectively transitionrelated costs accrued completion initiative march 31 2012 achieved total cost savings initiative approximately 140 million 97 million march 31 2013 2012 respectively compared similar expenses prior commencement streamlining initiative portion estimated transitionrelated savings incremental fiscal 2012 explained applicable results operations discussion follow see note 15 notes consolidated financial statements additional information business streamlining initiative results operations accordance financial accounting standards consolidation consolidate separately identify certain sponsored investment vehicles significant collateralized loan obligation entity clo consolidation investment vehicles impact net income loss attributable legg mason inc material impact consolidated operating results also hold investments certain consolidated sponsored investment funds change value investments recorded nonoperating income expense reflected net income loss net amounts allocated noncontrolling interests see notes 1 17 notes consolidated financial statements additional information regarding consolidation investment vehicles operating revenues total operating revenues year ended march 31 2013 26 billion decrease 19 27 billion year ended march 31 2012 despite average aum remaining essentially flat decrease primarily due impact reduction average aum advisory revenue yields 352 basis points year ended march 31 2012 337 basis points year ended march 31 2013 reduction average aum advisory revenue yields result less favorable average asset mix equity assets generally earn higher fees fixed income liquidity assets comprising lower percentage total average aum year ended march 31 2013 compared year ended march 31 2012 decrease offset part 491 million increase performance fees investment advisory fees separate accounts decreased 452 million 58 7303 million decrease 415 million result lower average equity assets managed batterymarch lmcm legg mason global equities group lmge 123 million due divestiture affiliate february 2012 decreases offset part increase 96 million due higher average fixed income assets managed brandywine investment advisory fees funds decreased 453 million 30 14 billion decrease 529 million due lower average assets managed permal 487 million due lower average equity assets managed royce lmcm lmge decreases offset part 391 million increase result higher average fixed income assets managed western asset brandywine 167 million increase result higher average equity assets clearbridge total aum march 31 2013 2012 approximately 6 accounts eligible earn performance fees performance fees increased 491 million 986 million primarily due 320 million fees received western asset related winddown participation us treasurys publicprivate investment program ppip higher fees earned assets managed permal brandywine also contributed increase distribution service fees decreased 105 million 31 3305 million result decline average fee rates received mutual fund aum subject distribution service fees operating expenses total operating expenses year ended march 31 2013 30 billion increase 311 23 billion prior year increase total operating expenses primarily result 7340 million intangible asset impairment charges recorded current year discussed operating expenses years ended march 31 2013 2012 incurred investment management affiliate level comprised approximately 70 total operating expenses year excluding impairment charges deemed corporate expenses remaining operating expenses comprised corporate distribution costs components total compensation benefits millions years ended march 31 follows total compensation benefits increased 39 12 billion • salaries incentives increased 295 million principally due increase 385 million incentivebased compensation investment affiliates primarily resulting costs associated modification employment arrangements significantly management permal impact reductions noncompensation related operating expenses revenue share based affiliates create offsetting increase compensation per applicable revenue share agreements additional salary incentive costs 122 million resulting marketbased compensation increases among retained staff new hires support ongoing growth initiatives also contributed increase increases offset part 237 million decrease corporate salaries primarily due headcount reductions resulting business streamlining initiative • benefits payroll taxes increased 78 million primarily result increase noncash amortization expense costs associated certain deferred compensation plans • transitionrelated costs decreased 346 million due completion business streamlining initiative march 2012 • management transition compensation costs current year associated chief executive officer stepping september 2012 subsequent reorganization executive committee costs primarily comprised 75 million cash severance 64 million net noncash accelerated vesting stock based awards also included line item 30 million noncash amortization expense related retention awards granted certain executives key employees • compensation benefits increased 236 million primarily due increase revenueshare based incentive obligations resulting net market gains assets invested deferred compensation plans seed capital investments offset corresponding increases nonoperating income expense compensation percentage operating revenues increased 455 430 prior year due impact reductions noncompensation related operating expenses revenue share based affiliates impact modification employment arrangements well impact quasifixed compensation costs administrative distribution personnel typically vary revenues increases offset part impact transitionrelated compensation recorded prior year well impact lower corporate compensation costs principally attributable business streamlining initiative distribution servicing expenses decreased 76 6006 million driven 538 million decrease due reduction average aum certain products pay fees thirdparty distributors communications technology expense decreased 91 1496 million driven impact 84 million transitionrelated costs recognized prior year well 44 million cost savings result business streamlining initiative occupancy expense increased 111 1719 million primarily due real estate related charges totaling 528 million recorded fiscal 2013 related space consolidation result savings approximately 100 million per year prospectively increase offset part impact 119 million lease reserves recorded prior year well acceleration 103 million depreciation prior year primarily related certain office space permanently vacated part business streamlining initiative increase also offset part 60 million cost savings also result business streamlining initiative amortization intangible assets decreased 284 140 million primarily due certain management contracts becoming fully amortized fiscal 2012 impairment intangible assets 7340 million year ended march 31 2013 impairment charges relate domestic mutual fund contracts asset permal fundsofhedge fund contracts asset permal trade name impairment charges resulted number current trends factors including decrease nearterm margin projections ii increase rate used discount projected future cash flows primarily due company specific factors including continued market regulatory influences continued stock price uncertainty search permanent chief executive officer ongoing december 31 2012 impairment testing date iii recent outflows related reductions assets management iv reduction nearterm projected growth rates changes resulted reduction projected cash flows overall assessment fair value assets domestic mutual fund contracts asset permal fundsofhedge funds contracts asset permal trade name asset declined carrying values accordingly impaired 3960 million 3210 million 170 million respectively see critical accounting policies note 5 notes consolidated financial statements discussion impairment charges expenses decreased 22 million 12 1884 million primarily due 41 million reduction charges trading errors 25 million decrease expense reimbursements paid certain mutual funds impact 17 million transitionrelated costs recognized prior year also contributed decrease decreases offset part 50 million increase litigationrelated expenses result certain regulatory investigations see note 8 notes consolidated financial statements discussion investigations 18 million increase professional fees primarily related initiatives permal including acquisition fauchier fiscal 2013 also offset decrease nonoperating income expense interest income decreased 339 76 million driven 26 million decrease due lower yields earned investment balances 18 million decrease due lower average investment balances interest expense decreased 282 629 million primarily result refinancing 25 convertible senior notes may 2012 nonoperating income expense decreased 401 million expense 180 million income 221 million prior year decrease primarily result 690 million loss debt extinguishment recognized connection repurchase notes may 2012 impact 86 million gain related assigned bankruptcy claim 75 million gain sale small affiliate recognized prior year also contributed decrease decreases offset part 227 million increase net market gains seed capital investments assets invested deferred compensation plans offset corresponding increases compensation discussed well 208 million increase net market gains corporate investments proprietary fund products offset compensation nonoperating income expense consolidated investment vehicles civs decreased 212 million expense 28 million income 183 million prior year primarily due net market losses investments certain civs well impact market gains recognized prior year period related previously consolidated civ redeemed prior year income tax provision benefit income taxes 1509 million compared provision 721 million prior year july 2011 uk finance act 2011 enacted reduced main uk corporate tax rate 27 26 effective april 1 2011 26 25 effective april 1 2012 july 2012 uk finance act 2012 enacted reducing main uk corporate tax rate 24 effective april 1 2012 23 effective april 1 2013 impact tax rate changes certain existing deferred tax assets liabilities resulted tax benefit 181 million current year prior year also included similar uk tax benefit 183 million revaluation deferred tax assets liabilities impact substantial due higher level pretax income fiscal year effective benefit rate 295 year ended march 31 2013 compared effective tax rate 238 prior year changes uk tax rate impacted effective tax benefit rate 35 percentage points year ended march 31 2013 60 percentage points prior year impact civs reduced effective tax benefit rate 05 08 percentage points years ended march 31 2013 2012 respectively otherwise change effective tax rate primarily related lower tax benefit associated intangible asset impairment charge recorded fiscal 2013 due lower statutory rates jurisdictions certain intangible assets held partially offset adjustments reserves impact certain tax planning initiatives recorded fiscal 2012 net income loss attributable legg mason inc net loss attributable legg mason inc year ended march 31 2013 totaled 3533 million 265 per diluted share compared net income attributable legg mason inc 2208 million 154 per diluted share prior year decrease primarily attributable impact pretax impairment charges 7340 million 5083 million net income tax benefits 382 per diluted share recorded current year related indefinitelife intangible assets well 690 million pretax loss 448 million net income tax benefits 034 per diluted share debt extinguishment recognized connection repurchase notes may 2012 real estate related charges 528 million also contributed decrease decreases offset part impact transitionrelated costs recorded prior year impact increased cost savings current year connection business streamlining initiative items previously discussed supplemental nongaap financial information supplemental information providing performance measures based methodologies generally accepted accounting principles “nongaap” adjusted income operating margin adjusted management uses benchmarks evaluating comparing periodtoperiod operating performance adjusted income decreased 3472 million 261 per diluted share year ended march 31 2013 3970 million 277 per diluted share prior year operating margin adjusted years ended march 31 2013 2012 168 213 respectively operating margin adjusted year ended march 31 2013 reduced 35 percentage points due real estate related charges management transition compensation costs recorded fiscal 2013 adjusted income define adjusted income net income loss attributable legg mason inc plus amortization deferred taxes related intangible assets goodwill imputed interest tax benefits contingent convertible debt less deferred income taxes goodwill indefinitelife intangible asset impairment also adjust noncore items reflective economic performance intangible asset impairments impact tax rate adjustments certain deferred tax liabilities related indefinitelife intangible assets loss extinguishment contingent convertible debt believe adjusted income provides useful representation operating performance adjusted noncash acquisition related items facilitate comparison results asset management firms issuedextinguished contingent convertible debt made significant acquisitions also believe adjusted income important metric estimating value asset management business adjusted income considers adjustments certain items relate operating performance comparability therefore readily reconcilable net income loss attributable legg mason inc determined gaap measure provided addition net income loss attributable legg mason inc substitute net income loss attributable legg mason inc may comparable nongaap performance measures including measures adjusted earnings adjusted income companies adjusted income liquidity measure used place cash flow measures determined gaap consider adjusted income useful investors important metric measuring economic performance asset management companies indicator value facilitates comparison operating results asset management firms issuedextinguished contingent convertible debt made significant acquisitions calculating adjusted income add impact amortization management contract assets impairment indefinitelife intangible assets arise acquisitions net income loss attributable legg mason inc reflect fact noncash expenses distort comparisons operating results asset management firms engaged significant acquisitions deferred taxes indefinitelife intangible assets goodwill include actual tax benefits amortization deductions realized gaap absent impairment charge disposition related business fully expect realize economic benefit current period tax amortization add benefit net income loss attributable legg mason inc calculation adjusted income however net operating loss carryforward receive benefit current tax amortization time conversely subtract noncash income tax benefits goodwill indefinitelife intangible asset impairment charges united kingdom tax rate adjustments excess book basis certain acquired indefinitelife intangible assets applicable recognized gaap also add back noncash imputed interest extinguishment loss contingent convertible debt adjusted amounts allocated conversion feature well adding actual tax benefits imputed interest realized gaap adjustments reflect items distort comparisons operating results prior periods results asset management firms engaged significant acquisitions including related impairments issuedextinguished contingent convertible debt disposition impairment charge noncore item occur impact adjusted income may distort actual changes operating performance value firm accordingly monitor items related impact including taxes adjusted income ensure appropriate adjustments explanations accompany disclosures although depreciation amortization fixed assets noncash expenses add charges calculating adjusted income charges related assets ultimately require replacement reconciliation net income loss attributable legg mason inc adjusted income thousands except per share amounts follows operating margin adjusted calculate operating margin adjusted dividing operating income loss adjusted exclude impact compensation expense gains losses investments made fund deferred compensation plans impact compensation expense gains losses seed capital investments affiliates revenue sharing agreements transitionrelated costs streamlining business model income loss civs impairment charges ii operating revenues adjusted add back net investment advisory fees eliminated upon consolidation investment vehicles less distribution servicing expenses use approximate measure revenues passed third parties refer operating revenues adjusted compensation items transitionrelated costs removed operating income loss calculation offset equal amount nonoperating income expense thus impact net income loss attributable legg mason inc transitionrelated costs impairment charges income loss civs removed operating income loss calculation items reflective core asset management operations use operating revenues adjusted calculation show operating margin without distribution servicing expenses use approximate distribution revenues passed third parties direct cost selling products although distribution servicing expenses may include commissions paid connection launching closedend funds corresponding revenue period operating revenues adjusted also include advisory revenues receive civs eliminated consolidation gaap believe operating margin adjusted useful measure performance provides measure core business activities excluding items impact net income loss attributable legg mason inc indicates operating margin would without distribution revenues passed third parties direct cost selling products transitionrelated costs impairment charges impact consolidation certain investment vehicles described consolidation investment vehicles impact net income loss attributable legg mason inc measure provided addition operating margin calculated gaap substitute calculations margins gaap may comparable nongaap performance measures including measures adjusted margins companies calculation operating margin operating margin adjusted follows dollars thousands fiscal 2012 compared fiscal 2011 assets management components changes aum billions years ended march 31 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 includes impact foreign exchange reinvestment dividends aum march 31 2012 6433 billion decrease 343 billion 5 march 31 2011 decrease aum attributable net client outflows 275 billion dispositions 239 billion partially offset market performance 171 billion including negative impact foreign currency exchange fluctuations majority dispositions liquidity assets 199 billion resulted amendment historical smith barney brokerage programs discussed also 40 billion dispositions divestiture two small affiliates longterm asset classes accounted net client outflows 213 billion 186 billion equity fixed income outflows respectively partially offset liquidity inflows 124 billion equity outflows primarily experienced products managed lmcm clearbridge batterymarch royce majority fixed income outflows products managed western asset including 127 billion outflows single low fee global sovereign mandate amendment certain historical smith barney brokerage programs first quarter fiscal 2012 previously discussed resulted reduction 199 billion liquidity aum year ended march 31 2012 significant portion management fees generated assets waived prior disposition liquidity aum resulted reduction operating revenue 523 million net related fee waivers year ended march 31 2012 compared year ended march 31 2011 disposition aum also resulted reductions distribution servicing expenses 414 million year ended march 31 2012 compared year ended march 31 2011 aum asset class aum asset class billions march 31 follows component changes aum asset class billions fiscal year ended march 31 2011 follows average aum asset class billions years ended march 31 follows aum distribution channel component changes aum distribution channel billions fiscal year ended march 31 2012 follows years ended march 31 2012 2011 overall effective fee rate across asset classes distribution channels 35 34 basis points respectively fees managing equity assets generally higher averaging approximately 75 basis points years ended march 31 2012 2011 compares fees managing fixed income assets averaged approximately 25 basis points years ended march 31 2012 2011 liquidity assets averaged 10 basis points reflecting impact current advisory fee waivers due low interest rate environment years ended march 31 2012 2011 fee rates assets distributed legg mason global distribution predominately retail nature averaged approximately 50 basis points years ended march 31 2012 2011 fee rates assets distributed affiliateother channel averaged approximately 20 basis points years ended march 31 2012 2011 decline higher yielding equity assets impacted revenues discussed investment performance overall investment performance assets management year ended march 31 2012 generally positive compared relevant benchmarks equity markets ended difficult year positive note responding favorably improving unemployment figures conclusion bank stress tests resulting certain banks increasing dividends reduced fears european debt fallout result us indices produced positive returns fiscal 2012 notable nasdaq composite returning 112 year ended march 31 2012 fixed income markets improved economic data suggested recovery strengthening flightstosafety ebbed european debt crisis eased allowing us treasury rates climb historically low levels yield curve steepened year economic releases federal reserve board painted increasingly optimistic picture talk third round quantitative easing diminished worst performing fixed income sector year high yield bonds measured barclays high yield index returning 65 best performing fixed income sector year treasury inflation protected securities tips measured barclays us tips index returning 122 march 31 2012 following table presents summary percentages strategy1 outpaced respective benchmarks march 31 2012 2011 trailing 1year 3year 5year 10year periods following table presents summary percentages us mutual fund assets2 outpaced lipper category averages march 31 2012 2011 trailing 1year 3year 5year 10year periods 1 purposes investment performance comparisons strategies aggregation discretionary portfolios separate accounts investment funds products single group represents particular investment objective case separate accounts investment performance account based upon performance strategy account assigned asset managers specific guidelines including portfolios strategies managers manage separate accounts investment funds strategy performance comparison assets based upon performance separate account march 31 2012 2011 91 total aum included strategy aum period although strategies three five tenyear histories total strategy aum includes liquidity assets certain assets included reported performance comparisons include accounts managed accordance guidelines outlined accounts strategies marketed potential clients accounts yet assigned strategy certain smaller products affiliates past performance indicative future results aum included institutional retail separate accounts investment funds included strategy separate accounts performance comparisons based grossoffee performance investment funds including fundofhedge funds managed separate account format performance comparisons based netoffee performance comparisons reflect actual performance specific separate account investment fund individual separate account investment fund performance may differ certain prior year amounts updated conform current year presentation 2 source lipper inc includes openend closedend variable annuity funds march 31 2012 2011 us longterm mutual fund assets represented data accounted 18 17 respectively total aum performance us longterm mutual fund assets included marketed composites results operations operating revenues total operating revenues year ended march 31 2012 27 billion decrease 44 28 billion prior year primarily due 4 decrease average aum 472 million decrease performance fees decrease offset part increase average aum revenue yields 344 basis points year ended march 31 2011 352 basis points year ended march 31 2012 resulting favorable average asset mix disposition liquidity aum related morgan stanley wealth management mswm relationship resulted reduction operating revenues 523 million net related fee waivers fiscal 2012 compared fiscal 2011 significant portion management fees generated assets waived prior disposition investment advisory fees separate accounts decreased 401 million 49 7755 million decrease 259 million primarily result lower average equity assets managed lmcm batterymarch clearbridge legg mason investment counsel trust company lmic 80 million primarily due divestiture singaporebased asset manager fiscal 2011 decreases offset part increase 67 million due higher average fixed income assets managed brandywine investment advisory fees funds remained essentially flat 15 billion periods higher average equity assets managed royce clearbridge higher average fixed income assets primarily managed western asset resulted increase 413 million 411 million respectively increases offset decrease 513 million net related fee waivers due lower average liquidity assets managed western asset primarily result previously discussed disposition liquidity aum related mswm relationship well 315 million decrease result lower average equity assets managed lmcm permal total aum march 31 2012 2011 approximately 6 period accounts eligible earn performance fees performance fees decreased 488 472 million 495 million year ended march 31 2012 primarily result lower fees earned assets managed permal western asset offset slightly increase performance fees earned assets managed brandywine distribution service fees decreased 382 million 101 3410 million primarily due disposition liquidity aum related mswm relationship well decline average mutual fund aum subject distribution service fees operating expenses total operating expenses year ended march 31 2012 23 billion decrease 31 24 billion prior year operating expenses year ended march 31 2012 incurred investment management affiliate level comprised approximately 70 total operating expenses remaining operating expenses comprised corporate distribution costs components total compensation benefits millions years ended march 31 follows total compensation benefits decreased 35 11 billion • salaries incentives decreased 108 million primarily due 406 million decrease corporate salaries incentives primarily resulting headcount reductions connection business streamlining initiative 403 million net decrease salaries incentives revenueshare based affiliates decreases offset part increase incentives 510 million resulting changes expense reimbursement arrangement western asset well additional costs 205 million associated marketbased compensation increases among retained staff new employees primarily global distribution group support ongoing growth initiatives • benefits payroll taxes increased 20 million primarily due 112 million increase noncash amortization expense associated certain deferred compensation awards revenueshare based affiliates increase offset part 92 million decrease corporate benefits expense primarily due headcount reductions resulting business streamlining initiative • transitionrelated costs decreased 104 million costs represent accruals severance retention costs related business streamlining initiative • compensation benefits decreased 219 million primarily due decrease revenueshare based incentive obligations resulting net market losses assets invested seed capital investments deferred compensation plans offset corresponding increases nonoperating income expense compensation percentage operating revenues increased 430 426 prior fiscal year primarily due impact change expense reimbursement arrangement western asset well marketbased compensation increases among retained staff new employees increases offset part impact lower corporate compensation costs primarily attributable business streamlining initiative impact compensation decreases related reduced market gains assets invested deferred compensation plans seed capital investments decrease transitionrelated compensation distribution servicing expenses decreased 89 6497 million principally driven 414 million decrease due previously discussed disposition liquidity aum related mswm relationship well 69 million decrease servicing expenses result business streamlining initiative 58 million decline structuring fees related closedend fund launches also contributed decrease communications technology expense increased 17 1647 million driven increases principally data processing costs market data costs consulting fees totaling 122 million primarily due transitionrelated costs incurred result business streamlining initiative increases offset part 93 million cost savings result streamlining changes including reduced depreciation technology hardware software consulting fees occupancy expense increased 123 1548 million primarily due 147 million net increase lease reserves recorded fiscal 2012 primarily related permanently abandoning certain office space part business streamlining initiative addition 103 million increase result acceleration depreciation related space permanently abandoned fiscal 2012 also related business streamlining initiative increases offset part impact writeoff 41 million real estate escrow deposit prior year 33 million reduction depreciation furniture leasehold improvements resulting business streamlining initiative amortization intangibles decreased 146 196 million primarily due full amortization certain management contracts fiscal 2012 expenses increased 141 million 80 1907 million primarily result increase expense reimbursements paid certain mutual funds current year expense cap arrangements nonoperating income expense interest income increased 242 115 million driven higher yields earned investment balances interest expense decreased 50 876 million primarily result retirement equity units fiscal 2012 reduced interest expense 41 million nonoperating income decreased 375 million 221 million primarily result 560 million net market losses investments proprietary fund products partially offset corresponding compensation decreases discussed 118 million due reduced gains assets invested deferred compensation plans substantially offset corresponding compensation decreases described decreases offset part 113 million increase dividend income partially offset corresponding compensation increase revenuesharing agreements gain 86 million related assigned bankruptcy claim gain 75 million sale small affiliate nonoperating income civs increased 166 million 183 million due net market gains investments certain civs income tax provision income taxes 721 million compared 1194 million prior year fiscal 2012 uk finance act 2011 act enacted act reduced main uk corporate income tax rate 27 26 effective april 1 2011 25 effective april 1 2012 impact tax rate changes revaluation certain existing deferred tax liabilities resulted tax benefit 183 million current year prior year also included similar tax benefit 89 million revaluation deferred tax liabilities addition restructuring australian business partially offset adjustments net value certain deferred tax assets resulted net tax benefit 101 million current year effective tax rate 238 compared 327 prior year changes uk tax rate impacted effective tax rate 60 25 percentage points years ended march 31 2012 2011 respectively addition restructuring australian business partially offset adjustments net value certain deferred tax assets impacted effective tax rate 33 percentage points current year net income attributable legg mason inc net income attributable legg mason inc year ended march 31 2012 totaled 2208 million 154 per diluted share compared 2539 million 163 per diluted share prior year decrease net income primarily due increase incentive compensation changes expense reimbursement arrangement western asset impact net market losses proprietary fund products assets invested deferred compensation plans offset compensation benefits net impact decreased operating revenues decreases offset part impact cost savings due business streamlining initiative impact tax benefits associated restructuring foreign subsidiary uk tax rate changes items previously discussed results operations supplemental nongaap financial information adjusted income decreased 3970 million 277 per diluted share year ended march 31 2012 4392 million 283 per diluted share prior year primarily due decrease net income previously discussed excluding impact uk tax rate adjustments operating margin adjusted years ended march 31 2012 2011 213 232 respectively adjusted income reconciliation net income attributable legg mason inc adjusted income thousands except per share amounts follows operating margin adjusted calculation operating margin operating margin adjusted follows dollars thousands liquidity capital resources primary objective capital structure appropriately support business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may time involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt consolidation variable interest entities discussed impact liquidity capital resources rights benefits bear risks associated assets liabilities civs beyond investments investment advisory fees generated vehicles eliminated consolidation additionally creditors civs recourse general credit beyond level investment consider liabilities obligations assets consist primarily intangible assets goodwill cash equivalents investment securities investment advisory related fee receivables assets principally funded equity capital longterm debt results operations march 31 2013 cash equivalents total assets longterm debt stockholders equity 09 billion 70 billion 11 billion 48 billion respectively total assets total liabilities civs march 31 2013 285 million 221 million respectively cash equivalents primarily invested liquid domestic nondomestic money market funds hold principally domestic nondomestic bank time deposits bank corporate commercial paper bonds government agency securities recognized losses investments monitoring cash equivalents mitigates potential material risks may associated balances following table summarizes consolidated statements cash flows years ended march 31 millions cash inflows provided operating activities fiscal 2013 3033 million primarily related net sales trading current investments results operations adjusted noncash items offset part allocation extinguished debt repayment payments accrued compensation cash outflows used investing activities fiscal 2013 110 million primarily related payments related acquisition fauchier payments made fixed assets offset part net activity related civs cash outflows used financing activities fiscal 2013 7359 million primarily related repayment longterm debt 10492 million repurchase 162 million shares common stock 4255 million 2500 million repayment shortterm debt dividends paid 553 million offset part proceeds subsequent longterm debt issuances 11432 million cash inflows provided operating activities fiscal 2012 4968 million primarily related net income adjusted noncash items cash inflows provided investing activities fiscal 2012 23 million primarily related 202 million net activity related civs release restricted cash required market hedge arrangements offset part payments made fixed assets cash outflows used financing activities fiscal 2012 4818 million primarily due repurchase 136 million shares common stock 4003 million dividends paid 436 million cash inflows provided operating activities fiscal 2011 4121 million primarily attributable net income adjusted noncash items cash outflows used investing activities fiscal 2011 444 million primarily attributable payments made fixed assets cash outflows used financing activities fiscal 2011 4685 million primarily attributable repurchase 146 million common shares 445 million financing transactions table reflects primary sources financing thousands march 31 2013 january 2008 increased capital base 125 billion sale 25 convertible senior notes proceeds strengthened balance sheet provided additional liquidity used general corporate purposes including purchase structured investment vehicle securities liquidity funds notes repurchased may 2012 discussed prior repurchase notes accreting carrying value notes principal amount maturity using interest rate 65 effective borrowing rate nonconvertible debt time issuance expected life seven years resulting additional interest expense fiscal 2013 2012 2011 approximately 58 million 391 million 367 million respectively connection financing entered economic hedge transactions increased effective conversion price notes hedge transactions net cost us 83 million paid proceeds notes transactions closed january 31 2008 capital plan may 2012 announced capital plan included refinancing notes refinancing effected issuance 650 million 55 senior notes net proceeds together cash hand 250 million remaining borrowing capacity existing revolving credit facility used repurchase 125 billion notes terms repurchase included repayment notes par plus accrued interest prepayment fee 63 million issuance warrants holders notes warrants provide purchase aggregate subject adjustment 142 million shares common stock net share settled basis exercise price 88 per share warrants expire june 2017 settled election either shares common stock cash also pursuant capital plan june 2012 entered unsecured credit agreement provides undrawn 500 million revolving credit facility 500 million term loan proceeds term loan used repay 500 million outstanding borrowings previous revolving credit facility terminated 500 million revolving credit facility may increased aggregate amount 250 million subject approval lenders expires june 2017 revolving credit facility available fund working capital needs general corporate purposes borrowings outstanding facility march 31 2013 500 million term loan entered conjunction unsecured credit agreement noted repaid time due four annual installments 50 million beginning june 2013 remainder repaid maturity june 2017 650 million 55 senior notes due may 2019 sold discount 68 million amortized interest expense sevenyear term connection extinguishment notes hedge transactions purchased call options warrants executed connection initial issuance notes also terminated financial covenants bank agreements include maximum net debt ebitda ratio 25 1 minimum ebitda interest expense ratio 40 1 debt defined include obligations borrowed money excluding nonrecourse debt civs capital leases net debt covenants debt reduced amount unrestricted cash excess greater subsidiary cash 375 million ebitda defined consolidated net income loss plusminus tax expense benefit interest expense depreciation amortization intangibles extraordinary expense losses noncash charges defined agreements march 31 2013 net debt ebitda ratio 14 1 ebitda interest expense ratio 116 1 therefore maintained compliance applicable covenants addition 55 senior notes subject certain nonfinancial covenants including provisions relating dispositions certain assets could require percentage related proceeds applied accelerated repayments net income loss significantly declines spend available cash may impact ability maintain compliance financial covenants determine compliance covenants may pressure may elect take number actions including reducing expenses order increase ebitda using available cash repay portion outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt anticipate available cash repay bank debt necessary using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments outstanding bank debt agreement currently impacted ratings two rating agencies interest rate annual commitment fee revolving line credit based higher credit rating two rating agencies june 2011 rating one agencies downgraded one notch agency downgrade rating absent upgrade former agency interest costs rise modestly addition terms 55 senior notes interest rate paid notes increase modestly credit ratings reduced investment grade also connection capital plan board directors authorized 10 billion additional purchases common stock 730 million remained available march 31 2013 completion purchase remaining 155 million common stock previously authorized occurred quarter ended june 30 2012 capital plan authorizes using 65 cash generated future operations beginning fiscal 2013 purchase shares common stock transactions march 13 2013 completed acquisition outstanding share capital fauchier leading european based manager fundsofhedge funds bnp paribas investment partners sa transaction included initial cash payment 634 million funded existing cash resources addition contingent consideration approximately 230 million approximately 300 million utilizing exchange rates march 31 2013 may due second fourth anniversaries closing respectively dependent achieving certain financial targets subject catch adjustment contingent consideration liability acquisition date fair value approximately 216 million may 2010 terminated exchangeable share arrangement related acquisition legg mason canada inc accordance terms transaction 11 million shares representing remaining outstanding exchangeable shares exchanged shares common stock oneforone basis certain asset management affiliates maintain various credit facilities general operating purposes certain affiliates also subject capital requirements various regulatory agencies affiliates met respective capital adequacy requirements periods presented see notes 2 6 notes consolidated financial statements additional information related fauchier acquisition capital plan respectively future outlook expect next 12 months cash generated operating activities adequate support operating investing cash needs planned share repurchases currently intend utilize available resources number potential activities including limited seed capital investments new products repurchase shares common stock acquisitions repayment outstanding debt payment increased dividends described currently project cash flows operating activities sufficient fund liquidity needs march 31 2013 550 million cash equivalents excess working capital requirements previously discussed accordance capital plan intend utilize 65 cash generated future operations purchase shares common stock currently expect raise additional debt equity financing next 12 months however assurances expectations projections could prove incorrect events may occur require additional liquidity acquisition opportunity refinance indebtedness market conditions might significantly worsen affecting results operations generation available cash events result operations available cash insufficient fund liquidity needs would likely seek manage available resources taking actions reducing future share repurchases additional costcutting reducing expected expenditures investments selling assets investment securities repatriating earnings foreign subsidiaries modifying arrangements affiliates andor employees types actions prove insufficient large acquisition refinancing opportunity arise may seek raise additional equity debt march 31 2013 total cash equivalents 933 million included 415 million held foreign subsidiaries amounts held foreign subsidiaries may subject material repatriation tax effects year ended march 31 2013 repatriated approximately 390 million foreign cash plan repatriate another 325 million next several years order increase cash available us general corporate purposes anticipate incremental tax cost approximately 18 million respect repatriation adjusted tax reserve accordingly repatriation accumulated prior period foreign earnings currently planned however circumstances change provide pay applicable additional us taxes connection repatriation funds practical time determine income tax liability would result repatriation accumulated foreign earnings credit liquidity risk cash equivalent deposits involve certain credit liquidity risks maintain cash equivalents number high quality financial institutions funds time may concentrations one institutions balances financial institutions funds credit quality monitored ongoing basis offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligation section follows consolidation discussed critical accounting policies notes 1 17 notes consolidated financial statements contractual contingent obligations contractual obligations make future payments principally connection longterm debt noncancelable lease agreements acquisition agreements service agreements see notes 6 8 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual obligations millions fiscal year excludes contractual obligations civs responsible liable obligations 1 excludes longterm borrowings consolidated clo 2078 million interest longterm borrowings applicable 2 amount contingent payments reflected year represents maximum amount could payable using exchange rates march 31 2013 earliest possible date terms business purchase agreement contingent obligation acquisition date fair value 216 million 3 table include approximately 374 million capital commitments investment partnerships legg mason limited partner obligations funded required end commitment periods fiscal 2021 4 table include amounts uncertain tax positions 515 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated 5 table include redeemable noncontrolling interests primarily related civs 210 million timing related cash outflows cannot reliably estimated 6 table excludes commitments arising potential awards proposed permal management equity plan key employees market risk maintain enterprise risk management program oversee coordinate risk management activities legg mason subsidiaries program certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income loss majority revenue calculated market value aum accordingly decline value underlying securities cause aum thus revenues decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts ordinary course business may also reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets performance fees may earned certain investment advisory contracts exceeding performance benchmarks strong markets tend increase fees declines market values aum result reduced fee revenues net income generally earn higher fees equity assets fees charged fixed income liquidity assets declines market values aum asset class disproportionately impact revenues addition revenue sharing agreements certain affiliates retain different percentages revenues cover costs including compensation net income loss profit margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary trading nontrading assets trading nontrading assets comprised investment securities including seed capital sponsored mutual funds products limited partnerships limited liability companies certain investment products trading current investments excluding civs march 31 2013 2012 subject risk security price fluctuations summarized thousands approximately 392 million 800 million trading current investments related longterm incentive compensation plans march 31 2013 2012 respectively offsetting liabilities fluctuation market value assets related liabilities material effect net income loss liquidity however impact compensation expense corresponding offset nonoperating income expense trading current investments 911 million 862 million march 31 2013 2012 respectively relate longterm incentive plans related liabilities completely offset due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income expense net income loss approximately 2408 million 2459 million trading current investments march 31 2013 2012 respectively investments proprietary fund products investments fluctuations market value impact nonoperating income expense amounts fluctuations market value approximately 138 million 126 million proprietary fund products march 31 2013 2012 respectively offsetting compensation expense revenue share agreements fluctuations market value approximately 719 million 118 million proprietary fund products march 31 2013 2012 respectively substantially offset gains losses market hedges therefore materially impact net income loss attributable legg mason inc investments proprietary fund products liquidated related fund establishes track record investors decision made longer pursue strategy nontrading assets excluding civs march 31 2013 2012 subject risk security price fluctuations summarized thousands equity method investments partnerships llcs march 31 2012 included approximately 893 million investments related involvement ppip fluctuations market value investments offsetting compensation expense revenuesharing agreements investments related ppip fully redeemed fiscal 2013 upon liquidation fund investment securities civs totaled 248 million 316 million march 31 2013 2012 respectively investments civs totaled 2106 million 2949 million march 31 2013 2012 respectively march 31 2013 2012 held equity investments civs 391 million 389 million respectively fluctuations market value investments civs excess equity investment impact net income loss attributable legg mason inc however may impact nonoperating income expense civs corresponding offset net income loss attributable noncontrolling interests valuation trading nontrading investments described within critical accounting policies heading valuation financial instruments see notes 1 14 notes consolidated financial statements discussion derivatives following summary effect 10 increase decrease market values financial instruments subject market valuation risks march 31 2013 1 gains losses related certain investments deferred compensation plans proprietary fund products directly offset corresponding adjustment compensation expense related liability addition investments proprietary fund products approximately 719 million economically hedged limit market risk result 10 increase decrease unrealized market value financial instruments subject market valuation risks would result 331 million increase decrease pretax earnings march 31 2013 also march 31 2013 2012 cash equivalents included 4858 million 8937 million respectively money market funds foreign exchange sensitivity operate primarily united states provide services earn revenues incur expenses outside united states accordingly fluctuations foreign exchange rates currencies principally united kingdom brazil japan canada singapore australia denominated euro may impact comprehensive income loss net income loss certain affiliates entered forward contracts manage impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect net income loss liquidity interest rate risk exposure interest rate changes outstanding debt partially mitigated 650 million 55 senior notes fixed interest rates march 31 2013 approximately 500 million outstanding floating rate debt subject fluctuations interest rates impact nonoperating income loss net income loss march 31 2013 estimate 1 change interest rates would result net annual change interest expense 5 million see note 6 notes consolidated financial statements additional disclosures regarding debt critical accounting policies estimates accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following critical accounting policies involve significant estimates judgments consolidation effective april 1 2010 adopted revised accounting guidance accounting standards codification asc topic 810 consolidation statement financial accounting standards 167 amendments financial accounting standards board interpretation 46r sfas 167 relating consolidation variable interest entities vies includes new approach determining consolidate vie changes necessary reassess consolidate vie changes assessment entities vies application revised accounting guidance deferred certain investment funds including money market funds investment funds qualify deferral continue assessed consolidation prior guidance financial accounting standards board interpretation 46r consolidation variable interest entities interpretation arb 51 fin 46r normal course business sponsor manager various types investment vehicles certain investment vehicles considered vies others considered voting rights entities vres subject traditional consolidation concepts based ownership rights services entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees vies material march 31 2013 issued investment performance guarantees vies vres investors investment vehicles considered vres consolidated controlling financial interest investment vehicle absent substantive investor rights replace manager entity kickout rights financial accounting standards board interpretation 46r accounting standards update 201010 amendments statement 167 certain investment funds sponsored investment funds including money market funds determine whether primary beneficiary vie absorb majority vies expected losses receive majority vies expected residual returns determination expected residual returns excludes gross fees paid decision maker certain criteria met determining whether primary beneficiary vie consider qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid us related party ownership guarantees implied relationships determining primary beneficiary must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks determining whether vie significant disclosure purposes consider factors used determination primary beneficiary statement financial accounting standards 167 accounting standards codification topic 810 consolidation sponsor manager collateralized debt obligation entities cdos clos qualify deferral assessed revised accounting guidance follows determine whether variable interest vie considering among things obligation absorb losses right receive benefits expected significant vie consider management fee structure including seniority level fees current expected economic performance entity well provisions included governing documents might restrict guarantee expected loss residual return significant variable interest determine whether primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits potentially could significant vie evaluating whether obligation absorb losses right receive benefits could potentially significant vie consider factors regarding design terms characteristics investment vehicles including following qualitative factors involvement investment vehicle beyond providing management services hold equity debt interests investment vehicle transferred assets investment vehicle potential aggregate fees future periods insignificant relative potential cash flows investment vehicle variability expected fees relation potential cash flows investment vehicle insignificant legg mason must consolidate vie deemed primary beneficiary see note 17 notes consolidated financial statements additional discussion civs vies revenue recognition vast majority revenues calculated percentage fair value aum underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager brokerdealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost designed approximate fair value vast majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs management fees aum fair values based unobservable inputs material march 31 2013 equity fixed income liquidity aum values aggregated 1618 billion 3651 billion 1377 billion respectively vast majority aum valued independent pricing services based upon observable market prices inputs believe market risk significant risk underlying value aum economic events financial market turmoil increased market price volatility however valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2013 less 1 total aum valued based unobservable inputs valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except longterm debt trading investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income loss comprehensive income loss depending underlying purpose instrument equity investments control investee primary beneficiary variable interest entity exert significant influence financial operating policies investee follow equity method accounting evaluation whether exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence may governing board investee legal rights investors entity pursuant funds operating documents relationship us investors entity substantially equity method investees investment companies record underlying investments fair value therefore equity method accounting share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense investments value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices evaluate nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2013 2012 excluding investments civs owned approximately 01 million 119 million respectively financial investments valued assumptions estimates unobservable inputs march 31 2013 2012 also approximately 999 million 2042 million respectively investments investment partnerships included noncurrent assets consolidated balance sheets approximately 688 million 1692 million respectively accounted equity method remainder accounted cost method considers factors indicate may impairment value investments addition march 31 2013 2012 563 million 783 million respectively equity method investments included investment securities consolidated balance sheets accounting guidance fair value measurements disclosures defines fair value establishes framework measuring fair value accounting guidance defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance accounting guidance fair value measurements establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category may include repurchase agreements fixed income securities certain proprietary fund products category also includes clo loans derivative liabilities civ level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds clo debt civ category may also include certain proprietary fund products redemption restrictions valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products certain investments held civs valued net asset value nav determined fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 fair values clo loans bonds determined based prices wellrecognized thirdparty pricing services utilize available market data therefore classified level 2 legg mason established controls designed assess reasonableness prices provided fair value clo debt valued using discounted cash flow methodology inputs used determine expected cash flows include assumptions forecasted default recovery rates market participant would use determining fair value clos underlying collateral assets given significance unobservable inputs fair value measurement clo debt valuation classified level 3 exchange traded options valued using last sale price absence sale last offering price options traded counter valued using dealer supplied valuations options classified level 1 futures contracts valued last settlement price end day exchange upon traded classified level 1 index single name credit default swaps interest rate swaps previously held valued based valuations furnished pricing services classified level 2 practical expedient rely navs certain investments fair value navs provided investees derived fair values underlying investments reporting date march 31 2013 approximately 2 total assets 10 financial assets measured fair value 9 total liabilities meet definition level 3 excluding assets liabilities civs approximately 1 total assets 8 financial assets measured fair value liabilities meet definition level 3 transfers categories measured beginning period see note 3 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2013 follows thousands identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weightedaverage cost capital takes consideration premium representing degree risk inherent asset fully described goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred perform tests include critical reviews significant assumptions determine intangible assets goodwill impaired minimum perform tests indefinitelife intangible assets goodwill annually december 31 performed impairment test permal fundsofhedge funds contracts indefinitelife intangible asset december 12 2012 modification employment contracts arrangements management permal completed day constituted triggering event test indicated fundsofhedge funds contracts asset impaired thereby triggering impairment tests indefinitelife intangible assets goodwill result impairment tests updated annual test date december 31 2012 permal fundsofhedge funds contracts trade name indefinitelife intangible assets domestic mutual fund contracts indefinitelife intangible assets determined partially impaired resulting aggregate pretax operating charges 734 million neither goodwill intangible assets deemed impaired details intangible assets goodwill related impairment tests follow impairment value amortizable intangible assets recognized year ended march 31 2013 estimates related future cash flows exceeded asset carrying values also determined triggering events occurred march 31 2013 therefore additional indefinitelife intangible asset goodwill impairment testing necessary amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates amortization periods appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows estimated remaining useful lives amortizable intangible assets currently range one six years weightedaverage life approximately 28 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined market participants perspective based projected discounted cash flows taking account values market participants would pay taxable transaction acquire respective assets two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names determine fair value intangible assets based upon discounted projected cash flows take consideration estimates future fees profit margins growth rates taxes discount rates asset determined impaired current implied fair value less recorded carrying value asset determination fair values indefinitelife intangible assets highly dependent estimates changes inputs could result material impairment related carrying values asset impaired difference current implied fair value carrying value asset reflected financial statements recognized expense period impairment determined exist contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth estimated net client flows projected market performance estimate projected cash flows projected growth rates affiliate used project assets management cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income liquidity investment manager based upon among things historical experience expectations future market investment performance internal external sources currently market growth assumptions 6 equity 3 fixed income 0 liquidity products general assumption 2 organic growth products subject exceptions organic growth nearterm periods starting point assumptions corporate planning process includes threeyear aum projections management operating affiliate consider specific business circumstances affiliate nearyear flow assumptions certain affiliates adjusted appropriate reflect market participant view beyond year three estimates move towards general organic growth assumption 2 appropriate affiliate asset class year 20 resulting cash flow growth rate year 20 held constant used project cash flows year 40 based projected aum affiliate asset class affiliate advisory fee rates applied determine projected revenues domestic mutual fund contracts projected revenues applied weightedaverage margin applicable affiliates manage aum margins based arrangements currently place affiliate projected operating income reduced appropriate tax rate calculate projected cash flows believe growth assumptions reasonable given consideration multiple inputs including internal external sources although assumptions subject change based fluctuations actual results market conditions assumptions also subject change due among factors poor investment performance one advisory affiliates withdrawal aum clients changes business climate adverse regulatory actions loss key personnel consider risks development growth assumptions discount rates discussed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows process includes comparison actual results prior growth projections however differences actual results prior projections necessarily indicative need reassess estimates given discounted projected cash flow analyses include projections well beyond three years variances nearyears may offset subsequent years fair value assessments pointintime consistency fair value assessment indicators value reflect expectations market participants pointintime critical evidence soundness estimate value subsequent periods consider differences actual results prior projections considering reasonableness growth assumptions used current impairment testing discount rates based appropriately weighted estimated costs debt equity capital using market participant perspective estimate cost debt based published debt rates estimate cost equity capital based capital asset pricing model considers riskfree interest rate peergroup betas company equity risk premiums equity risk adjusted consider relative risk associated legg mason indefinitelife intangible asset reporting unit discount rates also calibrated based assessment relevant market values continued market uncertainty resulting impact legg masons stock price search permanent ceo ongoing impairment testing process increase relative risk associated aspects business resulting higher discount rates current year evaluation legg masons indefinitelife intangible assets reporting unit consistent standard valuation practices taxable transactions projected discounted cash flow analysis also factors tax benefit value tax benefit represents discounted tax savings third party purchased asset given valuation date would receive future tax deductions amortization purchase price 15 years permal fundsofhedge funds contracts 626 million account approximately 20 indefinitelife intangible assets noted modification employment contracts arrangements management permal constituted triggering event december 12 2012 permal experienced recent outflows increased risk associated business past several years seen declines traditional high net worth client fundofhedge funds business permals historical focus permal offset extent new institutional business result factors actual results generally compare unfavorably growth assumptions permal fundsofhedge funds contracts used asset impairment testing december 31 2011 2010 result december 2012 testing nearterm growth assumptions contracts reduced together impact decreased margins nearyears resulting modifications employment arrangements led decreased projected cash flows business fundofhedge fund managers subject unique market regulatory influences adding additional uncertainty estimates based upon projected discounted cash flow analyses carrying value permal fundsofhedge funds contracts asset exceeded fair value resulting impairment charges 321 million excess cash flows permal fundsofhedge funds contracts assumed average annual growth rate approximately 8 however given current experience projected cash flows reflect net aum flows trending moderate inflows years 1 2 respectively projected cash flows permal fundsofhedge funds contracts discounted 160 reflecting permal legg mason specific factors noted investment performance including expected impact future asset flows significant factor growth projections permal fundsofhedge funds contracts market performance projections supported fact permals two largest funds comprise half contracts asset aum 10year average returns exceeding 6 market projections supported industry statistics domestic mutual fund contracts acquired citigroup asset management “cam” transaction 2106 million account approximately 65 indefinitelife intangible assets december 31 2012 approximately 127 billion aum primarily managed clearbridge western asset associated asset approximately 40 longterm fixed income aum 30 equity aum liquidity aum although domestic mutual fund contracts overall maintained strong recent market performance previously disclosed uncertainties regarding market conditions asset flows recent assessments related risk including risks related potential regulatory changes liquidity business reflected projected discounted cash flow analyses result impact factors projected discounted cash flow analyses related carrying value exceeded fair value resulting impairment charge 396 million excess impairment test cash flows domestic mutual fund contracts assumed annual growth rates average approximately 6 given current uncertainties reflect net aum flows trending moderate inflows years 1 2 respectively projected cash flows domestic mutual fund contracts discounted 145 reflecting business legg mason specific factors noted believe investment performance also significant influence domestic mutual fund contract longterm flows recent improvements performance favorably impact flows long performance strong aggregate 76 domestic mutual fund longterm aum funds outpaced threeyear lipper category average december 31 2012 date testing completed compares 33 september 30 2008 generally tends four fiveyear lag improved investment performance results increased asset flows addition believe recent reorganization distribution platform provides improved focus growth business also favorably impacted flows improvement investment performance assisted distribution personnel selling products result improved performance reorganization distribution platform us distribution group net inflows nine months september 30 2012 quarter ended june 30 2012 highest net inflows since march 2007 yeartodate results generally compare slightly favorably growth assumptions related domestic mutual fund contracts asset impairment testing december 31 2011 past several years however actual projection comparisons less favorable flows last several months less consistent considered current estimates trade names account 2 indefinitelife intangible assets primarily related permal tested intangible assets using assumptions similar described indefinitelife contracts permal trade name carrying value exceeded estimated fair value resulting 17 million impairment excess resulting fair value trade name significantly exceeded related carrying amount goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition december 2010 announced realignment executive management team fiscal 2012 resulted combination americas international divisions one operating segment global asset management internal management reporting modified consistent realignment discrete financial information regularly received chief operating decision maker chief executive officer consolidated global asset management business level result former americas international operating segments longer reporting units subsequently goodwill recorded evaluated one global asset management reporting unit level global asset management reporting unit consists operating businesses asset management affiliates centralized global distribution operations recent impairment testing process consolidated assets liabilities allocated single global asset management reporting unit except deferred tax assets arising net operating losses related assets liabilities reporting unit similarly projected operating results reporting unit include holding company corporate costs overhead including costs associated executive management finance human resources legal compliance internal audit central corporate functions goodwill principally originated acquisitions cam permal royce value reporting unit based part projected consolidated net cash flows including cash flows assets managed mutual funds closedend funds proprietary funds addition separate account assets managers significant assumptions used assessing implied fair value reporting unit discounted cash flow method consistent methodology discussed indefinitelife intangible assets also reporting unit level future corporate costs estimated consolidated projected operating results affiliates actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows reporting unit discounted projected cash flow analysis projected cash flows aggregate basis across asset classes assumed average annual growth rate approximately 8 discount rates based appropriately weighted estimated costs debt using market participant perspective also consistent methodology discussed indefinitelife intangible assets impairment test quarter ended december 31 2012 projected cash flows discounted 150 determine present value reflecting companyasset specific factors noted also perform marketbased valuation reporting unit value applies average ebitda multiples paid change control transactions peer companies ebitda observed average ebitda multiple utilized 95x ten asset management transactions dated october 2009 december 2012 results two estimates value reporting unit discounted cash flow ebitda multiple analyses compared significant difference assessed determine reasonableness value whether adjustment either result warranted values accepted appropriately weighted average two reporting unit valuations discounted cash flow ebitda multiple analyses used implied fair value global asset management reporting unit december 31 2012 exceeds carrying value approximately 660 million considering relative merits details involved valuation process used equal weighting two values december 2012 testing assess accuracy reporting unit value determined valuation methods comparing results market capitalization determine implied control premium reasonableness implied control premium tested comparing control premiums paid relevant actual change control transactions discussed assessment provides evidence underlying assumptions analyses reporting unit fair value reasonable calculating market capitalization purposes market volatility significant impact capitalization appropriate may consider average market prices stock period two months test date determine market capitalization control premium arises fact acquisition typically premium paid current market prices publicly traded companies relates ability control operations acquired company assessments control premiums asset management industry difficult many acquisitions involve privately held companies involve portions public company control premium calculated asset manager transactions often valued ebitda multiples absent unusual circumstances generally consistently priced range 8x 13x ebitda past several years recent market evidence regarding control premiums suggests values 11 99 realistic common believe premiums reasonable range estimation equity value market evidence published source two years ended december 31 2011 includes 56 transactions banking finance brokerage investment consulting industry groups average control premium value 43 noted control premium values specific public asset manager transactions limited however since 2000 17 public asset manager transactions available us control premium values ranging 20 154 averaged 55 consider specific circumstances company determine whether specific differences situation make market control premiums applicable also exclude consideration outlying values transactions known unique circumstances based analysis consideration believe implied control premium 48 determined reporting unit value estimation december 31 2012 reasonable relation range observed relevant market control premium values subsequent december 31 2012 analysis market price legg mason common stock appreciated 20 march 31 2013 would reduce implied control premium assuming values remain constant stockbased compensation stockbased compensation plans include stock options employee stock purchase plans marketbased performance share awards restricted stock awards deferred compensation payable stock compensation plans issue equity awards directors officers key employees accordance applicable accounting guidance compensation expense years ended march 31 2013 2012 2011 includes compensation cost nonvested sharebased awards grant date fair value amortized respective vesting periods straightline method also accounting guidance cash flows related income tax deductions excess less stockbased compensation expense classified financing cash flows granted 10 million 08 million 07 million stock options fiscal 2013 2012 2011 respectively additional information sharebased compensation see note 11 notes consolidated financial statements determine fair value option grant using blackscholes optionpricing model except marketbased grants would use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate except grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal expected life options estimate volatility equally weighted historical prices stock period equal expected life option implied volatility market listed options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different income taxes subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes management assesses likelihood able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision substantially deferred tax assets relate us uk taxing jurisdictions march 31 2013 us federal deferred tax assets aggregated 771 million realization expected require 42 billion future us earnings approximately 332 million must form foreign source income deferred tax assets generated us jurisdictions resulting net operating losses generally expire 20 years generated resulting foreign tax credits generally expire 10 years generated based estimates future taxable income using assumptions consistent used goodwill impairment testing likely current federal tax benefits relating net operating losses realizable valuation allowance necessary time respect resulting foreign tax credits likely tax benefits relating utilization 363 million foreign tax credits realized additional valuation allowance 171 million recorded fiscal 2013 respect thereto addition valuation allowance established prior years substantial portion deferred tax assets relating uk taxing jurisdictions tax planning may enhance positions realization current tax benefits dependent significant tax strategies march 31 2013 us state deferred tax assets aggregated 173 million due state tax planning allow utilization net operating losses generated certain jurisdictions recognized net valuation allowance release 20 million fiscal 2013 due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary net valuation allowance release 35 million fiscal 2013 primarily related full release valuation allowance deferred tax assets related australia singapore offset establishment valuation allowance certain uk deferred tax assets extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets event determine portion deferred tax assets already subject valuation allowance realizable required establish valuation allowance charge income tax provision period determination made depending facts circumstances charge could material earnings calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements forwardlooking statements made report form 10k time may otherwise make public filings press releases statements management forwardlooking statements within meaning private securities litigation reform act 1995 including information relating anticipated growth revenues margins earnings per share anticipated changes business amount client aum anticipated future performance business including expected earnings per share future periods anticipated future investment performance affiliates expected future net client cash flows anticipated expense levels changes expenses expected effects acquisitions expectations regarding financial market conditions words phrases may expects may affect may depend believes estimate project anticipate similar words phrases intended identify forwardlooking statements forwardlooking statements subject various known unknown risks uncertainties caution readers forwardlooking information provided behalf legg mason guarantee future performance actual results may differ materially forwardlooking information result various factors beyond control including limited discussed heading risk factors elsewhere report form 10k public filings press releases statements management due risks uncertainties factors caution person receiving forwardlooking information place undue reliance statements forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events future revenues may fluctuate due numerous factors total value composition aum mix aum among affiliates revenue yield aum volatility general level securities prices interest rates relative investment performance companysponsored investment funds asset management products absolute terms relative competing offerings market indices investor sentiment confidence general economic conditions ability maintain investment management administrative fees current levels competitive conditions business ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred result changes number total employees competitive factors changes percentages revenues paid compensation reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill otherwise support investment products connection litigation regulatory proceedings effects acquisitions dispositions business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risks revenues net income critical accounting policies intangible assets goodwill previously discussed item 7aitem 7 managements discussion analysis financial condition results operations executive overview legg mason inc holding company subsidiaries collectively comprise legg mason global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally us uk also offices australia bahamas brazil canada chile china dubai france germany italy japan poland singapore spain switzerland taiwan references fiscal 2016 2015 2014 refer fiscal year ended march 31 year terms us company refer legg mason operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks hurdle rates largest portion performance fees earned based 12month performance periods end differing quarters year portion based quarterly performance periods distribution service fees received distributing investment products services providing support services investment portfolios providing nondiscretionary advisory services generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level assets management aum assets advisement aua fee rates thus affected factors securities market conditions ability attract maintain aum key investment personnel investment performance aum varies large part period due inflows outflows client assets well market performance changes foreign exchange rates client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services fees charge investment services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions fees charge investment services vary based upon factors type underlying investment product amount aum asset management affiliate provides services type services investment objectives provided fees charged equity asset management services generally higher fees charged fixed income liquidity asset management services accordingly revenues average operating revenue yields affected composition aum changes relative level equity assets alternatives typically significantly impacting revenues average operating revenue yields average operating revenue yields calculated ratio annualized investment advisory fees distribution service fees revenues less performance fees average aum addition ordinary course business may reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets revenue sharing arrangements place asset management affiliates specified percentages affiliates revenues required distributed us balance revenues retained affiliates pay operating expenses including compensation expenses excluding certain expenses income taxes arrangements asset management affiliates retain different percentages revenues cover costs net income loss attributable legg mason inc operating margin compensation percentage operating revenues impacted based affiliates products generate aum change aum one affiliate respect one product class products dramatically different effect revenues earnings equal change another affiliate another product class products addition time may agree changes revenue sharing arrangements asset management personnel may impact compensation expenses profitability significant component cost structure employee compensation benefits majority variable nature includes incentive compensation primarily based upon revenue levels noncompensation related operating expense levels revenue sharebased affiliates overall profitability next largest component cost structure distribution servicing expense consists primarily fees paid thirdparty distributors selling asset management products services largely variable nature certain operating costs typically consistent period occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions global financial markets results individual period considered representative future results profitability sensitive variety factors including amount composition aum volatility general level securities prices interest rates well changes foreign currency exchange rates among things periods unfavorable market conditions likely adverse effect profitability addition diversification services products offered investment performance access distribution channels reputation market attraction retention key employees client relations significant factors determining whether successful attraction retention clients last years industry seen flows products currently garner significant market share discussion factors may affect results operations refer item 1a risk factors included herein financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms commercial banks insurance companies financial services companies industry impacted continued economic uncertainty constant introduction new products services consolidation financial services firms mergers acquisitions industry operate also subject extensive regulation federal state foreign laws like firms continue impacted regulatory legislative changes responding changes keeping abreast regulatory developments required continue require us incur costs impact profitability strategic priorities focused four primary areas listed management keeps strategic priorities mind evaluates operating performance financial condition consistent approach also presented table important initiatives management currently focuses evaluating performance financial condition strategic priorities discussed designed drive improvements net flows earnings cash flows aum key metrics including operating margin certain key metrics discussed annual results discussion follow connection strategic priorities principally products productivity • may 2 2016 completed transaction combine permal group limited permal existing hedge fund platform entrust capital entrust leading alternative asset management firm headquartered new york approximately 10 billion aum 2 billion aua committed capital 65 combined entity branded entrustpermal combination businesses entrust permal creates new global alternatives firm 26 billion aum total client assets including aua committed capital approximately 30 billion connection restructuring permal combination entrust expect incur 100 million total restructuring transitionrelated costs 433 million incurred year ended march 31 2016 approximately 40 million 50 million anticipated remaining costs associated restructuring expected incurred year ending march 31 2017 expect achieve approximately 35 million annual savings cost structures two businesses see notes 2 18 notes consolidated financial statements additional information • april 13 2016 acquired 82 majority equity interest clarion partners diversified real estate asset management firm based new york clarion partners managed approximately 415 billion aum april 30 2016 see note 18 notes consolidated financial statements additional information • march 2016 completed implementation management equity plan management royce associates royce incurred noncash charge 214 million upon issuance management equity plan units fiscal 2016 see note 11 notes consolidated financial statements additional information regarding royce management equity plan • march 2016 issued 450 million senior notes due 2026 250 million junior subordinated notes due 2056 net proceeds used finance acquisitions entrust clarion partners see note 6 notes consolidated financial statements additional information • january 22 2016 acquired 20 minority equity position precidian investments llc precidian firm specializing creating innovative products solutions solving market structure issues particularly regard exchangetraded fund etf marketplace see note 2 notes consolidated financial statements additional information • december 2015 launched four new etf products nasdaq stock exchange outcomeoriented indexbased etf funds managed whollyowned asset management affiliate qs investors holdings llc qs investors • october 21 2015 acquired 75 majority interest rare infrastructure limited rare infrastructure rare infrastructure specializes global listed infrastructure investing headquartered sydney australia approximately 68 billion aum closing see note 2 notes consolidated financial statements additional information net loss attributable legg mason inc year ended march 31 2016 250 million 025 per diluted share compared net income attributable legg mason inc 2371 million 204 per diluted share year ended march 31 2015 addition 433 million expenses related restructuring permal combination entrust 214 million charge related royce management equity plan discussed year ended march 31 2016 included pretax impairment charges 3710 million 276 per diluted share related permal indefinitelife intangible assets inclusive related intangible asset fauchier partners management limited fauchier year ended march 31 2015 included pretax nonoperating charge 1071 million 059 per diluted share related refinancing previously outstanding 55 senior notes well 358 million expenses related integration two existing affiliates batterymarch financial management inc batterymarch legg mason global asset management llc lmgaa qs investors average aum total revenues decreased fiscal 2016 compared fiscal 2015 discussed total aum decreased year ended march 31 2016 due negative impact market performance net client outflows longterm liquidity aum offset part acquisition rare infrastructure october 2015 following discussion analysis provides additional information regarding financial condition results operations business environment results operations fiscal 2016 us economic environment characterized continued growth improving fundamentals business environment strongly influenced overall markets remained sensitive increasing concerns economic political conditions countries well us federal reserve boards decision increase target federal funds rate december 2015 first time since 2006 us international equity markets experienced significant volatility fiscal 2016 despite recovering significant portion losses experienced result volatility three major us equity market indices decreased fiscal 2016 increasing past two fiscal years bond indices mixed illustrated table 1 indices trademarks dow jones company mcgrawhill companies inc nasdaq stock market inc barclays capital respectively affiliated legg mason 2 excludes impact reinvestment dividends stock splits december 2015 federal reserve board increased target federal funds rate first time since 2006 025 050 economic outlook us remained positive recent years financial environment operate continues reflect heightened level sensitivity move fiscal 2017 following table sets forth periods indicated amounts consolidated statements income loss percentage operating revenues increase decrease item percentage amount previous period nmnot meaningful 1 calculated based change actual amounts fiscal years percentage prior year amount assets management assets advisement assets management aum primarily managed across following asset classes equity fixed income liquidity  large cap growth  us intermediate investment grade  us managed cash  large cap value  us credit aggregate  us municipal cash  small cap core  global opportunistic fixed income  equity income  global government  large cap core  us municipal  international equity  global fixed income  infrastructure value  us long duration  small cap value  us limited duration  sector equity  us high yield  mid cap core  emerging markets  emerging markets equity  global equity components changes aum billions years ended march 31 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 primarily reclassification 05 billion 128 billion client assets aum aua fiscal 2016 2015 respectively reinvestment dividends 3 includes 68 billion related acquisition rare infrastructure 01 billion related acquisition pk investments llp pk investments year ended march 31 2016 95 billion related acquisition martin currie holdings limited martin currie 50 billion related acquisition qs investors offset part 95 billion related disposition legg mason investments counsel trust lmic year ended march 31 2015 aum march 31 2016 6696 billion decrease 331 billion 47 march 31 2015 total net client outflows 261 billion consisting net client outflows liquidity longterm asset classes 149 billion 112 billion respectively net longterm asset outflows comprised equity fixed income net outflows 108 billion 04 billion respectively equity net outflows primarily products managed royce outflows expected continue nearterm clearbridge investments llc “clearbridge” offset part equity net inflows qs investors fixed income net outflows primarily products managed western asset management company western asset permal offset part fixed income net inflows brandywine global investment management llc brandywine generally earn higher fees profits equity aum outflows equity asset class negatively impact revenues net income loss attributable legg mason inc would outflows asset classes market performance 153 billion positive impact foreign currency exchange rate fluctuations 14 billion acquisitions 69 billion primarily relate acquisition rare infrastructure october 2015 aum march 31 2015 7027 billion increase 09 billion 01 march 31 2014 total net client outflows 57 billion net client outflows 222 billion liquidity asset class substantially offset 165 billion net client inflows longterm asset classes fiscal 2015 experienced net inflows longterm asset classes time since fiscal 2007 net longterm asset inflows comprised fixed income net inflows 192 billion offset part equity net outflows 27 billion fixed income net inflows primarily products managed brandywine western asset equity net outflows primarily products managed royce qs investors partially offset equity inflows clearbridge brandywine market performance totaled 201 billion positive impact market performance 329 billion offset part reclassification 128 billion client assets aum aua first quarter fiscal 2015 discussed negative impact foreign currency exchange rate fluctuations 185 billion acquisitions dispositions net totaled 50 billion 95 billion related acquisition martin currie 50 billion related acquisition qs investors offset part 95 billion related disposition lmic investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds manage may redeem investments funds time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients thirdparty distributors relationships loss key investment management personnel financial market performance aum asset class aum asset class billions years ended march 31 follows average aum asset class billions years ended march 31 follows component changes aum asset class billions fiscal years ended march 31 2016 2015 2014 follows 1 fixed income redemptions include 47 billion year ended march 31 2014 related single lowfee global sovereign mandate client assets related client reclassified aum aua first quarter fiscal 2015 discussed 2 primarily reclassification client assets aum aua fiscal 2016 2015 05 billion 128 billion respectively reinvestment dividends 3 includes 68 billion related acquisition rare infrastructure 01 billion related acquisition pk investments year ended march 31 2016 95 billion related acquisition martin currie 50 billion related acquisition qs investors offset part 95 billion related disposition lmic year ended march 31 2015 alternative asset class beginning first quarter fiscal 2017 present alternative assets separate asset class aum currently define alternative assets aum managed entrustpermal permal capital management clarion partners rare infrastructure aum distribution channel broadly two principal distribution channels global distribution affiliateother sell variety investment products services global distribution consists centralized global distribution operations principally sells us international mutual funds commingled vehicles retail separately managed account programs subadvisory accounts insurance companies similar clients affiliateother consists distribution operations within asset managers principally sell institutional separate account management liquidity money market funds fundsofhedge funds component changes aum distribution channel billions years ended march 31 2016 2015 2014 follows 1 includes 68 billion related acquisition rare infrastructure 01 billion related acquisition pk investments year ended march 31 2016 95 billion related acquisition martin currie 50 billion related acquisition qs investors offset part 95 billion related disposition lmic year ended march 31 2015 operating revenue yield overall operating revenue yield less performance fees across asset classes distribution channels 38 basis points year ended march 31 2016 39 basis points years ended march 31 2015 2014 fees equity assets generally higher averaging approximately 70 basis points 75 basis points 85 basis points years ended march 31 2016 2015 2014 respectively average fee rate equity assets declined last four years due shift mix equity assets higher fee equity products lower fee equity products compares fees fixed income assets averaged approximately 30 basis points years ended march 31 2016 2015 2014 respectively liquidity assets averaged 10 basis points reflecting impact current advisory fee waivers due low interest rate environment years ended march 31 2016 2015 2014 equity assets primarily managed clearbridge royce brandywine permal qs investors martin currie rare infrastructure fixed income assets primarily managed western asset brandywine permal liquidity assets managed western asset fee rates assets distributed legg mason global distribution predominately retail nature averaged approximately 45 basis points year ended march 31 2016 approximately 50 basis points years ended march 31 2015 2014 fee rates assets distributed affiliateother channel averaged approximately 35 basis points years ended march 31 2016 2015 2014 investment performance overall investment performance aum years ended march 31 2016 2015 2014 mixed compared relevant benchmarks year ended march 31 2016 year ended march 31 2016 us indices produced mixed returns best performing dow jones industrial average returning 21 returns achieved economic environment characterized unexpected declines oil prices strong us dollar along slowtorecover us economy chinese currency devaluation fixed income markets december 2015 federal reserve raised target rate 025 representing federal reserves first step toward monetary policy normalization however expectations future federal reserve interest rate increases lessened forecasts pointed fewer future rate increases resulted yield curve continuing flatten fiscal year many longdated yields declined lowest performing fixed income sector year ended march 31 2016 high yield bonds measured barclays us high yield index declined 37 best performing fixed income sector year ended march 31 2016 us government bonds measured barclays us government index returned 24 year ended march 31 2015 year ended march 31 2015 us indices produced positive returns best performing nasdaq composite returned 167 returns achieved economic environment characterized uneven global growth heightened sensitivity economic news declining oil prices unrest middle east fixed income markets federal reserve kept target rate discount rate steady signaling increase federal reserve funds target rate near term overall yield curve flattened fiscal year many longdated yields declined lowest performing fixed income sector year ended march 31 2015 high yield bonds measured barclays us high yield index returned 20 best performing fixed income sector year ended march 31 2015 corporate bonds measured barclays us credit index returned 67 year ended march 31 2014 year ended march 31 2014 us indices produced positive returns best performing nasdaq composite returned 285 returns achieved economic environment characterized uneven global growth heightened sensitivity economic news concerns economic growth china ongoing ukrainerussia crisis fixed income markets federal reserve kept target rate discount rate steady tapering bondbuying program yield curve steepened fiscal year flattened last quarter many longdated yields declined lowest performing fixed income sector year ended march 31 2014 us treasury inflation protected securities tips measured barclays us tips index declined 65 best performing fixed income sector year ended march 31 2014 high yield bonds measured barclays us high yield bond index returned 75 following table presents summary percentages aum strategy1 outpaced respective benchmarks march 31 2016 2015 2014 trailing 1year 3year 5year 10year periods following table presents summary percentages us mutual fund assets2 outpaced lipper category averages march 31 2016 2015 2014 trailing 1year 3year 5year 10year periods 1 purposes investment performance comparisons strategies aggregation discretionary portfolios separate accounts investment funds products single group represents particular investment objective case separate accounts investment performance account based upon performance strategy account assigned asset managers specific guidelines including portfolios strategies managers manage separate accounts investment funds strategy performance comparison assets based upon performance separate account march 31 2016 2015 2014 91 90 91 total aum included strategy aum respectively although strategies three five tenyear histories total strategy aum includes liquidity assets certain assets included reported performance comparisons include accounts managed accordance guidelines outlined accounts strategies marketed potential clients accounts yet assigned strategy certain smaller products affiliates past performance indicative future results aum included institutional retail separate accounts investment funds included strategy separate accounts performance comparisons based grossoffee performance investment funds including fundofhedge funds managed separate account format performance comparisons based netoffee performance comparisons reflect actual performance specific separate account investment fund individual separate account investment fund performance may differ 2 source lipper inc includes openend closedend variable annuity funds march 31 2016 2015 2014 us longterm mutual fund assets represented data accounted 19 21 20 respectively total aum performance us longterm mutual fund assets included strategies following table presents summary absolute relative performance compared applicable benchmark representative sample funds within aum net management fees end period presented 1year 3year 5year 10year periods funds inception table includes representative sample funds significant subclass investment strategies ie large cap equity small cap equity etc funds within group representative performance significant investment strategies offer march 31 2016 constituted aggregate approximately 433 billion approximately 65 total aum meaningful exclusion funds fundsofhedge funds strategies involve privately placed hedge funds represent 2 total aum march 31 2016 investment performance made publicly available presenting investment returns funds provides relevant representation performance avoiding many complexities relating factors multiple fee structures bundled pricing asset level break points would arise reporting performance strategies product aggregations na applicable na applicable 1 listed order size based aum fund within subcategory 2 absolute performance actual performance ie rate return fund relative performance difference variance performance fund stated benchmark assets advisement quarter ended june 30 2014 began reporting aua result acquisition approximately 98 billion aua qs investors also first quarter fiscal 2015 approximately 128 billion assets previously reported aum primarily related lowfee global sovereign mandate investment discretion abated time reclassified aua experienced significant aua outflows year ended march 31 2015 result one client withdrawing approximately 80 billion redemptions material impact net income due low fee nature march 31 2016 2015 aua approximately 39 billion 35 billion respectively aua march 31 2016 comprised approximately 17 billion related qs investors approximately 10 billion related western asset approximately 8 billion related clearbridge approximately 2 billion related permal approximately 2 billion related brandywine aua fee rates vary level nondiscretionary service provided average annualized fee rate related aua approximately 10 basis points year ended march 31 2016 low single digit basis points year ended march 31 2015 increase average fee rate due previously discussed 80 billion redemption low fee aua quarter ended march 31 2015 fees aua aggregating 41 million 30 million considered servicing fees therefore recorded distribution service fees consolidated statement income years ended march 31 2016 2015 respectively prior fiscal 2015 fees aua material results operations accordance financial accounting standards consolidation consolidate separately identify certain sponsored investment vehicles consolidation investment vehicles impact net income loss attributable legg mason inc material impact consolidated operating results also hold investments consolidated sponsored investment funds change value investments recorded nonoperating income expense reflected net income loss attributable legg mason inc see notes 1 3 17 notes consolidated financial statements additional information regarding consolidation investment vehicles operating revenues components total operating revenues millions dollar percentage changes periods follows total operating revenues year ended march 31 2016 266 billion decrease 6 282 billion year ended march 31 2015 decrease primarily due decrease operating revenue yield excluding performance fees 39 basis points 38 basis points 3 decrease average aum decrease performance fees although equity fixed income aum together comprised higher percentage total average aum year ended march 31 2016 compared year ended march 31 2015 operating revenue yield excluding performance fees declined due less favorable product mix lower yielding products comprising higher percentage total average aum year ended march 31 2016 compared march 31 2015 total operating revenues year ended march 31 2015 282 billion increase 3 274 billion year ended march 31 2014 increase primarily due impact 6 increase average longterm aum offset part decrease performance fees although equity aum comprised higher percentage total aum march 31 2015 compared march 31 2014 operating revenue yield excluding performance fees 39 basis points years ended march 31 2015 2014 due slightly less favorable product mix lower yielding products comprising higher percentage total average aum year ended march 31 2015 compared year ended march 31 2014 investment advisory fees separate accounts year ended march 31 2016 investment advisory fees separate accounts increased 19 million 8261 million compared 8242 million year ended march 31 2015 increase 114 million due rare infrastructure acquired october 2015 87 million due full year results martin currie acquired october 2014 68 million result higher average equity assets managed brandywine 69 million result higher average fixed income assets managed brandywine 31 million result higher average assets managed permal increases substantially offset decrease 277 million due sale lmic november 2014 decrease 69 million due lower averaged fixed income assets managed western asset year ended march 31 2015 investment advisory fees separate accounts increased 468 million 6 8242 million compared 7774 million year ended march 31 2014 increase 347 million due higher average equity assets managed clearbridge 295 million due higher average fixed income assets managed western asset brandywine 174 million due martin currie acquired october 2014 including increase revenues related martin currie australia mc australia includes legacy australian asset manager increases offset part approximately 25 million revenues associated certain existing client assets reclassified aum aua year ended march 31 2015 previously discussed revenues included distribution service fees fiscal 2015 increases also offset part decrease 158 million resulting sale lmic november 2014 investment advisory fees funds year ended march 31 2016 investment advisory fees funds decreased 1355 million 9 141 billion compared 154 billion year ended march 31 2015 decrease 1049 million due lower average equity assets managed royce 439 million due lower average assets managed permal approximately 28 million related revenues due change distributor certain funds may 2015 longer included advisory fee revenue revenues related funds included distribution service fees fiscal 2016 decreases offset part increase 288 million due higher average fixed income assets managed western asset brandywine net increase 183 million fees liquidity assets largely due reduction fee waivers liquidity funds managed western asset year ended march 31 2015 investment advisory fees funds increased 432 million 3 154 billion compared 150 billion year ended march 31 2014 increase 801 million due higher average equity assets managed clearbridge 305 million due higher average fixed income assets managed brandywine western asset 147 million due martin currie acquired october 2014 including increase revenues related mc australia increases offset part decrease 405 million due lower average equity assets managed royce decrease 338 million due lower average assets managed permal net decrease 93 million fees liquidity assets due fee waivers liquidity funds managed western asset investment advisory performance fees total aum march 31 2016 2015 2014 approximately 7 6 accounts eligible earn performance fees year ended march 31 2016 investment advisory performance fees decreased 415 million 420 million compared 835 million year ended march 31 2015 primarily due lower fees earned assets managed permal brandywine year ended march 31 2015 investment advisory performance fees decreased 236 million 835 million compared 1071 million year ended march 31 2014 primarily due lower fees earned assets managed permal offset part increase fees earned assets managed brandywine distribution service fees year ended march 31 2016 distribution service fees increased 203 million 6 3815 million compared 3612 million year ended march 31 2015 primarily result approximately 29 million revenue included distribution service fees fiscal 2016 due change distributor certain funds may 2015 revenues related funds previously included investment advisory fees funds increase 116 million advisement fees associated aua also contributed increase increases offset part decline average mutual fund aum subject distribution service fees year ended march 31 2015 distribution service fees increased 136 million 4 3612 million compared 3476 million year ended march 31 2014 primarily result approximately 25 million revenues related client assets reclassified aum aua well increase average mutual fund aum subject distribution service fees previously discussed revenues associated aua included distribution service fees beginning fiscal 2015 increases offset part impact increased fee waivers related liquidity funds managed western asset operating expenses components total operating expenses millions dollar percentage changes periods follows nm meaningful total operating expenses year ended march 31 2016 increased 2891 million 12 261 billion compared 232 billion year ended march 31 2015 increase primarily due intangible asset impairment charges 371 million recorded year ended march 31 2016 discussed total operating expenses year ended march 31 2015 remained relatively flat 232 billion compared 231 billion year ended march 31 2014 operating expenses years ended march 31 2016 2015 2014 incurred investment management affiliate level comprised approximately 70 total operating expenses year excluding impairment charges deemed corporate expenses remaining operating expenses comprised corporate costs including costs global distribution operations compensation benefits components total compensation benefits millions dollar percentage changes periods follows nm meaningful total compensation benefits year ended march 31 2016 decreased 2 120 billion compared 123 billion year ended march 31 2015 year ended march 31 2015 increased 2 123 billion compared 121 billion year ended march 31 2014 • salaries incentives decreased 611 million 9158 million year ended march 31 2016 compared 9769 million year ended march 31 2015 primarily due decrease 586 million net compensation investment affiliates substantially result reduction operating revenue sharebased affiliates creates offsetting decrease compensation per applicable revenue share arrangements sale lmic november 2014 offset part acquisition martin currie october 2014 • salaries incentives increased 274 million 9769 million year ended march 31 2015 compared 9495 million year ended march 31 2014 principally due increase 158 million incentivebased compensation distribution corporate personnel primarily related increased retail sales global distribution group 97 million increase net compensation investment affiliates also contributed increase net compensation investment affiliates primarily due acquisition martin currie impact increased revenues certain revenueshare based affiliates offset part impact sale lmic november 2014 sale small affiliate closing certain businesses connection various corporate initiatives fiscal 2014 • benefits payroll taxes increased 179 million 2326 million year ended march 31 2016 compared 2147 million year ended march 31 2015 primarily result increase costs associated certain employee benefit plans • benefits payroll taxes increased slightly 2147 million year ended march 31 2015 compared 2145 million year ended march 31 2014 primarily result increase payroll taxes recruiting costs • transition severance costs increased 44 million 362 million year ended march 31 2016 compared 318 million year ended march 31 2015 transition severance costs year ended march 31 2016 primarily comprised 322 million costs associated previously discussed restructuring permal preparation combination entrust year ended march 31 2015 transition severance costs primarily comprised 246 million costs associated integration batterymarch lmgaa qs investors 43 million related sale lmic • transition costs severance increased 24 million 318 million year ended march 31 2015 compared 294 million year ended march 31 2014 primarily due higher compensation costs associated previously discussed integration batterymarch lmgaa time qs investors compared compensation costs associated various corporate initiatives recognized prior year • royce management equity plan represents charge arising grant equity units royce management equity plan previously discussed year ended march 31 2016 compensation percentage operating revenues increased 453 437 year ended march 31 2015 due impact charge associated royce management equity plan grant impact acquisition martin currie october 2014 impact higher transition severance costs current year offset part impact decreased revenues certain revenue sharebased affiliates retain relatively higher percentage revenues compensation year ended march 31 2015 compensation percentage operating revenues decreased 437 441 year ended march 31 2014 due impact decreased revenues certain revenue sharebased affiliates retain higher percentage revenues compensation offset part impact higher compensation costs corporate distribution personnel distribution servicing year ended march 31 2016 distribution servicing expenses decreased 8 5457 million compared 5948 million year ended march 31 2015 primarily due impact lower average aum certain products pay fees thirdparty distributors year ended march 31 2015 distribution servicing expenses decreased 4 5948 million compared 6191 million year ended march 31 2014 primarily due net decrease 209 million structuring fees related closedend fund launches communications technology year ended march 31 2016 communications technology expense increased 8 1979 million compared 1824 million year ended march 31 2015 result increase technology consulting license fees software product implementations current year period addition martin currie acquired october 2014 year ended march 31 2015 communications technology expense increased 16 1824 million compared 1579 million year ended march 31 2014 primarily due increases technology consulting data management depreciation expenses market data costs principally resulting cybersecurity data governance enhancements addition martin currie qs investors expenses occupancy year ended march 31 2016 occupancy expense increased 12 1226 million compared 1097 million year ended march 31 2015 real estate related charges 177 million recognized current year related reduced space requirements restructuring permal combination entrust real estate related charges 82 million recognized prior year connection integration batterymarch lmgaa qs investors year ended march 31 2015 occupancy expense decreased 5 1097 million compared 1152 million year ended march 31 2014 primarily due decrease 20 million depreciation furniture leaseholds 19 million decrease rent expense principally result lease reserves taken vacant space fiscal 2014 amortization impairment intangible assets year ended march 31 2016 amortization intangible assets increased 50 million compared 26 million year ended march 31 2015 primarily due additional amortization expense related acquisition rare infrastructure october 2015 year ended march 31 2015 amortization intangible assets decreased 79 26 million compared 123 million year ended march 31 2014 primarily due certain management contracts becoming fully amortized october 2014 december 2013 sale lmic offset part additional amortization expense related acquisitions qs investors may 2014 martin currie october 2014 impairment intangible assets 3710 million year ended march 31 2016 impairment charges relate permal fundsofhedge funds contracts asset permal trade name impairment charges resulted number current trends factors including periods moderate inflows outflows recent years related reductions aum ii reduction growth assumptions next five years iii decrease projected margins next two years iv increase rate used discount projected future cash flows primarily due company specific factors including continued market influences changes resulted reduction projected cash flows overall assessment fair value assets fair values permal fundsofhedge funds contracts asset permal trade name declined carrying values accordingly impaired 3640 million 70 million respectively see critical accounting policies note 5 notes consolidated financial statements discussion impairment charges year ended march 31 2016 expenses decreased 356 million 18 1630 million compared 1986 million year ended march 31 2015 primarily due 334 million credit related fair value adjustments decrease contingent consideration liabilities associated acquisitions martin currie fauchier 146 million decrease expense reimbursements paid certain mutual funds decreases partially offset 136 million increase professional fees due part costs acquisitions clarion partners entrust year ended march 31 2015 expenses increased 26 million 1 1986 million compared 1960 million year ended march 31 2014 primarily due 59 million increase travel entertainment expenses 53 million increase advertising expenses 47 million increase professional fees increases offset part 142 million decrease expense reimbursements paid certain mutual funds nonoperating income expense components total nonoperating income expense millions dollar percentage changes periods follows nm meaningful interest income year ended march 31 2016 interest income decreased 25 56 million compared 75 million year ended march 31 2015 primarily due 09 million decrease current year related lower average interestbearing investment balances lower yields earned balances 07 million interest income received prior year connection tax refund year ended march 31 2015 interest income increased 17 75 million compared 64 million year ended march 31 2014 driven higher yields earned investment balances interest expense year ended march 31 2016 interest expense decreased 17 484 million compared 583 million year ended march 31 2015 decrease 64 million primarily due decrease interest accruals uncertain tax positions offset part interest accretion contingent consideration liabilities related acquisitions martin currie rare infrastructure year ended march 31 2015 interest expense increased 10 583 million compared 529 million year ended march 31 2014 primarily due increase interest accruals uncertain tax positions interest accretion contingent consideration liabilities related acquisitions qs investors martin currie income expense net year ended march 31 2016 expense net decreased 593 million expense 260 million compared expense 853 million fiscal 2015 primarily due 1071 million charge recognized prior year related refinancing 55 senior notes july 2014 decrease offset part net market losses 270 million corporate investments offset compensation net market losses 106 million seed capital investments assets invested deferred compensation plans offset corresponding increases compensation mentioned net market losses 56 million investments consolidated sponsored investment vehicles designated consolidated investment vehicles civs impact net income attributable legg mason inc losses fully attributable noncontrolling interests 45 million loss foreign currency forward contract related acquisition rare infrastructure year ended march 31 2015 income expense net decreased 1181 million expense 853 million compared income 328 million fiscal 2014 decrease primarily due 1071 million charge related refinancing 55 senior notes july 2014 reduction net market gains 76 million seed capital investments assets invested deferred compensation plans offset corresponding decreases compensation mentioned reduction net market gains 53 million corporate investments offset compensation also contributed decrease nonoperating income loss consolidated investment vehicles year ended march 31 2016 nonoperating income expense consolidated investment vehicles net decreased 131 million expense 72 million compared income 59 million fiscal 2015 primarily due deconsolidation civ quarter ended march 31 2015 net market losses investments certain civs year ended march 31 2015 nonoperating income expense consolidated investment vehicles net increased 35 million income 59 million primarily due increase net market gains investments certain civs income tax provision year ended march 31 2016 provision income taxes 77 million compared 1253 million year ended march 31 2015 effective tax rate 305 year ended march 31 2016 compared 340 year ended march 31 2015 change effective tax rate largely due impact 3710 million impairment charges recognized lower tax rate jurisdictions november 2015 uk finance bill 2015 enacted reduced main uk corporate tax rate 20 19 effective april 1 2017 18 effective april 1 2020 reductions uk corporate tax rate resulted tax benefits 84 million fiscal 2016 impact civs increased effective rate 238 percentage points year ended march 31 2016 decreased effective rate 05 percentage points year ended march 31 2015 year ended march 31 2015 provision income taxes 1253 million compared 1378 million year ended march 31 2014 effective tax rate 340 year ended march 31 2015 compared 328 year ended march 31 2014 change effective rate primarily related impact 192 million income tax benefits recorded fiscal 2014 respect uk corporate tax rate reductions impacted effective tax rate 46 percentage points fiscal 2014 impact civs decreased effective rate 05 percentage points year ended march 31 2015 increased effective rate 02 percentage points year ended march 31 2014 net income loss attributable legg mason inc operating margin net loss attributable legg mason inc year ended march 31 2016 totaled 250 million 025 per diluted share compared net income attributable legg mason inc 2371 million 204 per diluted share year ended march 31 2015 decrease primarily attributable impact pretax impairment charges 3710 million 2968 million net income tax benefits 276 per diluted share related indefinitelife intangible assets year ended march 31 2016 offset part pretax nonoperating charge 1071 million 685 million net income tax benefits 059 per diluted share recognized year ended march 31 2015 connection refinancing 55 senior notes operating margin 19 year ended march 31 2016 compared 177 year ended march 31 2015 decrease primarily attributable impairment charges net income attributable legg mason inc year ended march 31 2015 totaled 2371 million 204 per diluted share compared 2848 million 233 per diluted share year ended march 31 2014 decrease primarily attributable pretax nonoperating charge 1071 million 685 million net income tax benefits 059 per diluted share related refinancing 55 senior notes year ended march 31 2015 offset part 207 million decrease costs related closedend fund launches net impact increased operating revenues operating margin 177 year ended march 31 2015 compared 157 year ended march 31 2014 supplemental nongaap financial information supplemental information providing performance measures adjusted income operating margin adjusted liquidity measure adjusted ebitda based methodologies generally accepted accounting principles “nongaap” management uses measures benchmarks evaluating comparing periodtoperiod operating performance liquidity adjusted income decreased 3703 million year ended march 31 2016 3788 million year ended march 31 2015 however due reduction weightedaverage shares outstanding result share repurchases adjusted income per diluted share increased 336 per diluted share year ended march 31 2016 326 per diluted share year ended march 31 2015 decrease adjusted income primarily attributable net impact decreased operating revenues offset part impact pretax nonoperating charge 1071 million 685 million net income tax 059 per diluted share related refinancing 55 senior notes prior year operating margin adjusted years ended march 31 2016 2015 186 230 respectively operating margin adjusted year ended march 31 2016 reduced 20 percentage points due costs associated restructuring permal combination entrust 10 percentage point due compensation charge associated royce management equity plan grant 04 percentage points real estate related charges recognized current year associated reduced space requirements operating margin adjusted year ended march 31 2015 reduced 17 percentage points due costs associated integration batterymarch lmgaa qs investors various corporate initiatives adjusted ebitda years ended march 31 2016 2015 6217 million 6865 million respectively decrease adjusted ebitda primarily result decrease cash provided operating activities adjusted income decreased 3788 million 326 per diluted share year ended march 31 2015 4178 million 341 per diluted share year ended march 31 2014 decrease primarily attributable pretax nonoperating charge 1071 million 685 million net income tax 059 per diluted share related refinancing 55 senior notes year ended march 31 2015 offset part net impact increased operating revenues operating margin adjusted years ended march 31 2015 2014 230 220 respectively operating margin adjusted years ended march 31 2015 2014 reduced 17 15 percentage points respectively due costs associated integration batterymarch lmgaa qs investors various corporate initiatives operating margin adjusted year ended march 31 2014 also reduced 10 percentage point due structuring fees related closedend fund real estate investment trust launches fiscal year adjusted ebitda years ended march 31 2015 2014 6865 million 6171 million respectively 694 million increase adjusted ebitda primarily result increase cash provided operating activities adjusted income define “adjusted income” net income loss attributable legg mason inc plus amortization deferred taxes related intangible assets goodwill less deferred income taxes goodwill indefinitelife intangible asset impairment also adjust noncore items reflective economic performance intangible asset impairments impact fair value adjustments contingent consideration liabilities impact tax rate adjustments certain deferred tax liabilities related indefinitelife intangible assets believe adjusted income provides useful representation operating performance adjusted noncash acquisition related items facilitate comparison results asset management firms made significant acquisitions also believe adjusted income important metric estimating value asset management business adjusted income considers adjustments certain items relate operating performance comparability therefore readily reconcilable net income loss attributable legg mason inc determined gaap measure provided addition net income loss attributable legg mason inc substitute net income loss attributable legg mason inc may comparable nongaap performance measures including measures adjusted earnings adjusted income companies adjusted income liquidity measure used place cash flow measures determined gaap fair value adjustments contingent consideration liabilities may provide tax benefit depending tax attributes acquisition transaction consider adjusted income useful investors important metric measuring economic performance asset management companies indicator value facilitates comparison operating results asset management firms made significant acquisitions calculating adjusted income adjust impact amortization management contract assets impairment indefinitelife intangible assets add subtract impact fair value adjustments contingent consideration liabilities arise acquisitions net income loss attributable legg mason inc reflect fact items distort comparisons operating results asset management firms engaged significant acquisitions deferred taxes indefinitelife intangible assets goodwill include actual tax benefits amortization deductions realized gaap absent impairment charge disposition related business fully expect realize economic benefit current period tax amortization add benefit net income loss attributable legg mason inc calculation adjusted income however net operating loss carryforward receive benefit current tax amortization time conversely subtract noncash income tax benefits goodwill indefinitelife intangible asset impairment charges uk tax rate adjustments excess book basis certain acquired indefinitelife intangible assets applicable recognized gaap adjustments reflect items distort comparisons operating results periods results asset management firms engaged significant acquisitions including related impairments disposition impairment charge noncore item occur impact adjusted income may distort actual changes operating performance value firm accordingly monitor items related impact including taxes adjusted income ensure appropriate adjustments explanations accompany disclosures although depreciation amortization fixed assets noncash expenses add charges calculating adjusted income charges related assets ultimately require replacement reconciliation net income loss attributable legg mason inc adjusted income thousands except per share amounts follows 1 calculating adjusted income per diluted share periods net income participating securities dividends include weightedaverage unvested restricted shares deemed participating securities earnings allocated participating securities weightedaverage unvested restricted shares 3065 year ended march 31 2015 purposes nongaap performance measure earnings allocated ratio participating securities common shares result inclusion participating securities earnings allocated thereto impact per share amounts adjustments made net income loss per diluted share attributable legg mason inc shareholders calculating adjusted income per diluted share periods net loss participating securities dividends exclude weightedaverage unvested restricted shares deemed participating securities weightedaverage unvested restricted shares 2831 year ended march 31 2016 2 periods net loss participating securities dividends impact weightedaverage unvested restricted shares deemed participating securities operating margin adjusted calculate operating margin adjusted dividing operating income loss adjusted exclude impact compensation expense gains losses investments made fund deferred compensation plans impact compensation expense gains losses seed capital investments affiliates revenue sharing arrangements amortization related intangible assets income loss civs impact fair value adjustments contingent consideration liabilities impairment charges ii operating revenues adjusted add back net investment advisory fees eliminated upon consolidation investment vehicles less distribution servicing expenses use approximate measure revenues passed third parties refer operating revenues adjusted compensation items removed operating income loss calculation offset equal amount nonoperating income expense thus impact net income loss attributable legg mason inc adjust impact amortization management contract assets impact fair value adjustments contingent consideration liabilities arise acquisitions reflect fact items distort comparison operating results asset management firms engaged significant acquisitions impairment charges income loss civs removed operating income loss calculation items reflective core asset management operations use operating revenues adjusted calculation show operating margin without distribution servicing expenses use approximate distribution revenues passed third parties direct cost selling products although distribution servicing expenses may include commissions paid connection launching closedend funds corresponding revenue period operating revenues adjusted also include advisory revenues receive civs eliminated consolidation gaap believe operating margin adjusted useful measure performance provides measure core business activities excludes items impact net income loss attributable legg mason inc indicates operating margin would without distribution revenues passed third parties direct cost selling products amortization related intangible assets changes fair value contingent consideration liabilities impairment charges impact consolidation certain investment vehicles described consolidation investment vehicles impact net income loss attributable legg mason inc measure provided addition operating margin calculated gaap substitute calculations margins gaap may comparable nongaap performance measures including measures adjusted margins companies calculation operating margin operating margin adjusted follows dollars thousands adjusted ebitda define adjusted ebitda cash provided operating activities plus minus allocation debt redemption payments interest expense net accretion amortization debt discounts premiums current income tax expense net gains losses investment securities net change assets liabilities net change assets liabilities adjustment aligns consolidated statements cash flows definition results metric amount ebitda used covenants revolving credit facility agreement believe adjusted ebitda useful investors liquidity measure provides additional information regard compliance debt covenants ability meet future working capital requirements measure provided addition cash provided operating activities may comparable nongaap liquidity measures including measures ebitda cash flow measures companies adjusted ebitda confused cash provided operating activities measures cash flows gaap provided supplement replacement gaap measure reconciliation cash provided operating activities adjusted ebitda follows dollars thousands liquidity capital resources primary objective capital structure appropriately support business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may time involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt consolidation variable interest entities discussed impact liquidity capital resources rights benefits bear risks associated assets liabilities civs consolidated sponsored investment vehicles beyond investments investment advisory fees generated vehicles eliminated consolidation additionally creditors civs consolidated sponsored investment vehicles recourse general credit beyond level investment consider liabilities obligations assets consist primarily intangible assets goodwill cash equivalents investment securities investment advisory related fee receivables assets principally funded equity capital longterm debt results operations march 31 2016 cash equivalents total assets longterm debt stockholders equity 13 billion 75 billion 17 billion 42 billion respectively total assets include amounts related civs 01 billion cash equivalents primarily invested liquid domestic nondomestic money market funds hold principally domestic nondomestic corporate commercial paper bonds government agency securities bank deposits recognized losses investments monitoring cash equivalents partially mitigates potential material risks may associated balances following table summarizes consolidated statements cash flows years ended march 31 millions cash inflows provided operating activities fiscal 2016 4545 million primarily related net loss adjusted noncash items cash inflows provided operating activities fiscal 2015 5681 million primarily related net income adjusted noncash items net activity related civs cash inflows provided operating activities fiscal 2014 4373 million primarily related net income adjusted noncash items offset part net purchases trading investments decrease net activity related civs primarily due winddown consolidated loan obligation clo see note 17 notes consolidated financial statements additional information regarding clo cash outflows used investing activities fiscal 2016 2446 million primarily related payments associated acquisitions rare infrastructure pk investments investment precidian investments aggregating 2341 million net acquired cash outflows used investing activities fiscal 2015 2080 million primarily related payments associated acquisitions martin currie qs investors 1837 million net acquired cash payments made fixed assets 458 million offset part proceeds businesses sold 470 million cash inflows provided investing activities fiscal 2014 1376 million primarily related net activity related civs offset part payments made fixed assets cash inflows provided financing activities fiscal 2016 4657 million primarily related proceeds issuance 6998 million longterm debt offset part repurchase 45 million shares common stock 2096 million cash outflows used financing activities fiscal 2015 5070 million primarily related repayment longterm debt 6458 million repurchase 69 million shares common stock 3565 million repayment longterm debt civs 792 million dividends paid 708 million offset part proceeds issuance 6588 million longterm debt cash outflows used financing activities fiscal 2014 6390 million primarily related repayment longterm debt 5004 million repayment longterm debt civs 1330 million repurchase 97 million shares common stock 3600 million dividends paid 620 million offset part proceeds longterm debt issuances 3937 million financing transactions table reflects primary sources financing thousands march 31 2016 march 2016 issued 250 million 6375 junior subordinated notes due 2056 notes 450 million 475 senior notes due 2026 notes net proceeds offerings used finance acquisitions clarion partners april 2016 entrust may 2016 discussed note 18 notes consolidated financial statements december 2015 entered new unsecured credit agreement provides 10 billion multicurrency revolving credit facility borrowed 40 million revolving credit facility remained outstanding march 31 2016 proceeds used repay 40 million outstanding borrowings previous revolving credit facility used partially finance acquisition rare infrastructure october 2015 discussed may 2016 used 460 million additional borrowings new revolving credit facility finance acquisition entrust replenish cash used complete acquisitions clarion partners rare infrastructure amount total borrowings outstanding facility 500 million date filing new revolving credit facility may increased aggregate amount 500 million 15 billion subject approval lenders expires december 2020 repaid time revolving credit facility available fund working capital needs general corporate purposes financial covenants credit agreement modified march 2016 include maximum net debt ebitda ratio 35 1 period march 31 2016 september 30 2016 325 1 period october 1 2016 december 31 2016 30 1 thereafter minimum ebitda interest ratio 40 1 debt defined include obligations borrowed money excluding nonrecourse debt civs capital leases net debt covenants debt reduced amount unrestricted cash excess greater subsidiary cash 300 million lesser 50 aggregate amount seed capital investments 125 million amount equal 50 hybrid capital securities ebitda defined consolidated net income loss plusminus tax expense benefit interest expense depreciation amortization intangibles extraordinary expense losses noncash charges certain transitionrelated costs defined agreements march 31 2016 legg masons net debt ebitda ratio 13 1 ebitda interest expense ratio 130 1 therefore legg mason maintained compliance applicable covenants net income loss significantly declines spend available cash may impact ability maintain compliance financial covenants determine compliance covenants may pressure time either outstanding borrowings facility want utilize available borrowings otherwise desire keep borrowings available may elect take number actions including reducing expenses order increase ebitda using available cash repay portion outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments may 2012 refinanced outstanding 25 senior convertible notes convertible notes refinancing effected issuance 650 million 55 senior notes net proceeds together cash hand 250 million remaining borrowing capacity existing revolving credit facility used repurchase 125 billion convertible notes terms repurchase included issuance warrants holders convertible notes warrants replaced conversion feature convertible notes provide purchase aggregate subject adjustment 142 million shares common stock net share settled basis exercise price 88 per share warrants expire july 2017 settled election either shares common stock cash june 2012 entered unsecured credit agreement provided 500 million revolving credit facility 500 million term loan repaid fiscal 2014 discussed proceeds term loan used repay 500 million outstanding borrowings previous revolving credit facility terminated january 2014 issued 400 million 5625 senior notes due 2044 net proceeds together cash hand used repay 450 million outstanding borrowings fiveyear term loan entered conjunction unsecured credit agreement noted 5625 senior notes sold discount 63 million amortized interest expense 30 year term also january 2014 entered 250 million incremental revolving credit facility contemplated addition 500 million revolving credit facility available credit agreement entered june 2012 revolving credit facilities available fund working capital needs general corporate purposes expire june 2017 borrowings outstanding either facility march 31 2015 october 2015 legg mason borrowed 40 million facilities partially finance acquisition rare infrastructure repaid december 2015 upon entering new unsecured credit agreement discussed revolving credit facilities terminated effective upon repayment june 2014 issued 250 million 27 senior notes due 2019 discount 06 million 250 million 395 senior notes due 2024 discount 05 million additional 150 million 5625 senior notes due 2044 premium 98 million july 2014 proceeds 659 million net related fees together cash hand used redeem outstanding 650 million 55 senior notes retirement 55 senior notes resulted pretax nonoperating charge 1071 million july 2014 consisting cash makewhole premium payment 986 million net 06 million reverse treasury lock call 55 senior notes 85 million associated existing deferred costs original issue discount outstanding revolving credit facility agreement currently impacted ratings two rating agencies interest rate annual commitment fee revolving line credit based higher credit rating two rating agencies june 2011 rating one agencies downgraded one grade agency downgrade rating absent upgrade former agency interest costs rise modestly see note 6 notes consolidated financial statements additional information regarding debt transactions expect next 12 months cash generated operating activities available cash hand adequate support operating investing cash needs acquisitions discussed may 2016 utilized 460 million borrowing capacity revolving credit facility proceeds issuance 2026 notes 2056 notes finance acquisition entrust discussed replenish cash used complete acquisitions clarion partners april 2016 rare infrastructure october 2015 may also utilize available resources number potential activities including limited acquisitions seed capital investments new products repurchase shares common stock repayment outstanding debt payment increased dividends addition ordinary operating cash needs anticipate cash needs next 12 months discussed acquisitions 1 using applicable exchange rate march 31 2016 amounts denominated currencies us dollar may 2 2016 closed transaction combine permal entrust create entrustpermal 65 transaction required cash payment 400 million funded borrowings revolving credit facility well portion proceeds 2026 notes 2056 notes issued march 2016 connection combination expect incur restructuring transition costs approximately 100 million approximately 15 noncash charges march 31 2016 approximately 43 million charges incurred approximately 24 million paid significant portion remaining costs paid year ending march 31 2017 see notes 2 18 notes consolidated financial statements additional information april 13 2016 acquired majority interest clarion partners acquisition required cash payment 577 million funded portion proceeds issuance 2026 notes 2056 notes march 2016 conjunction acquisition committed provide 100 million seed capital clarion partners products within two years closing see note 18 notes consolidated financial statements additional information october 21 2015 acquired majority interest rare infrastructure acquisition required initial cash payment approximately 214 million using foreign exchange rate october 21 2015 296 million australian dollar payment funded 40 million net borrowings previous revolving credit facility well existing cash resources contingent consideration may due march 31 2017 march 31 2018 aggregating approximately 81 million using foreign exchange rate march 31 2016 maximum 106 million australia dollar amount per contract dependent achievement certain net revenue targets subject potential catchup adjustments extending march 31 2019 noncontrolling interests 25 subject put call provisions may result future cash outlays october 1 2014 acquired outstanding equity interests martin currie transaction included initial cash payment 203 million using foreign exchange rate october 1 2014 £125 million payment funded existing cash contingent consideration payments may due march 31 following second third anniversaries closing aggregating approximately 467 million using foreign exchange rate march 31 2016 maximum £325 million contract amount inclusive payment certain potential pension obligations dependent achievement certain financial metrics specified share purchase agreement march 31 2017 2018 contingent consideration payment due march 31 2016 first anniversary payment actual payments made may also include amounts certain potential pension obligations accounted separately addition martin currie trustees pension plan referenced received notice pensions regulator uk reviewing plan’s current structure funding status review still process assurance review result accelerated funding december 2015 martin currie acquired certain assets pk investments business acquisition comprised initial cash payment 50 million contingent payment due december 31 2017 currently estimated 25 million amount ultimate contingent payment based certain financial metrics initial cash payment funded existing cash resources effective may 31 2014 completed acquisition qs investors july 2016 may required pay 10 million second anniversary contingent consideration amount payment dependent achievement certain net revenue targets intend fund amount due existing cash resources addition contingent consideration 20 million fourth anniversary payment may due july 2018 also dependent achievement certain net revenue targets subject potential catchup adjustment fourth anniversary payment second anniversary payment shortfall march 2013 completed acquisition outstanding share capital fauchier contingent consideration approximately 29 million using exchange rate march 31 2016 £20 million maximum contractual amount may due fourth anniversary closing dependent achieving certain levels revenue net distribution costs see note 2 notes consolidated financial statements additional information related acquisitions rare infrastructure martin currie qs investors fauchier march 2016 implemented affiliate management equity plan management royce management equity plan minority interests equivalent 169 royce entity issued management team addition june 2013 march 2014 implemented affiliate management equity plans entitle certain key employees permal clearbridge respectively participate 15 future growth respective enterprise value subject appropriate discounts discussed note 11 notes consolidated financial statements repurchases units granted plans may impact future liquidity requirements conjunction acquisition clarion partners implemented affiliate management equity plan similar plan implemented clearbridge immediate vesting initial grant certain asset management affiliates maintain various credit facilities general operating purposes certain affiliates subject capital requirements various regulatory agencies affiliates met respective capital adequacy requirements periods presented january 2015 board directors authorized 10 billion additional purchases common stock approximately 800 million remained available march 31 2016 intend utilize 90 million cash generated future operations purchase shares common stock quarterly basis subject market conditions potential uses cash future outlook described currently project cash flows operating activities sufficient fund present foreseeable nearterm liquidity needs acquisitions clarion partners april 2016 entrust may 2016 march 31 2016 approximately 11 billion cash equivalents excess working capital requirements 689 million used fund previously discussed acquisitions clarion partners entrust discussed intend utilize 90 million cash generated future operations purchase shares common stock quarter year ending march 31 2017 subject market conditions cash needs temporarily interrupted share repurchases november 2015 resumed share repurchases march 2016 intend catch additional 12 million share repurchases quarter ending june 30 2016 addition fiscal 2017 intend repay approximately 50 million outstanding 500 million borrowings revolving credit facility subject market conditions cash needs drawing 460 million revolving credit facility may 2016 connection acquisitions clarion partners entrust subject compliance applicable covenants approximately 350 million available borrowing capacity revolving credit facility expires december 2020 currently expect raise incremental debt equity financing next 12 months beyond current levels unless enter one acquisitions refinancings going forward assurances expectations projections could prove incorrect events may occur require additional liquidity excess amounts revolving credit facility opportunity refinance indebtedness market conditions might significantly worsen affecting results operations generation available cash events result operations available cash insufficient fund liquidity needs would likely seek manage available resources taking actions reducing future share repurchases reducing operating expenses reducing expected expenditures investments selling assets investment securities repatriating earnings foreign subsidiaries reducing dividend modifying arrangements affiliates andor employees types actions prove insufficient acquisition refinancing opportunity arise would likely utilize borrowing capacity revolving credit facility seek raise additional equity debt liquid assets include cash equivalents certain current investment securities march 31 2016 total liquid assets 17 billion 689 million used fund previously discussed acquisitions clarion partners april 2016 entrust may 2016 remaining 10 billion liquid assets included 378 million cash investments held foreign subsidiaries net working capital amounts foreign subsidiaries significant order increase cash available us general corporate purposes plan utilize 170 million foreign cash next several years 85 million accumulated foreign earnings additional tax provision associated repatriations previously recognized repatriation accumulated prior period foreign earnings currently planned however circumstances change provide pay applicable additional us taxes connection repatriation offshore earnings practical time determine income tax liability would result repatriation accumulated foreign earnings credit liquidity risk cash equivalent deposits involve certain credit liquidity risks maintain cash equivalents number high quality financial institutions funds time may concentrations one institutions balances financial institutions funds credit quality monitored ongoing basis offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations section follows consolidation discussed critical accounting policies notes 1 17 notes consolidated financial statements contractual contingent obligations contractual obligations make future payments principally connection longterm debt noncancelable lease agreements acquisition agreements service agreements see notes 6 8 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual obligations millions fiscal year excludes contractual obligations civs responsible liable obligations 1 represents borrowings revolving credit facility expire december 2020 april 2016 borrowed additional 460 million facility exercised amortizing variable fixed interest rate swap intention repaying 500 million borrowings december 2020 however may elect repay debt sooner management elects utilize portion available cash purpose 2 amount contingent payments reflected year represents maximum amount could payable earliest possible date terms business purchase agreements using applicable exchange rate march 31 2016 amounts denominated currencies us dollar related contingent consideration liabilities fair value 846 million march 31 2016 net certain potential pension obligations related martin currie see notes 2 8 notes consolidated financial statements fiscal 2017 amounts reflected clarion partners entrust represent cash payments made april 2016 may 2016 respectively connection acquisitions discussed note 18 notes consolidated financial statements 3 table include approximately 289 million capital commitments investment partnerships limited partner 100 million coinvestment commitment associated clarion partners acquisition obligations outstanding funded required end commitment periods running fiscal 2021 4 table include amounts uncertain tax positions 496 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated 5 table include redeemable noncontrolling interests primarily related affiliate minority interests civs 1758 million march 31 2016 timing related cash outflows cannot reliably estimated described note 18 notes consolidated financial statements clarion partners entrust also redeemable noncontrolling interests 6 table excludes potential obligations arising ultimate settlement awards affiliate management equity plans key employees permal clearbridge royce due uncertainty timing amounts ultimately payable see notes 1and 11 notes consolidated financial statements additional information regarding affiliate management equity plans market risk maintain enterprise risk management program oversee coordinate risk management activities legg mason subsidiaries program certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income loss majority revenue calculated market value aum accordingly decline value underlying securities cause aum thus revenues decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts ordinary course business may also reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets market conditions current historical low interest rate environment may lead us take actions performance fees may earned certain investment advisory contracts exceeding performance benchmarks strong markets tend increase fees declines market values aum result reduced fee revenues net income generally earn higher fees equity assets fees charged fixed income liquidity assets declines market values aum asset class greater impact revenues addition revenue sharing arrangements certain affiliates retain different percentages revenues cover costs including compensation net income loss profit margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary trading nontrading assets trading nontrading assets comprised investment securities including seed capital sponsored mutual funds products limited partnerships limited liability companies certain investment products trading current investments excluding civs march 31 2016 2015 subject risk security price fluctuations summarized table thousands trading current investments 1130 million 892 million march 31 2016 2015 respectively relate longterm incentive plans offsetting liabilities end respective vesting periods related liabilities may completely offset end reporting period due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income expense dependent vesting provisions plan net income loss approximately 4023 million 3655 million trading current investments march 31 2016 2015 respectively investments proprietary fund products investments fluctuations market value impact nonoperating income expense amounts fluctuations market value related approximately 358 million 375 million proprietary fund products march 31 2016 2015 respectively offsetting compensation expense revenue share arrangements fluctuations market value related approximately 1413 million 1630 million proprietary fund products march 31 2016 2015 respectively substantially offset gains losses market hedges therefore materially impact net income loss attributable legg mason inc investments proprietary fund products liquidated related fund establishes track record investors decision made longer pursue strategy nontrading assets excluding civs march 31 2016 2015 subject risk security price fluctuations summarized table thousands investment securities civs totaled 487 million 480 million march 31 2016 2015 respectively march 31 2016 2015 held equity investments civs 136 million 156 million respectively fluctuations market value investments civs excess equity investment impact net income loss attributable legg mason inc however may impact nonoperating income expense civs corresponding offset net income loss attributable noncontrolling interests valuation trading nontrading investments described within critical accounting policies heading valuation financial instruments see notes 1 15 notes consolidated financial statements discussion derivatives following summary effect 10 increase decrease market values financial instruments subject market valuation risks march 31 2016 thousands 1 gains losses related investments deferred compensation plans proprietary fund products directly offset vesting period corresponding adjustment compensation expense related liability addition investments proprietary fund products approximately 1413 million economically hedged limit market risk result 10 increase decrease unrealized market value financial instruments subject market valuation risks would result 284 million increase decrease pretax earnings march 31 2016 also march 31 2016 2015 cash equivalents included 11 billion 3533 million respectively money market funds foreign exchange sensitivity operate primarily us provide services earn revenues incur expenses outside us accordingly fluctuations foreign exchange rates currencies principally uk brazil japan canada singapore australia denominated euro may impact aum revenues expenses comprehensive income loss net income loss certain affiliates entered forward contracts manage portion impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect net income loss liquidity interest rate risk exposure interest rate changes outstanding debt substantially mitigated 250 million 395 senior notes due july 2024 550 million 5625 senior notes due july 2044 450 million 475 senior notes due march 2026 250 million 6375 junior subordinated notes due march 2056 fixed interest rates june 2014 entered interest rate swap contract designated fair value hedge effectively convert 250 million 27 senior notes due july 2019 fixed rate debt floating rate debt addition 40 million outstanding borrowings revolving credit agreement march 31 2016 also subject fluctuations interest rates march 31 2016 result interest rate swap outstanding borrowings revolving credit agreement estimate 1 change interest rates would result net annual change interest expense 29 million economic basis interest rate swap contract wholly partially hedges interest rate exposure operating cash april 21 2016 interest rate swap designated fair value hedge terminated therefore date 250 million 27 senior notes fixed interest rate addition april 29 2016 entered 467year amortizing interest rate swap designated cash flow hedge reduces exposure interest rate risk 500 million outstanding borrowings revolving credit facility see notes 6 15 notes consolidated financial statements additional discussion debt derivatives hedging respectively critical accounting policies estimates accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following critical accounting policies involve significant estimates judgments consolidation normal course business sponsor manage various types investment vehicles services entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees managed investment vehicles material march 31 2016 issued investment performance guarantees investment vehicles investors sell transfer assets investment vehicles accordance financial accounting standards consolidate certain sponsored investment vehicles designated civs certain investment vehicles sponsor manager considered variable interest entities vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights sponsored investment vehicles considered vres consolidated controlling financial interest investment vehicle absent substantive investor rights replace manager entity kickout rights may also fund initial cash investment certain vre investment vehicles generate investment performance track record order attract thirdparty investors product initial investment new product typically represents 100 ownership product discussed “seed capital investments” consolidated long maintain controlling financial interest product designated civs unless investment longerterm vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity potential controlling financial interest investment company vies sponsored investment fund vies deemed investment companies including money market funds determine primary beneficiary vie absorb majority vies expected losses receive majority vies expected residual returns determination expected residual returns excludes gross fees paid decision maker certain criteria met determining whether primary beneficiary investment company vie consider qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid us related party including employees’ ownership guarantees implied relationships determining primary beneficiary must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks determining whether vie significant disclosure purposes consider factors used determination primary beneficiary vies sponsored investment funds meet investment company criteria collateralized debt obligation entities clo entities determine primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits potentially could significant vie consider management fee structure including seniority level fees current expected economic performance entity well provisions included governing documents might restrict guarantee expected loss residual return evaluating whether obligation absorb losses right receive benefits could potentially significant vie consider factors regarding design terms characteristics investment vehicles including following qualitative factors involvement investment vehicle beyond providing management services hold equity debt interests investment vehicle transferred assets investment vehicle potential aggregate fees future periods insignificant relative potential cash flows investment vehicle variability expected fees relation potential cash flows investment vehicle insignificant must consolidate vie deemed primary beneficiary see notes 1 3 17 notes consolidated financial statements additional discussion civs vies revenue recognition vast majority revenues calculated percentage fair value aum underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager brokerdealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost approximates fair value vast majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs management fees aum fair values based unobservable inputs material march 31 2016 equity fixed income liquidity aum values aggregated 1805 billion 3768 billion 1123 billion respectively vast majority aum valued independent pricing services based upon observable market prices inputs believe market risk significant risk underlying value aum economic events financial market turmoil increased market price volatility however valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2016 less 1 total aum valued based unobservable inputs aum related clarion partners level 3 valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except portion longterm debt trading investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income loss comprehensive income loss depending underlying purpose instrument equity investments control investee primary beneficiary vie exert significant influence financial operating policies investee follow equity method accounting evaluation whether exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence may governing board investee legal rights investors entity pursuant funds operating documents relationship us investors entity equity method investees investment companies record underlying investments fair value therefore equity method accounting share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense investments value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices evaluate nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2016 2015 excluding investments civs owned approximately 02 million 03 million respectively financial investments valued assumptions estimates unobservable inputs march 31 2016 2015 also approximately 453 million 629 million respectively investments investment partnerships included noncurrent assets consolidated balance sheets approximately 373 million 483 million respectively accounted equity method remainder accounted cost method considers factors indicate may impairment value investments addition march 31 2016 2015 154 million 162 million respectively equity method investments included investment securities consolidated balance sheets accounting guidance fair value measurements disclosures defines fair value establishes framework measuring fair value accounting guidance defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance accounting guidance fair value measurements establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category may include fixed income securities certain proprietary fund products certain longterm debt level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds category may also include certain proprietary fund products redemption restrictions valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products certain investments held civs valued net asset value nav determined fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient rely navs certain investments fair value navs provided investees derived fair values underlying investments reporting date march 31 2016 approximately 1 total assets 3 financial assets measured fair value 3 total liabilities 82 financial liabilities measured fair value meet definition level 3 excluding assets liabilities civs approximately 1 total assets 3 financial assets measured fair value 3 liabilities 82 financial liabilities measured fair value meet definition level 3 transfers categories measured beginning period see note 3 17 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2016 follows thousands identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth attrition rates acquired contracts based upon historical experience factors estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weightedaverage cost capital takes consideration premium representing degree risk inherent asset fully described goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred perform quantitative tests include critical reviews significant assumptions determine intangible assets goodwill impaired qualitatively concluded likely respective fair values exceed related carrying values perform tests indefinitelife intangible assets goodwill annually december 31 completed annual impairment tests goodwill indefinitelife intangible assets december 31 2015 result impairment tests permal fundsofhedge funds contracts trade name indefinitelife intangible assets determined partially impaired resulting aggregate pretax operating charges 371 million neither goodwill intangible assets deemed impaired impairments value amortizable intangible assets recognized year ended march 31 2016 estimates related future cash flows exceeded asset carrying values also determined triggering events occurred march 31 2016 therefore additional indefinitelife intangible asset goodwill impairment testing necessary result uncertainty regarding future market conditions assessing fair value reporting unit intangible assets requires management exercise significant judgment details intangible assets goodwill related impairment tests follow acquisition rare infrastructure resulted addition indefinitelife mutual fund contracts asset amortizable separate accounts asset trade name asset goodwill 123 million 68 million 5 million 162 million 170 million australian dollars 94 million australian dollars 7 million australian dollars 225 million australian dollars respectively using foreign exchange rate october 21 2015 fair values rare infrastructure indefinitelife mutual fund contracts asset amortizable separate accounts asset established october 21 2015 acquisition date december 31 2015 impairment consideration limited review aum trends critical valuation inputs noted significant changes amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates amortization periods longer appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows march 31 2016 estimated remaining useful lives amortizable intangible assets range three 12 years weightedaverage life approximately 109 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined market participants perspective based projected discounted cash flows taking account values market participants would pay taxable transaction acquire respective assets two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names determine fair value intangible assets based upon discounted projected cash flows take consideration estimates future fees profit margins growth rates taxes discount rates determination fair values indefinitelife intangible assets highly dependent estimates changes inputs could result material impairment related carrying values asset determined impaired current implied fair value less recorded carrying value asset impaired difference current implied fair value carrying value asset reflected financial statements recognized operating expense period impairment determined exist contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset fauchier acquisition completed permal march 2013 included fundsofhedge fund business merged existing permal fund business common management shared resources including infrastructure employees processes cobranding initiatives accordingly related carrying values cash flows funds aggregated impairment testing projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth estimated net client flows projected market performance estimate projected cash flows projected growth rates affiliate used project aum cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income liquidity investment manager based upon among things historical experience expectations future market investment performance internal external sources currently market growth assumptions 6 equity 3 fixed income 0 liquidity products general assumption 2 organic growth products subject exceptions organic growth contraction generally years one five starting point assumptions corporate planning process includes threeyear aum projections management operating affiliate consider specific business circumstances affiliate flow assumptions certain affiliates adjusted appropriate reflect market participant view beyond year three estimates move towards general organic growth assumption 2 appropriate affiliate asset class year 20 resulting cash flow growth rate year 20 held constant used project cash flows year 40 based projected aum affiliate asset class affiliate advisory fee rates applied determine projected revenues domestic mutual fund contracts projected revenues applied weightedaverage margin applicable affiliates manage aum margins based arrangements currently place affiliate projected operating income reduced appropriate tax rate calculate projected cash flows believe growth assumptions reasonable given consideration multiple inputs including internal external sources although assumptions subject change based fluctuations actual results market conditions assumptions also subject change due among factors poor investment performance one operating affiliates withdrawal aum clients changes business climate adverse regulatory actions loss key personnel consider risks development growth assumptions discount rates discussed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows process includes comparison actual results prior growth projections however differences actual results prior projections necessarily indicative need reassess estimates given discounted projected cash flow analyses include projections well beyond three years variances nearyears may offset subsequent years fair value assessments pointintime consistency fair value assessment indicators value reflect expectations market participants pointintime critical evidence soundness estimate value subsequent periods consider differences actual results prior projections considering reasonableness growth assumptions used current impairment testing discount rates based appropriately weighted estimated costs debt equity capital using market participant perspective estimate cost debt based published debt rates estimate cost equity capital based capital asset pricing model considers riskfree interest rate peergroup betas company equity risk premiums equity risk adjusted consider relative risk associated indefinitelife intangible asset reporting unit discount rates also calibrated based assessment relevant market values consistent standard valuation practices taxable transactions projected discounted cash flow analysis also factors tax benefit value appropriate tax benefit represents discounted tax savings third party purchased asset given valuation date would receive future tax deductions amortization purchase price 15 years permal fundsofhedge funds contracts 698 million accounted approximately 20 indefinitelife intangible assets prior previously discussed impairment charge supported combined fundsofhedge funds business funds continued experience periods moderate inflows outflows recent years certain increased risks follows past several years seen declines traditional high net worth client fundsofhedge funds business permals historical focus permal offset extent inflows institutional business fundsofhedge fund managers subject certain market influences evidenced permals growth institutional funds separate accounts adding additional uncertainty estimates due part factors actual results 12 months ended december 31 2015 generally compared unfavorably growth assumptions permal fundsofhedge funds contracts used asset impairment testing december 31 2014 additionally historical fauchier portion permals business subject risk associated loss certain key staff result december 2015 testing growth assumptions contracts reduced first five years together impact decreased margins first two years led decreased projected cash flows business also projected cash flows permal fundsofhedge funds contracts discounted 165 compared 145 used prior years impairment testing reflecting factors noted based upon projected discounted cash flow analyses carrying value permal fundsofhedge funds contracts asset exceeded fair value 335 million resulting impairment charge 364 million excess cash flows permal fundsofhedge funds contracts assumed average annual growth rate approximately 7 5 market 2 organicother however given current experience projected nearyear cash flows reflect moderate aum outflows years one two net aum flows year three trend modest aum inflows year four investment performance including expected impact future asset flows significant factor growth projections permal fundsofhedge funds contracts market performance projections supported fact two largest funds comprise approximately half contracts asset aum 10year average returns approximating 5 market projections supported industry statistics domestic mutual fund contracts acquired citigroup asset management “cam” transaction 21 billion account approximately 70 indefinitelife intangible assets december 31 2015 approximately 150 billion aum primarily managed clearbridge western asset associated asset approximately 35 equity fixed income aum 30 liquidity aum previously disclosed uncertainties regarding market conditions asset flows risks related potential regulatory changes liquidity business reflected projected discounted cash flow analyses based projected discounted cash flow analyses related fair value exceeded carrying value approximately 10 billion impairment test cash flows domestic mutual fund contracts assumed annual growth rates average approximately 6 reflect moderate aum inflows years 1 2 projected cash flows domestic mutual fund contracts discounted 130 results 12 months december 31 2015 compared favorably growth assumptions related domestic mutual fund contracts asset impairment testing december 31 2014 assuming factors remain actual results andor changes assumptions domestic mutual fund contracts cash flow projections longterm would deviate 30 previous projections discount rate would raised 130 165 asset deemed impaired despite higher excess fair value related carrying value given current uncertainty regarding future market conditions reasonably possible fund performance flows aum levels may decrease near term actual cash flows domestic mutual funds contracts could deviate projections 30 asset could deemed impaired material amount trade names account 2 indefinitelife intangible assets primarily related permal carrying value 45 million tested intangible assets using assumptions similar described indefinitelife contracts permal trade name carrying value exceeded estimated fair value 38 million resulting 7 million impairment excess resulting fair values trade names significantly exceeded related carrying amounts goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition continue manage business one global asset management operating segment internal management reporting discrete financial information regularly received chief operating decision maker chief executive officer consolidated global asset management business level result goodwill recorded evaluated one global asset management reporting unit level global asset management reporting unit consists operating businesses asset management affiliates centralized global distribution operations impairment testing process consolidated assets except certain tax benefits liabilities allocated single global asset management reporting unit similarly projected operating results reporting unit include holding company corporate costs overhead including costs associated executive management finance human resources legal compliance internal audit central corporate functions goodwill principally originated acquisitions cam permal royce martin currie recently rare infrastructure value reporting unit based part projected consolidated net cash flows including cash flows assets managed mutual funds closedend funds proprietary funds addition separate account assets managers significant assumptions used assessing implied fair value reporting unit discounted cash flow method consistent methodology discussed indefinitelife intangible assets also reporting unit level future corporate costs estimated consolidated projected operating results affiliates actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows discount rates based appropriately weighted estimated costs equity using market participant perspective also consistent methodology discussed indefinitelife intangible assets also perform marketbased valuation reporting unit value applies average ebitda multiples paid change control transactions peer companies ebitda results two estimates value reporting unit discounted cash flow ebitda multiple analyses compared significant differences assessed determine reasonableness value whether adjustment either result warranted values accepted appropriately weighted average two reporting unit valuations discounted cash flow ebitda multiple analyses used implied fair value global asset management reporting unit december 31 2015 exceeded carrying value material amount considering relative merits details involved valuation process used equal weighting two values december 2015 testing assess accuracy reporting unit value determined valuation methods comparing results market capitalization determine implied control premium reasonableness implied control premium considered comparing control premiums paid relevant actual change control transactions assessment provides evidence underlying assumptions analyses reporting unit fair value reasonable calculating market capitalization purposes market volatility significant impact capitalization appropriate may consider average market prices stock period one two months test date determine market capitalization control premium arises fact acquisition typically premium paid current market prices publicly traded companies relates ability control operations acquired company assessments control premiums asset management industry difficult many acquisitions involve privately held companies involve portions public company control premium calculated based analysis consideration believe implied control premium determined reporting unit value estimation december 31 2015 lower end observed range reasonable contingent consideration liabilities connection business acquisitions may required pay additional future consideration based achievement certain designated financial metrics estimate fair value potential future obligations time business combination consummated record contingent consideration liability consolidated balance sheet fair values contingent consideration liabilities revised quarterly reporting date march 31 2016 fair values contingent consideration liabilities aggregate 846 million relating acquisitions rare infrastructure martin currie qs investors pk investments contingent consideration liability associated fauchier acquisition march 31 2016 estimate fair value contingent consideration liabilities using probabilityweighted modeling specific business acquisition arrangement contingent consideration estimated payments discounted present value measurement date martin currie purchase agreement requires us pay additional consideration based achievement certain financial metrics specified share purchase agreement certain future dates three onehalf year earnout term modeling martin currie contingent payment arrangement includes monte carlo simulation projected aum performance fees product performance determine related estimated payment amounts expected payment amounts subsequently change contingent consideration liabilities reduced increased current period resulting gain loss reflected within operating expense consolidated statements income loss significant increases decreases projected aum performance fee levels martin currie would result significantly higher lower contingent consideration liability fair value resulting changes could material operating results rare infrastructure fauchier qs investors purchase agreements require us pay additional consideration based whether certain future revenue thresholds achieved likewise significant increases decreases projected revenue levels rare infrastructure fauchier qs investors would result significantly higher lower contingent consideration liability fair value resulting changes could material operating results stockbased compensation stockbased compensation plans include stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units affiliate management equity plans deferred compensation payable stock compensation plans issue equity awards directors officers key employees accordance applicable accounting guidance compensation expense years ended march 31 2016 2015 2014 includes compensation cost nonvested sharebased awards grant date fair value amortized respective vesting periods straightline method also accounting guidance cash flows related income tax deductions excess less stockbased compensation expense classified financing cash flows granted 09 million 09 million 12 million stock options fiscal 2016 2015 2014 respectively fiscal 2016 implemented affiliate management equity plan royce resulted issuance minority equity interests affiliate management team interests allow holders receive quarterly distributions affiliates net revenues amounts equal percentage ownership represented equity hold fiscal 2014 also implemented management equity plans permal clearbridge granted units certain employees entitle participate 15 future growth respective affiliates enterprise value subject appropriate discounts additional information sharebased compensation see notes 1 11 notes consolidated financial statements determine fair value option grant using blackscholes optionpricing model except marketbased grants use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate exception grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal expected life options estimate volatility equally weighted historical prices stock period equal expected life option implied volatility market listed options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different also determine fair value optionlike affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts inputs blackscholes model generally determined fashion similar fair value grants options stock described however affiliates private companies without quoted stock prices utilize discounted cash flow analyses marketbased valuations similar discussed heading “intangible assets goodwill” determine respective business enterprise values subject appropriate discounts lack control marketability noncontrolling interests noncontrolling interests include affiliate minority interests thirdparty investor equity consolidated sponsored investment vehicles vested management equity plan interests noncontrolling interests holder may able request settlement classified redeemable reported estimated settlement values settlement expected occur future date changes expected settlement value recognized settlement period nonredeemable noncontrolling interests permit holder request settlement reported issuance value together undistributed net income allocated noncontrolling interests estimate settlement value noncontrolling interests fair value consolidated sponsored investment vehicles investor may request withdrawal time fair value based market quotes underlying securities held investment vehicles affiliate minority interests management equity plan interests fair value reflects related total business enterprise value appropriate discounts lack marketability control may also features equity interests dividend subordination contemplated valuations fair value optionlike management equity plan interests also relies blackscholes option pricing model calculations noted income taxes subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes management assesses likelihood able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision result prospective application new accounting guidance offset deferred tax assets liabilities related valuation allowances present single noncurrent amount march 31 2016 retrospectively adjusted prior periods substantially deferred tax assets relate us federal state uk taxing jurisdictions march 31 2016 us federal deferred tax assets aggregated 7115 million realization expected require 32 billion future us earnings 740 million must foreign sourced earnings deferred tax assets generated us jurisdictions resulting net operating losses generally expire 20 years generated resulting foreign tax credits generally expire 10 years generated based estimates future taxable income using assumptions consistent used goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realizable respect resulting foreign tax credit carryforwards likely tax benefits relating utilization approximately 235 million foreign taxes credits realized valuation allowance established estimates assumptions contemplate certain possible future changes ownership legg mason stock us internal revenue code could limit utilization net operating loss foreign tax credit benefits march 31 2016 federal valuation allowances aggregated 210 million decrease federal valuation allowances prior year relates 127 million expiring foreign tax credits release offset part 69 million 25 million relates foreign tax credits 34 million relates charitable contributions 10 million relates martin curries operating losses tax planning may enhance tax positions realization tax benefits deferred tax assets valuation allowances provided dependent implementation significant tax strategies march 31 2016 us state deferred tax assets aggregated 1757 million due limitations utilization net operating loss carryforwards taking consideration state tax planning strategies related valuation allowance 268 million substantially relates prior years state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary foreign jurisdictions decrease valuation allowances 114 million fiscal 2016 primarily relates change statutory rates tax planning utilize attributes previously considered realizable adjustments intercompany pricing models extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets event determine portion deferred tax assets already subject valuation allowance realizable required establish valuation allowance charge income tax provision period determination made depending facts circumstances charge could material earnings calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risk revenues net income loss critical accounting policies intangible assets goodwill previously discussed item 7aitem 7 managements discussion analysis financial condition results operations executive overview legg mason inc global asset management firm primarily operates nine independent asset management subsidiaries collectively subsidiaries “legg mason” help investors globally pursue better financial outcomes expanding choice across investment strategies vehicles investor access independent asset managers diverse expertise equity fixed income alternative liquidity investments acting independent investment managers often refer affiliates deliver investment capabilities varied products vehicles via multiple points access including directly various financial intermediaries investment advisory services include discretionary nondiscretionary management separate investment accounts numerous investment styles institutional individual investors investment products include proprietary mutual funds ranging money market liquidity products fixed income equity alternative funds managed wide variety investment styles also offer domestic offshore funds retail institutional investors privately placed real estate funds hedge funds fundsofhedge funds centralized global distribution group legg mason global distribution markets distributes supports investment products operations principally us uk also offices australia brazil canada chile china dubai france germany ireland italy japan singapore spain switzerland taiwan information see item 1 business included herein references fiscal 2019 2018 2017 refer fiscal year ended march 31 year terms us company refer legg mason financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms commercial banks insurance companies financial services companies industry continues experience disruption challenges including shift lowerfee passively managed products contributes increasing fee pressure increased role technology asset management services introduction new financial products services consolidation financial services firms mergers acquisitions asset management industry also subject extensive evolving regulation federal state foreign laws like firms continue impacted regulatory legislative changes responding changes keeping abreast regulatory developments required continue require us incur costs impact profitability financial position results operations materially affected overall trends conditions global financial markets results individual period considered representative future results operating revenues primarily consist investment advisory fees funds separate accounts distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks hurdle rates largest portion performance fees earned based 12month performance periods end differing quarters year portion based quarterly performance periods also earn performance fees alternative products lock end varying investment periods multipleyear intervals per terms certain recent acquisitions performance fees earned preclose assets management aum acquired entities fully passed compensation expense therefore impact net income loss attributable legg mason inc distribution service fees received distributing investment products services providing support services investment portfolios providing nondiscretionary advisory services assets advisement aua generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level aum aua related fee rates thus affected factors securities market conditions ability attract maintain aum key investment personnel investment performance aum changes period primarily due inflows outflows client assets market performance well changes foreign exchange rates client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services fees charge investment services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions fees charge investment services vary based upon factors type underlying investment product amount aum asset management affiliate provides services type services investment objectives provided general fees earned asset management services highest alternative assets followed equity assets fixed income assets liquidity assets accordingly revenues average operating revenue yields affected composition aum changes relative level alternative equity assets typically significantly impacting revenues average operating revenue yields average operating revenue yields calculated ratio total operating revenue less performance fees average aum addition ordinary course business may reduce waive investment management fees total expenses certain products services particular time periods limit fund expenses reasons help retain increase managed assets industry continues impacted disruption challenges continued migration higher fee lower fee products continues put pressure fees revenue sharing arrangements place certain asset management affiliates specified percentages affiliates revenues required distributed us balance revenues retained affiliates pay operating expenses including compensation expenses excluding certain expenses income taxes revenuesharing arrangements asset management affiliates retain different percentages revenues cover costs affiliates operate budget processes varying margin targets net income loss attributable legg mason inc operating margin compensation percentage operating revenues impacted based affiliates products generate aum change aum one affiliate respect one product class products different effect revenues earnings equal change another affiliate another product class products addition time may agree changes revenue sharing arrangements asset management personnel may impact compensation expenses profitability significant operating expenses employee compensation benefits majority variable nature includes incentive compensation portion based upon revenue levels noncompensation related operating expense levels revenue sharebased affiliates performance fees passed compensation expense overall profitability distribution servicing expenses consist primarily fees paid thirdparty distributors selling asset management products services certain operating costs occupancy depreciation amortization fixed contract commitments market data communication technology services typically consistent period usually decline reduced levels business activity conversely usually rise proportionately increased business activity absence unusual events revenues net income derived primarily aum fees associated investment products changes global financial markets composition level aum net new business inflows outflows changes mix investment products asset classes geographies may materially affect results operations profitability sensitive variety factors including amount composition aum volatility general level securities prices interest rates changes currency exchange rates among things periods unfavorable market conditions likely adverse effect profitability addition diversification services vehicles products offered investment performance access distribution channels reputation market attraction retention key employees client relations significant factors determining whether successful attracting retaining clients last years industry seen flows products currently garner significant market share including particular passive products corresponding flows products market share discussion factors may affect results operations refer discussion item 1a risk factors included herein strategy expand client choice products vehicles access focus strategic priorities four primary areas listed management considers strategic priorities evaluating operating performance financial condition consistent approach also presented table initiatives management currently focuses evaluating performance financial condition strategic priorities discussed designed drive improvements net flows earnings cash flows aum key metrics including operating margin certain key metrics discussed annual results discussion february 2019 announced plan implement new global operating platform combine certain affiliate parent company operations since announcement plans evolved focus corporate operations part broader strategic restructuring reduce costs also expanded areas included restructuring include broader corporate distribution functions well efficiency initiatives certain smaller affiliates operate outside revenuesharing arrangements expect incur aggregate strategic restructuring costs range 130 million 150 million incurred march 2021 expect strategic restructuring result future annual cost savings 100 million run rate basis end fiscal 2021 quarter ended march 31 2019 incurred 94 million 008 per diluted share costs related strategic restructuring see note 17 notes consolidated financial statements additional information addition prior january 1 2019 incurred 91 million 007 per diluted share costs associated previous corporate restructuring plans attribute include strategic restructuring net loss attributable legg mason inc year ended march 31 2019 285 million 038 per diluted share compared net income attributable legg mason inc 2851 million 301 per diluted share year ended march 31 2018 addition strategic restructuring corporate restructuring charges discussed net loss attributable legg mason inc year ended march 31 2019 included noncash impairment charges totaling 3652 million 307 per diluted share affiliate charges 92 million 006 per diluted share discrete net tax expenses tax items 77 million 009 per diluted share charge 42 million 005 per diluted share related regulatory matter discussed note 8 notes consolidated financial statements affiliate charges include charges restructuring certain affiliates primarily severance 68 million royce associates royce management equity plan costs 24 million net income attributable legg mason inc year ended march 31 2018 included one time net noncash provisional tax benefit 2137 million 226 per diluted share related tax cuts jobs act 2017 tax law enacted december 22 2017 benefit offset part noncash impairment charges related intangible assets 2290 million 196 per diluted share 670 million 071 per diluted share charge related regulatory matter discussed year ended march 31 2018 also included adjustments decrease fair value contingent consideration liabilities 313 million 033 per diluted share average aum total revenues decreased approximately 1 8 respectively fiscal 2019 compared fiscal 2018 discussed following discussion analysis provides additional information regarding financial condition results operations business environment year ended march 31 2019 volatile period us equity markets strong returns second third quarters calendar year 2018 driven corporate earnings growth favorable economic indicators offset sharp downturn fourth quarter calendar year 2018 due fears slowing global growth continued uncertainty surrounding trade disputes us china first quarter calendar year 2019 us equity markets responded favorably us federal reserves shift away tightening monetary policy posting substantial gains erasing losses experienced fourth quarter calendar year 2018 developed international equity markets emerging equity markets also volatile year ended march 31 2019 strong growth second third quarters calendar year 2018 erased fourth quarter calendar year 2018 driven concerns rising us interest rates trade disputes european political uncertainty slower growth china british exit european union markets rebounded first quarter calendar year 2019 concerns drove fourth quarter downturn eased global bond markets also volatile year 10year us treasury yield rose highest level since 2011 november 2018 declining december 2018 first quarter calendar year 2019 amid volatile equity markets increasing concerns slowing global growth signals federal reserve interest rate increases expected calendar year 2019 volatile equity markets fourth quarter calendar year 2018 also resulted losses investmentgrade high yield corporate bonds nonus developed market government bonds rebounded first quarter calendar year 2019 year ended march 31 2019 federal reserve board increased target federal funds rate three times 175 250 federal funds rate march 31 2019 remained 250 federal reserve board signaled rate increases calendar year 2019 significant change previous forecast indicated two rate increases likely calendar year 2019 following table summarizes returns various major market indices 1 indices trademarks dow jones company mcgrawhill companies inc nasdaq stock market inc barclays capital respectively affiliated legg mason 2 excludes impact reinvestment dividends stock splits addition factors industry continues impacted generally low growth mixed return environment continued migration active passive strategies together continuing regulatory changes factors continue put pressure fees contributing consolidation products managers distribution platforms factors also continue create significant flow challenges active managers like economic outlook us remained positive recent years impacted increased uncertainty led increased volatility us international equity bond markets volatility market highlights importance strong investment strategy financial environment operate continues reflect heightened level sensitivity continued pressure fees assets management aum primarily managed across following asset classes strategies equity fixed income alternative liquidity large cap growth us intermediate investment grade real estate us managed cash large cap value us credit aggregate hedge funds us municipal cash equity income global opportunistic fixed income listed international equity global government infrastructure small cap core global fixed income large cap core us municipal sector equity us long duration mid cap core high yield small cap value us limited duration emerging markets equity emerging markets debt small cap growth global equity components changes aum billions years ended march 31 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 discussed due change policy classification assets advisement aua aum effective april 1 2017 aum march 31 2018 includes 238 billion assets previously included aua comparable aua march 31 2017 160 billion net inflows related comparable aua 35 billion year ended march 31 2017 excluded table 3 realizations represent investment managerdriven distributions primarily related sale assets realizations specific alternative managers include clientdriven distributions eg client requested redemptions liquidations asset transfers prior april 1 2017 realizations reported net client cash flows 4 years ended march 31 2019 2017 primarily includes reinvestment dividends year ended march 31 2018 includes reclassification effective april 1 2017 160 billion certain assets previously included aua aum year ended march 31 2018 also includes reinvestment dividends 37 billion reconciliation previously reported amounts 5 includes 415 billion 96 billion related acquisitions clarion partners entrust respectively offset part 48 billion related disposition two small investment managers share joint venture year ended march 31 2017 aum march 31 2019 7580 billion increase 39 billion 1 compared march 31 2018 total net client outflows 80 billion comprised 103 billion net client outflows longterm asset classes offset part 23 billion net client inflows liquidity asset class longterm asset net outflows comprised equity net outflows 75 billion fixed income net outflows 43 billion offset part alternative net inflows 15 billion equity net outflows primarily products managed royce clearbridge investments clearbridge brandywine global investment management brandywine qs investors martin currie fixed income net outflows primarily products managed western asset management company western asset offset part net inflows products managed brandywine alternative net inflows primarily products managed clarion partners offset part net outflows products managed entrust global formerly entrustpermal rare infrastructure generally earn higher fees profits alternative equity aum outflows asset classes negatively impact revenues net income attributable legg mason inc would outflows fixed income liquidity asset classes market performance 213 billion negative impact foreign currency exchange rate fluctuations 84 billion fiscal 2018 began separately report realizations investment managerdriven distributions primarily related sale assets realizations specific alternative managers include clientdriven distributions eg requested redemptions liquidations asset transfers realizations years ended march 31 2019 2018 10 billion 26 billion respectively realizations 13 billion included net client cash flows year ended march 31 2017 aum march 31 2018 7541 billion increase 257 billion 4 compared march 31 2017 total net client outflows 226 billion comprised 243 billion net client outflows liquidity asset class offset part 17 billion net client inflows longterm asset classes longterm asset net inflows comprised fixed income net inflows 94 billion offset part equity net outflows 67 billion alternative net outflows 10 billion fixed income net inflows primarily products managed western asset brandywine offset part net outflows products managed qs investors equity net outflows primarily products managed qs investors royce brandywine offset part equity net inflows products managed martin currie alternative net outflows primarily products managed entrust global rare infrastructure offset part net inflows products managed clarion partners market performance 457 billion 160 billion relates reclassification effective april 1 2017 certain assets previously classified aua aum due change policy classification aua aum specifically retail separately managed account programs operate fees comparable programs managed fully discretionary basis aua generally comprised third party client assets including portfolio overlay model accounts advised us limited investment discretion positive impact foreign currency exchange rate fluctuations 54 billion investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds vehicles manage may redeem investments funds vehicles time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients thirdparty distributors relationships loss key investment management personnel financial market performance aum asset class aum asset class billions years ended march 31 follows nm meaningful average aum asset class billions years ended march 31 follows nm meaningful component changes aum asset class billions follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 years ended march 31 2019 2017 primarily includes reinvestment dividends year ended march 31 2018 includes reclassification effective april 1 2017 121 billion 39 billion certain equity fixed income assets respectively previously included aua aum year ended march 31 2018 also includes reinvestment dividends 37 billion reconciliation previously reported amounts 3 includes 415 billion 96 billion related acquisitions clarion partners entrust respectively offset part 48 billion related disposition two small investment managers portion joint venture 4 realizations represent investment managerdriven distributions primarily related sale assets realizations specific alternative managers include clientdriven distributions eg client requested redemptions liquidations asset transfers prior april 1 2017 realizations reported net client cash flows aum distribution channel two principal distribution channels global distribution affiliateother sell variety investment products services global distribution consists centralized global distribution operations principally sells us international mutual funds commingled vehicles retail separately managed account programs subadvisory accounts insurance companies similar clients affiliateother consists distribution operations within asset managers principally sell institutional separate account management liquidity money market funds real estate privately placed investment funds hedge funds component changes aum distribution channel billions follows 1 excludes 159 billion 103 billion aua march 31 2017 2016 respectively net client cash flows year ended march 31 2017 excludes 35 billion aua net inflows effective april 1 2017 significant portion assets reclassified aua aum accordingly 238 billion assets previously included aua included aum march 31 2018 2 includes 415 billion 96 billion related acquisitions clarion partners entrust respectively offset part 48 billion related disposition two small investment managers share joint venture 3 realizations represent investment managerdriven distributions primarily related sale assets realizations specific alternative managers include clientdriven distributions eg client requested redemptions liquidations asset transfers prior april 1 2017 realizations reported net client cash flows 4 includes reclassification effective april 1 2017 160 billion certain assets previously included aua aum due change policy classification aua aum also includes reinvestment dividends 37 billion reconciliation previously reported amounts operating revenue yield calculate operating revenue yields ratio operating revenues less performance fees average aum overall operating revenue yield less performance fees across asset classes distribution channels 38 basis points bps year ended march 31 2019 39 basis points years ended march 31 2018 2017 operating revenue yields asset class distribution channel follows operating revenue yields managing alternative assets declined last two fiscal years due shift mix assets higher fee lower fee products operating revenue yields equity assets declined last six years due shift mix assets higher fee equity products lower fee equity products yields managing equity assets also declined prior year due previously discussed reclassification certain assets aua aum increased aum denominator without corresponding increase operating revenue equity assets primarily managed clearbridge royce brandywine qs investors martin currie alternative assets managed clarion partners entrust global rare infrastructure fixed income assets primarily managed western asset brandywine liquidity assets managed western asset assets distributed legg mason global distribution predominately retail nature investment performance discussion market conditions year ended march 31 2019 see business environment following table presents summary percentages aum strategy1 outpaced respective benchmarks trailing 1year 3year 5year 10year periods following table presents summary percentages us mutual fund assets2 outpaced lipper category averages trailing 1year 3year 5year 10year periods na applicable 1 purposes investment performance comparisons strategies aggregation portfolios separate accounts investment funds products single group represents particular investment objective case separate accounts investment performance account based upon performance strategy account assigned asset managers specific guidelines including portfolios strategies managers manage separate accounts investment funds strategy performance comparison assets based upon performance separate account march 31 2019 2018 2017 88 87 88 respectively total aum included strategy aum although strategies 3year 5year 10year histories total strategy aum includes liquidity assets certain assets included reported performance comparisons include accounts managed accordance guidelines outlined accounts strategies marketed potential clients accounts yet assigned strategy certain smaller products affiliates past performance indicative future results aum included institutional retail separate accounts investment funds included strategy separate accounts performance comparisons based grossoffee performance investment funds managed separate account format performance comparisons based netoffee performance fundsofhedge funds generally specified benchmarks purposes comparison performance products net fees compared relevant hfrx index performance comparisons reflect actual performance specific separate account investment fund individual separate account investment fund performance may differ 2 source lipper inc includes openend closedend variable annuity funds effective april 1 2018 lipper investment management lim used comparative performance reporting replacing lipper analytical new applications lana discontinued lipper inc resulted changes composition comparative categories comparison purposes prior periods reflect categories reported lim us longterm mutual fund assets represented data accounted 18 total aum march 31 2019 2018 2017 performance us longterm mutual fund assets included strategies results operations accordance financial accounting standards consolidation consolidate separately identify amounts relating certain sponsored investment products consolidation investment products impact net income loss attributable legg mason inc material impact consolidated operating results also hold investments consolidated sponsored investment funds change value investments recorded nonoperating income expense reflected net income loss attributable legg mason inc see notes 1 19 notes consolidated financial statements additional information regarding consolidation investment products operating revenues components total operating revenues millions dollar percentage changes periods follows nm meaningful total operating revenues year ended march 31 2019 290 billion decrease 8 314 billion year ended march 31 2018 primarily due 1429 million decrease performance fees 832 million performance fees passed compensation expense discussed decrease operating revenue yield 38 basis points year ended march 31 2019 39 basis points year ended march 31 2018 also contributed decrease total operating revenues year ended march 31 2018 314 billion increase 9 289 billion year ended march 31 2017 increase primarily due 1195 million increase performance fees 480 million earned clarion partners fully passed compensation expense per terms acquisition agreement 9 increase average longterm aum also contributed increase operating revenue yield remained flat 39 basis points years ended march 31 2018 2017 investment advisory fees separate accounts year ended march 31 2019 investment advisory fees separate accounts remained relatively flat 103 billion compared 102 million year ended march 31 2018 increase 199 million primarily due higher average equity assets managed clearbridge substantially offset decrease 128 million primarily due reduction average fee rate earned fixed income assets managed brandywine decrease 71 million primarily due lower average alternative assets managed entrust global rare infrastructure year ended march 31 2018 investment advisory fees separate accounts increased 956 million 102 billion compared 9252 million year ended march 31 2017 increase 575 million resulted inclusion revenues associated certain assets reclassified aua aum effective april 1 2017 previously discussed prior reclassification fiscal 2018 revenues related comparable aua included distribution service fees addition higher average equity assets managed clearbridge contributed 285 million increase higher average fixed income assets western asset contributed 167 million increase increases offset part decrease 98 million due lower average alternative assets managed rare infrastructure investment advisory fees funds year ended march 31 2019 investment advisory fees funds decreased 848 million 5 148 billion compared 156 billion year ended march 31 2018 decrease 567 million primarily due lower average equity assets managed martin currie royce clearbridge 393 million primarily due lower average alternative assets managed entrust global 167 million due lower average liquidity assets managed western asset decreases partially offset part increase 264 million primarily due higher average alternative assets managed clarion partners year ended march 31 2018 investment advisory fees funds increased 828 million 6 156 billion compared 148 billion year ended march 31 2017 increase 1011 million due higher average equity assets managed clearbridge martin currie 418 million due higher average fixed income assets managed western asset 191 million due higher revenues earned clarion partners acquired april 2016 due part inclusion full year revenues current year increases offset part decrease 435 million due lower average alternative assets managed entrust global decrease 261 million due disposition two small investment managers march 2017 december 2016 net decrease 138 million fees liquidity assets result lower average liquidity assets managed western asset offset part reduction fee waivers liquidity funds investment advisory performance fees march 31 2019 2018 2017 approximately 12 11 12 respectively longterm aum accounts eligible earn performance fees point respective fiscal year performance fees earned clarion partners assets invested prior acquisition closing april 2016 fully passed clarion partners management team per terms acquisition agreement recorded compensation expense therefore impact net income loss attributable legg mason inc expect full pass performance fees clarion partners phase fiscal 2022 excluding aum eligible earn pass performance fees approximately 8 7 8 longterm aum accounts eligible earn performance fees point years ended march 31 2019 2018 2017 respectively years ended march 31 2019 2018 2017 53 60 49 respectively nonpass performance fee eligible aum earned performance fee year ended march 31 2019 investment advisory performance fees 849 million 490 million earned clarion partners passed compensation expense 205 million 96 million 58 million earned fixed income alternative equity assets respectively year ended march 31 2018 investment advisory performance fees 2278 million 1088 million earned clarion partners passed compensation expense 596 million 325 million 269 million earned fixed income equity alternative assets respectively year ended march 31 2017 investment advisory performance fees 1083 million 608 million earned clarion partners passed compensation expense 319 million 109 million 47 million earned fixed income alternative equity assets respectively decrease performance fees passed compensation expense year ended march 31 2019 primarily due aggregate 832 million decrease performance fees earned assets managed martin currie western asset entrust global brandywine increase year ended march 31 2018 primarily due aggregate 680 million increase performance fees earned assets managed martin currie western asset entrust global brandywine due part strong financial markets fiscal 2018 distribution service fees year ended march 31 2019 distribution service fees decreased 189 million 6 3030 million compared 3219 million year ended march 31 2018 primarily due reduction average mutual fund aum subject distribution service fees year ended march 31 2018 distribution service fees decreased 448 million 12 3219 million compared 3667 million year ended march 31 2017 decrease driven 390 million earned fiscal 2017 certain assets reclassified aua aum effective april 1 2017 revenue related assets included investment advisory fees separate accounts year ended march 31 2018 reduction average mutual fund aum subject distribution service fees also contributed decrease operating expenses components total operating expenses millions dollar percentage changes periods follows nm meaningful total operating expenses year ended march 31 2019 decreased 161 million 1 280 billion compared 282 billion year ended march 31 2018 year ended march 31 2018 increased 3516 million 14 282 billion compared 246 billion year ended march 31 2017 discussed total operating expenses years ended march 31 2019 2018 2017 included 3652 million 2290 million 350 million respectively impairment intangible assets year ended march 31 2018 also included 670 million charge regulatory matter discussed note 8 notes consolidated financial statements operating expenses incurred investment management affiliate level comprised approximately 70 65 70 years ended march 31 2019 2018 2017 respectively total operating expenses excluding impairment charges remaining operating expenses excluding impairment charges corporate costs including costs global distribution operations compensation benefits components total compensation benefits millions dollar percentage changes periods follows nm meaningful total compensation benefits year ended march 31 2019 decreased 7 140 billion compared 151 billion year ended march 31 2018 year ended march 31 2018 increased 8 151 billion compared 140 billion year ended march 31 2017 • salaries incentives decreased 562 million 106 billion year ended march 31 2019 compared 111 billion year ended march 31 2018 driven 473 million decrease net compensation investment affiliates primarily driven impact previously discussed decrease performance fees passed compensation expense salaries incentives increased 885 million 111 billion year ended march 31 2018 compared 102 billion year ended march 31 2017 driven 873 million increase net compensation investment affiliates primarily driven impact increased revenues certain revenueshare based affiliates typically creates corresponding increase compensation per applicable revenue share agreements • benefits payroll taxes increased 27 million 2656 million year ended march 31 2019 compared 2629 million year ended march 31 2018 primarily due increase costs associated certain longterm incentive deferred compensation benefit plans offset part decrease payrollrelated taxes benefits payroll taxes increased 174 million 2629 million year ended march 31 2018 compared 2455 million year ended march 31 2017 primarily due increase costs associated certain longterm incentive deferred compensation benefit plans well increase payrollrelated taxes • transitionrelated severance costs increased 30 million 144 million compared 114 million year ended march 31 2018 primarily due increase severance costs incurred certain affiliates increase offset part reduction costs associated restructuring permal combination entrust complete june 2018 09 million 58 million costs incurred years ended march 31 2019 2018 respectively well decrease severance costs distribution corporate personnel transition costs severance decreased 249 million 114 million compared 363 million year ended march 31 2017 58 million 273 million years ended march 31 2018 2017 respectively associated restructuring permal combination entrust remaining amounts period primarily severance costs corporate distribution personnel see note 2 notes consolidated financial statements discussion transitionrelated costs • management equity plan charges year ended march 31 2019 24 million associated additional grant equity units royce management equity plan final planned grant terms plan management equity plan charges year ended march 31 2017 comprised 152 million associated implementation management equity plan management team clarion partners 46 million associated additional grant equity units royce management equity plan see note 11 notes consolidated financial statement additional information regarding management equity plans year ended march 31 2019 compensation percentage operating revenues remained relatively flat 482 compared 480 year ended march 31 2018 impact increased compensation expense corporate distribution personnel directly tied revenues substantially offset impact decreased performance fees earned clarion partners passed compensation expense year ended march 31 2018 compensation percentage operating revenues decreased 480 486 year ended march 31 2017 impact reduction transition severance costs primarily incurred connection restructuring permal combination entrust impact previously discussed management equity plan charges recognized prior year substantially offset impact increase performance fees earned clarion partners passed fully compensation expense distribution servicing year ended march 31 2019 distribution servicing expenses decreased 10 4393 million compared to4893 million year ended march 31 2018 primarily due impact lower average fee rates paid certain products pay fees thirdparty distributors year ended march 31 2018 distribution servicing expenses decreased 2 4893 million compared 4991 million year ended march 31 2017 primarily due impact lower average aum certain products pay fees thirdparty distributors communications technology year ended march 31 2019 communications technology expense increased 7 2281 million compared 2128 million year ended march 31 2018 primarily due 112 million increase technology consulting maintenance costs related ongoing investments technology capabilities year ended march 31 2018 communications technology expense increased 2 2128 million compared 2089 million year ended march 31 2017 increase costs related implementation maintenance various technology initiatives offset part decrease technology depreciation printing costs occupancy year ended march 31 2019 occupancy expense increased 4 1053 million compared 1008 million year ended march 31 2018 primarily due real estate related charges recognized current year 53 million associated vacated subleased office space principally corporate headquarters year ended march 31 2018 occupancy expense decreased 11 1008 million compared 1137 million year ended march 31 2017 primarily due net real estate charges 96 million recognized fiscal 2017 consisted 123 million net charges recognized connection restructuring permal combination entrust offset part 27 million reduction previously existing lease reserve amortization intangible assets year ended march 31 2019 amortization intangible assets remained relatively flat 244 million compared 246 million year ended march 31 2018 year ended march 31 2018 amortization intangible assets decreased 246 million compared 262 million year ended march 31 2017 decrease primarily due reduction amortization expense result impairments rare infrastructure amortizable management contracts asset recognized fiscal 2018 2017 offset part full year amortization expense recognized fiscal 2018 related acquisitions clarion partners april 2016 entrust may 2016 impairment intangible assets impairment intangible assets 3652 million 2290 million 350 million years ended march 31 2019 2018 2017 respectively impairment charges recognized year ended march 31 2019 comprised 2746 million 182 million related entrust global indefinitelife fund managements contracts asset trade name asset respectively 650 million 64 million 10 million related rare infrastructure indefinitelife fund management contracts asset amortizable fund management contracts asset trade name asset respectively impairments entrust global assets primarily result continued net client outflows legacy high net worth fund products leading reduced growth expectations management fees performance fees declining margin higher discount rate impairments rare infrastructure indefinitelife fund management contracts trade name assets primarily result lower expected net client inflows performance fees leading lower margin higher discount rate impairment rare infrastructure amortizable asset resulted losses separate account aum related decline projected revenues revised estimate remaining useful life rare infrastructure separate account contracts intangible asset also contributed impairment asset impairment charges recognized year ended march 31 2018 comprised 1950 million related entrust global indefinitelife fund management contracts asset 320 million related rare infrastructure amortizable management contracts asset 20 million related rare infrastructure trade name asset impairment entrust global indefinitelife fund management contracts asset primarily result net client outflows legacy high net worth fund products including transfers client funds products entrust global separate accounts related decline revenues impairments rare infrastructure assets resulted losses separate account aum factors rare infrastructure related decline projected revenues revised estimate remaining useful life rare infrastructure separate account contracts intangible asset also contributed impairment asset impairment charges recognized year ended march 31 2017 comprised 180 million related rare infrastructure amortizable management contracts asset 170 million related permal trade name asset impairment rare infrastructure amortizable management contracts asset resulted client attrition related decline revenues reduction estimated remaining useful life contracts impairment permal trade name resulted decrease revenues reduction royalty rate reflecting decline value separate permal trade name due combination entrust see critical accounting policies note 5 notes consolidated financial statements discussion impairment charges contingent consideration fair value adjustments contingent consideration fair value adjustments year ended march 31 2019 included expense 06 million increased contingent consideration liability related acquisition qs investors contingent consideration fair value adjustments years ended march 31 2018 2017 included credits aggregating 313 million 395 million respectively contingent consideration fair value adjustments year ended march 31 2018 comprised 320 million reduced contingent consideration liabilities related acquisitions rare infrastructure martin currie qs investors offset part expense 07 million increased contingent consideration liability related acquisition pk investments contingent consideration fair value adjustments year ended march 31 2017 reduced contingent consideration liabilities related acquisitions martin currie rare infrastructure qs investors financial guard year ended march 31 2019 expenses decreased 440 million 16 2383 million compared 2823 million year ended march 31 2018 primarily due decrease 628 million charges related regulatory matter discussed note 8 notes consolidated financial statements 42 million charges recognized fiscal 2019 670 charges recognized fiscal 2018 decrease offset part 172 million increase professional fees largely related strategic restructuring corporate restructuring year ended march 31 2018 expenses increased 627 million 29 2823 million compared 2196 million year ended march 31 2017 primarily due 670 million charge regulatory matter discussed nonoperating income expense components total nonoperating income expense millions dollar percentage changes periods follows nm meaningful interest income year ended march 31 2019 interest income increased 51 million 122 million compared 71 million year ended march 31 2018 driven higher yields earned higher average interestbearing investment balances year ended march 31 2018 interest income remained relatively flat 71 million compared 68 million year ended march 31 2017 interest expense year ended march 31 2019 interest expense remained relatively flat 1173 million compared 1179 million year ended march 31 2018 year ended march 31 2018 interest expense increased 47 million 1179 million compared 1132 million year ended march 31 2017 primarily due net impact issuance 500 million 545 junior subordinated notes due 2056 545 2056 notes august 2016 proceeds used repay 500 million outstanding borrowings revolving credit facility income expense net years ended march 31 2019 2018 income expense net totaled income 311 million 108 million respectively year ended march 312019 included 141 million gains corporate investments 104 million net market gains seed capital investments assets invested deferred compensation plans offset corresponding increase compensation expense 84 million distribution investment holding year ended march 31 2018 included 123 million net market gains seed capital investments assets invested deferred compensation plans offset corresponding increase compensation expense offset part 18 million net market losses corporate investments year ended march 31 2018 income expense net income 108 million compared income 417 million year ended march 31 2017 change primarily due 180 million reduction net market gains corporate investments offset corresponding increase compensation expense 87 million gain recognized fiscal 2017 connection disposition two small investment managers share joint venture nonoperating income expense consolidated investment vehicles net year ended march 31 2019 nonoperating income expense consolidated investment vehicles net totaled expense 06 million compared income 98 million year ended march 31 2018 change primarily due activity civs respective periods year ended march 31 2018 nonoperating income expense consolidated investment vehicles net totaled income 98 million compared income 133 million year ended march 31 2017 change primarily due activity civs respective periods see notes 1 19 notes consolidated financial statements additional information regarding consolidation sponsored investment vehicles net market gains investments certain civs income tax provision benefit year ended march 31 2019 income tax provision 206 million compared income tax benefit 1025 million year ended march 31 2018 effective tax rate 722 year ended march 31 2019 compared effective benefit rate 438 year ended march 31 2018 effective tax rate year ended march 31 2019 reflects final adjustments related impact tax law effective benefit rate year ended march 31 2018 reflects impact tax law recognized upon enactment year ended march 31 2019 discrete tax expense 141 million related uncertain tax positions federal state local taxes including relating recent legislative changes recognized addition discrete tax benefits totaling 28 million related completion prior year tax audit discrete tax benefits 13 million recognized together net impact discrete tax items increased effective tax rate 351 percentage points year ended march 31 2019 year ended march 31 2018 income tax benefit 1025 million compared income tax provision 842 million year ended march 31 2017 effective benefit rate 438 year ended march 31 2018 compared effective tax rate 227 year ended march 31 2017 previously discussed december 22 2017 tax law enacted reduction us corporate tax rate well aspects tax law resulted onetime noncash provisional tax benefit 2209 million primarily due remeasurement certain existing deferred tax assets liabilities new 21 income tax rate addition noncash tax charge 73 million provisionally provided deemed repatriation unremitted foreign earnings provided tax law tax provision associated repatriations adjusted reflect impact tax law discussed note 7 notes consolidated financial statements accounting tax unremitted foreign earnings also completed adjustment amount 22 million additional expense recorded year ended march 31 2019 also year ended march 31 2018 effective benefit rate impacted 97 percentage points nondeductibility charge regulatory matter discussed note 8 notes consolidated financial statements addition fiscal 2018 changes state apportionment state laws audit settlements discrete changes impacting state deferred tax liabilities resulted additional net tax expense 33 million reduced effective benefit rate 11 percentage points year ended march 31 2018 08 million discrete tax expense recognized respect equitybased compensation reduced effective benefit rate 03 percentage points year ended march 31 2017 part larger strategic initiative restructured certain holding company businesses increased amount foreign tax credits available utilization reduced effective tax rate 50 percentage points september 2016 uk finance act 2016 enacted reduced main uk corporate tax rate effective april 1 2020 18 17 impact tax rate reduction certain existing deferred tax assets liabilities resulted tax benefit 41 million reduced effective tax rate 11 percentage points fiscal 2017 civs consolidated sponsored investment products reduced effective tax rate 20 percentage points year ended march 31 2019 increased effective benefit rate 13 percentage points year ended march 31 2018 reduced effective tax rate 11 percentage points year ended march 31 2017 net income loss attributable legg mason inc operating margin net loss attributable legg mason inc year ended march 31 2019 totaled 285 million 038 per diluted share compared net income attributable legg mason inc 2851 million 301 per diluted share year ended march 31 2018 net loss attributable legg mason inc year ended march 31 2019 included noncash impairment charges totaling 3652 million 307 per diluted share strategic restructuring corporate restructuring costs 185 million 015 per diluted share affiliate charges 92 million 006 per diluted share including royce management equity plan costs 24 million discrete net tax expenses tax items 77 million 009 per diluted share 42 million 005 per diluted share charge associated regulatory matter discussed note 8 notes consolidated financial statements net income attributable legg mason inc year ended march 31 2018 included onetime net noncash provisional tax benefit 2137 million 226 per diluted share related tax law benefit offset part noncash impairment charges related intangible assets 2290 million 196 per diluted share 670 million 071 per diluted share charge related regulatory matter discussed year ended march 31 2018 also included adjustments decrease fair value contingent consideration liabilities 313 million 033 per diluted share operating margin 36 year ended march 31 2019 compared 103 year ended march 31 2018 reflecting impact noncash impairment charges related regulatory matter recognized years ended march 31 2019 2018 discussed net income attributable legg mason inc year ended march 31 2018 totaled 2851 million 301 per diluted share compared 2273 million 218 per diluted share year ended march 31 2017 increase net income attributable legg mason inc largely result 2137 million 226 per diluted share onetime net noncash provisional tax benefit related tax law lower acquisition transitionrelated costs recognized fiscal 2018 70 million 005 per diluted share costs recognized year ended march 31 2018 compared 751 million 048 per diluted share recognized year ended march 31 2017 net impact increased operating revenues fiscal 2018 including 715 million increase performance fees passed compensation expense also contributed increase increases offset part 1940 million increase impairment charges 2290 million 196 per diluted share charges recognized year ended march 31 2018 compared 350 million 026 per diluted share charges recognized year ended march 31 2017 year ended march 31 2018 also impacted charge 670 million 071 per diluted share regulatory matter discussed note 8 notes consolidated financial statements addition net income attributable legg mason inc per diluted share year ended march 31 2018 benefited reduction weightedaverage shares outstanding result share repurchases operating margin 103 year ended march 31 2018 compared 146 year ended march 31 2017 reflecting impact increase noncash impairment charges charge regulatory matter discussed supplemental nongaap financial information supplemental information providing performance measure operating margin adjusted liquidity measure adjusted ebitda based methodologies generally accepted accounting principles “nongaap” management uses measures benchmarks evaluating comparing periodtoperiod operating performance liquidity operating margin adjusted calculate operating margin adjusted dividing operating income adjusted exclude impact compensation expense gains losses investments made fund deferred compensation plans impact compensation expense gains losses seed capital investments affiliates revenue sharing arrangements amortization related intangible assets income loss civs impact fair value adjustments contingent consideration liabilities unusual noncore charges including regulatory matter discussed note 8 notes consolidated financial statements impairment charges ii operating revenues adjusted add back net investment advisory fees eliminated upon consolidation investment vehicles less distribution servicing expenses use approximate measure revenues passed third parties less performance fees passed compensation expense net income loss attributable noncontrolling interests refer operating revenues adjusted deferred compensation items removed operating income calculation offset equal amount nonoperating income expense net thus impact net income loss attributable legg mason inc adjust impact amortization management contract assets impact fair value adjustments contingent consideration liabilities arise acquisitions reflect fact items distort comparison operating results asset management firms engaged significant acquisitions impairment charges unusual noncore charges including regulatory matter discussed note 8 notes consolidated financial statements income loss civs removed operating income calculation items reflective core asset management operations use operating revenues adjusted calculation show operating margin without distribution servicing expenses use approximate distribution revenues passed third parties direct cost selling products although distribution servicing expenses may include commissions paid connection launching closedend funds corresponding revenue period also use operating revenues adjusted calculation show operating margin without performances fees passed compensation expense net income loss attributable noncontrolling interests per terms certain recent acquisitions operating revenues adjusted also include advisory revenues receive consolidated investment vehicles eliminated consolidation gaap believe operating margin adjusted useful measure performance provides measure core business activities excludes items impact net income loss attributable legg mason inc indicates operating margin would without distribution revenues passed third parties direct cost selling products performance fees passed compensation expense net income attributable noncontrolling interests per terms certain recent acquisitions amortization related intangible assets changes fair value contingent consideration liabilities impairment charges unusual noncore charges including regulatory matter discussed note 8 notes consolidated financial statements impact consolidation certain investment vehicles described consolidation investment vehicles impact net income loss attributable legg mason inc measure provided addition operating margin calculated gaap substitute calculations margins gaap may comparable nongaap performance measures including measures adjusted margins companies calculation operating margin operating margin adjusted follows dollars thousands operating margin adjusted years ended march 31 2019 2018 2017 211 246 197 respectively operating margin adjusted year ended march 31 2019 reduced 08 percentage points due strategic restructuring corporate restructuring costs 04 percentage points due affiliate charges including royce management equity plan costs operating margin adjusted year ended march 31 2018 reduced 03 percentage points due transitionrelated costs incurred connection combination permal entrust operating margin adjusted year ended march 31 2017 reduced 18 percentage points due transitionrelated costs incurred connection combination permal entrust 08 percentage points due acquisitionrelated costs incurred connection clarion partners entrust acquisitions 07 percentage points due charge associated implementation clarion partners management equity plan adjusted ebitda define adjusted ebitda cash provided used operating activities plus minus interest expense net accretion amortization debt discounts premiums current income tax expense benefit net change assets liabilities net income loss attributable noncontrolling interests net gains losses earnings investments net gains losses consolidated investment vehicles net change assets liabilities adjustment aligns consolidated statements cash flows adjusted ebitda reduced equitybased compensation expense including management equity plan noncash issuancerelated charges management equity plan units may put called us cash payment although terms require occur believe measure useful investors us provides additional information regard ability meet working capital requirements service debt return capital stockholders measure provided addition cash provided operating activities may comparable nongaap performance measures liquidity measures companies including measures ebitda adjusted ebitda measure confused net income loss cash provided operating activities measures earnings cash flows gaap provided supplement replacement gaap measures calculation adjusted ebitda follows dollars thousands adjusted ebitda years ended march 31 2019 2018 2017 6222 million 6372 million 5602 million respectively decrease adjusted ebitda year ended march 31 2019 compared year ended march 31 2018 primarily due decrease net income adjusted noncash items increase adjusted ebitda year ended march 31 2018 compared year ended march 31 2017 primarily due increase net income adjusted noncash items largely result reduction acquisition transitionrelated costs incurred connection acquisitions clarion partners entrust net impact increased operating revenues offset part impact charge related regulatory matter liquidity capital resources march 31 2019 approximately 395 million cash equivalents excess working capital including current portion longterm debt regulatory requirements primary objective capital structure provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations review overall funding needs capital base ongoing basis determine capital base meets expected needs businesses intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may time involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt consolidation variable interest entities discussed impact liquidity capital resources however executed total return swap arrangements investors certain exchange traded funds etfs result receive investors related investment gains losses etfs may required consolidate etfs open total return swap agreements march 31 2019 total return swap notional values aggregated 612 million total return swap counterparties terminate positions legg mason may invest support etf products otherwise rights benefits bear risks associated assets liabilities civs consolidated sponsored investment products beyond investments investment advisory fees generated products eliminated consolidation additionally creditors civs consolidated sponsored investment products recourse general credit beyond level investment consider liabilities obligations assets consist primarily intangible assets goodwill cash equivalents investment securities investment advisory related fee receivables operations principally funded equity capital longterm debt retained earnings march 31 2019 cash equivalents total assets longterm debt net stockholders equity 09 billion 78 billion 22 billion 37 billion respectively total assets include amounts related civs consolidated sponsored investment products 02 billion cash equivalents primarily invested liquid domestic nondomestic money market funds hold principally domestic nondomestic government agency securities bank deposits corporate commercial paper recognized losses investments monitoring cash equivalents partially mitigates potential material risks may associated balances following table summarizes consolidated statements cash flows years ended march 31 millions cash inflows provided operating activities fiscal 2019 5609 million primarily related net income adjusted noncash items including impairment charges totaling 3652 million cash inflows provided operating activities fiscal 2018 4894 million primarily related net income adjusted noncash items including 2290 million impairment charges 2137 million tax benefit recognized connection enactment tax law offset part net activity civs cash inflows provided operating activities fiscal 2017 5348 million primarily related net income adjusted noncash items net sales investment securities cash outflows used investing activities fiscal 2019 2018 365 million 195 million respectively primarily related payments made fixed assets offset part returns capital received certain investments partnerships limited liability companies period cash outflows used investing activities fiscal 2017 10 billion primarily related payments associated acquisitions clarion partners entrust aggregating 9979 million net cash acquired cash outflows used financing activities fiscal 2019 3315 million primarily related repayment 1255 million outstanding borrowings unsecured revolving credit agreement amended time credit agreement dividends paid 1148 million distributions noncontrolling interest holders 386 million net redemptions attributable noncontrolling interests civs consolidated investment products 222 million cash outflows used financing activities fiscal 2018 4623 million primarily related purchase 66 million shares common stock 2536 million open market purchases purchase 56 million shares common stock shanda asset management investment limited shanda 2255 million discussed dividends paid 1022 million offset part 1255 million net borrowings credit agreement fund purchase shares shanda cash outflows used financing activities fiscal 2017 1169 million primarily related repurchase 117 million shares common stock 3817 million dividends paid 879 million repayment 400 million shortterm borrowings offset part 4824 million net proceeds issuance 545 2056 notes august 2016 based current level operations anticipated growth expect cash generated operating activities together available cash hand adequate support working capital needs least next 12 months currently intend utilize available resources activities including limited repayment outstanding debt strategic restructuring acquisitions seed capital investments new existing products payment dividends addition ordinary operating cash needs anticipate cash needs next 12 months discussed financing transactions table reflects primary sources financing thousands 1 500000 available march 31 2019 longterm debt august 2016 issued aggregate principal amount 500 million 545 2056 notes net proceeds together cash hand used repay total 500 million outstanding borrowings credit agreement discussed future outlook currently plan apply available funds repay 250 million outstanding 2019 senior notes due july 2019 revolving credit agreements maintain unsecured credit agreement provides 500 million multicurrency revolving credit facility revolving credit facility may increased aggregate amount 500 million 10 billion subject approval lenders expires december 2020 repaid time revolving credit facility available fund working capital needs general corporate purposes december 2017 borrowed 2255 million credit agreement fund purchase shares shanda march 2018 repaid 100 million borrowings september 2018 repaid remaining 1255 million outstanding borrowings outstanding credit agreement march 31 2019 may 2016 borrowed 460 million credit agreement partially finance acquisition entrust replenish cash used complete acquisitions clarion partners april 2016 rare infrastructure october 2015 august 2016 total 500 million outstanding borrowings credit agreement repaid using net proceeds 545 2056 notes together cash hand financial covenants credit agreement include maximum net debt ebitda ratio 30 1 minimum ebitda interest ratio 40 1 debt defined include obligations borrowed money excluding nonrecourse debt civs capital leases net debt covenants debt reduced amount unrestricted cash excess greater subsidiary cash 300 million lesser 50 aggregate amount seed capital investments 125 million amount equal 50 hybrid capital securities ebitda defined consolidated net income loss plusminus tax expense benefit interest expense depreciation amortization intangibles extraordinary expense losses noncash charges certain transitionrelated costs defined agreements march 31 2019 net debt ebitda ratio 25 1 ebitda interest expense ratio 54 1 therefore maintained compliance applicable covenants june 2 2017 credit agreement amended include legg mason inc parent entity among entities permitted incur liens secure obligations including related cash collateral provisions hedging agreements aggregate amount exceed 200 million one time prior amendment certain subsidiaries permitted incur liens cash collateral provided legg mason inc connection certain hedging agreements considered lien assets purposes lien covenant result compliance terms credit agreement times amendment provides waiver defaults credit agreement may arisen prior date amendment resulting provision cash collateral net income significantly declines spend available cash may impact ability maintain compliance financial covenants credit agreement determine compliance covenants may pressure time outstanding borrowings facility want utilize available borrowings otherwise desire keep borrowings available may elect take number actions including reducing expenses order increase ebitda using available cash repay portion outstanding debt seeking negotiate lenders modify terms restructure debt using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments credit agreement currently impacted ratings two rating agencies interest rate annual commitment fee revolving line credit based higher credit rating two rating agencies one rating agency gives us lower credit rating agency downgrade rating absent upgrade former agency borrowings outstanding revolving credit facility interest costs rise modestly certain asset management affiliates maintain various credit facilities general operating purposes certain affiliates subject capital requirements various regulatory agencies affiliates met respective capital adequacy requirements periods presented may 2012 refinanced outstanding 25 senior convertible notes convertible notes terms repurchase included issuance warrants holders convertible notes warrants replaced conversion feature convertible notes provided purchase aggregate subject adjustment 142 million shares common stock net share settled basis exercise price 88 per share warrants expired unexercised july 2017 see note 6 notes consolidated financial statements additional information regarding debt transactions acquisitions april 10 2019 clarion partners acquired majority stake gramercy europe jersey limited gramercy european real estate business specializing paneuropean logistics industrial assets transaction required initial cash payment 112 million paid using existing cash resources potential contingent consideration payment discussed may 2 2016 closed transaction combine permal entrust create entrustpermal renamed entrust global march 2019 65 transaction required cash payment 400 million funded borrowings revolving credit facility well portion proceeds 2026 notes 6375 2056 notes issued march 2016 connection combination incurred restructuring transitionrelated costs totaling approximately 94 million completion plan june 2018 approximately 15 noncash charges see note 2 notes consolidated financial statements additional information april 13 2016 acquired majority interest clarion partners acquisition required cash payment approximately 632 million including payment cash delivered 37 million coinvestments 16 million funded portion proceeds issuance 2026 notes 6375 2056 notes march 2016 contingent consideration april 10 2019 clarion partners acquired majority stake gramercy transaction provides potential contingent consideration payment 37 million using foreign exchange rate april 10 2019 €33 million potential payment due fifth anniversary closing effective may 31 2014 completed acquisition qs investors december 2018 paid 43 million final installment contingent consideration august 2016 paid 66 million second anniversary contingent consideration contingent consideration payments funded existing cash resources december 31 2015 martin currie acquired certain assets pk investments december 2017 contingent consideration 32 million paid using existing cash resources see note 2 notes consolidated financial statements additional information regarding acquisitions contingent consideration noncontrolling interests described may obligated settle noncontrolling interests related certain affiliates following table presents summary affiliate redeemable noncontrolling interests carrying values millions excluding amounts related management equity plans carrying values reflect estimated settlement values except settlement values less issuance price carrying value reflects issuance price ultimate timing amounts noncontrolling interest settlements uncertain project accuracy noncontrolling interests 35 outstanding equity entrust global 18 outstanding equity clarion partners 15 rare infrastructure subject put call provisions may result future cash outlays generally starting fiscal 2022 entrust global clarion partners subject earlier effectiveness certain circumstances may 10 2019 purchased 15 equity interest rare infrastructure held firms management team total consideration 222 million initial cash payment 120 million made may 10 2019 remaining consideration due subject certain conditions 50 one year closing 50 two years closing july 2 2018 corporate minority owner rare infrastructure exercised put option 10 ownership interest settlement value 155 million along 10 million dividends arrears paid october 2018 see note 15 notes consolidated financial statements additional information affiliate management equity plans conjunction acquisition clarion partners april 2016 implemented affiliate management equity plan entitles certain key employees clarion partners participate 15 future growth enterprise value subject appropriate discounts subsequent date grant march 2016 implemented affiliate management equity plan management royce management equity plan march 31 2019 noncontrolling interests equivalent 245 royce entity issued management team addition implemented affiliate management equity plan march 2014 entitles certain key employees clearbridge participate 15 future growth enterprise value subject appropriate discounts june 2013 implemented affiliate management equity plan entitled key employees permal participate 15 future growth enterprise value subject appropriate discounts april 2016 conjunction combination permal entrust permal management equity plan liquidated payment 72 million participants march 31 2019 estimated redemption value units management equity plans aggregated 818 million repurchases units granted plans may impact future liquidity requirements however amounts timing repurchases uncertain project accuracy see note 11 notes consolidated financial statements additional information regarding affiliate management equity plans share repurchases january 2015 board directors authorized 10 billion purchases common stock previously discussed december 2017 board directors approved purchase 56 million shares common stock 2255 million shanda utilizing remaining 1690 million common stock available repurchase authorized january 2015 authorizing purchase additional 565 million common stock complete transaction aggregate purchases 2255 million effectively acceleration share repurchase program repurchase shares common stock year ended march 31 2019 march 31 2019 purchases common stock authorized future outlook previously discussed currently intend utilize available cash resources fund various activities march 31 2019 395 million cash equivalents excess working capital including current portion longterm debt regulatory requirements includes amounts expected used fund accrued compensation payments primarily first quarter fiscal 2020 strategic restructuring previously discussed initiated strategic restructuring reduce costs expect incur aggregate restructuring costs range 130 million 150 million connection strategic restructuring incurred march 2021 majority restructuring costs paid cash fiscal 2019 incurred 94 million strategic restructuring costs expect incur 85 million 95 million costs fiscal 2020 expect strategic restructuring result future annual cost savings 100 million substantially cash savings expect achieve savings run rate basis end fiscal 2021 see note 17 notes consolidated financial statements additional information shortterm borrowings longterm debt intend continue accumulate cash repay 250 million outstanding 2019 senior notes due july 2019 currently expect raise incremental debt equity financing next 12 months going forward assurances expectations projections could prove incorrect events may occur require additional liquidity excess amounts available credit agreement opportunity refinance indebtedness complete acquisition market conditions might significantly worsen affecting results operations generation available cash events result operations available cash insufficient fund liquidity needs may seek manage available resources taking actions reducing operating expenses reducing expected expenditures investments selling assets investment securities repatriating earnings foreign subsidiaries reducing dividend modifying arrangements affiliates andor employees types actions prove insufficient acquisition refinancing opportunity arise would likely utilize borrowing capacity credit agreement seek raise additional equity debt liquid assets liquid assets include cash equivalents certain current investment securities march 31 2019 total liquid assets approximately 11 billion included 345 million cash equivalents investments held foreign subsidiaries net working capital amounts foreign subsidiaries significant order supplement cash available us general corporate purposes plan utilize approximately 20 million foreign cash annually next several years anticipate 13 million form debt service payments foreign affiliates remainder provided distribution forecasted future offshore earnings repatriation foreign earnings currently planned conjunction acquisition committed provide 100 million seed capital clarion partners products second anniversary transaction closing january 2016 acquired minority equity position precidian investments llc precidian terms transaction acquired series b preferred units precidian entitle us approximately 20 voting economic interests precidian along customary preferred equity protections may 20 2019 sec issued order granting exemptive relief use precidian investments activeshares® semitransparent etf methodology precidian executed royalty arrangements various financial institutions use activeshares® product sole option 48 months following initial investment may subject satisfaction certain closing conditions upon payment consideration convert preferred units 75 common equity precidian fully diluted basis credit liquidity risk cash equivalent deposits involve certain credit liquidity risks maintain cash equivalents number high quality financial institutions funds time may concentrations one institutions balances financial institutions funds credit quality monitored ongoing basis offbalance sheet arrangements offbalance sheet arrangements defined sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations section follows consolidation discussed critical accounting policies notes 1 19 notes consolidated financial statements derivatives hedging discussed notes 1 16 notes consolidated financial statements contractual obligations contractual obligations make future payments principally connection longterm debt noncancelable lease agreements service agreements see notes 6 8 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual obligations millions fiscal year excludes contractual obligations civs consolidated sponsored investment products responsible liable obligations 1 represents contributions made martin currie legacy pension plan annual basis may 2024 final payment due november 2024 using exchange rate march 31 2019 £23 million annual committed contribution amount £15 million final payment amount 2 table include approximately 393 million capital commitments investment partnerships limited partner outstanding funded required end commitment periods running fiscal 2030 100 million coinvestment commitment associated clarion partners acquisition 3 table include amounts uncertain tax positions 528 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated 4 table include redeemable noncontrolling interests related minority equity interests affiliates affiliate management equity plans key employees clarion partners clearbridge totaling 5887 million march 31 2019 timing amount related cash outflows cannot reliably estimated redeemable noncontrolling interests civs 1036 million march 31 2019 also excluded table obligations relation amounts potential obligations arising ultimate settlement awards affiliate management equity plan key employees royce also excluded due uncertainty timing amounts ultimately payable see note 8 notes consolidated financial statements additional information regarding affiliate management equity plans market risk maintain enterprise risk management program oversee coordinate risk management activities legg mason subsidiaries program certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income majority revenue calculated market value aum accordingly decline value underlying securities cause aum thus revenues decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts ordinary course business may also reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets market conditions low interest rate environments may lead us take actions performance fees may earned certain investment advisory contracts exceeding performance benchmarks strong markets tend increase fees declines market values aum result reduced fee revenues net income generally earn higher fees alternative assets equity assets fees charged fixed income liquidity assets declines market values aum asset classes greater impact revenues addition revenue sharing arrangements certain affiliates retain different percentages revenues cover costs including compensation affiliates operate different levels margins net income profit margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary investments comprised investment securities including seed capital sponsored mutual funds investment products limited partnerships limited liability companies certain investment products current investments excluding civs subject risk security price fluctuations summarized table thousands current investments 2230 million 1940 million march 31 2019 2018 respectively relate longterm incentive plans offsetting liabilities end respective vesting periods related liabilities may completely offset end reporting period due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income expense dependent vesting provisions plan net income approximately 1325 million 1738 million current investments march 31 2019 2018 respectively seed capital investments sponsored mutual funds investment products vehicles fluctuations market value impact nonoperating income expense amounts fluctuations market value related approximately 272 million 286 million seed capital investments march 31 2019 2018 respectively offsetting compensation expense revenue share arrangements fluctuations market value related approximately 896 million 1315 million seed capital investments march 31 2019 2018 respectively substantially offset gains losses market hedges therefore materially impact net income loss attributable legg mason inc seed capital investments liquidated related fund establishes track record investors decision made longer pursue strategy approximately 84 million 155 million current investments march 31 2019 2018 respectively represent noncontrolling interests associated consolidated seed capital investments products fluctuations market value investments impact net income loss attributable legg mason inc however may impact nonoperating income expense corresponding offset net income attributable noncontrolling interests fluctuations market value 128 million 157 million remaining current investments respective period offsetting compensation expense revenue share arrangements noncurrent investments excluding civs subject risk security price fluctuations summarized table thousands 1 prior fiscal 2019 previous accounting guidance investments accounted using cost method investment securities civs totaled 1380 million 1491 million march 31 2019 2018 respectively fluctuations market value investments civs excess equity investment impact net income loss attributable legg mason inc however may impact nonoperating income expense civs corresponding offset net income attributable noncontrolling interests march 31 2019 2018 held equity investments civs 437 439 million respectively march 31 2019 2018 fluctuations market value approximately 320 million 272 million respectively equity investments civs substantially offset gains losses market hedges therefore materially impact net income loss attributable legg mason inc fluctuations market value remaining 117 million 167 million respective period equity investments civs impact nonoperating income expense valuation investments described within critical accounting policies heading valuation financial instruments see notes 1 16 notes consolidated financial statements discussion derivatives following summary effect 10 increase decrease market values financial instruments subject market valuation risks march 31 2019 thousands gains losses related investments deferred compensation plans directly offset full vesting period corresponding adjustment compensation expense related liability addition investments proprietary fund products investments civs totaling approximately 1216 million economically hedged limit market risk result 10 increase decrease unrealized market value financial instruments subject market valuation risks table would result 106 million increase decrease pretax earnings attributable legg mason inc march 31 2019 addition entered various total return swap arrangements respect certain etfs sponsor notional amounts totaling 612 million march 31 2019 terms total return swap receive related gains losses investors underlying shares etfs however executed futures contracts notional amounts totaling 370 million limit market risk related total return swaps result 10 increase decrease underlying shares etfs would result additional 24 million increase decrease pretax earnings attributable legg mason inc march 31 2019 also march 31 2019 2018 cash equivalents included 5562 million 3501 million respectively money market funds foreign exchange sensitivity operate primarily us provide services earn revenues incur expenses outside us accordingly fluctuations foreign exchange rates currencies principally uk australia brazil japan singapore denominated euro may impact aum revenues expenses comprehensive income net income certain affiliates entered forward contracts manage portion impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect net income liquidity interest rate risk exposure interest rate changes substantially mitigated outstanding longterm debt fixed interest rates see note 6 notes consolidated financial statements additional discussion debt effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risk revenues net income loss critical accounting policies intangible assets goodwill previously discussed critical accounting policies estimates accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following critical accounting policies involve significant estimates judgments consolidation normal course business sponsor manage various types investment products services entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees exposure risk entities generally limited equity investment made required make earned uncollected management fees except total return swap arrangements executed additional risks discussed uncollected management fees managed investment products material march 31 2019 issued investment performance guarantees investment products investors sell transfer assets investment products accordance financial accounting standards consolidate certain sponsored investment products designated civs financial information certain consolidated civs included consolidated financial statements threemonth lag based upon availability investment products financial information certain investment products sponsor manage considered variable interest entities vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights may fund initial cash investment certain vre investment products generate investment performance track record order attract thirdparty investors product initial investment new product typically represents 100 ownership product discussed “seed capital investments” consolidated long maintain controlling financial interest product designated civs unless investment longerterm vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity investors potential controlling financial interest must consolidate vie deemed primary beneficiary consolidation accounting guidance limited partners similar equity holders sponsored investment vehicle structured limited partnership similar entity either substantive investor rights replace manager kickout rights substantive participation rights general partner entities vies sponsor manager investment vehicle may deemed decision maker accounting guidance fees paid decision maker marketbased fees considered variable interests vie marketbased fees customary commensurate level effort required services provided additionally employee interests sponsored investment vehicle made circumvent consolidation guidance financed sponsor included variable interests assessment included primary beneficiary determination decision maker deemed primary beneficiary vie power direct activities significantly impact economic performance vie obligation absorb losses receive benefits variable interests could significant vie determining whether primary beneficiary vie consider qualitative quantitative factors voting rights equity holders guarantees implied relationships fee paid decision maker marketbased included primary beneficiary determination entered various total return swap arrangements financial intermediaries respect certain legg mason sponsored etfs terms total return swaps absorb related gains losses underlying etf investments financial intermediaries therefore variable interests related funds significant may deemed primary beneficiary accordingly consolidate etfs significant open total return swap arrangements see notes 1 19 notes consolidated financial statements additional discussion civs vies revenue recognition effective april 1 2018 adopted updated accounting guidance revenue recognition modified retrospective basis contracts complete april 1 2018 adoption date updated guidance provides single comprehensive revenue recognition model contracts customers improves comparability removes inconsistencies revenue recognition practices across entities industries jurisdictions capital markets guidance also specifies accounting certain costs obtain fulfill contract customer revises criteria determining entity acting principal agent certain arrangements adoption updated guidance result significant changes prior revenue recognition practices except timing recognition certain performance incentive fees capitalization amortization certain sales commissions separate accounts net presentation certain fund expense reimbursements previously presented gross basis changes previous revenue recognition practices discussed primarily earn revenues providing investment management services distribution shareholder services customers generally investment funds underlying investors separately managed accounts discussed revenues calculated based value investments management determine transaction price recognized obligations terms contracts customers satisfied generally time services rendered valuation aum responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith march 31 2019 equity fixed income alternative liquidity aum values aggregated 202 billion 420 billion 68 billion 68 billion respectively majority aum valued independent pricing services based observable market prices inputs believe market risk significant risk underlying value aum economic events financial market turmoil increased market price volatility however discussed valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2019 approximately 8 total aum valued based unobservable inputs majority related real estate funds discussed mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager brokerdealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost approximates fair value majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income alternative liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs significant portion aum fair value determined based unobservable inputs certain real estate funds values real estate investments prepared giving consideration income cost sales comparison approaches estimating property value income approach estimates income stream property discounts income plus reversion presumed sale present value risk adjusted rate yield rates growth assumptions utilized approach derived market transactions well financial industry data discount rate exit capitalization rate significant inputs valuations rates based location type nature property current anticipated market conditions cost approach estimates replacement cost building less physical depreciation plus land value sales comparison approach compares recent transactions appraised property adjustments made dissimilarities typically provide range value many factors also considered determination fair value including limited operating cash flows financial performance properties property types geographic locations physical condition asset prevailing market capitalization rates prevailing market discount rates general economic conditions economic conditions specific market assets located specific rights terms associated investment inherent uncertainties valuation values may materially differ values would determined negotiations held parties sale transaction investment advisory fees earn investment advisory fees assets separately managed accounts investment funds products managed clients generally investment management services single performance obligation include series distinct services substantially transferred customer time using timebased measure progress investment management services satisfied time customer simultaneously receives consumes benefits advisory services performed separate account funds advisory fees separate account funds advisory fees variable consideration primarily based predetermined percentages daily monthly quarterly average market value aum defined investment management agreements average market value aum subject change based fluctuations volatility financial markets separate account funds advisory fees constrained end month quarter actual average market value aum known significant revenue reversal longer probable therefore separate account fund advisory fees included transaction price allocated investment management services performance obligation end monthly quarterly reporting period specified investment management contract payment services investment management contracts due variable consideration allocated transaction price generally within 30 days recognition separate account funds advisory fee revenue updated guidance consistent prior revenue recognition process performance incentive fees performance incentive fees variable consideration may earned certain investment management contracts exceeding performance benchmarks relative absolute basis exceeding contractual return thresholds performance incentive fees estimated inception contract however range outcomes possible due factors outside control investment manager particularly market conditions performance incentive fees therefore excluded transaction price becomes probable significant reversal cumulative amount revenue recognized occur portion performance incentive fees earned based 12month performance periods end differing quarters year portion also based quarterly performance periods also earn performance incentive fees alternative certain products lock earlier investor’s termination date liquidation fund contract multipleyear intervals specific events sale assets certain products performance incentive fees may recognized revenue earlier updated guidance prior revenue recognition practices deferred recognition contingencies resolved performance incentive fees recognized prior resolution contingencies recorded contract asset current assets noncurrent assets consolidated balance sheet fee waivers fund expense reimbursements may waive certain fees investors may reimburse investment funds certain operating expenses exceed certain threshold fee waivers continue reported reduction advisory fee revenue updated guidance prior accounting guidance fund expense reimbursements excess recognized revenue recorded expense consolidated statements income updated accounting guidance fund expense reimbursements exceed recognized revenue represent change transaction price therefore reported reduction investment advisory fees funds consolidated statements income distribution service fees revenue expense distribution service fees earned funds reimburse distributor costs marketing selling fund shares generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds nondiscretionary advisory services assets advisement distribution service fees earned companysponsored investment funds reported revenue distribution services marketing services considered single performance obligation success selling underlying shares highly dependent upon sales marketing efforts ongoing shareholder servicing separate performance obligation services highly interrelated interdependent sale shares fees earned related distribution shareholder serving considered variable consideration calculated based average market value fund average market value fund subject change based fluctuations volatility financial markets distribution shareholder service fees generally constrained end month quarter actual market value fund known related revenue longer subject significant reversal therefore distribution service fees generally included transaction price end monthly quarterly reporting period allocated two performance obligations based amount specified agreement distribution services largely satisfied inception investment ultimate amounts revenue subject variable consideration constraint accordingly portion distribution service revenue recognized periods subsequent satisfaction performance obligation certain fund share classes charge distribution services inception investment based fixed percentage share price fixed price allocated performance obligation substantially satisfied time initial investment recognition distribution service fee revenue updated guidance consistent prior revenue recognition process enter arrangements brokerdealers third parties sell market proprietary fund shares distribution servicing expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties recorded distribution servicing expense consolidated statements income distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers contract costs deferred sales commissions incur ordinary costs obtain investment management contracts services provided customers accordance investment management agreements costs include commissions paid wholesalers employees thirdparty broker dealers administration placement fees depending type services provided fees may paid time contract obtained ongoing basis updated guidance costs obtain contract capitalized costs incremental would incurred contract obtained costs fulfill contract capitalized relate directly contract costs generate enhance resources entity used satisfying performance obligations future costs expected recovered consistent prior accounting procedures fund launch costs including organizational underwriting costs placement fees commissions paid employees wholesalers brokerdealers sales fund shares expensed incurred costs would incurred regardless investor however commissions paid employees retail wholesalers connection sale retail separate accounts considered incremental fees relate obtaining specific contract calculated based specific rates recoverable management fees earned therefore capitalized updated accounting guidance commissions expensed incurred prior accounting practices capitalized sales commissions amortized based transfer services assets relate averages four years commissions pay financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc consideration generally variable based timing investors redeem investment therefore variable consideration included transaction price investors redeem shares satisfied point time cdsc receipts recorded distribution service fee revenue received reduction unamortized balance deferred sales commissions corresponding expense updated accounting guidance legg mason elected expense sales commissions related certain share classes amortization periods one year less incurred valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value equity investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income loss comprehensive income loss depending underlying purpose instrument effective april 1 2018 adopted updated accounting guidance prospective basis requires equity investments measured fair value changes recognized earnings guidance apply investments accounted equity method adoption updated guidance material impact consolidated financial statements equity investments control investee primary beneficiary vie exert significant influence financial operating policies investee follow equity method accounting evaluation whether exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence may governing board investee legal rights investors entity pursuant funds operating documents relationship us investors entity equity method investees investment companies record underlying investments fair value therefore equity method accounting share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense evaluate equity method investments impairment events changes circumstances indicate carrying value investment exceeds fair value decline fair value temporary investment securities value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2019 2018 owned 630 million 600 million respectively investments partnerships limited liability companies accounted equity method included noncurrent assets consolidated balance sheets 112 million 92 million respectively equity method investments included investment securities consolidated balance sheets amounts 421 million 337 million respectively valued based assumptions estimates unobservable inputs remainder valued using net asset value nav practical expedient discussed updated accounting guidance adopted april 1 2018 provides entities option elect measure equity investments readily determinable fair values qualify nav practical expedient adjusted cost adjusted cost method investments initially recorded cost subsequently adjusted increased decreased observable transaction involving investments similar investments issuer adjusted cost investment carrying values also reviewed adjusted impairment march 31 2019 approximately 122 million investments partnerships limited liability companies accounted using adjusted cost method march 31 2018 carrying value investments totaled 96 million investments accounted using cost method prior accounting guidance accounting guidance fair value measurements disclosures defines fair value establishes framework measuring fair value accounting guidance defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance accounting guidance fair value measurements establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category includes fixed income securities certain proprietary fund investment products certain longterm debt level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds real estate funds category also includes certain proprietary fund investment products redemption restrictions contingent consideration liabilities valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety certain proprietary fund products certain investments held civs valued nav determined fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 nav practical expedient based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity funds real estate funds investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient rely navs certain investments partnerships limited liability companies fair value navs provided investees derived fair values underlying investments reporting date investments fair value measured using nav practical expedient required categorized within fair value hierarchy march 31 2019 approximately 1 total assets 5 financial assets measured fair value less 1 total liabilities 11 financial liabilities measured fair value meet definition level 3 transfers categories measured beginning period see note 3 19 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2019 follows thousands identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds hedge funds fundsofhedge funds real estate funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds hedge funds fundsofhedge funds real estate funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth andor attrition rates acquired contracts based upon historical experience factors estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weightedaverage cost capital takes consideration premium representing degree risk inherent asset fully described goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred perform quantitative tests include critical reviews significant assumptions determine intangible assets goodwill impaired qualitatively concluded likely respective fair values exceed related carrying values perform tests indefinitelife intangible assets goodwill annually details intangible assets goodwill related impairment tests follow result uncertainty regarding future market conditions matters assessing fair value reporting unit intangible assets requires management exercise significant judgment historically performed annual goodwill indefinitelife intangible assets impairment tests december 31 year second quarter fiscal 2019 voluntarily changed date annual impairment test december 31 october 31in order better align impairment testing process existing longterm planning processes earnings release timing believe change accounting principle related annual impairment testing date delayed accelerated avoided impairment charge relative test date determined change accounting principle preferable circumstances performed annual impairment testing goodwill indefinitelife intangible assets october 31 2018 periodic impairment review amortizable intangible assets december 31 2018 due prior limited excess fair value related carrying values noted analyses entrust global formerly entrustpermal rare infrastructure indefinitelife fund management contracts assets negative market trends analyses completed current data december 31 2018 analyses trade name indefinitelife intangible assets related businesses also completed current data december 31 2018 result updated impairment tests entrust global indefinitelife mutual fund contracts asset trade name asset rare infrastructure indefinitelife fund management contracts asset amortizable management contracts asset trade name asset determined partially impaired resulting pretax operating charges totaling 365 million amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining economic lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates amortization periods longer appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows exception rare infrastructure separate account contracts amortizable asset discussed impairments values amortizable intangible assets recognized year ended march 31 2019 estimates related future cash flows exceeded asset carrying values three months ended december 31 2018 projected revenues related rare infrastructure separate account contracts asset declined due losses separate account clients aum based revised attrition estimates remaining useful life decreased three onehalf years two years december 31 2018 result decline projected revenues revised estimate useful life amortized carrying value 7 million determined exceed fair value impairment charge 6 million recorded three months ended december 31 2018 management estimated fair value asset december 31 2018 based discounted cash flow analysis using unobservable market inputs level 3 measurements addition useful life significant assumptions used cash flow analysis included projected revenue growth rates 7 discount rate 165 march 31 2019 fair value entrust global separate account contracts amortizable asset exceeded carrying value 42 million 10 despite excess fair value related carrying value future decreases cash flow projections resulting actual results changes assumptions due client attrition related reduction revenues investment performance market conditions factors may result impairment asset assurance continued client attrition asset outflows market uncertainty factors produce additional impairment asset march 31 2019 clarion partners separate account contracts amortizable asset net carrying values 71 million represented nearly 60 total amortizable intangible asset management contracts aggregate carrying value march 31 2019 cumulative undiscounted cash flows related separate account contracts amortizable asset exceeded carrying value material amount estimated remaining useful lives amortizable intangible assets currently range one nine years weightedaverage life approximately 62 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined market participants perspective based projected discounted cash flows taking account values market participants would pay taxable transaction acquire respective assets two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names determine fair value intangible assets based upon discounted projected cash flows take consideration estimates future fees profit margins growth rates taxes discount rates determination fair values indefinitelife intangible assets highly dependent estimates changes inputs could result material impairment related carrying values asset determined impaired current implied fair value less recorded carrying value asset impaired difference current implied fair value carrying value asset reflected financial statements recognized operating expense period impairment determined exist contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset discussed note 2 notes consolidated financial statements entrust combined permal form entrust permal renamed entrust global march 2019 common management shared resources including infrastructure employees processes branding initiatives accordingly completing annual impairment testing process fiscal 2017 indefinitelife funds management contracts asset related entrust acquisition combined indefinitelife fundsofhedge funds management contracts asset related legacy permal business related carrying values cash flows funds aggregated impairment testing projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth estimated net client flows projected market performance estimate projected cash flows projected growth rates affiliate used project aum cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income alternative liquidity investment manager based upon among things historical experience expectations future market investment performance internal external sources currently market growth assumptions 4 equity 3 fixed income 3 alternative 0 liquidity products general assumption 2 organic growth products subject exceptions organic growth contraction generally years one five starting point assumptions corporate planning process includes threeyear aum projections management operating affiliate consider specific business circumstances affiliate flow assumptions years one five certain affiliates adjusted appropriate reflect market participant view beyond year three estimates move towards general organic growth assumption 2 appropriate affiliate asset class year 20 resulting cash flow growth rate year 20 held constant used project cash flows year 40 based projected aum affiliate asset class affiliate advisory fee rates applied determine projected revenues domestic mutual fund contracts projected revenues applied weightedaverage margin applicable affiliates manage aum margins based arrangements currently place affiliate projected operating income reduced appropriate tax rate calculate projected cash flows believe growth assumptions reasonable given consideration multiple inputs including internal external sources although assumptions subject change based fluctuations actual results market conditions assumptions also subject change due among factors poor investment performance one operating affiliates withdrawal aum clients changes business climate adverse regulatory actions loss key personnel consider risks development growth assumptions discount rates discussed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows process includes comparison actual results prior growth projections however differences actual results prior projections necessarily indicative need reassess estimates given discounted projected cash flow analyses include projections well beyond three years variances nearyears may offset subsequent years fair value assessments pointintime consistency fair value assessment indicators value reflect expectations market participants pointintime critical evidence soundness estimate value subsequent periods consider differences actual results prior projections considering reasonableness growth assumptions used current impairment testing discount rates based appropriately weighted estimated costs debt equity capital using market participant perspective estimate cost debt based published debt rates estimate cost equity capital based capital asset pricing model considers riskfree interest rate peergroup betas company equity risk premiums equity risk adjusted consider relative risk associated indefinitelife intangible asset reporting unit discount rates also calibrated based assessment relevant market values consistent standard valuation practices taxable transactions projected discounted cash flow analysis also factors tax benefit value appropriate tax benefit represents discounted tax savings third party purchased asset given valuation date would receive future tax deductions amortization purchase price 15 years october 31 2018 combined entrust global fund management contracts asset accounted approximately 11 indefinitelife intangible assets supported combined entrust global fund management business past several years seen declines traditional legacy high net worth client fundsofhedge funds business including transfers client funds products entrust global separate account products result nearterm longterm growth assumptions contracts reduced led decreased projected cash flows business based upon projected discounted cash flow analyses entrust global fund management contracts asset carrying value 401 million exceeded fair value 127 million resulting impairment charge approximately 275 million excess base revenues related entrust global fund management contracts assumed annual growth contraction rates ranging 19 4 average 3 given current experience projected nearyear cash flows reflect aum outflows years one two trend modest aum inflows 1 year four investment performance including expected impact future asset flows significant factor growth projections funds contracts market performance projections supported fact alternative assets 5year annual returns approximating 5 supported industry statistics projected cash flows entrust global fund management contracts discounted 170 reflecting factors noted future decreases cash flow projections increases discount rate resulting actual results changes assumptions resulting flow aum levels investment performance market conditions factors may result impairment asset assurance asset flows market uncertainty factors produce additional impairment asset could significant october 31 2018 rare infrastructure fund management contracts asset 121 million accounted approximately 3 indefinitelife intangible assets based projected discounted cash flow analyses rare infrastructure fund management contracts asset carrying value 121 million exceeded fair 56 million resulting impairment charge 65 million given current experience projected nearyear cash flows reflect reduced aum inflows throughout projection period modest performance fees investment performance including expected impact future asset flows significant factor growth projections funds contracts market performance projections supported fact alternative assets 5year returns approximating 5 supported industry statistics projected cash flows rare infrastructure fund management contracts discounted 165 reflecting factors noted future decreases cash flow projections increases discount rate resulting actual results changes assumptions resulting flow aum levels investment performance market conditions factors may result impairment asset assurance asset flows market uncertainty factors produce additional impairment asset could significant domestic mutual fund contracts acquired citigroup asset management “cam” transaction 21 billion account approximately 60 indefinitelife intangible assets october 31 2018 approximately 145 billion aum primarily managed western asset clearbridge associated asset approximately 39 equity aum 45 fixed income aum 16 liquidity aum although domestic mutual funds overall maintained strong recent market performance previously disclosed uncertainties regarding market conditions asset flows reflected projected discounted cash flow analyses based projected discounted cash flow analyses related fair value exceeded carrying value material amount impairment test cash flows domestic mutual fund contracts assumed annual growth rates averaging approximately 6 reflect moderate aum inflows projected cash flows domestic mutual fund contracts discounted 150 october 31 2018 clarion partners fund management contracts asset 505 million accounted approximately 14 indefinitelife intangible assets based projected discounted cash flow analyses related fair value exceeded carrying value 25 impairment test cash flows clarion partners fund management contracts assumed longterm annual growth rates averaging 6 reflect moderate aum inflows throughout projection period projected cash flows clarion partners fund management contracts discounted 130 trade names account 2 indefinitelife intangible assets primarily related entrust global clarion partners carrying values 29 million 23 million respectively tested intangible assets using relief royalty approach discounted cash flow methods similar described indefinitelife contracts entrust global trade name carrying value 28 million exceeded fair value 10 million resulting impairment charge 18 million significant assumptions used cash flow analysis included projected annual revenue growth rates flat 4 average 4 royalty rate 10 discount rate 165 future decreases cash flow projections increases discount rate resulting actual results changes assumptions resulting flow aum levels investment performance market conditions factors may result impairment asset assurance asset outflows market uncertainty factors produce additional impairment asset october 31 2018 resulting fair values trade name assets significantly exceeded related carrying amounts goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition continue managed one global asset management operating segment internal management reporting discrete financial information regularly received chief operating decision maker chief executive officer consolidated global asset management business level result goodwill recorded evaluated one global asset management reporting unit level global asset management reporting unit consists operating businesses asset management affiliates centralized global distribution operations impairment testing process consolidated assets except certain tax benefits liabilities allocated single global asset management reporting unit similarly projected operating results reporting unit include holding company corporate costs overhead including interest expense costs associated executive management finance human resources legal compliance internal audit central corporate functions goodwill principally originated acquisitions cam permal royce martin currie rare infrastructure clarion partners entrust value reporting unit based part projected consolidated net cash flows including cash flows assets managed mutual funds closedend funds proprietary funds addition separate account assets managers significant assumptions used assessing implied fair value reporting unit discounted cash flow method consistent methodology discussed indefinitelife intangible assets also reporting unit level future corporate costs estimated consolidated projected operating results affiliates actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows discount rates based appropriately weighted estimated costs debt using market participant perspective also consistent methodology discussed indefinitelife intangible assets also perform marketbased valuation reporting unit value applies average ebitda multiples paid change control transactions peer companies ebitda results two estimates value reporting unit discounted cash flow ebitda multiple analyses compared significant differences assessed determine reasonableness value whether adjustment either result warranted values accepted appropriately weighted average two reporting unit valuations discounted cash flow ebitda multiple analyses used implied fair value global asset management reporting unit december 31 2018 exceeded carrying value 4 considering relative merits details involved valuation process used equal weighting two values 2018 testing significant assumptions used cash flow analysis included projected annual revenue growth rates ranging 2 6 average 5 projected cash flows discounted 1625 changes assumptions underlying projected cash flows reporting unit ebitda multiple resulting market conditions reduced aum factors could result impairment goodwill impairment could potentially material impact results operations financial condition assess accuracy reporting unit value determined valuation methods comparing results market capitalization determine implied control premium reasonableness implied control premium considered comparing control premiums paid relevant actual change control transactions assessment provides evidence underlying assumptions analyses reporting unit fair value reasonable calculating market capitalization purposes market volatility significant impact capitalization appropriate may consider average market prices stock period one two months test date determine market capitalization control premium arises fact acquisition typically premium paid current market prices publicly traded companies relates ability control operations acquired company assessments control premiums asset management industry difficult many acquisitions involve privately held companies involve portions public company control premium calculated recent market evidence regarding control premiums suggest values 0 61 average 25 realistic common believe premiums reasonable range estimation equity value based analysis consideration believe implied control premium 44 determined reporting unit value estimation december 31 2018 reasonable relation observed relevant market control premium values stockbased compensation stockbased compensation plans include restricted stock units stock options employee stock purchase plan market performancebased performance shares payable common stock affiliate management equity plans deferred compensation payable stock compensation plans issue equity awards directors officers key employees accordance applicable accounting guidance compensation expense years ended march 31 2019 2018 2017 includes compensation cost nonvested sharebased awards grant date fair value amortized respective vesting periods may reduced retirementeligible recipients straightline method effective april 1 2017 adopted updated accounting guidance stockbased compensation accounting updated guidance simplifies several aspects accounting stockbased compensation including income tax consequences clarifies classification criteria awards either equity liabilities classification related amounts statements cash flows updated guidance requires excess tax benefits deficiencies associated stockbased compensation recognized discrete items income tax provision benefit consolidated statements income loss reporting period occur thereby increasing volatility income tax provision benefit result fluctuations stock price adopted amendment modified retrospective basis upon adoption updated guidance elected prospectively account forfeitures occur also cash flows related income tax deductions excess less related stockbased compensation expense classified cash flows operating activities consolidated statements cash flows prior accounting guidance cash flows classified cash flows financing activities granted 04 million 08 million stock options fiscal 2018 2017 respectively determine fair value option grant using blackscholes optionpricing model requires management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate exception grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal expected life options estimate volatility equally weighted historical prices stock period equal expected life option implied volatility market listed options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes model used different type optionpricing model fair value option grants might different fiscal 2017 implemented affiliate equity management plan entitles certain key employees clarion partners participate 15 future growth affiliates enterprise value subject appropriate discounts subsequent date grant fiscal 2016 implemented affiliate management equity plan royce resulted issuance minority equity interests affiliate management team fiscal 2019 2017 2016 royce interests allow holders receive quarterly distributions affiliates net revenues amounts equal percentage ownership represented equity hold fiscal 2014 also implemented management equity plan clearbridge granted units certain employees entitle participate 15 future growth respective affiliates enterprise value subject appropriate discounts also determine fair value optionlike affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts inputs blackscholes model generally determined fashion similar fair value grants options stock described however affiliates private companies without quoted stock prices utilize discounted cash flow analyses marketbased valuations similar discussed heading “intangible assets goodwill” determine respective business enterprise values subject appropriate discounts lack control marketability additional information stockbased compensation see notes 1 11 notes consolidated financial statements noncontrolling interests noncontrolling interests include affiliate minority interests thirdparty investor equity consolidated sponsored investment products vested affiliate management equity plan interests noncontrolling interests holder may able request settlement classified redeemable noncontrolling interests reported estimated settlement values except settlement values less issuance value reported amount issuance value settlement expected occur future date changes expected settlement values recognized settlement period adjustments retained earnings nonredeemable noncontrolling interests permit holder request settlement reported issuance value together undistributed net income loss allocated noncontrolling interests estimate settlement value noncontrolling interests fair value amounts affiliate minority interests affiliate management equity plan interests reported fair value reflect related total business enterprise value appropriate discounts lack marketability control may also features equity interests dividend subordination contemplated valuations fair value optionlike management equity plan interests also relies blackscholes option pricing model calculations noted affiliate noncontrolling interests subsequent acquisition business enterprise values derived using various methods including discounted cash flows guideline public company guideline public transaction methods may engage thirdparty valuation experts perform independent determinations fair value review internally prepared valuations appropriate based relative significance related amounts related contractual provisions changes valuation inputs consolidated sponsored investment products investor may request withdrawal time fair value based market quotes underlying securities held investment vehicles income taxes subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions relevant jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision benefit financial statement purposes substantially deferred tax assets relate us federal state uk taxing jurisdictions march 31 2019 us federal deferred tax assets aggregated 595 million realization expected require 37 billion us earnings next eight years 03 billion must foreign sourced earnings deferred tax assets generated us jurisdictions resulting net operating losses generally expire 20 years generated resulting foreign tax credits generally expire 10 years generated based estimates future taxable income using assumptions similar used goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realized respect resulting foreign tax credit carryforwards likely tax benefits relating utilization approximately 18 million foreign taxes credits realized valuation allowance established estimates assumptions contemplate changes ownership legg mason stock could certain circumstances limit utilization net operating loss foreign tax credit benefits limitation would impact timing amount net operating loss foreign tax credit benefits ultimately realized expire march 31 2019 us state deferred tax assets aggregated 226 million offset valuation allowance 93 million primarily related state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized due variability future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary foreign jurisdictions net decrease valuation allowances 61 million fiscal 2019 primarily related current year increases carried forward uk interest deductions extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals well available planning strategies value measure realizability deferred tax assets event determine portion deferred tax assets already subject valuation allowance realizable required establish valuation allowance charge income tax provision period determination made values deferred tax assets based enacted corporate tax rates future period tax attributes anticipated realized legislative changes rates would require remeasurement deferred tax assets period enactment depending facts circumstances charge could material earnings december 22 2017 tax law enacted tax law complex materially changed us corporate income tax rate 35 21 included various changes impacted us fiscal 2019 remeasurement deferred tax assets liabilities completed adjustments necessary accounting tax unremitted foreign earnings completed fiscal 2019 adjustment amount 22 million additional expense recorded tax law also created new taxes international operations including global intangible lowtaxed income gilti provision fiscal 2019 made accounting policy election record expense gilti inclusions period cost applicable rather recognizing deferred taxes related basis differences expected reverse calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations executive overview legg mason inc global asset management firm primarily operates nine independent asset management subsidiaries collectively subsidiaries “legg mason” help investors globally pursue better financial outcomes expanding choice across investment strategies vehicles investor access independent asset managers diverse expertise equity fixed income alternative liquidity investments acting independent investment managers often refer affiliates deliver investment capabilities varied products vehicles via multiple points access including directly various financial intermediaries investment advisory services include discretionary nondiscretionary management separate investment accounts numerous investment styles institutional individual investors investment products include proprietary mutual funds ranging money market liquidity products fixed income equity alternative funds managed wide variety investment styles also offer domestic offshore funds retail institutional investors privately placed real estate funds hedge funds fundsofhedge funds centralized global distribution group legg mason global distribution markets distributes supports investment products operations principally us uk also offices australia brazil canada chile china dubai france germany ireland italy japan singapore spain switzerland taiwan information see item 1 business included herein references fiscal 2020 2019 2018 refer fiscal year ended march 31 year terms us company refer legg mason global markets experienced extreme volatility beginning second half february 2020 reaction novel coronavirus covid19 pandemic social containment measures dramatically restricted business activity despite efforts governments across globe support stimulate economies result significant market uncertainty exists including recessionary fear may significant impact business merger agreement acquisition franklin resources inc february 17 2020 entered agreement plan merger agreement franklin resources inc franklin templeton alpha sub inc merger sub wholly owned subsidiary franklin templeton pursuant legg mason inc company merged merger sub merger company continuing surviving corporation wholly owned subsidiary franklin templeton pursuant merger agreement outstanding share common stock company converted right receive franklin templeton 5000 cash transaction expected close end third calendar quarter 2020 subject satisfaction customary closing conditions parties including among others approval merger agreement holders majority legg masons outstanding common shares receipt required regulatory approvals refer definitive joint proxy statement company franklin templeton filed company us securities exchange commission april 16 2020 additional information merger business overview financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms commercial banks insurance companies financial services companies industry continues experience disruption challenges including shift lowerfee passively managed products contributes increasing fee pressure increased role technology asset management services introduction new financial products services consolidation financial services firms mergers acquisitions pending acquisition franklin templeton discussed asset management industry also subject extensive evolving regulation federal state foreign laws like firms continue impacted regulatory legislative changes responding changes keeping abreast regulatory developments required continue require us incur costs impact profitability financial position results operations materially affected overall trends conditions global financial markets extreme market conditions experienced end fiscal year due covid19 pandemic results individual period considered representative future results operating revenues primarily consist investment advisory fees funds separate accounts distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks hurdle rates largest portion performance fees earned based 12month performance periods end differing quarters year portion based quarterly performance periods also earn performance fees alternative products lock end varying investment periods multipleyear intervals per terms certain recent acquisitions performance fees earned preclose assets management aum acquired entities fully passed compensation expense therefore impact net income loss attributable legg mason inc distribution service fees received distributing investment products services providing support services investment portfolios providing nondiscretionary advisory services assets advisement aua generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level aum aua related fee rates thus affected factors securities market conditions ability attract maintain aum key investment personnel investment performance aum changes period primarily due inflows outflows client assets market performance well changes foreign exchange rates client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services fees charge investment services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions extremely challenged last six weeks fiscal year due global covid19 pandemic fees charge investment services vary based upon factors type underlying investment product amount aum asset management affiliate provides services type services investment objectives provided general fees earned asset management services highest alternative assets followed equity assets fixed income assets liquidity assets accordingly revenues average operating revenue yields affected composition aum changes relative level alternative equity assets typically significantly impacting revenues average operating revenue yields average operating revenue yields calculated ratio total operating revenue less performance fees average aum addition ordinary course business may reduce waive investment management fees total expenses certain products services particular time periods limit fund expenses reasons help retain increase managed assets industry continues impacted disruption challenges continued migration higher fee lower fee products vehicles share classes continues put pressure fees charge products revenue sharing arrangements place certain asset management affiliates specified percentages affiliates revenues required distributed us balance revenues retained affiliates pay operating expenses including compensation expenses excluding certain expenses income taxes revenuesharing arrangements asset management affiliates retain different percentages revenues cover costs affiliates operate budget processes varying margin targets net income loss attributable legg mason inc operating margin compensation percentage operating revenues impacted based affiliates products generate aum change aum one affiliate respect one product class products different effect revenues earnings equal change another affiliate another product class products addition time may agree changes revenue sharing arrangements asset management personnel may impact compensation expenses profitability significant operating expenses employee compensation benefits majority variable nature includes incentive compensation portion based upon revenue levels noncompensation related operating expense levels revenue sharebased affiliates performance fees passed compensation expense overall profitability distribution servicing expenses consist primarily fees paid thirdparty distributors selling asset management products services certain operating costs occupancy depreciation amortization fixed contract commitments market data communication technology services typically consistent period usually decline reduced levels business activity conversely usually rise proportionately increased business activity absence unusual events revenues net income derived primarily aum fees associated investment products changes global financial markets composition level aum net new business inflows outflows changes mix investment products asset classes geographies may materially affect results operations profitability sensitive variety factors including amount composition aum volatility general level securities prices interest rates changes currency exchange rates among things periods unfavorable market conditions likely adverse effect profitability addition diversification services vehicles products offered investment performance access distribution channels reputation market attraction retention key employees client relations significant factors determining whether successful attracting retaining clients last years industry seen flows products currently garner significant market share including particular passive products corresponding flows products market share discussion factors may affect results operations refer discussion item 1a risk factors included herein strategy expand client choice diversification business across investment strategies vehicles access focus strategic priorities four primary areas listed management considers strategic priorities evaluating operating performance financial condition consistent approach also presented table initiatives management currently focuses evaluating performance financial condition strategy developed based assumption continue independent company merger completed subsidiary franklin templeton evaluating progress strategic priorities considering initiatives support prioritize four key drivers value creation • leveraging centralized retail distribution drive growth • capitalizing investments provide investors greater choice • effectively controlling costs improve profitability • thoughtfully managing balance sheet capital allocation strategic priorities key drivers discussed designed increase shareholder value improvements net flows earnings cash flows aum key metrics including operating margin discussed annual results discussion pending merger franklin templeton reflects overall priority increasing shareholder value strategic restructuring fourth quarter fiscal 2019 initiated strategic restructuring reduce costs includes corporate distribution functions well efficiency initiatives certain smaller affiliates operate outside revenuesharing arrangements expect incur aggregate strategic restructuring costs range 100 million 105 million incurred march 2021 expect strategic restructuring result future annual cost savings 100 million achieved annual run rate basis end fiscal 2021 years ended march 31 2020 2019 incurred 710 million 057 per diluted share 94 million 008 per diluted share respectively costs related strategic restructuring see note 18 notes consolidated financial statements additional information achieved 68 million savings strategic restructuring year ended march 31 2020 cumulative achieved savings 72 million since january 1 2019 expect merger impact costs savings associated strategic restructuring addition year ended march 31 2020 incurred 195 million 016 per diluted share restructuring costs corporate matters including costs associated pending merger franklin templeton year ended march 31 2019 incurred 143 million 012 per diluted share costs associated previous corporate restructuring plans attribute include corporate restructuring costs strategic restructuring following discussion analysis provides additional information regarding financial condition results operations business environment fiscal year ended march 31 2020 extremely volatile us equity markets strong returns first three quarters fiscal 2020 offset extreme downturn fourth fiscal quarter due rapid spread covid19 deemed global pandemic widespread economic declines continued global uncertainty us equity markets suffered significant losses despite unprecedented legislative support us government effort secure stimulate economy strong returns first three quarters fiscal 2020 developed emerging international equity markets declined significantly fourth fiscal quarter response covid19 pandemic strong demand us treasuries cash negatively impacted emerging equity markets europe uk governments initiated historic stimulus spending effort instill consumer confidence combat negative economic effects travel business restrictions sectors emerging markets index suffered losses energy sector seeing largest drop 40 amid plunging oil prices global bond markets also saw steep declines fourth quarter fiscal 2020 exception us treasuries demand longterm us treasuries increased amid global pandemic investors sought traditionally safer assets result 10year us treasury yield fell record lows investmentgrade high yield corporate bonds well municipal bonds also suffered losses due riskadverse environment federal reserve board decreased target federal funds rate five times year ended march 31 2020 250 025 significant reductions made march 2020 effort increase financial market liquidity following table summarizes returns various major market indices 1 indices trademarks dow jones company mcgrawhill companies inc nasdaq stock market inc barclays capital respectively affiliated legg mason 2 excludes impact reinvestment dividends stock splits impact covid19 pandemic us international financial markets may significantly negative impact aum results operations fiscal 2021 particularly near term given continued uncertainty volatility cannot reasonably estimate impact market conditions future results operations cash flows financial condition addition industry continues impacted migration active passive strategies together continuing regulatory changes factors put pressure fees contributing consolidation products managers distribution platforms factors also continue create significant flow challenges active managers like assets management aum primarily managed across following asset classes strategies equity fixed income alternative liquidity large cap growth us intermediate investment grade real estate us managed cash equity income us long duration hedge funds us municipal cash cap growth us credit aggregate large cap value global opportunistic international equity global fixed income large cap core us municipal small cap core global sovereign cap value nontraditional bond small cap growth global government emerging markets equity intermediate small cap value short duration mid cap core high yield smallmid cap liability driven small cap international mid cap growth global equity components changes aum billions years ended march 31 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 realizations represent investment managerdriven distributions primarily related sale assets realizations specific alternative managers include clientdriven distributions eg client requested redemptions liquidations asset transfers 3 years ended march 31 2020 2019 primarily includes reinvestment dividends year ended march 31 2018 includes reclassification effective april 1 2017 160 billion certain assets previously included aua aum year ended march 31 2018 also includes reinvestment dividends 37 billion reconciliation previously reported amounts aum march 31 2020 7308 billion decrease 272 billion 4 compared march 31 2019 total net client outflows year ended march 31 2020 64 billion comprised 129 billion net client outflows longterm asset classes offset part 65 billion net client inflows liquidity asset class longterm asset net outflows comprised equity net outflows 165 billion fixed income net outflows 34 billion offset part alternative net inflows 70 billion equity net outflows primarily products managed clearbridge investments clearbridge brandywine global investment management brandywine royce investment partners royce qs investors fixed income net outflows primarily products managed brandywine western asset management company western asset alternative net inflows products managed clarion partners entrust global rare infrastructure generally earn higher fees profits alternative equity aum outflows asset classes negatively impact revenues net income attributable legg mason inc would outflows fixed income liquidity asset classes negative impact market performance 128 billion reflecting global market declines end fiscal 2020 due covid19 pandemic negative impact foreign currency exchange rate fluctuations 74 billion aum march 31 2019 7580 billion increase 39 billion 1 compared march 31 2018 total net client outflows 80 billion comprised 103 billion net client outflows longterm asset classes offset part 23 billion net client inflows liquidity asset class longterm asset net outflows comprised equity net outflows 75 billion fixed income net outflows 43 billion offset part alternative net inflows 15 billion equity net outflows primarily products managed royce clearbridge brandywine qs investors martin currie fixed income net outflows primarily products managed western asset offset part net inflows products managed brandywine alternative net inflows primarily products managed clarion partners offset part net outflows products managed entrust global rare infrastructure market performance 213 billion negative impact foreign currency exchange rate fluctuations 84 billion investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds vehicles manage may redeem investments funds vehicles time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients thirdparty distributors relationships loss key investment management personnel financial market performance aum asset class aum asset class billions follows average aum asset class billions follows component changes aum asset class billions follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 realizations represent investment managerdriven distributions primarily related sale assets realizations specific alternative managers include clientdriven distributions eg client requested redemptions liquidations asset transfers 3 years ended march 31 2020 2019 primarily includes reinvestment dividends year ended march 31 2018 includes reclassification effective april 1 2017 121 billion 39 billion certain equity fixed income assets respectively previously included aua aum year ended march 31 2018 also includes reinvestment dividends 37 billion reconciliation previously reported amounts aum distribution channel two principal distribution channels global distribution affiliateother sell variety investment products services global distribution consists centralized global distribution operations principally sells us international mutual funds commingled vehicles retail separately managed account programs subadvisory accounts insurance companies similar clients affiliateother consists distribution operations within asset managers principally sell institutional separate account management liquidity money market funds real estate privately placed investment funds fundsofhedge funds component changes aum distribution channel billions 1 realizations represent investment managerdriven distributions primarily related sale assets realizations specific alternative managers include clientdriven distributions eg client requested redemptions liquidations asset transfers 2 years ended march 31 2020 2019 primarily includes reinvestment dividends year ended march 31 2018 includes reclassification effective april 1 2017 160 billion certain assets previously included aua aum due change policy classification aua aum year ended march 31 2018 also includes reinvestment dividends 37 billion reconciliation previously reported amounts operating revenue yield calculate operating revenue yields ratio total operating revenues less performance fees average aum overall operating revenue yield less performance fees across asset classes distribution channels 36 basis points bps 38 bps 39 bps years ended march 31 2020 2019 2018 respectively operating revenue yields asset class distribution channel follows total operating revenue yield decreased last two fiscal years primarily due asset mix shift lower fee vehicles share classes specific fee reductions operating revenue yield managing equity assets declined last seven years managing alternative assets declined last five years primarily due shift mix assets higher fee lower fee vehicles share classes higher fee lower fee earning affiliates equity assets primarily managed clearbridge royce brandywine qs investors martin currie alternative assets managed clarion partners entrust global rare infrastructure fixed income assets primarily managed western asset brandywine liquidity assets managed western asset assets distributed legg mason global distribution predominately retail nature investment performance discussion market conditions year ended march 31 2020 see business environment following table presents summary percentages aum strategy1 outpaced respective benchmarks trailing 1year 3year 5year 10year periods following table presents summary percentages us mutual fund assets2 outpaced lipper category averages trailing 1year 3year 5year 10year periods na applicable 1 purposes investment performance comparisons strategies aggregation portfolios separate accounts investment funds products single group represents particular investment objective case separate accounts investment performance account based upon performance strategy account assigned asset managers specific guidelines including portfolios strategies managers manage separate accounts investment funds strategy performance comparison assets based upon performance separate account march 31 2020 2019 2018 88 87 respectively total aum included strategy aum although strategies 3 5 10year histories total strategy aum includes liquidity assets certain assets included reported performance comparisons include accounts managed accordance guidelines outlined accounts strategies marketed potential clients accounts yet assigned strategy certain smaller products affiliates past performance indicative future results aum included institutional retail separate accounts investment funds included strategy separate accounts performance comparisons based grossoffee performance investment funds managed separate account format performance comparisons based netoffee performance fundsofhedge funds generally specified benchmarks purposes comparison performance products net fees compared relevant hfrx index performance comparisons reflect actual performance specific separate account investment fund individual separate account investment fund performance may differ effective july 1 2019 comparative benchmarks certain strategies added measure relative performance stated benchmark previously provided comparative purposes prior periods updated reflect relative returns using comparative benchmarks applicable 2 source lipper inc includes openend closedend variable annuity funds effective april 1 2018 lipper investment management lim used comparative performance reporting replacing lipper analytical new applications lana discontinued lipper inc resulted changes composition comparative categories comparison purposes prior periods reflect categories reported lim us longterm mutual fund assets represented data accounted 18 total aum march 31 2020 2019 2018 performance us longterm mutual fund assets included strategies results operations accordance financial accounting standards consolidation consolidate separately identify amounts relating certain sponsored investment products consolidation investment products impact net income loss attributable legg mason inc material impact consolidated operating results extent investment consolidated investment product related gains losses impact net income loss attributable legg mason inc see notes 1 20 notes consolidated financial statements additional information regarding consolidation investment products operating revenues components total operating revenues millions dollar percentage changes periods follows total operating revenues year ended march 31 2020 increased 1 292 billion compared 290 billion year ended march 31 2019 primarily due increase investment advisory fees separate accounts funds reflecting higher average aum increase 212 million performance fees passed compensation expense increases offset part 326 million decrease distribution servicing fees reflecting shift lower fee earning mutual fund share classes lower average fund aum earning distribution fees 71 million decrease performance fees passed compensation expense total operating revenues year ended march 31 2019 290 billion decrease 8 314 billion year ended march 31 2018 decrease primarily due 1429 million decrease performance fees 832 million performance fees passed compensation expense discussed decrease operating revenue yield 38 basis points year ended march 31 2019 39 basis points year ended march 31 2018 also contributed decrease investment advisory fees separate accounts year ended march 31 2020 investment advisory fees separate accounts increased 2 105 billion compared 103 billion year ended march 31 2019 fees earned fixed income equity assets increased 204 million 58 million respectively reflecting increase average fixed income equity aum offset part reduction average fee rates earned fixed income assets increases offset part 43 million decrease fees earned alternative assets driven lower average fee rates earned alternative assets offset part increase average alternative aum year ended march 31 2019 investment advisory fees separate accounts increased 85 million 103 billion compared 102 billion year ended march 31 2018 increase 199 million primarily due higher average equity assets managed clearbridge substantially offset decrease 128 million primarily due reduction average fee rate earned fixed income assets managed brandywine decrease 71 million primarily due lower average alternative assets managed entrust global rare infrastructure investment advisory fees funds year ended march 31 2020 investment advisory fees funds increased 150 million 1 150 billion compared 148 billion year ended march 31 2019 fees earned alternative assets increased 253 million driven higher average alternative aum offset part lower average fee rates earned alternative assets fees earned fixed income assets increased 190 million due higher average fixed income aum offset part lower average fee rates earned fixed income assets increases offset part 285 million decrease fees earned equity assets driven lower average equity aum lower average fee rates earned equity assets year ended march 31 2019 investment advisory fees funds decreased 848 million 5 148 billion compared 156 billion year ended march 31 2018 decrease 567 million primarily due lower average equity assets managed martin currie royce clearbridge 393 million primarily due lower average alternative assets managed entrust global 167 million due lower average liquidity assets managed western asset decreases partially offset part increase 264 million primarily due higher average alternative assets managed clarion partners investment advisory performance fees march 31 2020 2019 2018 approximately 11 12 11 respectively longterm aum accounts eligible earn performance fees point respective fiscal year performance fees earned clarion partners assets invested prior acquisition closing april 2016 fully passed clarion partners management team per terms acquisition agreement recorded compensation expense therefore impact net income loss attributable legg mason inc expect pass performance fees clarion partners largely phased fiscal 2022 excluding aum eligible earn pass performance fees approximately 7 8 7 longterm aum accounts eligible earn performance fees point years ended march 31 2020 2019 2018 respectively year ended march 31 2020 investment advisory performance fees 990 million 420 million earned clarion partners passed compensation expense 351 million 163 million 56 million earned alternative fixed income equity assets respectively year ended march 31 2019 investment advisory performance fees 849 million 490 million earned clarion partners passed compensation expense 205 million 96 million 58 million earned fixed income alternative equity assets respectively year ended march 31 2018 investment advisory performance fees 2278 million 1088 million earned clarion partners passed compensation expense 596 million 325 million 269 million earned fixed income equity alternative assets respectively increase performance fees passed compensation expense year ended march 31 2020 primarily due aggregate 212 million increase performance fees earned primarily assets managed entrust global clarion partners western asset rare infrastructure offset part decrease performance fees earned assets managed brandywine decrease performance fees passed compensation expense year ended march 31 2019 primarily due aggregate 832 million decrease performance fees earned assets managed martin currie western asset entrust global brandywine distribution service fees year ended march 31 2020 distribution service fees decreased 326 million 11 2704 million compared 3030 million year ended march 31 2019 reflecting reduction average mutual fund aum subject distribution service fees shift average aum subject distribution service fees lower fee share classes previously discussed year ended march 31 2019 distribution service fees decreased 189 million 6 3030 million compared 3219 million year ended march 31 2018 primarily due reduction average mutual fund aum subject distribution service fees operating expenses components total operating expenses millions dollar percentage changes periods follows nm meaningful total operating expenses year ended march 31 2020 decreased 3832 million 14 242 billion compared 280 billion year ended march 31 2019 year ended march 31 2019 decreased 161 million 1 280 billion compared 282 billion year ended march 31 2018 discussed total operating expenses years ended march 31 2019 2018 included 3652 million 2290 million respectively charges impairments intangible assets year ended march 31 2018 also included 670 million charge regulatory matter discussed note 9 notes consolidated financial statements operating expenses incurred investment management affiliate level comprised approximately 70 65 years ended march 31 2020 2019 2018 respectively total operating expenses excluding impairment charges remaining operating expenses corporate costs including costs global distribution operations compensation benefits components total compensation benefits millions dollar percentage changes periods follows nm meaningful compensation benefits year ended march 31 2020 increased 3 144 billion compared 140 billion year ended march 31 2019 year ended march 31 2019 decreased 7 140 billion compared 151 billion year ended march 31 2018 • salaries incentives benefits increased 165 million 135 billion year ended march 31 2020 compared 133 billion year ended march 31 2019 driven 237 million increase salary incentive compensation related corporate distribution personnel including increased sales commissions 216 million increase net compensation investment affiliates driven increase operating revenues certain affiliates increases operating revenues revenueshare based affiliates typically create corresponding increase compensation per applicable revenue share agreements 75 million increase deferred compensation expense due higher annual acceleration awards retirement eligible employees also contributed increase increases offset part 347 million savings strategic restructuring salaries incentives benefits decreased 525 million 133 billion year ended march 31 2019 compared 138 billion year ended march 31 2018 driven 479 million decrease net compensation benefits investment affiliates primarily driven impact previously discussed decrease performance fees passed compensation expense • strategic restructuring costs 572 million year ended march 31 2020 primarily comprised employee termination benefit costs including severance acceleration deferred compensation awards see note 18 notes consolidated financial statements additional information • affiliate charges 24 million year ended march 31 2020 comprised severance costs associated restructuring plans certain affiliates affiliate charges 93 million year ended march 31 2019 comprised 69 million severance costs associated restructuring plans certain affiliates 24 million management equity plan charges associated additional grant equity units royce management equity plan see note 12 notes consolidated financial statement additional information regarding management equity plans • acquisition transitionrelated costs years ended march 31 2019 2018 comprised employee termination benefit costs including severance acceleration deferred compensation awards related restructuring permal combination entrust completed june 2018 year ended march 31 2020 compensation percentage operating revenues increased 492 compared 482 year ended march 31 2019 primarily due costs incurred connection strategic restructuring current year ended march 31 2019 compensation percentage operating revenues remained relatively flat 482 compared 480 year ended march 31 2018 impact increased compensation expense corporate distribution personnel directly tied revenues substantially offset impact decreased performance fees earned clarion partners passed compensation expense distribution servicing year ended march 31 2020 distribution servicing expenses decreased 6 4132 million compared to4393 million year ended march 31 2019 primarily due lower average aum certain products pay fees thirdparty distributors shift average aum subject distribution service fees lower fee share classes previously discussed year ended march 31 2019 distribution servicing expenses decreased 10 4393 million compared 4893 million year ended march 31 2018 primarily due impact lower average fee rates paid certain products pay fees thirdparty distributors communications technology year ended march 31 2020 communications technology expense decreased 1 2254 million compared 2281 million year ended march 31 2019 primarily due savings associated strategic restructuring year ended march 31 2019 communications technology expense increased 7 2281 million compared 2128 million year ended march 31 2018 primarily due 112 million increase technology consulting maintenance costs related ongoing investments technology capabilities occupancy year ended march 31 2020 occupancy expense increased 5 1104 million compared 1053 million year ended march 31 2019 primarily due strategic restructuring costs largely related space vacated corporate headquarters year ended march 31 2019 occupancy expense increased 4 1053 million compared 1008 million year ended march 31 2018 primarily due real estate related charges recognized current year 53 million associated vacated subleased office space principally corporate headquarters impairment intangible assets impairment intangible assets 3652 million 2290 million years ended march 31 2019 2018 respectively impairment charges recognized year ended march 31 2019 comprised 2746 million 182 million related entrust global indefinitelife fund management contracts asset trade name asset respectively 650 million 64 million 10 million related rare infrastructure indefinitelife fund management contracts asset amortizable fund management contracts asset trade name asset respectively impairments entrust global assets primarily result continued net client outflows legacy high net worth fund products leading reduced growth expectations management fees performance fees declining margin higher discount rate impairments rare infrastructure indefinitelife fund management contracts trade name assets primarily result lower expected net client inflows performance fees leading lower margin higher discount rate impairment rare infrastructure amortizable asset resulted losses separate account aum related decline projected revenues revised estimate remaining useful life rare infrastructure separate account contracts intangible asset also contributed impairment asset impairment charges recognized year ended march 31 2018 comprised 1950 million related entrust global indefinitelife fund management contracts asset 320 million related rare infrastructure amortizable management contracts asset 20 million related rare infrastructure trade name asset impairment entrust global indefinitelife fund management contracts asset primarily result net client outflows legacy high net worth fund products including transfers client funds products entrust global separate accounts related decline revenues impairments rare infrastructure assets resulted losses separate account aum factors rare infrastructure related decline projected revenues revised estimate remaining useful life rare infrastructure separate account contracts intangible asset also contributed impairment asset see critical accounting policies note 5 notes consolidated financial statements discussion impairment charges contingent consideration fair value adjustments contingent consideration fair value adjustments years ended march 31 2020 2019 2018 included credit 09 million expense 06 million credits aggregating 313 million respectively credits fiscal 2018 comprised 320 million reduced contingent consideration liabilities related acquisitions rare infrastructure martin currie qs investors offset part expense 07 million increased contingent consideration liability related acquisition pk investments year ended march 31 2020 expenses decreased 288 million 12 2095 million compared 2383 million year ended march 31 2019 primarily due 245 million savings associated strategic restructuring 42 million charge recognized prior year period regulatory matter year ended march 31 2019 expenses decreased 440 million 16 2383 million compared 2823 million year ended march 31 2018 primarily due decrease 628 million charges related regulatory matter discussed note 9 notes consolidated financial statements 42 million charges recognized fiscal 2019 670 charges recognized fiscal 2018 decrease offset part 172 million increase professional fees largely related strategic restructuring corporate restructuring nonoperating income expense components total nonoperating income expense millions dollar percentage changes periods follows nm meaningful interest income year ended march 31 2020 interest income remained relatively flat 123 million compared 122 million year ended march 31 2019 year ended march 31 2019 interest income increased 51 million 122 million compared 71 million year ended march 31 2018 driven higher yields earned higher average interestbearing investment balances interest expense year ended march 31 2020 interest expense decreased 74 million 1099 million compared 1173 million year ended march 31 2019 primarily due repayment 1255 million outstanding borrowings credit agreement september 2018 repayment 250 million 27 senior notes july 2019 year ended march 31 2019 interest expense remained relatively flat 1173 million compared 1179 million year ended march 31 2018 income expense net years ended march 31 2020 2019 income expense net totaled expense 133 million income 311 million respectively year ended march 31 2020 included 106 million net market losses seed capital investments assets invested deferred compensation plans offset corresponding decrease compensation expense 62 million losses corporate investments losses offset part 35 million net market gains investments consolidated sponsored investment products designated civs impact net income attributable legg mason inc gains fully attributable noncontrolling interests year ended march 31 2019 included 141 million gains corporate investments 104 million net market gains seed capital investments assets invested deferred compensation plans offset corresponding increase compensation expense 84 million distribution investment holding year ended march 31 2019 income expense net income 311 million compared income 108 million year ended march 31 2018 year ended march 31 2018 included 123 million net market gains seed capital investments assets invested deferred compensation plans offset corresponding increase compensation expense offset part 18 million net market losses corporate investments nonoperating income expense consolidated investment vehicles net year ended march 31 2020 nonoperating income expense consolidated investment vehicles net totaled income 163 million compared expense 06 million year ended march 31 2019 year ended march 31 2019 nonoperating income expense consolidated investment vehicles net totaled expense 06 million compared income 98 million year ended march 31 2018 see notes 1 20 notes consolidated financial statements additional information regarding consolidation sponsored investment vehicles net market gains investments certain civs income tax provision benefit years ended march 31 2020 2019 income tax provision 1060 million 206 million respectively year ended march 31 2018 income tax benefit 1025 million effective tax rate 258 722 years ended march 31 2020 2019 respectively effective benefit rate 438 year ended march 31 2018 effective tax rate year ended march 31 2019 reflects final adjustments related impact tax cuts jobs act 2017 tax law enacted december 22 2017 effective benefit rate year ended march 31 2018 reflects impact tax law recognized upon enactment effective tax rate year ended march 31 2020 reflects net discrete tax expense 24 million primarily related revaluation certain existing deferred tax assets liabilities reduction net operating loss due audit settlements discrete tax expense recognized vested stock awards grant date exercise price higher vesting date stock prices offset part discrete tax benefit resulting settlement prior year state audits statute expirations net impact discrete tax items increased effective income tax rate 06 percentage points year ended march 31 2020 year ended march 31 2019 discrete tax expense 141 million related uncertain tax positions federal state local taxes including relating recent legislative changes recognized addition discrete tax benefits totaling 28 million related completion prior year tax audit discrete tax benefits 13 million recognized together net impact discrete tax items increased effective tax rate 351 percentage points year ended march 31 2019 previously discussed december 22 2017 tax law enacted reduction us corporate tax rate well aspects tax law resulted onetime noncash provisional tax benefit 2209 million primarily due remeasurement certain existing deferred tax assets liabilities new 21 income tax rate addition noncash tax charge 73 million provisionally provided deemed repatriation unremitted foreign earnings provided tax law tax provision associated repatriations adjusted reflect impact tax law discussed note 7 notes consolidated financial statements accounting tax unremitted foreign earnings completed fiscal 2019 adjustment amount 22 million additional expense recorded period also year ended march 31 2018 effective benefit rate impacted 97 percentage points nondeductibility charge regulatory matter discussed note 9 notes consolidated financial statements addition fiscal 2018 changes state apportionment state laws audit settlements discrete changes impacting state deferred tax liabilities resulted additional net tax expense 33 million reduced effective benefit rate 11 percentage points year ended march 31 2018 08 million discrete tax expense recognized respect equitybased compensation reduced effective benefit rate 03 percentage points civs consolidated sponsored investment products reduced effective tax rate 08 percentage points 20 percentage points years ended march 31 2020 2019 respectively increased effective benefit rate 13 percentage points year ended march 31 2018 net income loss attributable legg mason inc operating margin net income attributable legg mason inc year ended march 31 2020 totaled 2514 million 279 per diluted share compared net loss attributable legg mason inc 285 million 038 per diluted share year ended march 31 2019 increase net income loss attributable legg mason inc primarily driven noncash impairment charges totaling 3652 million 312 per diluted share recognized prior year well higher operating revenues current year reflecting increase investment advisory fees driven higher average aum increase performance fees passed compensation expense well impact savings strategic restructuring increases offset part higher strategic restructuring corporate restructuring costs current year previously discussed increase compensation expense corporate distribution personnel including increased sales commissions net market losses recognized corporate investments compared gains recognized prior year operating margin 173 year ended march 31 2020 compared 36 year ended march 31 2019 reflecting noncash impairment charges recognized year ended march 31 2019 net loss attributable legg mason inc year ended march 31 2019 totaled 285 million 038 per diluted share compared net income attributable legg mason inc 2851 million 301 per diluted share year ended march 31 2018 net loss attributable legg mason inc year ended march 31 2019 included noncash impairment charges totaling 3652 million 312 per diluted share strategic restructuring corporate restructuring costs 185 million 015 per diluted share affiliate charges 92 million 006 per diluted share including royce management equity plan costs 24 million discrete net tax expenses tax items 77 million 009 per diluted share 42 million 005 per diluted share charge associated regulatory matter discussed note 9 notes consolidated financial statements net income attributable legg mason inc year ended march 31 2018 included onetime net noncash provisional tax benefit 2137 million 226 per diluted share related tax law benefit offset part noncash impairment charges related intangible assets 2290 million 196 per diluted share 670 million 071 per diluted share charge related regulatory matter discussed year ended march 31 2018 also included adjustments decrease fair value contingent consideration liabilities 313 million 033 per diluted share operating margin 36 year ended march 31 2019 compared 103 year ended march 31 2018 reflecting impact noncash impairment charges related regulatory matter recognized years ended march 31 2019 2018 discussed supplemental nongaap financial information supplemental information providing performance measures adjusted net income adjusted earnings per diluted share adjusted eps “adjusted operating margin” along liquidity measure adjusted ebitda based methodologies generally accepted accounting principles nongaap effective quarter ended june 30 2019 began disclosing adjusted operating margin revises prior disclosure operating margin adjusted include adjustments restructuring costs acquisition expenses transitionrelated costs integration activities described management uses performance measures benchmarks evaluate compare periodtoperiod operating performance believe performance measures provide useful information operating results core asset management business facilitate comparison results asset management firms periodtoperiod results also providing nongaap liquidity measure adjusted ebitda management uses benchmark evaluating comparing periodtoperiod liquidity believe measure useful investors provides additional information regard ability meet working capital requirements service debt return capital stockholders adjusted net income adjusted earnings per diluted share adjusted net income adjusted eps include adjustments certain items relate operating performance therefore readily reconcilable net income loss attributable legg mason inc net income loss per diluted share attributable legg mason inc shareholders determined generally accepted accounting principles gaap respectively define adjusted net income net income loss attributable legg mason inc adjusted exclude following • restructuring costs including ◦ corporate charges related ongoing strategic restructuring cost saving business initiatives including severance lease costs certain transactionrelated costs ◦ affiliate charges including affiliate restructuring severance costs certain onetime charges arising issuance management equity plan awards • amortization intangible assets • gains losses seed investments offset compensation hedges • acquisition expenses transitionrelated costs integration activities including certain related professional fees costs associated transition acquisition acquired businesses • impairments intangible assets • contingent consideration fair value adjustments • charges related significant litigation regulatory matters • income tax expense benefit adjustments provide effective nongaap tax rate commensurate expected annual pretax adjusted net income including ◦ impact income tax expense benefit nongaap adjustments ◦ tax items including deferred tax asset liability adjustments associated statutory rate changes impact aspects recent us tax reform shortfalls windfalls associated stockbased compensation adjustments restructuring costs gains losses seed investments offset compensation hedges income tax expense benefit items described included calculation items reflective core asset management business providing investment management related products services adjust acquisitionrelated items including amortization intangible assets impairments intangible assets contingent consideration fair value adjustments make easier identify trends affecting underlying business related acquisitions facilitate comparison operating results asset management firms engaged significant acquisitions adjust charges credits related significant litigation regulatory matters net insurance proceeds revenue share adjustments matters reflect underlying operations performance business calculating adjusted eps adjust net income loss per diluted share attributable legg mason inc shareholders determined gaap per share impact adjustment net taxes included calculation adjusted net income measures provided addition net income loss attributable legg mason inc net income loss per diluted share attributable legg mason inc shareholders substitutes measures nongaap measures considered isolation may comparable nongaap performance measures including measures adjusted earnings adjusted income adjusted earnings per share companies respectively adjusted net income adjusted eps liquidity measures used place cash flow measures determined gaap calculations adjusted net income adjusted eps follows dollars thousands except per share amounts 1 see note 18 notes consolidated financial statements additional information regarding strategic restructuring initiatives 2 see results operations additional information regarding affiliate charges 3 nongaap effective tax rates years ended march 31 2020 2019 2018 261 260 301 respectively adjusted net income 3390 million 376 per diluted share year ended march 31 2020 compared 2886 million 326 per diluted share year ended march 31 2019 increase driven higher operating revenues reflecting increase investment advisory fees funds separate accounts driven higher average aum increase performance fees passed compensation expense well impact savings strategic restructuring adjusted net income 2886 million 326 per diluted share year ended march 31 2019 compared 3224 million 341 per diluted share year ended march 31 2018 adjusted net income decreased primarily due lower operating revenues adjusted operating margin calculate adjusted operating margin dividing “adjusted operating income” “adjusted operating revenues” discussed measures include adjustments certain items relate operating performance therefore readily reconcilable operating margin operating income loss total operating revenues determined gaap respectively define adjusted operating revenues operating revenues adjusted • include ◦ net investment advisory fees eliminated upon consolidation investment vehicles • exclude ◦ distribution servicing fees portion investment advisory fees used pay distribution servicing costs third party intermediaries based contractual relationships thirdparty intermediaries ultimate clients amount distribution servicing fees portion investment advisory fees excluded approximate direct costs selling servicing products paid thirdparty intermediaries based contractual percentages value related aum ◦ performance fees passed compensation expense net income loss attributable noncontrolling interests adjustments relate items impact net income loss attributable legg mason inc included one ways management views evaluates business results define adjusted operating income operating income loss adjusted exclude following • restructuring costs including ◦ corporate charges related ongoing strategic restructuring cost saving business initiatives including severance lease costs transaction costs ◦ affiliate charges including affiliate restructuring severance costs certain onetime charges arising issuance management equity plan awards • amortization intangible assets • impact compensation expense ◦ gains losses investments made fund deferred compensation plans ◦ gains losses seed capital investments affiliates revenue sharing arrangements • acquisition expenses transitionrelated costs integration activities including certain related professional fees costs associated transition acquisition acquired businesses • impairments intangible assets • contingent consideration fair value adjustments • charges related significant regulatory matters • income loss consolidated investment vehicles calculating adjusted operating income adjust restructuring costs items reflective core asset management business providing investment management related products services adjust impact compensation expense gains losses investments made fund deferred compensation plans seed capital investments affiliates revenue sharing arrangements offset equal amount nonoperating income expense net thus impact net income attributable legg mason inc adjust acquisitionrelated items including amortization intangible assets impairments intangible assets contingent consideration fair value adjustments make easier identify trends affecting underlying business related acquisitions facilitate comparison operating results asset management firms engaged significant acquisitions adjust charges credits related significant litigation regulatory matters net insurance proceeds revenue share adjustments matters reflect underlying operations performance business adjust income loss consolidated investment vehicles consolidation investment vehicles impact net income loss attributable legg mason inc measures provided addition substitutes operating margin operating revenues operating income loss calculated gaap nongaap measures considered isolation may comparable nongaap performance measures including measures adjusted margins adjusted operating revenues adjusted operating income companies adjusted operating margin adjusted operating revenues adjusted operating income liquidity measures used place cash flow measures determined gaap calculations operating margin adjusted operating margin follows dollars thousands adjusted ebitda define adjusted ebitda cash provided used operating activities plus minus • interest expense net accretion amortization debt discounts premiums • current income tax expense benefit • net change assets liabilities aligns consolidated statements cash flows • net income loss attributable noncontrolling interests • net gains losses earnings investments • net gains losses consolidated investment vehicles • adjusted ebitda reduced equitybased compensation expense including management equity plan noncash issuancerelated charges management equity plan units may put called legg mason cash payment although terms require occur liquidity measure provided addition cash provided operating activities may comparable nongaap performance measures liquidity measures companies including measures ebitda adjusted ebitda measure confused net income loss cash provided operating activities measures earnings cash flows gaap provided supplement replacement gaap measures calculations adjusted ebitda follows dollars thousands adjusted ebitda years ended march 31 2020 2019 2018 6450 million 6222 million 6372 million respectively increase adjusted ebitda year ended march 31 2020 compared year ended march 31 2019 primarily due increase net income adjusted noncash items decrease adjusted ebitda year ended march 31 2019 compared year ended march 31 2018 primarily due decrease net income adjusted noncash items liquidity capital resources march 31 2020 approximately 745 million cash equivalents excess working capital regulatory requirements primary objective capital structure provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations review overall funding needs capital base ongoing basis determine capital base meets expected needs businesses period heightened uncertainty economic environment remain focused preservation capital help us build maintain liquidity previously discussed february 17 2020 entered merger agreement franklin templeton merger agreement limits ability take certain actions including among things acquiring businesses incurring capital expenditures specified thresholds incurring additional debt consolidation variable interest entities discussed impact liquidity capital resources however executed total return swap arrangements investors certain exchange traded funds etfs result receive investors related investment gains losses etfs may required consolidate etfs open total return swap agreements march 31 2020 total return swap notional values aggregated 142 million total return swap counterparties terminate positions legg mason may invest support etf products otherwise rights benefits bear risks associated assets liabilities civs consolidated sponsored investment products beyond investments investment advisory fees generated products eliminated consolidation additionally creditors civs consolidated sponsored investment products recourse general credit beyond level investment consider liabilities obligations assets consist primarily intangible assets goodwill cash equivalents investment securities investment advisory related fee receivables operations principally funded equity capital longterm debt retained earnings march 31 2020 cash equivalents total assets longterm debt net stockholders equity 10 billion 80 billion 20 billion 38 billion respectively total assets include amounts related civs consolidated sponsored investment products 02 billion cash equivalents primarily invested liquid domestic nondomestic money market funds hold principally domestic nondomestic government agency securities bank deposits corporate commercial paper shortterm treasury bills recognized losses investments monitoring cash equivalents partially mitigates potential material risks may associated balances following table summarizes consolidated statements cash flows years ended march 31 millions cash inflows provided operating activities fiscal 2020 5606 million primarily related net income adjusted noncash items cash inflows provided operating activities fiscal 2019 5609 million primarily related net income adjusted noncash items including impairment charges totaling 3652 million cash inflows provided operating activities fiscal 2018 4894 million primarily related net income adjusted noncash items including 2290 million impairment charges 2137 million tax benefit recognized connection enactment tax law offset part net activity civs cash outflows used investing activities fiscal 2020 454 million primarily related payments fixed assets minority investment uk retirement solutions provider acquisition gramercy europe jersey limited gramercy discussed offset part returns capital received certain investments partnerships limited liability companies cash outflows used investing activities fiscal 2019 365 million primarily related payments made fixed assets offset part returns capital received certain investments partnerships limited liability companies cash outflows used investing activities fiscal 2018 195 billion primarily related payments made fixed assets offset part returns capital received certain investments partnerships limited liability companies cash outflows used financing activities fiscal 2020 4090 million primarily related repayment 250 million 27 senior notes july 2019 dividends paid 1380 million distributions noncontrolling interest holders 378 million employee tax withholdings settlement net share transactions 154 million offset part issuances common stock stockbased compensation 441 million cash outflows used financing activities fiscal 2019 3315 million primarily related repayment 1255 million outstanding borrowings unsecured revolving credit agreement amended time credit agreement dividends paid 1148 million distributions noncontrolling interest holders 386 million net redemptions attributable noncontrolling interests civs consolidated investment products 222 million cash outflows used financing activities fiscal 2018 4623 million primarily related purchase 66 million shares common stock 2536 million open market purchases purchase 56 million shares common stock shanda asset management investment limited shanda 2255 million discussed dividends paid 1022 million offset part 1255 million net borrowings credit agreement fund purchase shares shanda april 3 2020 borrowed 250 million credit agreement provide additional liquidity amid heightened uncertainty due covid19 pandemic currently foresee need utilize cash drawn precaution event economic environment worsens significantly based current level operations expect cash generated operating activities together available cash hand excluding proceeds credit agreement drawing adequate support working capital needs least next 12 months economic environment worsen significantly projections prove incorrect would credit agreement drawdown proceeds available use subject limitations contained merger agreement currently intend utilize available resources activities including limited strategic restructuring acquisitions seed capital investments new existing products payment dividends addition ordinary operating cash needs anticipate cash needs next 12 months including payment certain severance retention incentives connection merger discussed financing transactions table reflects primary sources financing thousands 1 500000 available march 31 2020 subject terms merger agreement however 250 million amount drawn april 2020 longterm debt july 15 2019 repaid 250 million 27 senior notes due july 2019 using existing cash resources revolving credit agreement maintain unsecured credit agreement provides 500 million multicurrency revolving credit facility revolving credit facility may increased aggregate amount 500 million 10 billion subject approval lenders expires december 2020 repaid time revolving credit facility available fund working capital needs general corporate purposes borrowings outstanding credit agreement march 31 2020 terms merger agreement may borrow 30 million revolving credit facility borrowings must made ordinary course business consistent past practice previously discussed approval franklin templeton april 3 2020 borrowed 250 million credit agreement provide additional liquidity precaution financial covenants credit agreement include maximum net debt ebitda ratio 30 1 minimum ebitda interest ratio 40 1 debt defined include obligations borrowed money excluding nonrecourse debt civs capital leases net debt covenants debt reduced amount unrestricted cash excess greater subsidiary cash 300 million lesser 50 aggregate amount seed capital investments 125 million amount equal 50 hybrid capital securities ebitda defined consolidated net income loss plusminus tax expense benefit interest expense depreciation amortization intangibles extraordinary expense losses noncash charges certain transitionrelated costs defined agreements march 31 2020 net debt ebitda ratio 19 1 ebitda interest expense ratio 61 1 therefore maintained compliance applicable covenants giving effect april 3 2020 drawdown credit agreement net debt ebitda ratio 22 1 ebitda interest expense ratio 57 1 net income significantly declines spend available cash may impact ability maintain compliance financial covenants credit agreement determine compliance covenants may pressure time outstanding borrowings facility want utilize available borrowings otherwise desire keep borrowings available subject terms merger agreement may elect take number actions including reducing expenses order increase ebitda using available cash repay portion outstanding debt seeking negotiate lenders modify terms restructure debt using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments credit agreement currently impacted ratings two rating agencies interest rate annual commitment fee revolving line credit based higher credit rating two rating agencies one rating agency gives us lower credit rating agency downgrade rating absent upgrade former agency borrowings outstanding revolving credit facility interest costs rise modestly certain asset management affiliates maintain various credit facilities general operating purposes certain affiliates subject capital requirements various regulatory agencies affiliates met respective capital adequacy requirements periods presented see note 6 notes consolidated financial statements additional information regarding debt transactions acquisitions contingent consideration april 10 2019 clarion partners acquired majority stake gramercy european real estate business specializing paneuropean logistics industrial assets transaction required initial cash payment 102 million net cash acquired paid using existing cash resources potential contingent consideration payment discussed may 2 2016 closed transaction combine permal entrust create entrustpermal renamed entrust global march 2019 65 connection combination incurred restructuring transitionrelated costs totaling approximately 94 million completion plan june 2018 approximately 15 noncash charges contingent consideration clarion partners acquisition gramercy provides potential contingent consideration payment 37 million using foreign exchange rate april 10 2019 €33 million potential payment due fifth anniversary closing march 31 2020 related contingent consideration liability 33 million effective may 31 2014 completed acquisition qs investors december 2018 paid 43 million final installment contingent consideration using existing cash resources december 31 2015 martin currie acquired certain assets pk investments december 2017 contingent consideration 32 million paid using existing cash resources see notes 2 9 notes consolidated financial statements additional information regarding acquisitions contingent consideration respectively noncontrolling interests described may obligated settle noncontrolling interests related certain affiliates following table presents summary affiliate redeemable noncontrolling interests carrying values millions excluding amounts related management equity plans carrying values reflect estimated settlement values except settlement values less issuance price carrying value reflects issuance price ultimate timing amounts noncontrolling interest settlements uncertain project accuracy noncontrolling interests 35 outstanding equity entrust global 18 outstanding equity clarion partners subject put call provisions may result future cash outlays generally starting fiscal 2022 entrust global clarion partners subject earlier effectiveness certain circumstances may 10 2019 purchased 15 equity interest rare infrastructure held firms management team total consideration 220 million initial cash payment 120 million including 18 million dividends arrears made may 10 2019 using existing cash resources half deferred consideration paid may 2020 remaining half due subject certain conditions two years closing july 2 2018 corporate minority owner rare infrastructure exercised put option 10 ownership interest settlement value 155 million along 10 million dividends arrears paid october 2018 see note 16 notes consolidated financial statements additional information affiliate management equity plans conjunction acquisition clarion partners april 2016 implemented affiliate management equity plan entitles certain key employees clarion partners participate 15 future growth enterprise value subject appropriate discounts subsequent date grant march 2016 implemented affiliate management equity plan management royce management equity plan march 31 2020 noncontrolling interests equivalent 245 royce entity issued management team addition implemented affiliate management equity plan march 2014 entitles certain key employees clearbridge participate 15 future growth enterprise value subject appropriate discounts march 31 2020 estimated redemption fair value units management equity plans aggregated 847 million repurchases units granted plans may impact future liquidity requirements however amounts timing repurchases uncertain project accuracy see note 12 notes consolidated financial statements additional information regarding affiliate management equity plans share repurchases january 2015 board directors authorized 10 billion purchases common stock december 2017 board directors approved purchase 56 million shares common stock 2255 million shanda utilizing remaining 1690 million common stock available repurchase authorized january 2015 authorizing purchase additional 565 million common stock complete transaction aggregate purchases 2255 million effectively acceleration share repurchase program repurchase shares common stock years ended march 31 2020 2019 march 31 2020 purchases common stock authorized without franklin templetons consent prohibited merger agreement merger pending future outlook previously discussed currently intend utilize available cash resources fund various activities however period heightened uncertainty economic environment merger pending remain focused preservation capital help us build maintain liquidity march 31 2020 745 million cash equivalents excess working capital regulatory requirements includes amounts expected used fund accrued compensation payments primarily first quarter fiscal 2021 strategic restructuring previously discussed initiated strategic restructuring reduce costs expect incur aggregate restructuring costs range 100 million 105 million connection strategic restructuring incurred march 2021 majority restructuring costs paid cash incurred 80 million strategic restructuring costs march 31 2020 approximately 43 million costs paid date expect incur approximately 20 million 25 million costs fiscal 2021 see note 18 notes consolidated financial statements additional information expect strategic restructuring result future annual cost savings 100 million substantially cash savings expect achieve savings run rate basis end fiscal 2021 march 31 2020 realized cumulative savings approximately 72 million expect merger impact costs savings associated strategic restructuring shortterm borrowings longterm debt previously discussed april 3 2020 borrowed 250 million credit agreement provide additional liquidity amid heightened uncertainty due covid19 pandemic exclusive borrowings currently expect raise additional incremental debt equity financing next 12 months going forward assurances expectations projections could prove incorrect market conditions might significantly worsen affecting results operations generation available cash events may occur require additional liquidity excess remaining amounts available credit agreement opportunity refinance indebtedness complete acquisition events result operations available cash insufficient fund liquidity needs may seek manage available resources taking actions reducing operating expenses reducing expected expenditures investments selling assets investment securities repatriating earnings foreign subsidiaries reducing dividend modifying arrangements affiliates andor employees types actions prove insufficient acquisition refinancing opportunity arise would likely utilize borrowing capacity credit agreement seek raise additional equity debt liquid assets liquid assets include cash equivalents certain current investment securities march 31 2020 total liquid assets approximately 11 billion included 334 million cash equivalents investments held foreign subsidiaries net working capital amounts foreign subsidiaries significant order supplement cash available us general corporate purposes plan utilize approximately 13 million foreign cash annually next several years anticipate amount provided debt service payments foreign affiliates repatriation foreign earnings currently planned conjunction acquisition clarion partners committed provide 100 million seed capital clarion partners products january 2016 acquired minority equity position precidian investments llc precidian terms transaction acquired series b preferred units precidian entitle us approximately 20 voting economic interests precidian along customary preferred equity protections precidian executed license arrangements various financial institutions use activeshares® product january 21 2020 provided notice intent convert preferred units 75 common equity precidian fully diluted basis subject satisfaction certain closing conditions within nine months following notice plan use cash hand related 25 million payment credit liquidity risk cash equivalent deposits involve certain credit liquidity risks maintain cash equivalents number high quality financial institutions funds affiliates time may concentrations one institutions balances financial institutions funds credit quality monitored ongoing basis offbalance sheet arrangements offbalance sheet arrangements defined sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations section follows consolidation discussed critical accounting policies notes 1 20 notes consolidated financial statements derivatives hedging discussed notes 1 17 notes consolidated financial statements contractual contingent obligations contractual obligations make future payments principally connection longterm debt noncancelable lease agreements service agreements see notes 6 8 9 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual obligations millions fiscal year excludes contractual obligations civs consolidated sponsored investment products responsible liable obligations 1 represents contributions made martin currie legacy pension plan annual basis may 2024 final payment due november 2024 using exchange rate march 31 2020 £23 million annual committed contribution amount £15 million final payment amount 2 see note 21 notes consolidated financial statements information regarding 250 million borrowed credit agreement april 3 2020 3 table include approximately 164 million capital commitments investment partnerships limited partner outstanding funded required end commitment periods running fiscal 2029 100 million coinvestment commitment associated clarion partners acquisition 4 table include amounts uncertain tax positions 555 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated 5 table include redeemable noncontrolling interests related minority equity interests affiliates affiliate management equity plans key employees clarion partners clearbridge totaling 5973 million march 31 2020 timing amount related cash outflows cannot reliably estimated redeemable noncontrolling interests civs 1171 million march 31 2020 also excluded table obligations relation amounts potential obligations arising ultimate settlement awards affiliate management equity plan key employees royce also excluded due uncertainty timing amounts ultimately payable see note 12 notes consolidated financial statements additional information regarding affiliate management equity plans market risk maintain enterprise risk management program oversee coordinate risk management activities legg mason subsidiaries program certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income majority revenue calculated market value aum accordingly decline value underlying securities cause aum thus revenues decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts ordinary course business may also reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets market conditions low interest rate environments may lead us take actions performance fees may earned certain investment advisory contracts exceeding performance benchmarks strong markets tend increase fees declines market values aum result reduced fee revenues net income generally earn higher fees alternative assets equity assets fees charged fixed income liquidity assets declines market values aum asset classes greater impact revenues addition revenue sharing arrangements certain affiliates retain different percentages revenues cover costs including compensation affiliates operate different levels margins net income profit margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary investments comprised investment securities including seed capital sponsored mutual funds investment products limited partnerships limited liability companies certain investment products current investments excluding civs subject risk security price fluctuations summarized table thousands current investments 2162 million 2230 million march 31 2020 2019 respectively relate longterm incentive plans offsetting liabilities end respective vesting periods related liabilities may completely offset end reporting period due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income expense dependent vesting provisions plan net income approximately 1087 million 1325 million current investments march 31 2020 2019 respectively seed capital investments sponsored mutual funds investment products vehicles fluctuations market value impact nonoperating income expense amounts fluctuations market value related approximately 116 million 272 million seed capital investments march 31 2020 2019 respectively offsetting compensation expense revenue share arrangements fluctuations market value related approximately 545 million 896 million seed capital investments march 31 2020 2019 respectively substantially offset gains losses market hedges therefore materially impact net income loss attributable legg mason inc seed capital investments liquidated related fund establishes track record investors decision made longer pursue strategy approximately 61 million 84 million current investments march 31 2020 2019 respectively represent noncontrolling interests associated consolidated seed capital investments products fluctuations market value investments impact net income loss attributable legg mason inc however may impact nonoperating income expense corresponding offset net income attributable noncontrolling interests fluctuations market value 73 million 128 million remaining current investments respective period offsetting compensation expense revenue share arrangements noncurrent investments excluding civs subject risk security price fluctuations summarized table thousands investment securities civs totaled 1188 million 1380 million march 31 2020 2019 respectively fluctuations market value investments civs excess equity investment impact net income loss attributable legg mason inc however may impact nonoperating income expense civs corresponding offset net income attributable noncontrolling interests march 31 2020 2019 held equity investments civs 284 437 million respectively march 31 2020 2019 fluctuations market value approximately 267 million 320 million respectively equity investments civs substantially offset gains losses market hedges therefore materially impact net income loss attributable legg mason inc fluctuations market value remaining 17 million 117 million respective period equity investments civs impact nonoperating income expense valuation investments described within critical accounting policies heading valuation financial instruments see notes 1 17 notes consolidated financial statements discussion derivatives following summary effect 10 increase decrease market values financial instruments subject market valuation risks march 31 2020 thousands gains losses related investments deferred compensation plans directly offset full vesting period corresponding adjustment compensation expense related liability addition investments proprietary fund products investments civs totaling approximately 812 million economically hedged limit market risk result 10 increase decrease unrealized market value financial instruments subject market valuation risks table would result 123 million increase decrease pretax earnings attributable legg mason inc march 31 2020 addition entered various total return swap arrangements respect certain etfs sponsor notional amounts totaling 142 million march 31 2020 terms total return swap receive related gains losses investors underlying shares etfs however executed futures contracts notional amounts totaling 61 million limit market risk related total return swaps result 10 increase decrease underlying shares etfs would result additional 08 million increase decrease pretax earnings attributable legg mason inc march 31 2020 also march 31 2020 2019 cash equivalents included 5945 million 5562 million respectively money market funds foreign exchange sensitivity operate primarily us provide services earn revenues incur expenses outside us accordingly fluctuations foreign exchange rates currencies principally australia uk brazil singapore japan denominated euro may impact aum revenues expenses comprehensive income net income certain affiliates entered forward contracts manage portion impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material impact net income liquidity interest rate risk exposure interest rate changes substantially mitigated outstanding longterm debt fixed interest rates see note 6 notes consolidated financial statements additional discussion debt effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risk revenues net income loss critical accounting policies intangible assets goodwill previously discussed critical accounting policies estimates accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following critical accounting policies involve significant estimates judgments consolidation normal course business sponsor manage various types investment products services entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees exposure risk entities generally limited equity investment made required make earned uncollected management fees except total return swap arrangements executed additional risks discussed uncollected management fees managed investment products material march 31 2020 issued investment performance guarantees investment products investors sell transfer assets investment products accordance financial accounting standards consolidate certain sponsored investment products designated civs financial information certain consolidated civs included consolidated financial statements threemonth lag based upon availability investment products financial information certain investment products sponsor manage considered variable interest entities vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights may fund initial cash investment certain vre investment products generate investment performance track record order attract thirdparty investors product initial investment new product typically represents 100 ownership product discussed “seed capital investments” consolidated long maintain controlling financial interest product designated civs unless investment longerterm vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity investors potential controlling financial interest must consolidate vie deemed primary beneficiary consolidation accounting guidance limited partners similar equity holders sponsored investment vehicle structured limited partnership similar entity either substantive investor rights replace manager kickout rights substantive participation rights general partner entities vies sponsor manager investment vehicle may deemed decision maker accounting guidance fees paid decision maker marketbased fees considered variable interests vie marketbased fees customary commensurate level effort required services provided additionally employee interests sponsored investment vehicle made circumvent consolidation guidance financed sponsor included variable interests assessment included primary beneficiary determination decision maker deemed primary beneficiary vie power direct activities significantly impact economic performance vie obligation absorb losses receive benefits variable interests could significant vie determining whether primary beneficiary vie consider qualitative quantitative factors voting rights equity holders guarantees implied relationships fee paid decision maker marketbased included primary beneficiary determination entered various total return swap arrangements financial intermediaries respect certain legg mason sponsored etfs terms total return swaps absorb related gains losses underlying etf investments financial intermediaries therefore variable interests related funds significant may deemed primary beneficiary accordingly consolidate etfs significant open total return swap arrangements see notes 1 20 notes consolidated financial statements additional discussion civs vies revenue recognition effective april 1 2018 adopted updated accounting guidance revenue recognition modified retrospective basis contracts complete april 1 2018 adoption date updated guidance provides single comprehensive revenue recognition model contracts customers improves comparability removes inconsistencies revenue recognition practices across entities industries jurisdictions capital markets guidance also specifies accounting certain costs obtain fulfill contract customer revises criteria determining entity acting principal agent certain arrangements adoption updated guidance result significant changes prior revenue recognition practices except timing recognition certain performance incentive fees capitalization amortization certain sales commissions separate accounts net presentation certain fund expense reimbursements previously presented gross basis changes previous revenue recognition practices discussed primarily earn revenues providing investment management services distribution shareholder services customers generally investment funds underlying investors separately managed accounts discussed revenues calculated based value investments management determine transaction price recognized obligations terms contracts customers satisfied generally time services rendered valuation aum responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith march 31 2020 equity fixed income alternative liquidity aum values aggregated 161 billion 420 billion 75 billion 75 billion respectively majority aum valued independent pricing services based observable market prices inputs believe market risk significant risk underlying value aum economic events financial market turmoil increased market price volatility however discussed valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2020 approximately 9 total aum valued based unobservable inputs majority related real estate funds discussed mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager brokerdealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost approximates fair value majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income alternative liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs significant portion aum fair value determined based unobservable inputs certain real estate funds values real estate investments prepared giving consideration income cost sales comparison approaches estimating property value income approach estimates income stream property discounts income plus reversion presumed sale present value risk adjusted rate yield rates growth assumptions utilized approach derived market transactions well financial industry data discount rate exit capitalization rate significant inputs valuations rates based location type nature property current anticipated market conditions cost approach estimates replacement cost building less physical depreciation plus land value sales comparison approach compares recent transactions appraised property adjustments made dissimilarities typically provide range value many factors also considered determination fair value including limited operating cash flows financial performance properties property types geographic locations physical condition asset prevailing market capitalization rates prevailing market discount rates general economic conditions economic conditions specific market assets located specific rights terms associated investment inherent uncertainties valuation values may materially differ values would determined negotiations held parties sale transaction investment advisory fees earn investment advisory fees assets separately managed accounts investment funds products managed clients generally investment management services single performance obligation include series distinct services substantially transferred customer time using timebased measure progress investment management services satisfied time customer simultaneously receives consumes benefits advisory services performed separate account funds advisory fees separate account funds advisory fees variable consideration primarily based predetermined percentages daily monthly quarterly average market value aum defined investment management agreements average market value aum subject change based fluctuations volatility financial markets separate account funds advisory fees constrained end month quarter actual average market value aum known significant revenue reversal longer probable therefore separate account fund advisory fees included transaction price allocated investment management services performance obligation end monthly quarterly reporting period specified investment management contract payment services investment management contracts due variable consideration allocated transaction price generally within 30 days recognition separate account funds advisory fee revenue updated guidance consistent prior revenue recognition process performance incentive fees performance incentive fees variable consideration may earned certain investment management contracts exceeding performance benchmarks relative absolute basis exceeding contractual return thresholds performance incentive fees estimated inception contract however range outcomes possible due factors outside control investment manager particularly market conditions performance incentive fees therefore excluded transaction price becomes probable significant reversal cumulative amount revenue recognized occur portion performance incentive fees earned based 12month performance periods end differing quarters year portion also based quarterly performance periods also earn performance incentive fees alternative certain products lock earlier investor’s termination date liquidation fund contract multipleyear intervals specific events sale assets certain products performance incentive fees may recognized revenue earlier updated guidance prior revenue recognition practices deferred recognition contingencies resolved performance incentive fees recognized prior resolution contingencies recorded contract asset current assets noncurrent assets consolidated balance sheet fee waivers fund expense reimbursements may waive certain fees investors may reimburse investment funds certain operating expenses exceed certain threshold fee waivers continue reported reduction advisory fee revenue updated guidance prior accounting guidance fund expense reimbursements excess recognized revenue recorded expense consolidated statements income updated accounting guidance fund expense reimbursements exceed recognized revenue represent change transaction price therefore reported reduction investment advisory fees funds consolidated statements income distribution service fees revenue expense distribution service fees earned funds reimburse distributor costs marketing selling fund shares generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds nondiscretionary advisory services assets advisement distribution service fees earned companysponsored investment funds reported revenue distribution services marketing services considered single performance obligation success selling underlying shares highly dependent upon sales marketing efforts ongoing shareholder servicing separate performance obligation services highly interrelated interdependent sale shares fees earned related distribution shareholder serving considered variable consideration calculated based average market value fund average market value fund subject change based fluctuations volatility financial markets distribution shareholder service fees generally constrained end month quarter actual market value fund known related revenue longer subject significant reversal therefore distribution service fees generally included transaction price end monthly quarterly reporting period allocated two performance obligations based amount specified agreement distribution services largely satisfied inception investment ultimate amounts revenue subject variable consideration constraint accordingly portion distribution service revenue recognized periods subsequent satisfaction performance obligation certain fund share classes charge distribution services inception investment based fixed percentage share price fixed price allocated performance obligation substantially satisfied time initial investment recognition distribution service fee revenue updated guidance consistent prior revenue recognition process enter arrangements brokerdealers third parties sell market proprietary fund shares distribution servicing expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties recorded distribution servicing expense consolidated statements income distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers contract costs deferred sales commissions incur ordinary costs obtain investment management contracts services provided customers accordance investment management agreements costs include commissions paid wholesalers employees thirdparty broker dealers administration placement fees depending type services provided fees may paid time contract obtained ongoing basis updated guidance costs obtain contract capitalized costs incremental would incurred contract obtained costs fulfill contract capitalized relate directly contract costs generate enhance resources entity used satisfying performance obligations future costs expected recovered consistent prior accounting procedures fund launch costs including organizational underwriting costs placement fees commissions paid employees wholesalers brokerdealers sales fund shares expensed incurred costs would incurred regardless investor however commissions paid employees retail wholesalers connection sale retail separate accounts considered incremental fees relate obtaining specific contract calculated based specific rates recoverable management fees earned therefore capitalized updated accounting guidance commissions expensed incurred prior accounting practices capitalized sales commissions amortized based transfer services assets relate averages four years commissions pay financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc consideration generally variable based timing investors redeem investment therefore variable consideration included transaction price investors redeem shares satisfied point time cdsc receipts recorded distribution service fee revenue received reduction unamortized balance deferred sales commissions corresponding expense updated accounting guidance legg mason elected expense sales commissions related certain share classes amortization periods one year less incurred valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value equity investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income loss comprehensive income loss depending underlying purpose instrument effective april 1 2018 adopted updated accounting guidance prospective basis requires equity investments measured fair value changes recognized earnings guidance apply investments accounted equity method adoption updated guidance material impact consolidated financial statements equity investments control investee primary beneficiary vie exert significant influence financial operating policies investee follow equity method accounting evaluation whether exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence may governing board investee legal rights investors entity pursuant funds operating documents relationship us investors entity equity method investees investment companies record underlying investments fair value therefore equity method accounting share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense evaluate equity method investments impairment events changes circumstances indicate carrying value investment exceeds fair value decline fair value temporary investment securities value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2020 2019 owned 640 million 630 million respectively investments partnerships limited liability companies accounted equity method included noncurrent assets consolidated balance sheets 53 million 112 million respectively equity method investments included investment securities consolidated balance sheets amounts 431 million 421 million respectively valued based assumptions estimates unobservable inputs remainder valued using net asset value nav practical expedient discussed updated accounting guidance adopted april 1 2018 provides entities option elect measure equity investments readily determinable fair values qualify nav practical expedient adjusted cost adjusted cost method investments initially recorded cost subsequently adjusted increased decreased observable transaction involving investments similar investments issuer adjusted cost investment carrying values also reviewed adjusted impairment march 31 2020 2019 approximately 197 million 122 million respectively investments partnerships limited liability companies accounted using adjusted cost method accounting guidance fair value measurements disclosures defines fair value establishes framework measuring fair value accounting guidance defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance accounting guidance fair value measurements establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category includes fixed income securities certain proprietary fund investment products certain longterm debt level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds real estate funds category also includes certain proprietary fund investment products redemption restrictions contingent consideration liabilities valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety certain proprietary fund products certain investments held civs valued nav determined fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 nav practical expedient based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity funds real estate funds investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient rely navs certain investments partnerships limited liability companies fair value navs provided investees derived fair values underlying investments reporting date investments fair value measured using nav practical expedient required categorized within fair value hierarchy consolidated balance sheet march 31 2020 includes approximately 1 total assets 9 financial assets measured fair value less 1 total liabilities 19 financial liabilities measured fair value meet definition level 3 transfers categories measured beginning period see note 3 20 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2020 follows thousands identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds hedge funds fundsofhedge funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds hedge funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth andor attrition rates acquired contracts based upon historical experience factors estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weightedaverage cost capital takes consideration premium representing degree risk inherent asset fully described goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred perform quantitative tests include critical reviews significant assumptions determine intangible assets goodwill impaired qualitatively concluded likely respective fair values exceed related carrying values perform tests indefinitelife intangible assets goodwill annually details intangible assets goodwill related impairment tests follow performed annual impairment testing goodwill indefinitelife intangible assets october 31 2019 determined impairment value assets also reviewed critical valuation inputs december 31 2019 determine quantitative analyses warranted addition performed periodic impairment review amortizable intangible assets march 31 2020 given level market disruption associated covid19 assessed whether triggering event occurred identifiable indefinitelife intangible assets goodwill march 31 2020 certain indefinitelife intangible assets determined triggering events due combination significant market volatility uncertainty ensuing covid19 pandemic limited excess fair value related carrying values recent quantitative analyses october 31 2019 updated quantitative analyses indefinitelife intangible assets march 31 2020 determined impairment value assets discussed amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining economic lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates amortization periods longer appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows impairments values amortizable intangible assets recognized year ended march 31 2020 estimates related future cash flows exceeded asset carrying values march 31 2020 entrust global separate account contracts amortizable asset net carrying value 33 million represented approximately 30 total amortizable intangible asset management contracts aggregate carrying value cumulative undiscounted cash flows related asset exceeded carrying value approximately 3 march 31 2020 despite excess fair value related carrying value future decreases cash flow projections resulting actual results changes assumptions due client attrition related reduction revenues investment performance market conditions factors may result impairment asset assurance continued client attrition asset outflows market uncertainty factors produce additional impairment asset march 31 2020 clarion partners separate account contracts amortizable asset net carrying value 60 million represented approximately 55 total amortizable intangible asset management contracts aggregate carrying value march 31 2020 cumulative undiscounted cash flows related separate account contracts amortizable asset exceeded carrying value material amount estimated remaining useful lives amortizable intangible assets currently range one eight years weightedaverage life approximately 54 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined market participants perspective based projected discounted cash flows taking account values market participants would pay taxable transaction acquire respective assets two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names determine fair value intangible assets based upon discounted projected cash flows take consideration estimates future fees profit margins growth rates taxes discount rates determination fair values indefinitelife intangible assets highly dependent estimates changes inputs could result material impairment related carrying values asset determined impaired current fair value less recorded carrying value asset impaired difference current fair value carrying value asset reflected financial statements recognized operating expense period impairment determined exist contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth estimated net client flows projected market performance estimate projected cash flows projected growth rates affiliate used project aum cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income alternative liquidity investment manager based upon among things historical experience expectations future market investment performance internal external sources market growth assumptions recent annual impairment testing 45 equity 2 fixed income 3 alternative 0 liquidity products general assumption 2 organic growth products subject exceptions based recent trends organic growth contraction generally years one five starting point assumptions corporate planning process includes threeyear aum projections management operating affiliate consider specific business circumstances affiliate assumptions certain affiliates adjusted appropriate reflect market participant view beyond year three estimates move towards general organic growth assumption 2 appropriate affiliate asset class year 20 resulting cash flow growth rate year 20 held constant used project cash flows year 40 based projected aum affiliate asset class affiliate advisory fee rates applied determine projected revenues domestic mutual fund contracts projected revenues applied weightedaverage margin applicable affiliates manage aum margins based arrangements currently place affiliate projected operating income reduced appropriate tax rate calculate projected cash flows believe growth assumptions reasonable given consideration multiple inputs including internal external sources although assumptions subject change based fluctuations actual results market conditions assumptions also subject change due among factors poor investment performance one operating affiliates withdrawal aum clients changes business climate adverse regulatory actions loss key personnel consider risks development growth assumptions discount rates discussed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows process includes comparison actual results prior growth projections however differences actual results prior projections necessarily indicative need reassess estimates given discounted projected cash flow analyses include projections well beyond three years variances nearyears may offset subsequent years fair value assessments pointintime consistency fair value assessment indicators value reflect expectations market participants pointintime critical evidence soundness estimate value subsequent periods consider differences actual results prior projections considering reasonableness growth assumptions used current impairment testing discount rates based appropriately weighted estimated costs debt equity capital using market participant perspective estimate cost debt based published debt rates estimate cost equity capital based capital asset pricing model considers riskfree interest rate peergroup betas company equity risk premiums equity risk adjusted consider relative risk associated indefinitelife intangible asset reporting unit discount rates also calibrated based assessment relevant market values consistent standard valuation practices taxable transactions projected discounted cash flow analysis also factors tax benefit value appropriate tax benefit represents discounted tax savings third party purchased asset given valuation date would receive future tax deductions amortization purchase price 15 years domestic mutual fund contracts acquired citigroup asset management “cam” transaction 21 billion account approximately 65 indefinitelife intangible assets october 31 2019 approximately 163 billion aum primarily managed western asset clearbridge associated asset approximately 38 equity aum 48 fixed income aum 14 liquidity aum previously disclosed uncertainties regarding market conditions asset flows risks related potential regulatory changes liquidity business reflected projected discounted cash flow analyses despite relevant recent market activity given level excess fair value related carrying value recent impairment testing domestic mutual fund contracts asset deemed triggering event march 31 2020 october 31 2019 clarion partners fund management contracts asset 505 million accounted approximately 16 indefinitelife intangible assets based projected discounted cash flow analyses related fair value exceeded carrying value material amount despite relevant recent market activity given level excess fair value related carrying value recent impairment testing clarion partners fund management contracts asset deemed triggering event march 31 2020 october 31 2019 combined entrust global fund management contracts asset 127 million accounted approximately 4 indefinitelife intangible assets supported combined entrust global fund management business based projected discounted cash flow analyses related fair value exceeded carrying value 10 october 31 2019 impairment test base revenues related entrust global fund management contracts assumed longterm annual growth rates averaging 6 projected nearyear cash flows reflected aum outflows years one two trend modest aum inflows 2 year five projected cash flows entrust global fund management contracts discounted 155 given recent uncertain markets relatively limited excess fair value recent impairment test entrust global fund management contracts asset deemed triggering event march 31 2020 expanded recent analysis asset consider several different outcomes probabilityweighted basis scenario reflecting reduced revenue growth rates lower operating margins particularly near term based probabilityweighted analysis related fair value exceeded carrying value approximately 1 march 31 2020 october 31 2019 rare infrastructure fund management contracts asset 55 million accounted approximately 2 indefinitelife intangible assets based projected discounted cash flow analyses related fair value exceeded carrying value material amount impairment test cash flows rare infrastructure fund management contracts assumed longterm annual growth rates averaging 10 given current experience projected nearyear cash flows reflect reduced aum inflows throughout projection period modest performance fees projected cash flows rare infrastructure fund management contracts discounted 150 despite relevant recent market activity given level excess fair value related carrying value recent impairment testing rare infrastructure fund management contracts asset deemed triggering event march 31 2020 future decreases cash flow projections increases discount rate resulting actual results changes assumptions resulting flow aum levels investment performance market conditions factors may result impairment asset assurance asset flows market uncertainty factors produce impairment asset could significant october 31 2019 trade names accounted 1 indefinitelife intangible assets primarily related clarion partners entrust global carrying values 23 million 10 million respectively tested intangible assets using relief royalty approach discounted cash flow methods similar described indefinitelife contracts october 31 2019 resulting fair value entrust global trade name exceeded carrying value 6 resulting fair values trade name assets significantly exceeded related carrying amounts given recent uncertain markets relatively limited excess fair value recent impairment test entrust global trade name asset deemed triggering event tested using relief royalty approach march 31 2020 resulting fair value entrust global trade name asset exceeded carrying value 10 million approximately 3 goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition continue managed one global asset management operating segment internal management reporting discrete financial information regularly received chief operating decision maker chief executive officer consolidated global asset management business level result goodwill recorded evaluated one global asset management reporting unit level global asset management reporting unit consists operating businesses asset management affiliates centralized global distribution operations impairment testing process consolidated assets except certain tax benefits liabilities allocated single global asset management reporting unit similarly projected operating results reporting unit include holding company corporate costs overhead including interest expense costs associated executive management finance human resources legal compliance internal audit central corporate functions goodwill principally originated acquisitions cam permal royce martin currie rare infrastructure clarion partners entrust value reporting unit based part projected consolidated net cash flows including cash flows assets managed mutual funds closedend funds proprietary funds addition separate account assets managers significant assumptions used assessing implied fair value reporting unit discounted cash flow method consistent methodology discussed indefinitelife intangible assets also reporting unit level future corporate costs estimated consolidated projected operating results affiliates actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows discount rates based appropriately weighted estimated costs debt using market participant perspective also consistent methodology discussed indefinitelife intangible assets also perform marketbased valuation reporting unit value applies average ebitda multiples paid change control transactions peer companies ebitda results two estimates value reporting unit discounted cash flow ebitda multiple analyses compared significant differences assessed determine reasonableness value whether adjustment either result warranted values accepted appropriately weighted average two reporting unit valuations discounted cash flow ebitda multiple analyses used implied fair value global asset management reporting unit october 31 2019 exceeded carrying value 22 considering relative merits details involved valuation process used equal weighting two values 2019 testing significant assumptions used cash flow analysis included projected average annual cash flow growth rates 7 projected cash flows discounted 160 changes assumptions underlying projected cash flows reporting unit ebitda multiple resulting market conditions reduced aum factors could result impairment goodwill impairment could potentially material impact results operations financial condition assess accuracy reporting unit value determined valuation methods comparing results market capitalization determine implied control premium reasonableness implied control premium considered comparing control premiums paid relevant actual change control transactions assessment provides evidence underlying assumptions analyses reporting unit fair value reasonable calculating market capitalization purposes market volatility significant impact capitalization appropriate may consider average market prices stock period one two months test date determine market capitalization control premium arises fact acquisition typically premium paid current market prices publicly traded companies relates ability control operations acquired company assessments control premiums asset management industry difficult many acquisitions involve privately held companies involve portions public company control premium calculated recent market evidence regarding control premiums suggest values 173 average 24 based analysis consideration believe implied control premium 37 determined reporting unit value estimation october 31 2019 reasonable relation observed relevant market control premium values determined triggering event occurred goodwill march 31 2020 note share price reporting unit fair value significantly impacted covid19 result merger agreement franklin templeton per terms merger agreement franklin templeton acquire outstanding common stock 50 per share cash valuing total transaction approximately 45 billion approximates fair value reporting unit determined recent impairment testing reflected trading value legg mason common stock stockbased compensation stockbased compensation plans include restricted stock units stock options employee stock purchase plan espp market performancebased performance shares payable common stock affiliate management equity plans deferred compensation payable stock compensation plans issued equity awards directors officers key employees terms merger agreement may grant new awards amend modify terms outstanding awards stockbased compensation plans due limitation fiscal 2021 directors officers key employees issued deferred cash units subject accelerated vesting payment upon closing transaction lieu equity awards addition purchase shares espp ceased february 2020 espp terminate immediately prior closing date merger accordance applicable accounting guidance compensation expense years ended march 31 2020 2019 2018 includes compensation cost nonvested sharebased awards grant date fair value amortized respective vesting periods may reduced retirementeligible recipients straightline method merger agreement provides settlement outstanding equity awards vested unvested contingent upon merger closing settlement unvested awards accommodates franklin templetons acquisition legg mason therefore incur related accelerated compensation expense excess tax benefits deficiencies associated stockbased compensation recognized discrete items income tax provision benefit consolidated statements income loss reporting period occur may increase volatility income tax provision benefit result fluctuations stock price account forfeitures occur also cash flows related income tax deductions excess less related stockbased compensation expense classified cash flows operating activities consolidated statements cash flows granted 04 million stock options fiscal 2018 stock options granted fiscal 2020 fiscal 2019 determine fair value option grant using blackscholes optionpricing model requires management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate exception grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal expected life options estimate volatility equally weighted historical prices stock period equal expected life option implied volatility market listed options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes model used different type optionpricing model fair value option grants might different fiscal 2017 implemented affiliate equity management plan entitles certain key employees clarion partners participate 15 future growth affiliates enterprise value subject appropriate discounts subsequent date grant fiscal 2016 implemented affiliate management equity plan royce resulted issuance minority equity interests affiliate management team fiscal 2019 2017 2016 royce interests allow holders receive quarterly distributions affiliates net revenues amounts equal percentage ownership represented equity hold subordinate maintenance operating expenses equity interests fiscal 2014 also implemented management equity plan clearbridge granted units certain employees entitle participate 15 future growth respective affiliates enterprise value subject appropriate discounts determine fair value optionlike affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts requires management develop estimates regarding certain input variables inputs blackscholes model include baseline value dividend yield volatility expected term riskfree interest rate require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal expected life options estimate volatility equally weighted historical prices stock period equal expected life grant implied volatility market listed options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes model used different type optionpricing model fair value option grants might different however affiliates private companies without quoted stock prices utilize discounted cash flow analyses marketbased valuations similar discussed heading “intangible assets goodwill” determine respective business enterprise values subject appropriate discounts lack control marketability additional information stockbased compensation see notes 1 12 notes consolidated financial statements noncontrolling interests noncontrolling interests include affiliate minority interests thirdparty investor equity consolidated sponsored investment products vested affiliate management equity plan interests noncontrolling interests holder may able request settlement classified redeemable noncontrolling interests reported estimated settlement values except settlement values less issuance value reported amount issuance value settlement expected occur future date changes expected settlement values recognized settlement period adjustments retained earnings nonredeemable noncontrolling interests permit holder request settlement reported issuance value together undistributed net income loss allocated noncontrolling interests estimate settlement value noncontrolling interests fair value amounts affiliate minority interests affiliate management equity plan interests reported fair value reflect related total business enterprise value appropriate discounts lack marketability control may also features equity interests dividend subordination contemplated valuations fair value optionlike management equity plan interests also relies blackscholes option pricing model calculations noted affiliate noncontrolling interests subsequent acquisition business enterprise values derived using various methods including discounted cash flows guideline public company guideline public transaction methods may engage thirdparty valuation experts perform independent determinations fair value review internally prepared valuations appropriate based relative significance related amounts related contractual provisions changes valuation inputs consolidated sponsored investment products investor may request withdrawal time fair value based market quotes underlying securities held investment vehicles income taxes subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions relevant jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision benefit financial statement purposes substantially deferred tax assets relate us federal state uk taxing jurisdictions march 31 2020 us federal deferred tax assets aggregated 627 million realization expected require 32 billion us earnings next eight years approximately 349 million must foreign sourced earnings deferred tax assets generated us jurisdictions resulting net operating losses generally expire 20 years generated resulting foreign tax credits generally expire 10 years generated based estimates future taxable income using assumptions similar used goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realized respect resulting foreign tax credit carryforwards likely tax benefits relating utilization approximately 24 million foreign taxes credits realized valuation allowance established estimates assumptions contemplate changes ownership legg mason stock could certain circumstances limit utilization net operating loss foreign tax credit benefits limitation would impact timing amount net operating loss foreign tax credit benefits ultimately realized expire march 31 2020 us state deferred tax assets aggregated 238 million offset valuation allowance 92 million primarily related state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized due variability future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary foreign jurisdictions net decrease valuation allowances 38 million fiscal 2020 primarily related current year increases carried forward uk interest deductions offset part unrealized gainslosses pension liabilities extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals well available planning strategies value measure realizability deferred tax assets event determine portion deferred tax assets already subject valuation allowance realizable required establish valuation allowance charge income tax provision period determination made values deferred tax assets based enacted corporate tax rates future period tax attributes anticipated realized legislative changes rates would require remeasurement deferred tax assets period enactment depending facts circumstances charge could material earnings calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations executive overview legg mason inc holding company subsidiaries collectively comprise “legg mason” global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally united states america united kingdom also offices australia bahamas brazil canada chile china dubai france germany italy japan luxembourg poland singapore spain taiwan operate one reportable business segment asset management three divisions managed investments institutional wealth management managed investments primarily engaged providing investment advisory services proprietary investment funds retail separately managed account programs institutional focuses providing asset management services institutional clients wealth management primarily focused providing asset management services high net worth individuals families endowments includes fundsofhedge funds business see note 19 notes consolidated financial statements additional information regarding aggregation operating segments financial reporting purposes operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution service fees received distributing investment products services providing support services investment portfolios generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level assets management thus affected factors securities market conditions ability attract maintain assets management key investment personnel investment performance fees charge investment services vary based upon factors type underlying investment product amount assets management type services investment objectives provided fees charged equity asset management services generally higher fees charged fixed income liquidity asset management services accordingly revenues affected composition assets management addition ordinary course business may reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets revenue sharing agreements subsidiaries retain different percentages revenues cover costs including compensation net income profit margin compensation percentage operating revenues impacted based subsidiaries generate revenues change assets management one subsidiary dramatically different effect revenues earnings equal change another subsidiary significant component cost structure employee compensation benefits majority variable nature includes incentive compensation primarily based upon revenue levels profits next largest component cost structure distribution servicing fees primarily fees paid third party distributors selling asset management products services largely variable nature certain operating costs fixed nature occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly united states increasingly countries operate results individual period considered representative future results profitability sensitive variety factors including amount composition assets management volatility general level securities prices interest rates among things sustained periods unfavorable market conditions likely affect profitability adversely addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients past decade experienced substantial expansion due internal growth strategic acquisition asset management firms provided among things broader range investment expertise additional product diversification increased assets management financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms brokerdealers commercial banks industry affected consolidation financial services firms mergers acquisitions industry operate also subject extensive regulation federal state foreign laws like firms impacted regulatory legislative changes postenron era responding changes required us incur costs continue impact profitability much fiscal 2008 continuing thereafter fixed income markets endured substantial turmoil one effect turmoil liquidity markets many types asset backed commercial paper medium term notes issued structured investment vehicles “sivs” became substantially reduced result entered several transactions fiscal year provide support liquidity funds managed asset managers invested sivissued securities transactions resulted aggregate charges fiscal year 2008 6083 million 3137 million net income taxes compensation related adjustments december 1 2005 completed strategic acquisition become pure asset management company transferred private client capital markets businesses “pccm” citigroup inc “citigroup” portion consideration exchange substantially citigroup’s asset management business “cam” prior closing transaction reported pccm businesses separate business segments however businesses included discontinued operations fiscal 2006 described effective november 1 2005 also purchased permal group ltd “permal” leading global fundsofhedge funds manager expand global asset management business see notes 2 3 notes consolidated financial statements additional information related transaction citigroup acquisition permal result sale pccm businesses citigroup distribution fees earned companysponsored investment funds reported continuing operations distribution fee revenue substantial portion passed third parties including parties related prior sale distribution servicing expense periods presented reflect change discontinued operations result sale pccm businesses fiscal 2006 results private client capital markets segments reflected discontinued operations private client distributed wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds feebased account fees net interest customers’ margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets consisted equity fixed income institutional sales trading corporate public finance primary sources revenue equity fixed income institutional sales trading included commissions principal credits transactions corporate municipal products maintained proprietary fixed income equity securities inventories primarily facilitate customer transactions result recognized trading profits losses trading activities corporate finance revenues included underwriting fees advisory fees private placements mergers acquisitions sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also included realized unrealized gains losses investments acquired connection merchant investment banking activities references fiscal 2008 2007 2006 refer fiscal year ended march 31 year terms “we” “us” “our” “company” refer legg mason business environment results operations financial environment globally united states volatile fiscal 2008 challenging market conditions persisted throughout fiscal year continued contraction worldwide credit markets due part subprime lending issues began summer 2007 weaker us dollar major writedowns related credit crisis within financial sector record high oil prices continued concern investors state us global economies result three major us equity market indices declined fiscal year dow jones industrial average1 nasdaq composite index2 sp 5003 1 6 7 respectively fiscal year addition fiscal 2008 federal reserve reduced federal funds rate 225 march 31 2008 525 year ago effort ease impact credit crisis financial environment operate continues challenging moving fiscal 2009 expect challenges presented credit markets persist throughout next fiscal year cannot predict uncertainties impact company’s results 1 dow jones industrial average trademark dow jones company affiliated legg mason 2 nasdaq trademark nasdaq stock market inc affiliated legg mason 3 sp trademark standard poor’s division mcgrawhill companies inc affiliated legg mason following table sets forth periods indicated items consolidated statements income percentage operating revenues increase decrease item percentage amount previous period nmnot meaningful 1 calculated based change actual amounts fiscal years percentage prior year amount fiscal 2008 compared fiscal 2007 financial overview fiscal 2008 entered several transactions provide support certain liquidity funds held securities issued sivs managed subsidiary transactions resulted aggregate charges fiscal year 6083 million also fiscal 2008 impairment charge 1510 million recorded reduction value certain acquired management contract intangible assets net income year ended march 31 2008 totaled 2676 million 186 per diluted share decrease 59 58 respectively prior year cash income continuing operations see supplemental nongaap financial information 4685 million 325 per diluted share representing decrease 45 prior year decreases primarily due net losses related liquidity fund support net income tax benefits compensation related adjustments 3137 million 218 per diluted share impairment charge net income tax benefits 948 million 066 per diluted share pretax profit margin continuing operations declined 96 240 prior year pretax profit margin continuing operations adjusted see supplemental nongaap financial information declined 132 332 prior year fiscal 2008 losses related liquidity fund support impairment charge reduced pretax profit margin 110 33 respectively reduced pretax profit margin adjusted 151 45 respectively assets management components changes assets management “aum” billions years ended march 31 follows aum march 31 2008 9501 billion decrease 184 billion 2 march 31 2007 net client cash outflows fiscal year 263 billion driven outflows equity assets approximately 44 billion resulting part lower relative investment performance partially offset approximately 15 billion 3 billion fixed income liquidity inflows respectively due part investment performance experienced net equity outflows quarter since september 2006 quarter generally earn higher fees profits equity aum outflows asset class negatively impact revenues net income would outflows asset classes aum asset class aum asset class billions march 31 follows average aum asset class billions year ended march 31 follows aum division aum division billions march 31 follows component changes aum division billions year ended march 31 2008 follows assets managed us domiciled clients accounted 66 67 total assets managed nonus domiciled clients represented 34 33 total assets managed march 31 2008 2007 respectively revenue division operating revenues division millions years ended march 31 follows increase operating revenues managed investments division primarily due increased mutual fund revenues western asset management company “western asset” royce associates llc “royce” partially offset decreased mutual fund revenues clearbridge advisors llc “clearbridge” increase operating revenues institutional division primarily due increased separate account revenues western asset brandywine global investment management llc “brandywine” partially offset decreased performance fees western asset increase operating revenues wealth management division primarily due increased revenues distribution service fees performance fees permal partially offset decreased separate account revenues private capital management lp “pcm” results operations operating revenues continuing operations year ended march 31 2008 46 billion 7 43 billion prior year primarily result 9 increase average aum principally liquidity fixed income asset classes investment advisory fees separate accounts increased 1 187 million 146 billion primarily result higher average assets managed western asset brandywine batterymarch financial management inc offset part decline advisory fees due lower average assets managed pcm clearbridge investment advisory fees funds increased 15 23 billion primarily result increase average assets managed permal western asset royce increases partially offset decrease average assets managed clearbridge performance fees decreased 7 95 million 1327 million fiscal 2008 primarily result decreases performance fees earned western asset legg mason capital management inc “lmcm” partially offset increase performance fees earned permal distribution service fees decreased 3 6923 million primarily result decline average aum retail share classes domestic equity funds operating expenses compensation benefits remained flat 16 billion increased revenueshare based incentive expense higher revenues along higher salary benefits certain subsidiaries substantially offset incentive expense reductions related charges provide support certain liquidity funds hold sivissued securities see note 18 notes consolidated financial statements discussion charges related liquidity business compensation percentage operating revenues 339 fiscal 2008 361 fiscal 2007 primarily result reduction compensation resulting adjustments related liquidity fund support distribution servicing expenses increased 7 13 billion primarily result increased average aum permal liquidity assets pay higher relative fees third party distributors communications technology expense increased 11 1928 million primarily result increased depreciation expense technology maintenance expenditures related investment management business continuity infrastructure office relocations occupancy expense increased 29 1294 million primarily result higher rent new office locations impact duplicate rent facilities relocation periods expense impairment management contracts 1510 million representing writedown certain acquired management contracts result accelerated rate client attrition previously estimated see note 6 notes consolidated financial statements discussion impairment management contracts operating expenses increased 1 2099 million driven primarily increased promotional expenses offset part decreased expenses transition services agreement citigroup related integration businesses acquired citigroup prior year losses disposal certain fixed assets result office relocations income expense interest income increased 180 million 769 million primarily result higher average firm investment account balances offset part decline average interest rates earned balances interest expense increased 112 million 827 million due 500 million new borrowings 10 billion unsecured revolving credit facility issuance 125 billion convertible senior notes january 2008 offset part 150 million principal reduction made 700 million term loan nonoperating income expense decreased 6287 million loss 6005 million primarily result losses related liquidity fund support approximately 6073 million excludes 10 million financing costs included interest expense see note 18 notes consolidated financial statements additional information provision income taxes provision income taxes decreased 56 1760 million primarily result lower earnings due losses related liquidity fund support impairment acquired management contract assets recorded current year effective tax rate increased 397 381 prior year primarily reflecting increase earnings higher state income tax rate jurisdictions result impairment liquidity fund support charges lower relative state income tax rates supplemental nongaap financial information cash income continuing operations supplemental information providing performance measure based methodology generally accepted accounting principles “nongaap” “cash income continuing operations” management uses benchmark evaluating comparing periodtoperiod operating performance legg mason inc subsidiaries define “cash income continuing operations” income continuing operations plus amortization deferred taxes related intangible assets believe cash income continuing operations provides good representation operating performance adjusted noncash acquisition related items facilitates comparison results asset management firms engaged significant acquisition transactions also believe cash income continuing operations important metric estimating value asset management business considering acquisitions often calculate target firm’s cash earnings metric estimating value measure provided addition income continuing operations substitute income continuing operations may comparable nongaap performance measures including measures cash earnings cash income companies cash income continuing operations liquidity measure used place cash flow measures determined gaap consider cash income continuing operations useful investors important metric measuring economic performance asset management companies indicator value facilitates comparisons operating results asset management firms engaged significant acquisitions calculating cash income continuing operations add impact amortization intangible assets acquisitions management contracts income continuing operations reflect fact noncash expense makes difficult compare operating results asset management firms engaged significant acquisitions deferred taxes indefinitelife intangible assets goodwill represent actual tax benefits realized gaap absent impairment charge disposition related business actually receive tax benefits indefinitelife intangible assets goodwill add income calculation cash income continuing operations disposition impairment charge indefinitelife intangible assets goodwill occur impact cash income continuing operations may distort actual changes operating performance value firm accordingly monitor changes indefinitelife intangible assets goodwill related impact cash income continuing operations ensure appropriate explanations accompany disclosures cash income continuing operations although depreciation amortization fixed assets noncash expenses add charges calculating cash income continuing operations charges related assets ultimately require replacement reconciliation income continuing operations cash income continuing operations thousands except per share follows decrease cash income continuing operations fiscal 2008 primarily due net losses related liquidity fund support 3137 million 218 per diluted share impairment management contracts net income tax benefits 948 million 066 per diluted share pretax profit margin continuing operations adjusted believe pretax profit margin continuing operations adjusted distribution servicing expense useful measure performance indicates margins would without distribution revenues passed third parties direct cost selling products thus shows effect revenues margins measure provided addition company’s pretax profit margin continuing operations calculated gaap substitute calculations margin gaap may comparable nongaap performance measures including measures adjusted margins companies reconciliation pretax profit margin continuing operations adjusted distribution servicing expense thousands follows fiscal 2008 losses related liquidity fund support impairment management contracts reduced pretax profit margin 110 33 respectively reduced pretax profit margin adjusted 151 45 respectively fiscal 2007 compared fiscal 2006 since strategic transaction citigroup completed december 1 2005 acquired cam business sold pccm businesses retroactively reflected results operations pccm businesses discontinued operations fiscal 2006 effective november 1 2005 completed acquisition permal result acquisitions results continuing operations fiscal 2007 include full year results cam permal results continuing operations fiscal 2006 include four months results cam five months results permal assets management aum march 31 2007 9685 billion 1009 billion 12 march 31 2006 net client cash inflows fiscal year 442 billion representing 5 aum march 31 2006 driven approximately 27 billion client inflows fixed income liquidity assets client outflows equity assets resulting part lower relative investment performance approximately 10 billion generally earn higher fees profit margins equity aum outflows asset class disproportionately impact revenues net income components changes aum billions years ended march 31 follows average aum years ended march 31 2007 2006 9058 billion 5469 billion respectively significant increase due impact full year cam acquisition aum asset class billions march 31 follows aum division billions march 31 follows components changes aum division billions years ended march 31 2007 follows assets managed us domiciled clients accounted 67 68 total assets managed nonus domiciled clients represented 33 32 total assets managed march 31 2007 2006 respectively assets managed nonus domiciled clients march 31 2006 revised include 193 billion assets previously included assets managed us domiciled clients principally nonus domiciled funds revenue division operating revenues division millions years ended march 31 follows 1 fiscal 2006 includes reclassification approximately 294 million 46 million institutional wealth management divisions respectively managed investments division reflect change whereby revenues generated proprietary funds except managed permal included managed investments division increases operating revenues managed investments institutional divisions primarily due including full year’s results cam increase operating revenues wealth management division primarily due including full year’s results permal including growth since acquisition offset part decreases pcm following discussion separately addresses results continuing operations results discontinued operations results continuing operations operating revenues continuing operations year ended march 31 2007 43 billion 64 26 billion prior year primarily result including full year’s results cam permal including permal’s growth since acquisition combined accounted approximately 90 increase revenues higher average aum reflecting favorable market conditions net client cash flows also contributed increase investment advisory fees separate accounts increased 31 14 billion primarily result acquisition cam accounted approximately 80 increase well higher aum western asset brandywine lmcm offset part decline advisory fees due lower average assets managed pcm investment advisory fees funds increased 103 20 billion approximately 90 increase attributable acquisitions cam permal including permal’s growth since acquisition performance fees increased 40 1422 million fiscal 2007 primarily result 319 million increased fees earned permal distribution service fees increased 68 7164 million approximately 75 increase due addition fees earned cam addition distribution service fees permal contributed approximately 10 increase operating expenses compensation benefits increased 39 16 billion primarily result addition compensation costs acquired businesses increased revenue sharebased incentive expense higher revenues certain subsidiaries compensation percentage operating revenues 361 year ended march 31 2007 426 primarily result higher revenues revenue share entities including revenues transferred acquired entities retain lower percentage revenues compensation decrease transactionrelated compensation transactionrelated compensation costs primarily include recognition previously deferred compensation cam employees prior citigroup plans accruals retention compensation transitional cam employees costs severance cam included purchase price allocation reflected results operations compensation percentage revenues also decreased result significant increase fund revenues substantial portion passed third parties distribution servicing expense distribution servicing expenses increased 113 12 billion approximately 80 increase resulting addition acquired businesses majority distribution servicing expenses paid citigroup primary distributor communications technology occupancy amortization intangible assets expenses increased primarily result full year expenses related cam operations increase expenses primarily travel professional fees advertising costs litigation award settlement fiscal 2006 reflects reversal 82 million charges recorded fiscal 2004 result settlement civil copyright infringement lawsuit income expense interest income increased 109 million 589 million primarily result higher average interest rates earned higher average firm investment account balances interest expense increased 188 million 715 million primarily due impact full year interest expense 700 million term loan issued finance acquisition cam offset part repayment maturity 100 million senior notes fiscal 2006 conversion zerocoupon contingent convertible senior notes common stock income decreased 123 million 281 million result investments held variable interest entities “vies” longer consolidated offset part corresponding minority interests provision income taxes provision income taxes increased 443 3976 million primarily result increase income continuing operations effective tax rate decreased 381 385 prior year primarily reflecting increased revenues earnings foreign jurisdictions lower effective tax rates net income diluted earnings per share declined 43 6468 million 49 448 respectively prior year result aftertax gain sale pccm businesses 6440 million 494 per diluted share recognized prior year income continuing operations totaled 6462 million 49 prior year income continuing operations per diluted share increased 34 448 despite 11 increase weighted average diluted shares outstanding cash income continuing operations see supplemental nongaap financial information rose 59 fiscal year 8454 million 586 per diluted share 5321 million 410 per diluted share primarily due including full year’s results cam permal pretax profit margin continuing operations declined 240 270 prior year primarily result addition full year’s results cam permal increases distribution revenues substantial portion passed third parties distribution servicing expense increase noncompensation related expenses offset part decreases compensation benefits percent revenue due part higher revenue sharebased incentive expense higher revenues certain subsidiaries retain lower percentage revenues compensation transactionrelated compensation nonoperating income pretax profit margin continuing operations adjusted see supplemental nongaap financial information declined 332 343 prior year primarily result increase noncompensation related expenses decrease nonoperating income offset part reduced compensation benefits percent total revenue transactionrelated compensation year ended march 31 2006 income discontinued operations net tax totaled 664 million diluted earnings per share discontinued operations 051 supplemental nongaap financial information reconciliation income continuing operations cash income continuing operations thousands except per share follows 1 increase prior year primarily relates deferred income taxes intangible assets goodwill acquired entities full fiscal year reconciliation pretax profit margin continuing operations adjusted distribution servicing expense thousands follows results discontinued operations income discontinued operations net tax year ended march 31 2006 664 million 051 per diluted share gain sale discontinued operations net tax fiscal 2007 2006 06 million 6440 million respectively gain sale discontinued operations impact earnings per share fiscal 2007 responsible 494 per diluted share fiscal 2006 financial results discontinued operations business segment thousands follows 1 represents distribution fees proprietary mutual funds historically reported private client reclassified asset management distribution fee revenue corresponding distribution expense reflect legg mason’s continuing role funds’ distributor liquidity capital resources primary objective capital structure funding practices appropriately support business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations fiscal 2008 entered series arrangements provide approximately 2 billion financial support certain liquidity funds managed asset managers invested asset backed commercial paper medium term notes issued sivs arrangements described liquidity fund support section overall funding needs capital base continually reviewed determine capital base meets expected needs businesses order ensure adequate resources liquidity fund support transactions well general corporate purposes increased capital base 125 billion sale 25 convertible senior notes intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may time involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt assets consist primarily intangible assets goodwill cash equivalents securities purchased agreements resell investment advisory related fees receivables assets principally funded equity capital longterm debt investment advisory fee receivables shortterm nature collectibility reasonably certain excess cash generally invested institutional money market funds governmental money market funds commercial paper repurchase agreements highly liquid nature current assets provides us flexibility financing managing anticipated operating needs liquidity fund support fiscal 2008 entered series arrangements provide approximately 2 billion financial support certain liquidity funds march 31 2008 support amounts related cash collateral thousands follows 1 included current restricted cash consolidated balance sheet 2 pertains citi institutional liquidity fund plc usd fund prime cash reserves portfolio 3 pertains citi institutional liquidity fund plc usd fund 4 pertains legg mason western asset canadian money market fund 5 pertains citi institutional liquid reserves portfolio series master portfolio trust 6 securities issued sivs letters credit november 2007 entered arrangements two large banks provide letters credit “locs” aggregate amount approximately 335 million benefit two liquidity funds managed one subsidiaries discussed note 18 notes consolidated financial statements part loc arrangements agreed reimburse banks amounts may drawn locs support agreement provided approximately 286 million cash collateral march 31 2008 march 7 2008 elected procure loc large bank support another fund’s holdings certain sivissued securities march loc provides support 150 million supported 150 million excess capacity 1 billion revolving credit facility locs may drawn certain circumstances including upon fund’s realizing loss disposition restructuring underlying siv securities upon agreement’s termination unpaid amounts remain underlying securities certain circumstances upon ratings downgrades issuing bank addition terms march loc require fund sell underlying securities continues hold loc’s expiration draw loc makeup losses sale locs terminate later one year date origination capital support agreements november 2007 entered capital support agreement “csa” one liquidity funds discussed pursuant agreed provide 15 million capital contributions fund recognizes losses certain investments continues hold underlying securities expiration oneyear term agreement applicable time fund’s net asset value less specified threshold march 31 2008 also entered csas another fund make capital contributions fund realizes loss sale certain events relating two sivissued securities portfolio make maximum 400 million contributions fund march csas fully collateralized obligation csas terminate later one year date origination march csa requires fund sell securities termination still holds utilize csa cover losses total return swap december 2007 reduced dublindomiciled fund holdings sivissued securities total return swap discussed note 18 notes consolidated financial statements total return swap pay bank counterparty “bank” losses including losses incurred sale securities principal repaid maturity bank incurs ownership securities return purchase price paid underlying securities equal onemonth libor rate plus 1 bank pay us principal interest receives securities excess price paid securities total return swap arrangement terminates november 2008 however may elect earlier terminate total return swap arrangement time bank may elect early termination total return swap arrangement certain circumstances including event material adverse effect business financial condition credit ratings senior debt reduced bbb standard poor’s baa2 moody’s investors service maintain consolidated basis least 250 million aggregate cash equivalents plus amounts available borrowed revolving credit facilities upon termination total return swap arrangement outstanding securities sold market prices responsible reimburse bank losses bank incurs sale maximum future amount could required pay total return swap arrangement would aggregate price paid bank securities 832 million plus financing costs connection total return swap reimbursed dublindomiciled fund 595 million provided 1395 mil lion cash collateral terms total return swap may increased decreased based changes value upon maturities underlying securities purchase nonbank sponsored sivs december 2007 purchased cash aggregate 132 million principal amount nonbank sponsored siv securities dublindomiciled liquidity fund january 2008 may 2008 approximately 50 million 82 million respectively principal amount securities matured paid full purchase canadian conduit securities december 2007 acquired cash aggregate 98 million principal amount conduit securities issued canadian asset backed commercial paper issuers provide liquidity support canadian liquidity fund locs csas total return swap expire coming ten months may required provide substantial amounts funds banks still hold underlying securities expiration time may elect provide additional credit support liquidity funds managed subsidiaries deem action necessary appropriate future may required use additional cash pay support collateral pledge cash investment funds restrict ability use cash purposes together future uses cash provide additional support reduce flexibility use assets corporate purposes including debt repayments stock repurchases acquisitions financing transactions table reflects primary sources financing thousands march 31 2008 1 150 million available 500 million reserved connection loc amount support certain sivissued holdings proprietary liquidity funds january 2008 increased capital base 125 billion sale 25 convertible senior notes affiliate kohlberg kravis roberts co proceeds strengthened balance sheet providing additional liquidity used general corporate purposes including support key business initiatives potential future acquisitions purchase retire convertible preferred stock connection financing entered economic hedging transactions increase effective conversion price notes hedging transactions net cost us 83 million paid proceeds notes transaction closed january 31 2008 used approximately 180 million capital raised purchase retire preferred stock convertible 25 million shares common stock november 2007 borrowed aggregate 500 million unsecured revolving credit facility general corporate purposes facility matures october 14 2010 may prepaid time contains customary covenants default provisions january 3 2008 amended credit agreement increase maximum amount may borrow 500 million 1 billion march 7 2008 elected procure loc support 150 million certain sivissued holdings liquidity fund facility see previous discussion liquidity fund support included outstanding debt 425 million principal amount senior notes due july 2 2008 bear interest 675 notes issued discount yield 680 425 million principal amount senior notes reclassified current portion longterm debt september 2007 quarter accreted balance march 31 2008 425 million fiscal 2006 holders zerocoupon contingent convertible notes aggregating 480 million principal amount maturity converted notes approximately 55 million shares common stock fiscal 2007 remaining outstanding zerocoupon contingent convertible senior notes converted 756 thousand shares common stock may 2008 issued 115 billion equity units unit consisting 5 interest 1000 principal amount senior notes due june 30 2021 interest payable quarterly annual rate 56 purchase contract committing holder purchase shares common stock june 30 2011 holders also receive quarterly contract adjustment payment purchase contract annual rate 14 required pledge interests senior notes us collateral purchase commitment net proceeds equity units offering approximately 111 billion used general corporate purposes may include support liquidity funds managed subsidiaries financing acquisitions repayment outstanding debt december 2007 quarter fitch ratings moody’s investors service changed outlook senior unsecured debt negative stable result firm’s support liquidity funds april 2008 standard poor’s rating services revised outlook rating legg mason stable positive debt ratings march 31 2008 moody’s investors service standard poor’s rating services fitch ratings a2 bbb respectively december 1 2005 completed acquisition cam exchange outstanding stock subsidiaries constituted pccm businesses ii 5393545 shares common stock 13346632 shares nonvoting convertible preferred stock convertible upon transfer 13346632 shares common stock iii 512 million cash borrowed 700 million fiveyear syndicated term loan facility terms agreement paid postclosing purchase price adjustment 847 million citigroup september 2006 based retention certain aum nine months closing since contingent payment paid available cash unsecured 5year 300 million floatingrate credit agreement entered fund obligation terminated accordance terms fiscal 2008 2006 issued approximately 553 million 496 million common shares respectively upon conversion approximately 553 496 shares respectively convertible preferred stock issued cam acquisition fourth quarter fiscal 2008 repurchased 25 shares convertible 25 million common shares convertible preferred stock approximately 180 million cash october 14 2005 entered syndicated fiveyear 700 million unsecured floatingrate term loan agreement primarily fund cash portion purchase price citigroup transaction closing borrowed 600 million 512 million used fund cash portion purchase remainder used fund acquisitionrelated expenses remaining 100 million 700 million loan facility drawn february 2006 additional acquisition related costs effective closing citigroup transaction entered 400 million threeyear amortizing interest rate swap “swap” hedge portion 700 million floating rate term loan fixed rate 49 march 2007 quarter swap began unwind repaid corresponding 50 million debt fiscal 2008 repaid 100 million debt outstanding balance facility 550 million march 31 2008 remaining unamortized balance swap 150 million also connection citigroup transaction one subsidiaries borrower 364day promissory note 832 million fiscal year ended march 31 2007 paid available cash balance outstanding note effective november 1 2005 acquired 80 outstanding equity permal concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares resulting legg mason owning 100 outstanding voting common stock permal right purchase preference shares four years subsequent closing right exercised holders equity interests right require us purchase interests general time frame approximately consideration aggregate consideration paid us closing 800 million 200 million form 1889322 newly issued shares common stock remainder cash funded cash portion acquisition existing cash accordance terms transaction acquired preference shares representing additional 75 ownership interest permal december 31 2007 quarter anticipated acquire remaining 125 four years initial closing prices based permal’s revenues maximum aggregate price including earnout payments related purchase based upon future revenue levels equity interests permal 1386 billion 961 million minimum price excluding acquisition costs dividends fiscal 2008 contingent acquisition payments 240 million made former owners permal 208 million paid cash balance common stock remaining minimum obligation 81 million march 31 2008 payable november 2011 unless earned earlier agreements provide additional consideration 265 million based permal’s future revenues earnings may elect deliver 25 future payments form shares common stock addition fiscal 2008 2007 paid approximately 12 million period dividends preference shares pay minimum 15 million dividends preference shares next 2 years fiscal 2008 initiated plan repatriate accumulated earnings approximately 225 million certain foreign subsidiaries order replenish funds used contingent acquisition payment us former owners permal repatriated approximately 36 million funds fiscal 2008 august 1 2001 purchased pcm cash approximately 682 million excluding acquisition costs transaction included two contingent payments based pcm’s revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion fiscal 2005 made maximum third anniversary payment 400 million former owners pcm fiscal 2007 paid available cash maximum fifth anniversary payment 300 million accrued liability corresponding increase goodwill march 31 2006 payment subject certain limited clawback provisions fiscal 2010 february 26 2008 announced definitive agreement citigroup global markets inc affiliate citigroup would acquire majority overlay implementation business legg mason private portfolio group includes managed account trading technology platform sale closed april 1 2008 cash proceeds approximately 181 million received march 31 2008 total assets stockholders’ equity 118 billion 66 billion respectively fiscal 2008 stockholders’ equity increased approximately 790 million primarily due net income stock option exercises offset share repurchases dividend payments year ended march 31 2008 cash equivalents increased 2799 million 118 billion march 31 2007 146 billion march 31 2008 excludes 6046 million securities purchased agreements resell 8517 million restricted cash flows operating activities provided 9644 million primarily attributable net income adjusted noncash items purchases trading securities cash flows investing activities used 19 billion primarily attributable funding restricted cash related liquidity fund support transactions discussed note 18 notes consolidated financial statements securities purchased agreements resell permal contractual acquisition payment payments leasehold improvements office relocations financing activities provided 12 billion primarily due proceeds issuance 25 convertible senior notes shortterm borrowings unsecured revolving credit facility offset part dividend payments repayment principal longterm debt common preferred stock repurchases addition 115 billion equity units discussed expect cash flows provided operating activities cash hand primary sources working capital next year fiscal 2002 board directors previously authorized us discretion purchase 30 million shares common stock june 2007 quarter repurchased 40150 shares 40 million july 19 2007 board directors authorized us repurchase time 50 million shares common stock replace previous share repurchase authorization january 2008 board directors also authorized us repurchase nonvoting convertible preferred stock representing 4 million shares common stock proceeds convertible senior notes discussed february 2008 repurchased retired preferred stock convertible 25 million shares common stock 180 million also fiscal 2008 repurchased 11 million shares common stock 94 million new authorization addition 40150 shares repurchases fiscal 2007 2006 fiscal 2008 2007 2006 paid cash dividends 1328 million 1099 million 786 million respectively anticipate continue pay quarterly dividends repurchase shares discretionary basis certain asset management subsidiaries maintain various credit facilities general operating purposes see notes 7 8 notes consolidated financial statements additional information certain subsidiaries also subject capital requirements various regulatory agencies subsidiaries met respective capital adequacy requirements offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission “sec” include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations contingent payments section follows special purpose variable interest entities liquidity fund support notes 1 17 18 notes consolidated financial statements previously discussed fiscal 2008 entered various offbalance sheet arrangements provide support certain liquidity funds arrangements include letters credit capital support agreements total return swap fully described note 18 notes consolidated financial statements january 2008 entered hedge warrant transactions convertible notes certain financial institution counterparties increase effective conversion price convertible senior notes see note 8 notes consolidated financial statements contractual obligations contingent payments contractual obligations make future payments connection longterm debt noncancelable lease agreements addition described liquidity capital resources made expect make contingent payments business purchase agreements see notes 7 8 10 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual contingent obligations millions fiscal year contractual contingent obligations march 31 2008 1 coupon interest floating rate longterm debt based rates march 31 2008 2 amount commitments reflected year represents maximum amount could payable earliest possible date terms agreements 3 amount contingent payments reflected year represents maximum amount could payable earliest possible date terms business purchase agreements 4 table include approximately 506 million capital commitments investment partnerships legg mason limited partner obligations funded required end commitment periods range fiscal 2009 2011 5 table include amounts uncertain tax positions 211 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated 6 table include obligations 485 million letters credit 415 million capital support agreements total return swap 890 million see note 18 notes consolidated financial statements additional information regarding commitments restructuring charges connection cam transaction incurred costs restructuring business combined entities see note 2 notes consolidated financial statements market risk management committee oversees coordinates risk management activities legg mason subsidiaries addition certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income majority revenue calculated market value aum accordingly decline value securities cause aum decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts performance fees may earned certain investment advisory contracts exceeding performance benchmarks declines market values aum underperformance advisory contracts versus applicable performance benchmarks result reduced fee revenues net income generally earn higher fees equity assets fees charged fixed income liquidity assets declines market values aum asset class disproportionately impact revenues addition revenue sharing agreements subsidiaries retain different percentages revenues cover costs including compensation net income profit margin compensation percentage operating revenues impacted based subsidiaries generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary trading nontrading assets liabilities trading nontrading assets liabilities comprised investment securities including seed capital sponsored mutual funds products securities issued sivs conduit investments derivative instruments limited partnerships limited liability companies certain investment products entered series arrangements provide credit support certain liquidity funds beginning november 2007 arrangements include letters credit capital support agreements purchase securities issued sivs conduits substantially increase exposure risk security price fluctuations fund support arrangements related risks discussed trading assets march 31 2008 2007 subject risk security price fluctuations summarized thousands approximately 1698 million 1537 million trading investments related longterm incentive compensation plans march 31 2008 2007 respectively offsetting liabilities fluctuation market value assets related liabilities material effect net income liquidity however may impact compensation expense corresponding offset nonoperating income trading investments 375 million 380 million march 31 2008 2007 respectively relate longterm incentive plans related liabilities completely offset due vesting provisions therefore fluctuations market value trading investments impact nonoperating income net income approximately 1403 million 815 million trading assets march 31 2008 2007 respectively investments proprietary fund products investments fluctuations market value impact nonoperating income net income investments proprietary fund products liquidated related fund establishes track record investors remaining trading assets include 1415 million march 31 2008 investments issued sivs acquired liquidity funds subsidiary manages 820 million matured paid full may 2008 fair value trading assets also fluctuate market changes impact nonoperating income net income nontrading assets liabilities march 31 2008 2007 subject risk security price fluctuations summarized thousands fluctuations market value nontrading assets underlying securities nontrading derivative assets liabilities impact nonoperating income net income derivative asset total return swap 457 million march 31 2008 arrangement covers aggregate 890 million principal siv issued securities substantially risk along related financing costs also addition recorded derivative liabilities fund support arrangements 5517 million march 31 2008 arrangements collectively cover aggregate 34 billion principal siv issued securities exposure limited approximately 900 million accordingly fund support arrangements currently expose us 3483 million additional potential losses siv issued securities held funds managed subsidiary total return swap fund support arrangements oneyear terms expire later march 2009 see notes 1 18 notes consolidated financial statements discussion derivatives liquidity fund support actions foreign exchange sensitivity operate primarily united states provide services earn revenues incur expenses outside united states accordingly fluctuations foreign exchange rates currencies principally united kingdom canada japan australia may impact comprehensive net income certain subsidiaries entered forward contracts manage impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect comprehensive net income liquidity interest rate risk exposure interest rate changes outstanding debt mitigated substantial portion debt fixed interest rates addition portion outstanding floating rate debt hedged interest rate swap reduces exposure interest rate risk march 31 2008 2007 approximately 911 million 312 million respectively outstanding floating rate debt hedged fluctuations interest rates impact nonoperating income net income see note 8 notes consolidated financial statements additional disclosures regarding debt total return swap recorded derivative asset 457 million march 31 2008 includes certain payment provisions based libor rates fluctuation interest rates impact nonoperating income net income critical accounting policies accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following among current accounting policies involve significant estimates judgments valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except longterm debt trading investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income comprehensive income depending underlying purpose instrument investments value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices evaluate nontrading investment securities “other temporary” impairment may exist fair value investment security adjusted cost extended period time “other temporary” impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined fiscal 2008 entered various credit support arrangements certain liquidity funds managed subsidiary qualify derivative transactions fair values derivative instruments based management’s estimates expected outcomes derived pricing data underlying securities andor detailed collateral analyses march 31 2008 457 million derivative assets included current assets 5517 million derivative liabilities included current liabilities consolidated balance sheet exposure derivative instruments based underlying securities’ values related gains losses may vary significantly relation recorded balances none derivative transactions designated hedge accounting defined sfas 133 “accounting derivative instruments hedging activities” related gains losses included nonoperating income expense consolidated statement income fiscal 2008 trading nontrading investments illiquid privately held securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2008 2007 owned approximately 1566 million 13 million respectively trading nontrading financial investments valued assumptions estimates march 31 2008 2007 also approximately 817 million 583 million respectively investments investment partnerships included assets consolidated balance sheets investments generally accounted cost equity method september 2006 fasb issued statement 157 “fair value measurements” “sfas 157” provide consistent definition fair value establish framework measuring fair value generally accepted accounting principles sfas 157 additional disclosure requirements effective fiscal 2009 disclosure requirements include classification fair value measurements impacting entity’s financial statements among hierarchy prioritizes inputs valuation techniques used measure fair values three broad levels measurements level 1 based quoted prices active markets level 2 based direct indirect observable inputs level 3 based unobservable inputs including management’s estimates provisions sfas 157 recurring fair value measurements adopted us fiscal 2009 expected material impact fair value measurements consolidated financial statements estimated less 3 total assets approximately 11 total liabilities meet definition level 3 fair values based unobservable inputs including management’s estimates result fair values level 3 assets liabilities potentially subject significant fluctuations amounts ultimately realized intangible assets goodwill identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon certain estimates assumptions including projected future cash flows growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates investment performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed march 31 2008 approximately 25 billion goodwill 39 billion indefinitelife intangible assets 2377 million net amortizable intangible assets estimated useful lives amortizable intangible assets currently range one 15 years march 31 2008 amortizable intangible assets amortized weightedaverage life 8 years goodwill evaluated quarterly reporting unit level considered impaired carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted cash flows similar techniques employed analyzing purchase price acquisition target defined reporting units managed investments institutional wealth management divisions operating segments allocations goodwill divisions acquisitions dispositions based relative fair values businesses added sold divisions see note 19 notes consolidated financial statements additional information related business segments significant assumptions used assessing implied fair value goodwill discounted cash flow method include projected cash flows generated reporting unit expected current longterm cash flow growth rates discount rate used determine present value cash flows wealth management managed investments reporting units represent approximately 56 40 respectively goodwill wealth management goodwill principally attributable pcm managed investments goodwill principally attributable cam acquisition projected cash flows divisions assumed grow 10 annually next five years longterm annual growth rate 5 projected cash flows discounted 12 determine present value discount rate based estimated average riskadjusted weighted average cost capital wealth management reporting unit annual cash flows would decline 54 discount rate would increase 19 goodwill deemed impaired managed investments reporting unit annual cash flows would decline 49 discount rate would increase 18 goodwill deemed impaired review fair value intangible assets quarterly basis considering projected cash flows determine whether assets impaired amortization periods appropriate asset determined impaired difference value asset reflected financial statements current implied fair value recognized expense period impairment determined temporary amortization periods appropriate expected lives adjusted impact fair value assessed implied fair values intangible assets subject amortization determined reporting period using undiscounted cash flow analysis significant assumptions used assessing implied fair value management contract intangible assets include projected cash flows generated contracts estimated remaining lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates management contract intangible assets related retail separately managed accounts acquired cam acquisition client contracts acquired 2001 acquisition pcm represent approximately 59 15 respectively total amortizable intangible assets cam intangible asset original expected life 12 years represents annual contract turnover rate 8 97 years remaining cam contracts impaired cash flows would decline approximately 59 client attrition would increase sufficiently decrease remaining estimated life 41 pcm intangible asset related acquired client contracts original expected life 18 years represents annual contract attrition rate 6 fiscal 2008 acquired client contracts related assets management declined significantly based revised attrition estimates remaining useful lives decreased periods one five years march 31 2008 result significant recent client attrition declines assets management revised estimate remaining useful lives evaluation march 31 2008 indicated amortized carrying value 188 million would fully recoverable projected cash flows remaining acquired contracts discounted rate 12 indicated remaining value 37 million impairment charge 151 million pcm management contracts recorded march 2008 quarter current assumed client attrition rates cash flows generated underlying management contracts held pcm would decline approximately 35 asset become impaired similarly change profitability contracts client attrition would accelerate rate remaining estimated useful life would decline approximately 49 asset would deemed impaired intangible assets lives indeterminable indefinite fair value determined based anticipated discounted cash flows two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names significant assumptions used assessing fair value proprietary fund contracts include projected cash flows generated contracts discount rate used determine present value cash flows projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth approximating market returns contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset domestic mutual fund contracts acquired cam acquisition permal fundsofhedge funds contracts account approximately 65 24 respectively indefinite life intangible assets cash flows cam permal contracts assumed grow longterm annual rates 5 8 respectively approximates expected average market returns projected cash flows cam permal funds discounted 12 changes assumptions increased discount rate declining cash flows could result impairment current profitability levels cash flows generated cam mutual fund contracts would fall approximately 27 discount rate used test would raised 15 asset deemed impaired likewise cash flows generated permal fundsofhedge funds contracts would decline approximately 76 discount rate increased 28 asset deemed impaired trade names account 3 indefinitelife intangible assets approximately onethird relates pcm unlike pcm’s management contracts recovery trade name value considers pcm’s cash flows acquired client contracts current profitability levels estimated 8 longterm growth rate cash flows generated pcm would fall approximately 9 discount rate used test would raised 120 124 trade name considered impairment however since trade names considered indefinitelife continue evaluate trade names longterm view determining impairment business acquisitions pcm royce permal involved closely held companies certain key employees also owners companies establishing purchase price may include contingent consideration whereby portion purchase price paid acquisition date determination contingent payments consistent methods valuing establishing purchase price record payments additional purchase price compensation contingencies met historically contingent payments recorded additional goodwill see note 6 notes consolidated financial statements additional information regarding intangible assets goodwill stockbased compensation stockbased compensation plans include stock options employee stock purchase plans restricted stock awards deferred compensation payable stock compensation plans issue stock options officers key employees nonemployee members board directors fiscal 2007 adopted sfas 123 r “sharebased payment” related pronouncements using modifiedprospective method related transition election method compensation expense years ended march 31 2008 2007 includes compensation cost nonvested sharebased awards grantdate fair value amortized respective vesting periods straightline method described determine fair value stock options using blackscholes option pricing model exception marketbased performance grants valued monte carlo optionpricing model prior fiscal 2007 awards also accounted grantdate fair value except awards granted prior april 1 2003 recorded intrinsic value result prior adoption sfas 123 r related compensation expense recognized awards granted prior april 1 2003 expense related stockbased employee compensation included determination net income fiscal 2006 less would included fair value method applied awards modifiedprospective method results year ended march 31 2006 restated additionally unamortized deferred compensation previously classified separate component stockholders’ equity reclassified reduction additional paidin capital also sfas 123 r cash flows related income tax deductions excess stockbased compensation expense classified financing cash flows year ended march 31 2008 year ended march 31 2006 amount 92376 continues classified operating cash inflows accordance provisions sfas 123 r provide disclosure note 13 notes consolidated financial statements pro forma results compensation expense associated stock option grants recognized grantdate fair value respective vesting period accounted prior years’ stock option grants grantdate fair value net income continuing operations would reduced 32 million fiscal 2006 respectively net income discontinued operations would reduced 40 million fiscal 2006 reductions result including additional expenses grants made prior april 2003 granted 933000 1037380 1101105 stock options including grants nonemployee directors fiscal 2008 2007 2006 respectively additional information sharebased compensation see note 13 notes consolidated financial statements determine fair value option grant using blackscholes optionpricing model except performance marketbased grants use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate except grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal vesting period options estimate volatility part based upon historical prices stock period equal expected life option part upon implied volatility marketlisted options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different income taxes legg mason subsidiaries subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes management assesses likelihood able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due determine estimates changed income tax provision adjusted period determination made fiscal 2008 adopted fasb interpretation 48 “accounting uncertainty income taxes” “fin 48” prescribes recognition measurement thresholds financial statements tax positions adoption fin 48 material impact consolidated financial statements see note 9 notes consolidated financial statements additional disclosures regarding income taxes recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements forwardlooking statements made 2008 annual report form 10k time may otherwise make public filings press releases statements management “forwardlooking statements” within meaning private securities litigation reform act 1995 including information relating anticipated growth revenues earnings per share anticipated changes businesses amount client aum anticipated future performance business anticipated future investment performance subsidiaries expected future net client cash flows anticipated expense levels changes expenses expected effects acquisitions expectations regarding financial market conditions words phrases “can be” “may be” “expects” “may affect” “may depend” “believes” “estimate” “project” “anticipate” similar words phrases intended identify forwardlooking statements forwardlooking statements subject various known unknown risks uncertainties caution readers forwardlooking information provided behalf legg mason guarantee future performance actual results may differ materially forwardlooking information result various factors beyond control including limited discussed heading “risk factors” elsewhere annual report form 10k public filings press releases statements management due risks uncertainties factors caution person receiving forwardlooking information place undue reliance statements forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events future revenues may fluctuate due numerous factors total value composition aum volatility general level securities prices interest rates relative investment performance companysponsored investment funds asset management products compared competing offerings market indices investor sentiment confidence general economic conditions ability maintain investment management administrative fees current levels competitive conditions business ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred result changes number total employees competitive factors changes percentages revenues paid compensation reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill otherwise support investment products connection litigation regulatory proceedings effects acquisitions dispositions business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible goodwill values see discussion “market risksrevenues net income” “critical accounting policiesintangibles goodwill” previously discussed item 7aitem 7 managements discussion analysis financial condition results operations executive overview legg mason inc holding company subsidiaries collectively comprise legg mason global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally united states america us united kingdom uk also offices australia bahamas brazil canada chile china dubai france germany italy japan luxembourg poland singapore spain switzerland taiwan references fiscal 2014 2013 2012 refer fiscal year ended march 31 year terms us company refer legg mason operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks largest portion performance fees earned based 12month performance periods end differing quarters year portion based quarterly performance periods distribution service fees received distributing investment products services providing support services investment portfolios generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level assets management aum fee rates thus affected factors securities market conditions ability attract maintain aum key investment personnel investment performance aum primarily vary period due inflows outflows client assets well market performance client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services fees charge investment services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions fees charge investment services vary based upon factors type underlying investment product amount aum asset management affiliate provides services type services investment objectives provided fees charged equity asset management services generally higher fees charged fixed income liquidity asset management services accordingly revenues average advisory revenue yields affected composition aum changes relative level equity assets significantly impacting revenues average advisory revenue yields average advisory revenue yields calculated ratio annualized investment advisory fees excluding performance fees average aum addition ordinary course business may reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets revenue sharing agreements place asset management affiliates specified percentages affiliates revenues required distributed us balance revenues retained pay operating expenses including compensation expenses excluding certain expenses income taxes agreements asset management affiliates retain different percentages revenues cover costs net income loss attributable legg mason inc operating margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one affiliate dramatically different effect revenues earnings equal change another affiliate addition time may agree changes revenue sharing agreements arrangements asset management personnel may impact compensation expenses profitability significant component cost structure employee compensation benefits majority variable nature includes incentive compensation primarily based upon revenue levels noncompensation related operating expense levels revenue sharebased affiliates overall profitability next largest component cost structure distribution servicing expense consists primarily fees paid thirdparty distributors selling asset management products services largely variable nature certain operating costs quasifixed nature occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly us increasingly countries operate results individual period considered representative future results profitability sensitive variety factors including amount composition aum volatility general level securities prices interest rates among things periods unfavorable market conditions likely adverse effect profitability addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients last years industry seen flows products currently garner significant market share financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms brokerdealers commercial banks financial services companies industry impacted continued economic uncertainty constant introduction new products services consolidation financial services firms mergers acquisitions industry operate also subject extensive regulation federal state foreign laws like firms impacted regulatory legislative changes responding changes keeping abreast regulatory developments required continue require us incur costs continue impact profitability strategic priorities focused four primary areas listed management keeps strategic priorities mind evaluates operating performance financial condition consistent approach also presented table important initiatives management currently focuses evaluating performance financial condition strategic priorities discussed designed drive improvements operating margin net flows earnings cash flows assets management key metrics certain key metrics discussed annual results discussion follow connection strategic priorities year ended march 31 2014 incurred 294 million expenses related various corporate initiatives including closing reorganizing certain businesses ongoing efforts increase efficiency effectiveness beginning fiscal 2015 plan invest centralized global distribution business include reinvestment savings various corporate initiatives march 2014 entered agreement acquire qs investors holdings llc qs investors leading customized solutions global quantitative equities provider approximately 5 billion aum nearly 100 billion assets advisement aua march 31 2014 acquisition expected close first quarter fiscal 2015 connection completion acquisition beginning first quarter fiscal 2015 begin reporting aua two existing affiliates batterymarch financial management inc batterymarch legg mason global asset allocation llc lmgaa integrated time qs investors leverage best aspects subsidiary connection integration expect incur restructuring transition costs approximately 35 million approximately 25 million incurred year ended march 31 2014 approximately 30 million anticipated remaining costs associated integration expected incurred year ending march 31 2015 net income attributable legg mason inc fiscal 2014 2848 million 233 per diluted share compared net loss attributable legg mason inc 3533 million 265 per diluted share fiscal 2013 prior year loss primarily attributable 7340 million 381 per diluted share noncash impairment charges related intangible assets 690 million 034 per diluted share nonoperating charge extinguishment debt average aum total revenues increased fiscal 2014 compared fiscal 2013 strong overall investment performance improvement global distribution function contributed continued reduction longterm asset outflows increases aum due market performance new product launches fiscal 2014 offset modest outflows longterm assets following discussion analysis provides additional information regarding financial condition results operations business environment results operations business environment fiscal 2014 marked slow steady growth us economy experienced steady growth despite broad range mixed economic news including improvements housing sector consumer confidence uncertainty regarding federal reserves bond buying program three major us equity market indices increased fiscal 2014 two major us equity market indices reached record highs final quarter fiscal 2014 fixed income markets experienced difficult year longerterm market interest rates increased due part federal reserve tapering bond buying program economic outlook remained positive recent years financial environment operate still reflects heightened level sensitivity move fiscal 2015 three major us equity market indices barclays capital global aggregate bond index increased past three fiscal years barclays capital us aggregate bond index slightly negative fiscal 2014 increasing fiscal 2012 2013 illustrated table 1 indices trademarks dow jones company mcgrawhill companies inc nasdaq stock market inc barclays capital respectively affiliated legg mason following table sets forth periods indicated amounts consolidated statements income loss percentage operating revenues increase decrease item percentage amount previous period nmnot meaningful 1 calculated based change actual amounts fiscal years percentage prior year amount assets management aum primarily managed across following asset classes equity fixed income liquidity  large cap growth  us intermediate investment grade  us managed cash  small cap core  global government  us municipal cash  large cap value  us credit aggregate  equity income  global opportunistic fixed income  global equity  us municipal  sector equity  global fixed income  international equity  us long duration  mid cap core  us limited duration  global emerging market equity  us high yield  emerging markets components changes aum billions years ended march 31 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 includes negative impact foreign exchange movements primarily fixed income securities 49 billion 83 billion 18 billion years ended march 31 2014 2013 2012 respectively also includes reinvestment dividends aum march 31 2014 7018 billion increase 372 billion 6 march 31 2013 increase aum attributable net client inflows 83 billion market performance 302 billion partially offset disposition 13 billion resulting sale small affiliate market performance includes 49 million resulting negative impact foreign currency exchange fluctuations 121 billion net client inflows liquidity asset class 38 billion net outflows longterm asset classes equity outflows 50 billion partially offset fixed income inflows 12 billion equity outflows occurred products managed royce associates “royce” batterymarch permal group ltd permal clearbridge llc formerly legg mason capital management lmcm partially offset equity inflows clearbridge investments llc “clearbridge” due part product investment performance experienced net annual outflows equity asset class since fiscal 2007 fixed income inflows primarily products managed brandywine global investment management llc brandywine partially offset outflows principally western asset management company western asset including 48 billion outflows single lowfee global sovereign mandate managed western asset previously discussed first quarter fiscal 2015 begin reporting aua primarily related qs investors addition approximately 13 billion fixed income assets classified aum march 31 2014 reclassified aua first quarter fiscal 2015 including assets related lowfee global sovereign mandate experienced net fixed income inflows fiscal 2014 experiencing net fixed income outflows prior five fiscal years generally earn higher fees profits equity aum outflows equity asset class negatively impact revenues net income loss attributable legg mason inc would outflows asset classes month ended april 30 2014 experienced liquidity outflows approximately 20 billion primarily lowfee money market fund expect outflow material impact revenues net income aum march 31 2013 6646 billion increase 213 billion 3 march 31 2012 increase aum attributable market performance 342 billion 54 billion related acquisition fauchier partners management limited fauchier market performance includes 83 billion resulting negative impact foreign currency exchange fluctuations increases offset part net client outflows 117 billion dispositions 66 billion dispositions liquidity assets resulted amendment historical smith barney brokerage programs providing investment liquidity funds asset managers manage longterm asset classes accounted net client outflows 204 billion 110 billion equity fixed income outflows respectively partially offset liquidity inflows 197 billion equity outflows primarily experienced products managed batterymarch royce permal lmcm majority fixed income outflows products managed western asset including 64 billion outflows lowfee global sovereign mandate discussed fixed income outflows western asset offset part fixed income inflows brandywine investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds manage may redeem investments funds time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients thirdparty distributors relationships loss key investment management personnel financial market performance aum asset class aum asset class billions years ended march 31 follows average aum asset class billions years ended march 31 follows component changes aum asset class billions fiscal years ended march 31 2014 2013 2012 follows aum distribution channel two principal distribution channels global distribution affiliateother sell variety investment products services global distribution consists centralized global distribution operations principally sells us international mutual funds commingled vehicles retail separately managed account programs subadvisory accounts insurance companies similar clients affiliateother consists distribution operations within asset managers principally sell institutional separate accounts liquidity money market funds component changes aum distribution channel billions years ended march 31 2014 2013 2012 follows overall effective fee rate across asset classes distribution channels 34 basis points years ended march 31 2014 2013 35 basis points year ended march 31 2012 fees managing equity assets generally higher averaging approximately 70 basis points year ended march 31 2014 75 basis points years ended march 31 2013 2012 compares fees managing fixed income assets averaged approximately 25 basis points years ended march 31 2014 2013 2012 liquidity assets averaged 10 basis points reflecting impact current advisory fee waivers due low interest rate environment years ended march 31 2014 2013 2012 equity assets primarily managed clearbridge royce batterymarch permal fixed income assets primarily managed western asset brandywine permal liquidity assets primarily managed western asset fee rates assets distributed legg mason global distribution predominately retail nature averaged approximately 50 basis points years ended march 31 2014 2013 2012 fee rates assets distributed affiliateother channel averaged approximately 30 basis points years ended march 31 2014 2013 2012 investment performance overall investment performance aum years ended march 31 2014 2013 2012 generally positive compared relevant benchmarks year ended march 31 2014 year ended march 31 2014 us indices produced positive returns best performing nasdaq composite returning 285 returns achieved economic environment characterized uneven global growth heightened sensitivity economic news concerns economic growth china ongoing ukrainerussia crisis fixed income markets federal reserve kept target rate discount rate steady tapering bondbuying program yield curve steepened year flattened last quarter many longdated yields declined lowest yielding fixed income sector year us treasury inflation protected securities tips measured barclays us tips index returned 65 best performing fixed income sector year high yield bonds measured barclays us high yield bond index returned 75 march 31 2014 year ended march 31 2013 year ended march 31 2013 us indices produced positive returns best performing sp 400 mid cap index returned 178 year ended march 31 2013 returns achieved economic environment characterized uneven domestic growth heightened sensitivity economic news included improving unemployment housing figures anticipation implementation sequestration concerns surrounding fiscal cliff periodic developments continuing european sovereign debt crisis fixed income markets federal reserve affirmed commitment hold federal funds rate historic lows beginning third round quantitative easing continuing support secondary mortgage market actions taken keep interest rates low stimulate economic growth resulted downward shift yield curve year lowest yielding fixed income sector year us government bonds measured barclays us government bond index returned 30 best performing fixed income sector year high yield bonds measured barclays us high yield bond index returned 131 march 31 2013 year ended march 31 2012 year ended march 31 2012 equity markets ended difficult year positive note responding favorably improving unemployment figures conclusion bank stress tests resulting certain banks increasing dividends reduced fears european debt fallout result us indices produced positive returns full fiscal year notable nasdaq composite returned 112 year ended march 31 2012 fixed income markets improved economic data suggested recovery strengthening flightstosafety ebbed european debt crisis eased allowing us treasury rates climb historically low levels yield curve steepened year economic releases federal reserve board painted increasingly optimistic picture talk third round quantitative easing diminished worst performing fixed income sector year high yield bonds measured barclays high yield index returned 65 best performing fixed income sector year tips measured barclays us tips index returned 122 march 31 2012 following table presents summary percentages aum strategy1 outpaced respective benchmarks march 31 2014 2013 2012 trailing 1year 3year 5year 10year periods following table presents summary percentages us mutual fund assets2 outpaced lipper category averages march 31 2014 2013 2012 trailing 1year 3year 5year 10year periods 1 purposes investment performance comparisons strategies aggregation discretionary portfolios separate accounts investment funds products single group represents particular investment objective case separate accounts investment performance account based upon performance strategy account assigned asset managers specific guidelines including portfolios strategies managers manage separate accounts investment funds strategy performance comparison assets based upon performance separate account march 31 2014 2013 2012 91 90 91 total aum included strategy aum respectively although strategies three five tenyear histories total strategy aum includes liquidity assets certain assets included reported performance comparisons include accounts managed accordance guidelines outlined accounts strategies marketed potential clients accounts yet assigned strategy certain smaller products affiliates past performance indicative future results aum included institutional retail separate accounts investment funds included strategy separate accounts performance comparisons based grossoffee performance investment funds including fundofhedge funds managed separate account format performance comparisons based netoffee performance comparisons reflect actual performance specific separate account investment fund individual separate account investment fund performance may differ certain prior year amounts updated conform current year presentation 2 source lipper inc includes openend closedend variable annuity funds march 31 2014 2013 2012 us longterm mutual fund assets represented data accounted 20 19 18 respectively total aum performance us longterm mutual fund assets included strategies following table presents summary absolute relative performance compared applicable benchmark representative sample funds within aum net management fees end period presented 1year 3year 5year 10year periods funds inception table includes representative sample funds significant subclass investment strategies ie large cap equity small cap equity etc funds within group representative performance significant investment strategies offer march 31 2014 constituted aggregate approximately 410 billion approximately 58 total aum meaningful exclusions fundsofhedge funds strategies involve privately placed hedge funds represent 3 total assets management march 31 2014 investment performance made publicly available providing investment returns funds provides relevant representation performance avoiding many complexities relating factors multiple fee structures bundled pricing asset level break points would arise reporting performance strategies product aggregations 1 absolute performance actual performance ie rate return fund relative performance difference variance performance fund stated benchmark business model streamlining initiative may 2010 announced initiative streamline business model drive increased profitability growth primarily involved transitioning certain shared services investment affiliates closer actual client relationships initiative resulted 140 million annual cost savings substantially cash savings cost savings consisted 80 million compensation benefits cost reductions resulting eliminating positions certain corporate shared services functions result transitioning functions affiliates charging affiliates centralized services continued provided without corresponding adjustment revenue sharing compensation arrangements ii approximately 50 million noncompensation costs eliminating streamlining activities corporate distribution business units including savings associated consolidating office space iii approximately 10 million global distribution group sharing affiliate revenues retail assets management without corresponding adjustment revenue sharing compensation arrangements initiative involved 1275 million transitionrelated costs primarily included charges employee termination benefits incentives retain employees transition period transitionrelated costs also included charges consolidating leased office space early contract terminations accelerated depreciation fixed assets asset disposals professional fees year ended march 31 2012 transitionrelated costs totaled 731 million transitionrelated costs accrued completion initiative march 31 2012 achieved total annual cost savings initiative approximately 140 million 97 million march 31 2013 2012 respectively compared similar expenses prior commencement streamlining initiative portion estimated transitionrelated savings fiscal 2013 incremental fiscal 2012 explained applicable results operations discussion follow see note 15 notes consolidated financial statements additional information business streamlining initiative results operations accordance financial accounting standards consolidation consolidate separately identify certain sponsored investment vehicles significant collateralized loan obligation entity clo consolidation investment vehicles impact net income loss attributable legg mason inc material impact consolidated operating results also hold investments consolidated sponsored investment funds change value investments recorded nonoperating income expense reflected net income loss net amounts allocated noncontrolling interests see notes 1 3 17 notes consolidated financial statements additional information regarding consolidation investment vehicles operating revenues components total operating revenues millions dollar percentage changes periods follows total operating revenues year ended march 31 2014 274 billion increase 49 261 billion year ended march 31 2013 increase primarily due impact 3 increase average longterm aum increase average aum advisory revenue yields 337 basis points year ended march 31 2013 341 basis points year ended march 31 2014 increase average aum advisory revenue yields result slightly favorable average asset mix equity assets generally earn higher fees fixed income liquidity assets comprising slightly higher percentage total average aum year ended march 31 2014 compared year ended march 31 2013 total operating revenues year ended march 31 2013 261 billion decrease 19 266 billion year ended march 31 2012 despite average aum remaining essentially flat decrease primarily due impact reduction average aum advisory revenue yields 352 basis points year ended march 31 2012 337 basis points year ended march 31 2013 reduction average aum advisory revenue yields result less favorable average asset mix equity assets generally earn higher fees fixed income liquidity assets comprising lower percentage total average aum year ended march 31 2013 compared year ended march 31 2012 decrease offset part 491 million increase performance fees investment advisory fees separate accounts year ended march 31 2014 investment advisory fees separate accounts increased 471 million 64 7774 million compared 7303 million year ended march 31 2013 increase 328 million result higher average equity assets managed clearbridge 232 million resulted higher revenues permal including resulting acquisition fauchier march 2013 79 million due higher average fixed income assets managed brandywine increases offset part decrease 176 million due lower average equity assets managed batterymarch decrease 68 million due sale small affiliate august 2013 year ended march 31 2013 investment advisory fees separate accounts decreased 452 million 58 7303 million compared 7755 million year ended march 31 2012 decrease 415 million result lower average equity assets managed batterymarch lmcm legg mason global equities group lmge 123 million due divestiture affiliate february 2012 decreases offset part increase 96 million due higher average fixed income assets managed brandywine investment advisory fees funds year ended march 31 2014 investment advisory fees funds increased 552 million 38 15 billion compared 14 billion year ended march 31 2013 increase 856 million due higher average equity assets managed clearbridge 165 million due higher average fixed income assets managed brandywine offset part decrease 487 million due lower average fixed income assets managed western asset year ended march 31 2013 investment advisory fees funds decreased 452 million 30 14 billion compared 15 billion year ended march 31 2012 decrease 529 million due lower average assets managed permal 487 million due lower average equity assets managed royce lmcm lmge decreases offset part 391 million increase result higher average fixed income assets managed western asset brandywine 167 million increase result higher average equity assets clearbridge performance fees total aum march 31 2014 2013 2012 approximately 6 accounts eligible earn performance fees year ended march 31 2014 performance fees increased 85 million 1071 million compared 986 million year ended march 31 2013 primarily due higher fees earned assets managed permal including resulting fauchier acquisition offset part impact 320 million fees received western asset prior year related winddown participation us treasurys publicprivate investment program ppip strong performance fees heavily influenced strong equity markets fiscal 2014 year ended march 31 2013 performance fees increased 491 million 986 million compared 495 million year ended march 31 2012 primarily due 320 million fees received western asset related winddown participation ppip higher fees earned assets managed permal brandywine also contributed increase distribution service fees year ended march 31 2014 distribution service fees increased 171 million 52 3476 million compared 3305 million year ended march 31 2013 resulting increase average fee rates received mutual fund aum subject distribution service fees year ended march 31 2013 distribution service fees decreased 105 million 31 3305 million compared 3410 million year ended march 31 2012 resulting decline average fee rates received mutual fund aum subject distribution service fees operating expenses components total operating expenses millions dollar percentage changes periods follows nm meaningful total operating expenses year ended march 31 2014 231 billion decrease 242 305 billion year ended march 31 2013 total operating expenses year ended march 31 2013 305 billion increase 311 232 billion year ended march 31 2012 change total operating expenses fiscal 2014 fiscal 2013 primarily result 7340 million intangible asset impairment charges recorded fiscal 2013 discussed operating expenses years ended march 31 2014 2013 2012 incurred investment management affiliate level comprised approximately 70 total operating expenses year excluding impairment charges deemed corporate expenses remaining operating expenses comprised corporate distribution costs compensation benefits components total compensation benefits millions years ended march 31 follows nm meaningful total compensation benefits year ended march 31 2014 increased 18 121 billion compared 119 billion year ended march 31 2013 year ended march 31 2013 increased 39 119 billion compared 114 billion year ended march 31 2012 • salaries incentives increased 284 million 9529 million year ended march 31 2014 compared 9245 million year ended march 31 2013 principally due increase 117 million incentivebased compensation investment affiliates primarily resulting higher revenues increase 117 million incentivebased compensation corporate distribution personnel partially result increased retail sales • salaries incentives increased 295 million 9245 million year ended march 31 2013 compared 8950 million year ended march 31 2012 principally due increase 385 million incentivebased compensation investment affiliates primarily resulting costs associated modification employment arrangements significantly management permal impact reductions noncompensation related operating expenses revenue share based affiliates create offsetting increase compensation per applicable revenue share agreements additional salary incentive costs 122 million resulting marketbased compensation increases among retained staff new hires support ongoing growth initiatives also contributed increase increases offset part 237 million decrease corporate salaries primarily due headcount reductions resulting business streamlining initiative • benefits payroll taxes increased 152 million 2197 million year ended march 31 2014 compared 2045 million year ended march 31 2013 primarily result 44 million costs associated previously discussed corporate initiatives 35 million increase costs associated certain employee benefit plans 25 million increase health insurance expense 22 million increase payrollrelated taxes • benefits payroll taxes increased 78 million 2045 million year ended march 31 2013 compared 1967 million year ended march 31 2012 primarily result increase noncash amortization expense costs associated certain deferred compensation plans • transitionrelated costs 346 million year ended march 31 2012 represent costs related business streamlining initiative completed march 2012 • management transition compensation costs 40 million year ended march 31 2014 represent amortization expense related retention awards granted certain executives key employees prior year • management transition compensation costs 179 million year ended march 31 2013 associated chief executive officer stepping september 2012 subsequent reorganization executive committee costs primarily comprised 75 million cash severance 64 million net noncash accelerated vesting stock based awards also included line item 30 million noncash amortization expense related retention awards granted certain executives key employees • compensation benefits decreased 78 million 338 million year ended march 31 2014 compared 416 million year ended march 31 2013 primarily due 195 million decrease deferred compensation revenueshare based incentive obligations resulting reduction net market gains assets invested deferred compensation plans seed capital investments partially offset corresponding decreases nonoperating income expense decreases offset part 117 million increase severance expense 168 million primarily related previously discussed corporate initiatives • compensation benefits increased 236 million 416 million compared 180 million year ended march 31 2012 primarily due increase revenueshare based incentive obligations resulting 227 million increase net market gains assets invested deferred compensation plans seed capital investments offset corresponding increases nonoperating income expense year ended march 31 2014 compensation percentage operating revenues decreased 441 455 year ended march 31 2013 due impact compensation decreases related reduction net market gains assets invested deferred compensation plans seed capital investments compensation impact winddown western assets participation ppip fiscal 2013 year ended march 31 2013 compensation percentage operating revenues increased 455 430 year ended march 31 2012 due impact reductions noncompensation related operating expenses revenue share based affiliates impact modification employment arrangements well impact quasifixed compensation costs administrative distribution personnel typically vary revenues increases offset part impact transitionrelated compensation recorded fiscal 2012 well impact lower corporate compensation costs principally attributable business streamlining initiative distribution servicing year ended march 31 2014 distribution servicing expenses increased 31 6191 million compared 6006 million year ended march 31 2013 152 million increase due increase average aum certain products pay fees thirdparty distributors year ended march 31 2013 distribution servicing expenses decreased 76 6006 million compared 6497 million year ended march 31 2012 driven 538 million decrease due reduction average aum certain products pay fees thirdparty distributors communications technology year ended march 31 2014 communications technology expense increased 55 1579 million compared 1497 million year ended march 31 2013 primarily result increase technology consulting market data telephone expenses year ended march 31 2013 communications technology expense decreased 91 1497 million compared 1647 million year ended march 31 2012 driven impact 84 million transitionrelated costs recognized fiscal 2012 well 44 million cost savings result business streamlining initiative occupancy year ended march 31 2014 occupancy expense decreased 330 1152 million compared 1719 million year ended march 31 2013 primarily due impact real estate related charges totaling 528 million recognized fiscal 2013 46 million decrease rent expense primarily result lease reserves taken vacant space fiscal 2013 decreases offset part 79 million real estate related charges taken fiscal 2014 connection previously discussed corporate initiatives year ended march 31 2013 occupancy expense increased 110 1719 million compared 1548 million year ended march 31 2012 primarily due real estate related charges totaling 528 million recorded fiscal 2013 related space consolidation resulted savings approximately 100 million per year beginning fiscal 2014 increase offset part impact 119 million lease reserves recorded fiscal 2012 well acceleration 103 million depreciation fiscal 2012 primarily related certain office space permanently vacated part business streamlining initiative increase also offset part 60 million cost savings also result business streamlining initiative amortization impairment intangible assets year ended march 31 2014 amortization intangible assets decreased 121 123 million compared 140 million year ended march 31 2013 primarily due certain management contracts becoming fully amortized december 2013 year ended march 31 2013 amortization intangible assets decreased 286 140 million compared 196 million year ended march 31 2012 primarily due certain management contracts becoming fully amortized fiscal 2012 impairment intangible assets 7340 million year ended march 31 2013 impairment charges related domestic mutual fund contracts asset permal fundsofhedge fund contracts asset permal trade name impairment charges resulted number trends factors resulted reduction projected cash flows overall assessment fair value assets domestic mutual fund contracts asset permal fundsofhedge funds contracts asset permal trade name asset declined carrying values accordingly impaired 3960 million 3210 million 170 million respectively fiscal 2013 see note 5 notes consolidated financial statements discussion impairment charges year ended march 31 2014 expenses increased 76 million 40 1960 million compared 1884 million year ended march 31 2013 primarily due 147 million increase expense reimbursements paid certain mutual funds 50 million charge fair value adjustment increase contingent consideration liability related acquisition fauchier acquired business performed better initially projected increases offset part 80 million decrease franchise taxes well 53 million decrease professional fees year ended march 31 2013 expenses decreased 23 million 12 1884 million compared 1907 million year ended march 31 2012 primarily due 41 million reduction charges trading errors 25 million decrease expense reimbursements paid certain mutual funds impact 17 million transitionrelated costs recognized fiscal 2012 also contributed decrease decreases offset part 50 million increase litigationrelated expenses result certain resolved regulatory investigations 18 million increase professional fees primarily related initiatives permal including acquisition fauchier fiscal 2013 also offset decrease nonoperating income expense components total nonoperating income expense millions dollar percentage changes periods follows nm meaningful interest income year ended march 31 2014 interest income decreased 158 64 million compared 76 million year ended march 31 2013 driven impact lower average interestbearing investment balances year ended march 31 2013 interest income decreased 339 76 million compared 115 million year ended march 31 2012 driven 26 million decrease due lower yields earned investment balances 18 million decrease due lower average investment balances interest expense year ended march 31 2014 interest expense decreased 159 529 million compared 629 million year ended march 31 2013 primarily result 56 million decrease interest accruals uncertain tax positions 44 million decrease due refinancing 25 convertible senior notes convertible notes may 2012 fiveyear term loan january 2014 year ended march 31 2013 interest expense decreased 282 629 million compared 876 million year ended march 31 2012 primarily result refinancing convertible notes may 2012 income expense net year ended march 31 2014 income expense net improved 508 million income 328 million expense 180 million fiscal 2013 increase primarily result impact 690 million loss debt extinguishment recognized connection repurchase convertible notes may 2012 offset part 195 million decrease net market gains seed capital investments assets invested deferred compensation plans offset corresponding decreases compensation discussed year ended march 31 2013 income expense net decreased 401 million expense 180 million income 221 million fiscal 2012 decrease primarily result 690 million loss debt extinguishment recognized connection repurchase convertible notes may 2012 impact 86 million gain related assigned bankruptcy claim 75 million gain sale small affiliate recognized fiscal 2012 also contributed decrease decreases offset part 227 million increase net market gains seed capital investments assets invested deferred compensation plans offset corresponding increases compensation discussed well 208 million increase net market gains corporate investments proprietary fund products offset compensation nonoperating income loss consolidated investment vehicles year ended march 31 2014 nonoperating income loss consolidated investment vehicles civs net improved 52 million income 24 million loss 28 million fiscal 2013 primarily due net market gains investments certain civs year ended march 31 2013 nonoperating income expense civs net decreased 211 million expense 28 million income 183 million fiscal 2012 primarily due net market losses investments certain civs well impact market gains recognized fiscal 2012 related previously consolidated civ redeemed fiscal year income tax provision benefit year ended march 31 2014 provision income taxes 1378 million compared income tax benefit 1509 million year ended march 31 2013 effective tax rate 328 year ended march 31 2014 compared effective benefit rate 295 year ended march 31 2013 change effective rate primarily related higher relative proportion pretax income loss jurisdictions higher tax rates substantially offset adjustments deferred tax balances reserves july 2012 uk finance act 2012 enacted reduced main uk corporate tax rate 25 24 effective april 1 2012 23 effective april 1 2013 july 2013 finance bill 2013 enacted reducing main uk corporate tax rate 21 effective april 1 2014 20 effective april 1 2015 impact tax rate changes certain existing deferred tax assets liabilities resulted tax benefit 192 million 181 million revaluation deferred tax assets liabilities years ended march 31 2014 2013 respectively impacted effective rate 46 percentage points year ended march 31 2014 35 percentage points year ended march 31 2013 impact civs increased effective rate 02 percentage points year ended march 31 2014 reduced effective rate 05 percentage points year ended march 31 2013 year ended march 31 2013 benefit income taxes 1509 million compared provision 721 million prior year effective benefit rate 295 year ended march 31 2013 compared effective tax rate 238 year ended march 31 2012 change effective rate primarily related lower tax benefit associated intangible asset impairment charge recorded fiscal 2013 due lower statutory rates jurisdictions certain intangible assets held partially offset adjustments reserves impact certain tax planning initiatives recorded fiscal 2012 july 2011 uk finance act 2011 enacted reduced main uk corporate tax rate 27 26 effective april 1 2011 26 25 effective april 1 2012 discussed july 2012 uk finance act 2012 enacted reducing main uk corporate tax rate 24 effective april 1 2012 23 effective april 1 2013 impact tax rate changes certain existing deferred tax assets liabilities resulted tax benefit 181 million 183 million years ended march 31 2013 2012 respectively impacted effective rate 35 percentage points year ended march 31 2013 60 percentage points year ended march 31 2012 impact changes uk tax rate substantial year ended march 31 2012 due higher level pretax income fiscal year impact civs reduced effective rate 05 08 percentage points years ended march 31 2013 2012 respectively net income loss attributable legg mason inc operating margin net income attributable legg mason inc year ended march 31 2014 totaled 2848 million 233 per diluted share compared net loss attributable legg mason inc 3533 million 265 per diluted share year ended march 31 2013 increase primarily attributable impact pretax impairment charges 7340 million 5083 million net income tax benefits 381 per diluted share recorded prior year impact 690 million pretax loss 448 million net income tax benefits 034 per diluted share debt extinguishment recognized connection repurchase convertible notes may 2012 impact 528 million real estate related charges recognized fiscal 2013 net impact increased operating revenues previously discussed addition net income attributable legg mason inc per diluted share benefited reduction weightedaverage shares outstanding result share repurchases operating margin 157 year ended march 31 2014 compared 166 year ended march 31 2013 net loss attributable legg mason inc year ended march 31 2013 totaled 3533 million 265 per diluted share compared net income attributable legg mason inc 2208 million 154 per diluted share year ended march 31 2012 decrease primarily attributable impact pretax impairment charges 7340 million 5083 million net income tax benefits 381 per diluted share recorded fiscal 2013 related indefinitelife intangible assets well 690 million pretax loss 448 million net income tax benefits 034 per diluted share debt extinguishment recognized connection repurchase convertible notes may 2012 real estate related charges 528 million recognized fiscal 2013 also contributed decrease decreases offset part impact transitionrelated costs recorded fiscal 2012 impact increased cost savings fiscal 2013 connection business streamlining initiative items previously discussed operating margin 166 year ended march 31 2013 compared 127 year ended march 31 2012 supplemental nongaap financial information supplemental information providing performance measures based methodologies generally accepted accounting principles “nongaap” adjusted income operating margin adjusted management uses benchmarks evaluating comparing periodtoperiod operating performance adjusted income increased 4178 million 341 per diluted share year ended march 31 2014 3472 million 261 per diluted share year ended march 31 2013 operating margin adjusted years ended march 31 2014 2013 220 175 respectively operating margin adjusted year ended march 31 2014 reduced 15 percentage points due expenses recognized fiscal year related previously discussed corporate initiatives restructuring charges related qs investors acquisition 10 percentage point due structuring fees related closedend fund launch fiscal year operating margin adjusted year ended march 31 2013 reduced 35 percentage points due real estate related charges management transition compensation costs recorded fiscal year 10 percentage point due structuring fees related closedend fund real estate investment trust launches fiscal year adjusted income decreased 3472 million 261 per diluted share year ended march 31 2013 3970 million 277 per diluted share year ended march 31 2012 operating margin adjusted years ended march 31 2013 2012 168 213 respectively operating margin adjusted year ended march 31 2013 reduced 35 percentage points due real estate related charges management transition compensation costs recorded fiscal 2013 adjusted income define adjusted income net income loss attributable legg mason inc plus amortization deferred taxes related intangible assets goodwill imputed interest tax benefits contingent convertible debt less deferred income taxes goodwill indefinitelife intangible asset impairment also adjust noncore items reflective economic performance intangible asset impairments impact fair value adjustments contingent consideration liabilities impact tax rate adjustments certain deferred tax liabilities related indefinitelife intangible assets loss extinguishment contingent convertible debt believe adjusted income provides useful representation operating performance adjusted noncash acquisition related items facilitate comparison results asset management firms issuedextinguished contingent convertible debt made significant acquisitions also believe adjusted income important metric estimating value asset management business adjusted income considers adjustments certain items relate operating performance comparability therefore readily reconcilable net income loss attributable legg mason inc determined gaap measure provided addition net income loss attributable legg mason inc substitute net income loss attributable legg mason inc may comparable nongaap performance measures including measures adjusted earnings adjusted income companies adjusted income liquidity measure used place cash flow measures determined gaap fair value adjustments contingent consideration liabilities may provide tax benefit depending tax attributes acquisition transaction current fair value adjustment contingent consideration liability provide current tax benefit consider adjusted income useful investors important metric measuring economic performance asset management companies indicator value facilitates comparison operating results asset management firms issuedextinguished contingent convertible debt made significant acquisitions calculating adjusted income adjust impact amortization management contract assets impairment indefinitelife intangible assets add subtract impact fair value adjustments contingent consideration liabilities arise acquisitions net income loss attributable legg mason inc reflect fact items distort comparisons operating results asset management firms engaged significant acquisitions deferred taxes indefinitelife intangible assets goodwill include actual tax benefits amortization deductions realized gaap absent impairment charge disposition related business fully expect realize economic benefit current period tax amortization add benefit net income loss attributable legg mason inc calculation adjusted income however net operating loss carryforward receive benefit current tax amortization time conversely subtract noncash income tax benefits goodwill indefinitelife intangible asset impairment charges uk tax rate adjustments excess book basis certain acquired indefinitelife intangible assets applicable recognized gaap also add back noncash imputed interest extinguishment loss contingent convertible debt adjusted amounts allocated conversion feature well adding actual tax benefits imputed interest realized gaap adjustments reflect items distort comparisons operating results periods results asset management firms engaged significant acquisitions including related impairments issuedextinguished contingent convertible debt disposition impairment charge noncore item occur impact adjusted income may distort actual changes operating performance value firm accordingly monitor items related impact including taxes adjusted income ensure appropriate adjustments explanations accompany disclosures although depreciation amortization fixed assets noncash expenses add charges calculating adjusted income charges related assets ultimately require replacement reconciliation net income loss attributable legg mason inc adjusted income thousands except per share amounts follows operating margin adjusted calculate operating margin adjusted dividing operating income loss adjusted exclude impact compensation expense gains losses investments made fund deferred compensation plans impact compensation expense gains losses seed capital investments affiliates revenue sharing agreements amortization related intangible assets transitionrelated costs streamlining business model income loss civs impact fair value adjustments contingent consideration liabilities impairment charges ii operating revenues adjusted add back net investment advisory fees eliminated upon consolidation investment vehicles less distribution servicing expenses use approximate measure revenues passed third parties refer operating revenues adjusted compensation items transitionrelated costs removed operating income loss calculation offset equal amount nonoperating income expense thus impact net income loss attributable legg mason inc adjust impact amortization management contract assets impact fair value adjustments contingent consideration liabilities arise acquisitions reflect fact items distort comparison operating results asset management firms engaged significant acquisitions transitionrelated costs impairment charges income loss civs removed operating income loss calculation items reflective core asset management operations use operating revenues adjusted calculation show operating margin without distribution servicing expenses use approximate distribution revenues passed third parties direct cost selling products although distribution servicing expenses may include commissions paid connection launching closedend funds corresponding revenue period operating revenues adjusted also include advisory revenues receive civs eliminated consolidation gaap believe operating margin adjusted useful measure performance provides measure core business activities excludes items impact net income loss attributable legg mason inc indicates operating margin would without distribution revenues passed third parties direct cost selling products amortization related intangible assets changes fair value contingent consideration liabilities transitionrelated costs impairment charges impact consolidation certain investment vehicles described consolidation investment vehicles impact net income loss attributable legg mason inc measure provided addition operating margin calculated gaap substitute calculations margins gaap may comparable nongaap performance measures including measures adjusted margins companies effective april 1 2013 revised definition operating margin adjusted add back amortization intangible assets applied change periods presented impact results years ended march 31 2013 2012 increases 07 10 percentage points respectively calculation operating margin operating margin adjusted follows dollars thousands liquidity capital resources primary objective capital structure appropriately support business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may time involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt consolidation variable interest entities discussed impact liquidity capital resources rights benefits bear risks associated assets liabilities civs beyond investments investment advisory fees generated vehicles eliminated consolidation additionally creditors civs recourse general credit beyond level investment consider liabilities obligations assets consist primarily intangible assets goodwill cash equivalents investment securities investment advisory related fee receivables assets principally funded equity capital longterm debt results operations march 31 2014 cash equivalents total assets longterm debt stockholders equity 09 billion 71 billion 10 billion 47 billion respectively total assets include amounts related civs 02 billion cash equivalents primarily invested liquid domestic nondomestic money market funds hold principally domestic nondomestic corporate commercial paper bonds government agency securities bank deposits recognized losses investments monitoring cash equivalents mitigates potential material risks may associated balances following table summarizes consolidated statements cash flows years ended march 31 millions cash inflows provided operating activities fiscal 2014 4373 million primarily related net income adjusted noncash items offset part net sales purchases trading current investments decrease net activity related civs primarily due winddown clo see note 17 notes consolidated financial statements additional information regarding clo cash inflows provided operating activities fiscal 2013 3033 million primarily related net sales trading current investments results operations adjusted noncash items offset part allocation extinguished debt repayment payments accrued compensation cash inflows provided operating activities fiscal 2012 4968 million primarily related net income adjusted noncash items cash inflows provided investing activities fiscal 2014 1376 million primarily related net activity related civs offset part payments fixed assets cash outflows used investing activities fiscal 2013 110 million primarily related payments related acquisition fauchier payments made fixed assets offset part net activity related civs cash inflows provided investing activities fiscal 2012 23 million primarily related 202 million net activity related civs release restricted cash required market hedge arrangements offset part payments made fixed assets cash outflows used financing activities fiscal 2014 6390 million primarily related repayment longterm debt 5004 million repayment longterm debt civs 1330 million repurchase 97 million shares common stock 3600 million dividends paid 620 million offset part proceeds longterm debt issuances 3937 million cash outflows used financing activities fiscal 2013 7359 million primarily related repayment longterm debt 10492 million repurchase 162 million shares common stock 4255 million 2500 million repayment shortterm debt dividends paid 553 million offset part proceeds subsequent longterm debt issuances 11432 million cash outflows used financing activities fiscal 2012 4818 million primarily due repurchase 136 million shares common stock 4018 million dividends paid 436 million financing transactions table reflects primary sources financing thousands march 31 2014 capital plan financing transactions may 2012 announced capital plan included refinancing convertible notes refinancing effected issuance 650 million 55 senior notes net proceeds together cash hand 250 million remaining borrowing capacity existing revolving credit facility used repurchase 125 billion convertible notes terms repurchase included repayment convertible notes par plus accrued interest prepayment fee 63 million issuance warrants holders convertible notes warrants replace conversion feature convertible notes provide purchase aggregate subject adjustment 142 million shares common stock net share settled basis exercise price 88 per share warrants expire july 2017 settled election either shares common stock cash 650 million 55 senior notes due may 2019 sold discount 68 million amortized interest expense sevenyear term also pursuant capital plan june 2012 entered unsecured credit agreement provides 500 million revolving credit facility 500 million term loan repaid fiscal 2014 discussed proceeds term loan used repay 500 million outstanding borrowings previous revolving credit facility terminated january 2014 issued 400 million 5625 senior notes net proceeds together cash hand used repay 450 million outstanding borrowings fiveyear term loan entered conjunction unsecured credit agreement noted 5625 senior notes due january 2044 sold discount 63 million amortized interest expense 30 year term january 2014 entered 250 million incremental revolving credit facility contemplated addition 500 million revolving credit facility available existing credit agreement revolving credit facilities available fund working capital needs general corporate purposes expire june 2017 borrowings outstanding either revolving credit facilities march 31 2014 connection extinguishment convertible notes hedge transactions purchased call options warrants executed connection initial issuance convertible notes also terminated financial covenants bank agreements include maximum net debt ebitda ratio 25 1 minimum ebitda interest expense ratio 40 1 debt defined include obligations borrowed money excluding nonrecourse debt civs capital leases net debt covenants debt reduced amount unrestricted cash excess greater subsidiary cash 375 million ebitda defined consolidated net income loss plusminus tax expense benefit interest expense depreciation amortization intangibles extraordinary expense losses noncash charges defined agreements march 31 2014 net debt ebitda ratio 12 1 ebitda interest expense ratio 125 1 therefore maintained compliance applicable covenants addition 55 senior notes subject certain nonfinancial covenants including provisions relating dispositions certain assets could require percentage related proceeds applied accelerated repayments net income loss significantly declines spend available cash may impact ability maintain compliance financial covenants determine compliance covenants may pressure may elect take number actions including reducing expenses order increase ebitda using available cash repay portion outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt anticipate available cash repay bank debt necessary using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments outstanding bank debt agreement currently impacted ratings two rating agencies interest rate annual commitment fee revolving lines credit based higher credit rating two rating agencies june 2011 rating one agencies downgraded one notch agency downgrade rating absent upgrade former agency interest costs rise modestly addition terms 55 senior notes interest rate paid notes increase modestly credit ratings reduced investment grade also connection capital plan board directors authorized 10 billion additional purchases common stock 370 million remained available march 31 2014 capital plan authorizes using 65 cash generated future operations purchase shares common stock transactions march 2013 completed acquisition outstanding share capital fauchier leading european based manager fundsofhedge funds bnp paribas investment partners sa transaction included initial cash payment 634 million funded existing cash resources addition contingent consideration approximately 25 million approximately 33 million using exchange rate british pound us dollar march 31 2014 may due second fourth anniversaries closing respectively dependent achieving certain levels revenue net distribution costs subject potential catchup adjustment fourth anniversary payment second anniversary payment shortfall fair value contingent consideration liability approximately 296 million march 31 2014 increase 77 million march 31 2013 50 million attributable revised estimates amounts payable 27 million attributable changes exchange rate interest amortization executed currency forwards economically hedge risk movements exchange rate us dollar british pound estimated contingent liability payment amounts denominated march 2014 entered agreement acquire qs investors leading customized solutions global quantitative equities provider initial purchase price 11 million contingent consideration 10 million 20 million due second fourth anniversaries closing respectively dependent achievement certain net revenue targets subject potential catchup adjustment fourth anniversary payment second anniversary payment shortfall acquisition expected close first quarter fiscal 2015 certain asset management affiliates maintain various credit facilities general operating purposes certain affiliates also subject capital requirements various regulatory agencies affiliates met respective capital adequacy requirements periods presented see notes 2 6 notes consolidated financial statements additional information related acquisitions fauchier qs investors capital plan respectively future outlook expect next 12 months cash generated operating activities adequate support operating investing liquidity needs planned share repurchases currently intend utilize available resources number potential activities including limited acquisitions seed capital investments new products repurchase shares common stock repayment outstanding debt payment increased dividends june 2013 march 2014 implemented management equity plans entitle certain key employees permal clearbridge respectively participate 15 future growth respective enterprise value subject appropriate discounts discussed notes 1 11 notes consolidated financial statements repurchases units granted plans may impact future liquidity requirements connection planned integration time two existing affiliates batterymarch lmgaa qs investors acquisition closes expect incur restructuring transition costs approximately 35 million approximately 25 noncash charges approximately 25 million charges accrued march 31 2014 significant portion costs paid year ending march 31 2015 see note 2 additional information described currently project cash flows operating activities sufficient fund liquidity needs march 31 2014 500 million cash equivalents excess working capital requirements previously discussed accordance capital plan intend utilize 65 cash generated future operations purchase shares common stock year ending march 31 2015 march 31 2014 also undrawn revolving credit facilities totaling 750 million expiring june 2017 currently expect raise incremental debt equity financing next 12 months beyond current levels however assurances expectations projections could prove incorrect events may occur require additional liquidity acquisition opportunity refinance indebtedness market conditions might significantly worsen affecting results operations generation available cash events result operations available cash insufficient fund liquidity needs would likely seek manage available resources taking actions reducing future share repurchases costcutting reducing expected expenditures investments selling assets investment securities repatriating earnings foreign subsidiaries reducing dividend modifying arrangements affiliates andor employees types actions prove insufficient large acquisition refinancing opportunity arise may seek raise additional equity debt march 31 2014 total cash equivalents 858 million included 306 million held foreign subsidiaries fiscal 2014 order increase cash available us general corporate purposes implemented plans developed prior years repatriate accumulated foreign earnings deferred taxes previously accrued repatriated 301 million plan repatriate additional 245 million foreign cash next several years due certain tax planning strategies anticipate generate tax benefit approximately 12 million respect future repatriation accumulated earnings adjusted tax reserve accordingly repatriation accumulated prior period foreign earnings currently planned however circumstances change provide pay applicable additional us taxes connection repatriation offshore funds practical time determine income tax liability would result repatriation accumulated foreign earnings credit liquidity risk cash equivalent deposits involve certain credit liquidity risks maintain cash equivalents number high quality financial institutions funds time may concentrations one institutions balances financial institutions funds credit quality monitored ongoing basis offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations section follows consolidation discussed critical accounting policies notes 1 17 notes consolidated financial statements contractual contingent obligations contractual obligations make future payments principally connection longterm debt noncancelable lease agreements acquisition agreements service agreements see notes 6 8 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual obligations millions fiscal year excludes contractual obligations civs responsible liable obligations 1 excludes current portion longterm borrowings consolidated clo 792 million interest borrowings applicable 2 amount contingent payments reflected year represents maximum amount could payable using exchange rate british pound us dollar march 31 2014 amounts due fiscal 2016 fiscal 2018 earliest possible date terms business purchase agreements contingent obligation fair value 296 million march 31 2014 3 table include approximately 345 million capital commitments investment partnerships legg mason limited partner obligations funded required end commitment periods running fiscal 2021 4 table include amounts uncertain tax positions 557 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated 5 table include redeemable noncontrolling interests primarily related civs 451 million timing related cash outflows cannot reliably estimated 6 table excludes potential obligations arising ultimate settlement awards management equity plans key employees permal clearbridge due uncertainty timing amounts ultimately payable see notes 1 11 notes consolidated financial statements additional information regarding management equity plans market risk maintain enterprise risk management program oversee coordinate risk management activities legg mason subsidiaries program certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income loss majority revenue calculated market value aum accordingly decline value underlying securities cause aum thus revenues decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts ordinary course business may also reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets performance fees may earned certain investment advisory contracts exceeding performance benchmarks strong markets tend increase fees declines market values aum result reduced fee revenues net income generally earn higher fees equity assets fees charged fixed income liquidity assets declines market values aum asset class disproportionately impact revenues addition revenue sharing agreements certain affiliates retain different percentages revenues cover costs including compensation net income loss profit margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary trading nontrading assets trading nontrading assets comprised investment securities including seed capital sponsored mutual funds products limited partnerships limited liability companies certain investment products trading current investments excluding civs march 31 2014 2013 subject risk security price fluctuations summarized thousands approximately 337 million 392 million trading current investments related longterm incentive compensation plans march 31 2014 2013 respectively offsetting liabilities fluctuation market value assets related liabilities material effect net income loss liquidity however impact compensation expense corresponding offset nonoperating income expense trading current investments 900 million 911 million march 31 2014 2013 respectively relate longterm incentive plans related liabilities completely offset due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income expense net income loss approximately 3440 million 2408 million trading current investments march 31 2014 2013 respectively investments proprietary fund products investments fluctuations market value impact nonoperating income expense amounts fluctuations market value related approximately 199 million 138 million proprietary fund products march 31 2014 2013 respectively offsetting compensation expense revenue share agreements fluctuations market value related approximately 1098 million 719 million proprietary fund products march 31 2014 2013 respectively substantially offset gains losses market hedges therefore materially impact net income loss attributable legg mason inc investments proprietary fund products liquidated related fund establishes track record investors decision made longer pursue strategy nontrading assets excluding civs march 31 2014 2013 subject risk security price fluctuations summarized thousands investment securities civs totaled 505 million 248 million march 31 2014 2013 respectively investments civs totaled 318 million 2106 million march 31 2014 2013 respectively march 31 2014 2013 held equity investments civs 394 million 391 million respectively fluctuations market value investments civs excess equity investment impact net income loss attributable legg mason inc however may impact nonoperating income expense civs corresponding offset net income loss attributable noncontrolling interests valuation trading nontrading investments described within critical accounting policies heading valuation financial instruments see notes 1 14 notes consolidated financial statements discussion derivatives following summary effect 10 increase decrease market values financial instruments subject market valuation risks march 31 2014 thousands 1 gains losses related certain investments deferred compensation plans proprietary fund products directly offset corresponding adjustment compensation expense related liability addition investments proprietary fund products approximately 1098 million economically hedged limit market risk result 10 increase decrease unrealized market value financial instruments subject market valuation risks would result 328 million increase decrease pretax earnings march 31 2014 also march 31 2014 2013 cash equivalents included 4566 million 4858 million respectively money market funds foreign exchange sensitivity operate primarily us provide services earn revenues incur expenses outside us accordingly fluctuations foreign exchange rates currencies principally uk brazil japan canada singapore australia denominated euro may impact comprehensive income loss net income loss certain affiliates entered forward contracts manage portion impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect net income loss liquidity interest rate risk exposure interest rate changes outstanding debt substantially mitigated 650 million 55 senior notes 400 million 5625 senior notes fixed interest rates see note 6 notes consolidated financial statements additional disclosures regarding debt critical accounting policies estimates accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following critical accounting policies involve significant estimates judgments consolidation normal course business sponsor manager various types investment vehicles services entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees managed investment vehicles material march 31 2014 issued investment performance guarantees investment vehicles investors accordance financial accounting standards consolidation consolidate various sponsored investment vehicles separately identified civs certain investment vehicles sponsor manager considered variable interest entities vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights investment vehicles considered vres consolidated controlling financial interest investment vehicle absent substantive investor rights replace manager entity kickout rights may also fund initial cash investment certain vre investment vehicles generate investment performance track record order attract thirdparty investors product “seed capital investments” consolidated long legg mason maintains controlling financial interest product included civs may also hold longerterm controlling financial interest sponsored investment fund vres thirdparty investors consolidated included civs vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity potential controlling financial interest investment company vies sponsored investment funds deemed investment companies including money market funds determine primary beneficiary vie absorb majority vies expected losses receive majority vies expected residual returns determination expected residual returns excludes gross fees paid decision maker certain criteria met determining whether primary beneficiary investment company vie consider qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid us related party including employees’ ownership guarantees implied relationships determining primary beneficiary must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks determining whether vie significant disclosure purposes consider factors used determination primary beneficiary vies sponsored investment funds meet investment company criteria collateralized debt obligation entities clo entities significant variable interest determine primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits potentially could significant vie determine whether variable interest vie considering among things obligation absorb losses right receive benefits expected significant vie consider management fee structure including seniority level fees current expected economic performance entity well provisions included governing documents might restrict guarantee expected loss residual return evaluating whether obligation absorb losses right receive benefits could potentially significant vie consider factors regarding design terms characteristics investment vehicles including following qualitative factors involvement investment vehicle beyond providing management services hold equity debt interests investment vehicle transferred assets investment vehicle potential aggregate fees future periods insignificant relative potential cash flows investment vehicle variability expected fees relation potential cash flows investment vehicle insignificant must consolidate vie deemed primary beneficiary see note 17 notes consolidated financial statements additional discussion civs vies revenue recognition vast majority revenues calculated percentage fair value aum underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager brokerdealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost designed approximate fair value vast majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs management fees aum fair values based unobservable inputs material march 31 2014 equity fixed income liquidity aum values aggregated 1864 billion 3652 billion 1502 billion respectively vast majority aum valued independent pricing services based upon observable market prices inputs believe market risk significant risk underlying value aum economic events financial market turmoil increased market price volatility however valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2014 less 1 total aum valued based unobservable inputs valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except longterm debt trading investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income loss comprehensive income loss depending underlying purpose instrument equity investments control investee primary beneficiary variable interest entity exert significant influence financial operating policies investee follow equity method accounting evaluation whether exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence may governing board investee legal rights investors entity pursuant funds operating documents relationship us investors entity substantially equity method investees investment companies record underlying investments fair value therefore equity method accounting share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense investments value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices evaluate nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2014 2013 excluding investments civs owned approximately 03 million 04 million respectively financial investments valued assumptions estimates unobservable inputs march 31 2014 2013 also approximately 874 million 999 million respectively investments investment partnerships included noncurrent assets consolidated balance sheets approximately 630 million 688 million respectively accounted equity method remainder accounted cost method considers factors indicate may impairment value investments addition march 31 2014 2013 226 million 563 million respectively equity method investments included investment securities consolidated balance sheets accounting guidance fair value measurements disclosures defines fair value establishes framework measuring fair value accounting guidance defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance accounting guidance fair value measurements establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category may include repurchase agreements fixed income securities certain proprietary fund products category also includes clo loans derivative liabilities civ level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds clo debt civ category may also include certain proprietary fund products redemption restrictions valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products certain investments held civs valued net asset value nav determined fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 fair values clo loans bonds determined based prices wellrecognized thirdparty pricing services utilize available market data therefore classified level 2 legg mason established controls designed assess reasonableness prices provided fair value clo debt valued using discounted cash flow methodology inputs used determine expected cash flows include assumptions forecasted default recovery rates market participant would use determining fair value clos underlying collateral assets given significance unobservable inputs fair value measurement clo debt valuation classified level 3 exchange traded options valued using last sale price absence sale last offering price options traded counter valued using dealer supplied valuations options classified level 1 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient rely navs certain investments fair value navs provided investees derived fair values underlying investments reporting date march 31 2014 approximately 2 total assets 11 financial assets measured fair value 5 total liabilities meet definition level 3 excluding assets liabilities civs approximately 1 total assets 7 financial assets measured fair value 1 liabilities meet definition level 3 transfers categories measured beginning period see note 3 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2014 follows thousands identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weightedaverage cost capital takes consideration premium representing degree risk inherent asset fully described goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred perform quantitative tests include critical reviews significant factors assumptions determine intangible assets goodwill impaired consider factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected consolidated financial statements current fair value recognized expense period impairment determined triggering event occurred perform quantitative tests annually december 31 indefinitelife intangible assets goodwill unless qualitatively conclude likely respective fair values exceed related carrying values completed annual impairment tests goodwill indefinitelife intangible assets december 31 2013 determined impairments value assets date impairments values amortizable intangible assets recognized year ended march 31 2014 estimates related future cash flows exceeded asset carrying values also determined triggering events occurred march 31 2014 therefore additional indefinitelife intangible asset goodwill impairment testing necessary result uncertainty regarding future market conditions assessing fair value reporting unit intangible assets requires management exercise significant judgment amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates amortization periods appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows estimated remaining useful lives amortizable intangible assets currently range one five years weightedaverage life approximately 32 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined market participants perspective based projected discounted cash flows taking account values market participants would pay taxable transaction acquire respective assets two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names determine fair value intangible assets based upon discounted projected cash flows take consideration estimates future fees profit margins growth rates taxes discount rates asset determined impaired current implied fair value less recorded carrying value asset determination fair values indefinitelife intangible assets highly dependent estimates changes inputs could result material impairment related carrying values asset impaired difference current implied fair value carrying value asset reflected financial statements recognized expense period impairment determined exist contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset fauchier acquisition completed permal march 2013 included fundsofhedge fund business intended merged existing permal fund business common management shared resources including infrastructure employees processes cobranding initiatives accordingly related carrying values cash flows funds aggregated impairment testing projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth estimated net client flows projected market performance estimate projected cash flows projected aum growth rates affiliate used cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income liquidity investment manager based upon among things historical experience expectations future market investment performance internal external sources currently market growth assumptions 6 equity 3 fixed income 0 liquidity products general assumption 2 organic growth products subject exceptions organic growth contraction nearterm periods starting point assumptions corporate planning process includes threeyear aum projections management operating affiliate consider specific business circumstances affiliate nearyear flow assumptions certain affiliates adjusted appropriate reflect market participant view beyond year three estimates move towards general organic growth assumption 2 appropriate affiliate asset class year 20 resulting cash flow growth rate year 20 held constant used project cash flows year 40 based projected aum affiliate asset class affiliate advisory fee rates applied determine projected revenues domestic mutual fund contracts projected revenues applied weightedaverage margin applicable affiliates manage aum margins based arrangements currently place affiliate projected operating income reduced appropriate tax rate calculate projected cash flows believe growth assumptions reasonable given consideration multiple inputs including internal external sources although assumptions subject change based fluctuations actual results market conditions assumptions also subject change due among factors poor investment performance one operating affiliates withdrawal aum clients changes business climate adverse regulatory actions loss key personnel consider risks development growth assumptions discount rates discussed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows process includes comparison actual results prior growth projections however differences actual results prior projections necessarily indicative need reassess estimates given discounted projected cash flow analyses include projections well beyond three years variances nearyears may offset subsequent years fair value assessments pointintime consistency fair value assessment indicators value reflect expectations market participants pointintime critical evidence soundness estimate value subsequent periods consider differences actual results prior projections considering reasonableness growth assumptions used current impairment testing discount rates based appropriately weighted estimated costs debt equity capital using market participant perspective estimate cost debt based published debt rates estimate cost equity capital based capital asset pricing model considers riskfree interest rate peergroup betas company equity risk premiums equity risk adjusted consider relative risk associated legg mason indefinitelife intangible asset reporting unit discount rates also calibrated based assessment relevant market values consistent standard valuation practices taxable transactions projected discounted cash flow analysis also factors tax benefit value appropriate tax benefit represents discounted tax savings third party purchased asset given valuation date would receive future tax deductions amortization purchase price 15 years domestic mutual fund contracts acquired citigroup asset management “cam” transaction 2106 million account approximately 65 indefinitelife intangible assets december 31 2013 approximately 138 billion aum primarily managed clearbridge western asset associated asset approximately 40 equity aum 30 longterm fixed aum liquidity aum although domestic mutual funds overall maintained strong recent market performance previously disclosed uncertainties regarding market conditions asset flows recent assessments related risk including risks related potential regulatory changes liquidity business reflected projected discounted cash flow analyses based projected discounted cash flow analyses related fair value exceeded carrying value approximately 450 million impairment test cash flows domestic mutual fund contracts assumed annual growth rates average approximately 6 given current uncertainties reflect moderate aum inflows years 1 2 projected cash flows domestic mutual fund contracts discounted 140 reflecting business factors noted results 12 months december 31 2013 generally compared favorably growth assumptions related domestic mutual fund contracts asset impairment testing december 31 2012 believe investment performance also significant influence domestic mutual fund contract longterm flows continued outperformance favorably impact flows aggregate 61 domestic mutual fund longterm aum funds outpaced threeyear lipper category average december 31 2013 improved 33 september 30 2008 generally tends four fiveyear lag improved investment performance results increased asset flows addition believe recent reorganization distribution platform provides improved focus growth business also favorably impacted flows improvement investment performance assisted distribution personnel selling products result improved performance reorganization distribution platform us distribution group net inflows 12 months december 31 2013 assuming factors remain actual results andor changes assumptions domestic mutual fund contracts cash flow projections longterm would deviate approximately 20 previous projections discount rate would raised 140 160 asset deemed impaired given current uncertainty regarding future market conditions reasonably possible fund performance flows aum levels may decrease near term actual cash flows domestic mutual funds contracts could deviate projections approximately 20 asset could deemed impaired material amount permal fundsofhedge funds contracts 692 million account approximately 20 indefinitelife intangible assets permal experienced recent outflows increased risk associated business past several years seen declines traditional high net worth client fundofhedge funds business permals historical focus permal offset extent new institutional business despite factors impact acquired fauchier business experienced better revenues including performance fees originally projected contributed actual results marginally exceeded previous projections permal fundsofhedge funds contracts used asset impairment testing december 31 2012 result continued risk business december 2013 testing nearterm growth assumptions contracts reduced fundofhedge fund managers subject unique market regulatory influences adding additional uncertainty estimates based upon projected discounted cash flow analyses fair value permal fundsofhedge funds contracts asset exceeded carrying value 70 million cash flows permal fundsofhedge funds contracts assumed average annual growth rate approximately 7 however given current experience projected cash flows reflect moderate aum outflows year one net aum flows year two trending moderate aum inflows year three investment performance including expected impact future asset flows significant factor growth projections permal fundsofhedge funds contracts market performance projections supported fact permals two largest funds comprise approximately half contracts asset aum 10year average returns exceeding 5 market projections supported industry statistics projected cash flows permal fundsofhedge funds contracts discounted 155 reflecting factors noted assuming factors remain actual results andor changes assumptions permal fundsofhedge funds contracts cash flow projections longterm would deviate approximately 10 previous projections discount rate would raised 155 165 asset deemed impaired given current uncertainty regarding future market conditions reasonably possible fund performance flows aum levels may decrease near term actual cash flows permal fundsofhedge funds contracts could deviate projections approximately 10 asset could deemed impaired material amount trade names account 2 indefinitelife intangible assets primarily related permal tested intangible assets using assumptions similar described indefinitelife contracts resulting fair values trade names significantly exceeded related carrying amounts goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition legg mason continues managed one global asset management operating segment internal management reporting discrete financial information regularly received chief operating decision maker chief executive officer consolidated global asset management business level result goodwill recorded evaluated one global asset management reporting unit level global asset management reporting unit consists operating businesses asset management affiliates centralized global distribution operations impairment testing process consolidated assets except certain tax benefits liabilities allocated single global asset management reporting unit similarly projected operating results reporting unit include holding company corporate costs overhead including costs associated executive management finance human resources legal compliance internal audit central corporate functions goodwill principally originated acquisitions cam permal royce value reporting unit based part projected consolidated net cash flows including cash flows assets managed mutual funds closedend funds proprietary funds addition separate account assets managers significant assumptions used assessing implied fair value reporting unit discounted cash flow method consistent methodology discussed indefinitelife intangible assets also reporting unit level future corporate costs estimated consolidated projected operating results affiliates actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows reporting unit discounted projected cash flow analysis projected cash flows aggregate basis across asset classes assumed average annual growth rate approximately 8 discount rates based appropriately weighted estimated costs debt using market participant perspective also consistent methodology discussed indefinitelife intangible assets impairment test december 31 2013 projected cash flows discounted 145 determine present value reflecting companyasset specific factors noted also perform marketbased valuation reporting unit value applies average ebitda multiples paid change control transactions peer companies ebitda observed average ebitda multiple utilized 110x 11 asset management transactions dated january 2010 december 2012 results two estimates value reporting unit discounted cash flow ebitda multiple analyses compared significant difference assessed determine reasonableness value whether adjustment either result warranted values accepted appropriately weighted average two reporting unit valuations discounted cash flow ebitda multiple analyses used implied fair value global asset management reporting unit december 31 2013 exceeded carrying value material amount considering relative merits details involved valuation process used equal weighting two values december 2013 testing assess accuracy reporting unit value determined valuation methods comparing results market capitalization determine implied control premium reasonableness implied control premium considered comparing control premiums paid relevant actual change control transactions assessment provides evidence underlying assumptions analyses reporting unit fair value reasonable calculating market capitalization purposes market volatility significant impact capitalization appropriate may consider average market prices stock period one two months test date determine market capitalization control premium arises fact acquisition typically premium paid current market prices publicly traded companies relates ability control operations acquired company assessments control premiums asset management industry difficult many acquisitions involve privately held companies involve portions public company control premium calculated asset manager transactions often valued ebitda multiples absent unusual circumstances generally consistently priced range 8x 13x ebitda past several years recent market evidence regarding control premiums suggest values 13 79 realistic common believe premiums reasonable range estimation equity value based analysis consideration believe implied control premium determined reporting unit value estimation december 31 2013 lower end observed range reasonable stockbased compensation stockbased compensation plans include stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units management equity plans deferred compensation payable stock compensation plans issue equity awards directors officers key employees accordance applicable accounting guidance compensation expense years ended march 31 2014 2013 2012 includes compensation cost nonvested sharebased awards grant date fair value amortized respective vesting periods straightline method also accounting guidance cash flows related income tax deductions excess less stockbased compensation expense classified financing cash flows granted 12 million 10 million 08 million stock options fiscal 2014 2013 2012 respectively fiscal 2014 also implemented management equity plans two affiliates granted units certain employees entitle participate 15 future growth respective affiliates enterprise value subject appropriate discounts additional information sharebased compensation see note 11 notes consolidated financial statements determine fair value option grant using blackscholes optionpricing model except marketbased grants use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate exception grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal expected life options estimate volatility equally weighted historical prices stock period equal expected life option implied volatility market listed options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different also determine fair value affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts inputs blackscholes model generally determined fashion similar fair value grants options stock described however affiliates private companies without quoted stock prices utilize discounted cash flow analyses marketbased valuations similar discussed heading “intangible assets goodwill” determine respective business enterprise values subject appropriate discounts lack control marketability income taxes subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes management assesses likelihood able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision substantially deferred tax assets relate us uk taxing jurisdictions march 31 2014 us federal deferred tax assets aggregated 763 million realization expected require 38 billion future us earnings approximately 673 million must form foreign source income deferred tax assets generated us jurisdictions resulting net operating losses generally expire 20 years generated resulting foreign tax credits generally expire 10 years generated based estimates future taxable income using assumptions consistent used goodwill impairment testing likely current federal tax benefits relating net operating losses realizable valuation allowance necessary time respect resulting foreign tax credits likely tax benefits relating utilization 399 million foreign tax credits realized additional valuation allowance 23 million recorded fiscal 2014 respect thereto addition valuation allowance established prior years substantial portion deferred tax assets relating uk taxing jurisdictions tax planning may enhance positions realization current tax benefits dependent significant tax strategies march 31 2014 us state deferred tax assets aggregated 180 million due limitations utilization net operating loss carryforwards taking consideration state tax planning strategies recognized additional valuation allowance 86 million fiscal 2014 additionally 348 million fully reserved deferred tax assets relating us state capital loss carryforwards expired unused fiscal 2014 due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary increase valuation allowance certain uk deferred tax assets 05 million resulted full valuation allowance also recorded fiscal 2014 extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets event determine portion deferred tax assets already subject valuation allowance realizable required establish valuation allowance charge income tax provision period determination made depending facts circumstances charge could material earnings calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risk revenues net income loss critical accounting policies intangible assets goodwill previously discussed item 7aitem 7 managements discussion analysis financial condition results operations executive overview legg mason inc holding company subsidiaries collectively comprise legg mason global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally us uk also offices australia bahamas brazil canada chile china dubai france germany italy japan luxembourg poland singapore spain switzerland taiwan references fiscal 2015 2014 2013 refer fiscal year ended march 31 year terms us company refer legg mason operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks hurdle rates largest portion performance fees earned based 12month performance periods end differing quarters year portion based quarterly performance periods distribution service fees received distributing investment products services providing support services investment portfolios providing nondiscretionary advisory services generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level assets management aum assets advisement aua fee rates thus affected factors securities market conditions ability attract maintain aum key investment personnel investment performance aum primarily vary period due inflows outflows client assets well market performance client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services fees charge investment services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions fees charge investment services vary based upon factors type underlying investment product amount aum asset management affiliate provides services type services investment objectives provided fees charged equity asset management services generally higher fees charged fixed income liquidity asset management services accordingly revenues average advisory revenue yields affected composition aum changes relative level equity assets alternatives typically significantly impacting revenues average advisory revenue yields average advisory revenue yields calculated ratio annualized investment advisory fees excluding performance fees average aum addition ordinary course business may reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets revenue sharing agreements place asset management affiliates specified percentages affiliates revenues required distributed us balance revenues retained affiliates pay operating expenses including compensation expenses excluding certain expenses income taxes agreements asset management affiliates retain different percentages revenues cover costs net income loss attributable legg mason inc operating margin compensation percentage operating revenues impacted based affiliates products generate aum change aum one affiliate respect one product class products dramatically different effect revenues earnings equal change another affiliate another product class products addition time may agree changes revenue sharing agreements arrangements asset management personnel may impact compensation expenses profitability significant component cost structure employee compensation benefits majority variable nature includes incentive compensation primarily based upon revenue levels noncompensation related operating expense levels revenue sharebased affiliates overall profitability next largest component cost structure distribution servicing expense consists primarily fees paid thirdparty distributors selling asset management products services largely variable nature certain operating costs typically consistent period occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly us increasingly countries operate results individual period considered representative future results profitability sensitive variety factors including amount composition aum volatility general level securities prices interest rates among things periods unfavorable market conditions likely adverse effect profitability addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients last years industry seen flows products currently garner significant market share discussion factors may affect results operations refer item 1a risk factors included herein financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms commercial banks insurance companies financial services companies industry impacted continued economic uncertainty constant introduction new products services consolidation financial services firms mergers acquisitions industry operate also subject extensive regulation federal state foreign laws like firms impacted regulatory legislative changes responding changes keeping abreast regulatory developments required continue require us incur costs continue impact profitability strategic priorities focused four primary areas listed management keeps strategic priorities mind evaluates operating performance financial condition consistent approach also presented table important initiatives management currently focuses evaluating performance financial condition strategic priorities discussed designed drive improvements net flows earnings cash flows aum key metrics including operating margin certain key metrics discussed annual results discussion follow connection strategic priorities october 1 2014 acquired martin currie holdings limited martin currie martin currie leading global equities specialist based united kingdom approximately 95 billion aum date acquisition connection acquisition january 1 2015 legacy australian asset manager became part martin currie renamed martin currie australia mc australia also connection strategic priorities effective may 31 2014 acquired qs investors holdings llc qs investors year ended march 31 2015 incurred approximately 358 million expenses related integration time two existing affiliates batterymarch financial management inc batterymarch legg mason global asset allocation llc lmgaa qs investors additional costs related integration expected material addition november 7 2014 completed sale equity interests legg mason investment counsel trust company na lmic stifel financial corporations global wealth management business material impact consolidated financial condition results operations see notes 2 8 notes consolidated financial statements item 8 financial statements supplemental data included herein additional information regarding acquisitions dispositions years ended march 31 2015 2014 also incurred 16 million 294 million respectively expenses related various corporate initiatives implemented fiscal 2014 including closing reorganizing certain businesses ongoing efforts increase efficiency effectiveness savings realized result corporate initiatives reinvested centralized global distribution business result reinvesting savings additional investments incurred expenses approximately 11 million year ended march 31 2015 expect expenses continue annual rate approximately 28 million 32 million going forward net income attributable legg mason inc year ended march 31 2015 2371 million 204 per diluted share compared 2848 million 233 per diluted share year ended march 31 2014 average aum total revenues increased fiscal 2015 compared fiscal 2014 discussed strong overall investment performance improved sales global distribution function contributed net client inflows longterm aum year ended march 31 2015 total net client flows negative result outflows liquidity aum increases aum due martin currie qs investors acquisitions net client inflows longterm aum positive market performance offset part reclassification certain client assets previously reported aum aua discussed net client outflows liquidity aum impact sale lmic following discussion analysis provides additional information regarding financial condition results operations business environment results operations fiscal 2015 economic environment characterized continued domestic growth improved economic data us overall markets remaining sensitive increasing concern economic conditions countries three major us equity market indices increased past three fiscal years bond indices mixed illustrated table 1 indices trademarks dow jones company mcgrawhill companies inc nasdaq stock market inc barclays capital respectively affiliated legg mason following table sets forth periods indicated amounts consolidated statements income loss percentage operating revenues increase decrease item percentage amount previous period nmnot meaningful 1 calculated based change actual amounts fiscal years percentage prior year amount assets management assets advisement assets management aum primarily managed across following asset classes equity fixed income liquidity  large cap growth  us intermediate investment grade  us managed cash  small cap core  us credit aggregate  us municipal cash  large cap value  global opportunistic fixed income  equity income  global government  international equity  us municipal  sector equity  global fixed income  mid cap core  us long duration  emerging markets equity  us limited duration  global equity  us high yield  large cap core  emerging markets components changes aum billions years ended march 31 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 includes positive impact market performance including reinvestment dividends 329 billion 351 billion 425 billion years ended march 31 2015 2014 2013 respectively negative impact foreign currency exchange rate movements 185 billion 49 billion 83 billion primarily related fixed income securities years ended march 31 2015 2014 2013 respectively fiscal 2015 also includes reclassification 128 billion client assets aum aua first quarter fiscal 2015 3 year ended march 31 2015 includes 95 billion related acquisition martin currie 50 billion related acquisition qs investors offset part 95 billion related disposition lmic aum march 31 2015 7027 billion increase 09 billion 01 march 31 2014 total net client outflows 57 billion net client outflows 222 billion liquidity asset class substantially offset 165 billion net client inflows longterm asset classes fiscal 2015 experienced net inflows longterm asset classes first time since fiscal 2007 net longterm asset inflows comprised fixed income inflows 192 billion offset part equity outflows 27 billion fixed income inflows primarily products managed brandywine global investment management llc brandywine western asset management company western asset equity net outflows primarily products managed royce associates royce outflows expected continue nearterm qs investors including legacy batterymarch partially offset equity inflows clearbridge investments llc “clearbridge” brandywine generally earn higher fees profits equity aum outflows equity asset class negatively impact revenues net income loss attributable legg mason inc would outflows asset classes market performance totaled 16 billion positive impact market performance 329 billion substantially offset negative impact foreign currency exchange rate fluctuations 185 billion reclassification 128 billion client assets aum aua first quarter fiscal 2015 discussed acquisitions dispositions net totaled 50 billion 95 billion related acquisition martin currie 50 billion related acquisition qs investors offset part 95 billion related disposition lmic aum march 31 2014 7018 billion increase 372 billion 6 march 31 2013 total net client inflows 83 billion 121 billion net client inflows liquidity asset class offset part 38 billion net client outflows longterm asset classes net longterm asset outflows comprised equity outflows 50 billion offset part fixed income inflows 12 billion equity outflows occurred products managed royce legacy batterymarch permal group ltd permal legg mason capital management renamed clearbridge llc partially offset equity inflows clearbridge fixed income inflows primarily products managed brandywine partially offset outflows principally western asset including 48 billion outflows single lowfee global sovereign mandate market performance totaled 302 billion positive impact market performance 351 billion offset part negative impact foreign currency exchange fluctuations 49 billion dispositions 13 billion resulted sale small affiliate investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds manage may redeem investments funds time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients thirdparty distributors relationships loss key investment management personnel financial market performance aum asset class aum asset class billions years ended march 31 follows average aum asset class billions years ended march 31 follows component changes aum asset class billions fiscal years ended march 31 2015 2014 2013 follows 1 fixed income redemptions include 47 billion 64 billion years ended march 31 2014 2013 respectively related single lowfee global sovereign mandate client assets related client reclassified aum aua first quarter fiscal 2015 discussed 2 total market performance includes positive impact market performance including reinvestment dividends 329 billion 351 billion 425 billion years ended march 31 2015 2014 2013 respectively negative impact foreign currency exchange rate movements 185 billion 49 billion 83 billion years ended march 31 2015 2014 2013 respectively primarily related fixed income securities year ended march 31 2015 also includes reclassification 128 billion client assets aum aua first quarter fiscal 2015 3 total acquisitions dispositions net year ended march 31 2015 includes 95 billion 50 billion related acquisitions martin currie qs investors respectively offset part 95 billion related disposition lmic aum distribution channel broadly two principal distribution channels global distribution affiliateother sell variety investment products services global distribution consists centralized global distribution operations principally sells us international mutual funds commingled vehicles retail separately managed account programs subadvisory accounts insurance companies similar clients affiliateother consists distribution operations within asset managers principally sell institutional separate account management liquidity money market funds fundsofhedge funds component changes aum distribution channel billions years ended march 31 2015 2014 2013 follows 1 includes 95 billion related acquisition martin currie 50 billion related acquisition qs investors offset part 95 billion related disposition lmic effective fee rates overall effective fee rate across asset classes distribution channels approximately 34 basis points years ended march 31 2015 2014 2013 fees managing equity assets generally higher averaging approximately 65 basis points year ended march 31 2015 70 basis points year ended march 31 2014 75 basis points year ended march 31 2013 average fees rate managing equity assets declined last three years due shift mix equity assets higher fee equity products lower fee equity products compares fees managing fixed income assets averaged approximately 30 basis points year ended march 31 2015 25 basis points years ended march 31 2014 2013 liquidity assets averaged 10 basis points reflecting impact current advisory fee waivers due low interest rate environment years ended march 31 2015 2014 2013 equity assets primarily managed clearbridge royce brandywine permal qs investors including legacy batterymarch assets martin currie fixed income assets primarily managed western asset brandywine permal liquidity assets managed western asset fee rates assets distributed legg mason global distribution predominately retail nature averaged approximately 50 basis points years ended march 31 2015 2014 2013 fee rates assets distributed affiliateother channel averaged approximately 30 basis points years ended march 31 2015 2014 2013 investment performance overall investment performance aum years ended march 31 2015 2014 2013 generally positive compared relevant benchmarks year ended march 31 2015 year ended march 31 2015 us indices produced positive returns best performing nasdaq composite returning 167 returns achieved economic environment characterized uneven global growth heightened sensitivity economic news declining oil prices unrest middle east fixed income markets federal reserve kept target rate discount rate steady signaling increase federal reserve funds target rate near term overall yield curve flattened year many longdated yields declined lowest performing fixed income sector year high yield bonds measured barclays us high yield index returned 20 best performing fixed income sector year corporate bonds measured barclays us credit index returned 67 year ended march 31 2014 year ended march 31 2014 us indices produced positive returns best performing nasdaq composite returning 285 returns achieved economic environment characterized uneven global growth heightened sensitivity economic news concerns economic growth china ongoing ukrainerussia crisis fixed income markets federal reserve kept target rate discount rate steady tapering bondbuying program yield curve steepened year flattened last quarter many longdated yields declined lowest performing fixed income sector year us treasury inflation protected securities tips measured barclays us tips index declined 65 best performing fixed income sector year high yield bonds measured barclays us high yield bond index returned 75 march 31 2014 year ended march 31 2013 year ended march 31 2013 us indices produced positive returns best performing sp 400 mid cap index returned 178 returns achieved economic environment characterized uneven domestic growth heightened sensitivity economic news included improving unemployment housing figures anticipation implementation sequestration concerns surrounding fiscal cliff periodic developments continuing european sovereign debt crisis fixed income markets federal reserve affirmed commitment hold federal funds rate historic lows beginning third round quantitative easing continuing support secondary mortgage market actions taken keep interest rates low stimulate economic growth resulted downward shift yield curve year lowest performing fixed income sector year us government bonds measured barclays us government bond index returned 30 best performing fixed income sector year high yield bonds measured barclays us high yield bond index returned 131 following table presents summary percentages aum strategy1 outpaced respective benchmarks march 31 2015 2014 2013 trailing 1year 3year 5year 10year periods following table presents summary percentages us mutual fund assets2 outpaced lipper category averages march 31 2015 2014 2013 trailing 1year 3year 5year 10year periods 1 purposes investment performance comparisons strategies aggregation discretionary portfolios separate accounts investment funds products single group represents particular investment objective case separate accounts investment performance account based upon performance strategy account assigned asset managers specific guidelines including portfolios strategies managers manage separate accounts investment funds strategy performance comparison assets based upon performance separate account march 31 2015 2014 2013 90 91 90 total aum included strategy aum respectively although strategies three five tenyear histories total strategy aum includes liquidity assets certain assets included reported performance comparisons include accounts managed accordance guidelines outlined accounts strategies marketed potential clients accounts yet assigned strategy certain smaller products affiliates past performance indicative future results aum included institutional retail separate accounts investment funds included strategy separate accounts performance comparisons based grossoffee performance investment funds including fundofhedge funds managed separate account format performance comparisons based netoffee performance comparisons reflect actual performance specific separate account investment fund individual separate account investment fund performance may differ 2 source lipper inc includes openend closedend variable annuity funds march 31 2015 2014 2013 us longterm mutual fund assets represented data accounted 21 20 19 respectively total aum performance us longterm mutual fund assets included strategies following table presents summary absolute relative performance compared applicable benchmark representative sample funds within aum net management fees end period presented 1year 3year 5year 10year periods funds inception table includes representative sample funds significant subclass investment strategies ie large cap equity small cap equity etc funds within group representative performance significant investment strategies offer march 31 2015 constituted aggregate approximately 4361 billion approximately 62 total aum meaningful exclusion funds fundsofhedge funds strategies involve privately placed hedge funds represent 3 total aum march 31 2015 investment performance made publicly available providing investment returns funds provides relevant representation performance avoiding many complexities relating factors multiple fee structures bundled pricing asset level break points would arise reporting performance strategies product aggregations 1 listed order size based aum fund within subcategory 2 absolute performance actual performance ie rate return fund relative performance difference variance performance fund stated benchmark assets advisement quarter ended june 30 2014 began reporting aua result acquisition approximately 98 billion aua qs investors also first quarter fiscal 2015 approximately 128 billion assets previously reported aum primarily related lowfee global sovereign mandate investment discretion abated time reclassified aua experienced significant aua outflows year ended march 31 2015 result one client redeeming approximately 80 billion redemptions material impact net income due low fee nature march 31 2015 aua approximately 35 billion primarily comprised approximately 17 billion related qs investors approximately 11 billion related western asset approximately 7 billion related clearbridge aua fee rates vary level nondiscretionary service provided march 31 2015 average annualized fee rate related aua low single digit basis points fees aua aggregating 30 million considered servicing fees therefore recorded distribution service fees consolidated statement income year ended march 31 2015 prior fiscal 2015 fees aua material results operations accordance financial accounting standards consolidation consolidate separately identify certain sponsored investment vehicles consolidation investment vehicles impact net income loss attributable legg mason inc material impact consolidated operating results also hold investments consolidated sponsored investment funds change value investments recorded nonoperating income expense reflected net income loss net amounts allocated noncontrolling interests see notes 1 3 16 notes consolidated financial statements additional information regarding consolidation investment vehicles operating revenues components total operating revenues millions dollar percentage changes periods follows total operating revenues year ended march 31 2015 282 billion increase 28 274 billion year ended march 31 2014 increase primarily due impact 6 increase average longterm aum offset part decrease performance fees although equity aum comprised higher percentage total aum march 31 2015 compared march 31 2014 average aum advisory revenue yields excluding performance fees 34 basis points years ended march 31 2015 2014 due slightly less favorable product mix lower yielding products comprising higher percentage total average aum year ended march 31 2015 compared year ended march 31 2014 total operating revenues year ended march 31 2014 274 billion increase 49 261 billion year ended march 31 2013 increase primarily due impact 3 increase average longterm aum average aum advisory revenue yields excluding performance fees 34 basis points years ended march 31 2014 2013 investment advisory fees separate accounts year ended march 31 2015 investment advisory fees separate accounts increased 468 million 60 8242 million compared 7774 million year ended march 31 2014 increase 347 million due higher average equity assets managed clearbridge 295 million due higher average fixed income assets managed western asset brandywine 174 million due martin currie including increase revenues related mc australia increases offset part approximately 25 million revenues associated certain existing client assets reclassified aum aua year ended march 31 2015 previously discussed revenues included distribution service fees fiscal 2015 increases also offset part decrease 158 million resulting sale lmic november 2014 year ended march 31 2014 investment advisory fees separate accounts increased 471 million 64 7774 million compared 7303 million year ended march 31 2013 increase 328 million result higher average equity assets managed clearbridge 232 million resulted higher revenues permal including resulting acquisition fauchier partners management limited fauchier march 2013 79 million due higher average fixed income assets managed brandywine increases offset part decrease 176 million due lower average equity assets managed batterymarch decrease 68 million due sale small affiliate august 2013 investment advisory fees funds year ended march 31 2015 investment advisory fees funds increased 432 million 29 154 billion compared 150 billion year ended march 31 2014 increase 801 million due higher average equity assets managed clearbridge 305 million due higher average fixed income assets managed brandywine western asset 147 million due martin currie including increase revenues related mc australia increases offset part decrease 405 million due lower average equity assets managed royce decrease 338 million due lower average assets managed permal net decrease 93 million fees liquidity assets due fee waivers liquidity funds managed western asset primarily maintain certain yields investors year ended march 31 2014 investment advisory fees funds increased 552 million 38 15 billion compared 14 billion year ended march 31 2013 increase 856 million due higher average equity assets managed clearbridge 165 million due higher average fixed income assets managed brandywine offset part decrease 487 million due lower average fixed income assets managed western asset investment advisory performance fees total aum march 31 2015 2014 2013 approximately 7 6 accounts eligible earn performance fees year ended march 31 2015 performance fees decreased 236 million 835 million compared 1071 million year ended march 31 2014 primarily due lower fees earned assets managed permal offset part increase fees earned assets managed brandywine year ended march 31 2014 performance fees increased 85 million 1071 million compared 986 million year ended march 31 2013 primarily due higher fees earned assets managed permal including resulting fauchier acquisition offset part impact 320 million fees received western asset prior year related winddown participation us treasurys publicprivate investment program ppip strong performance fees heavily influenced strong equity markets fiscal 2014 distribution service fees year ended march 31 2015 distribution service fees increased 136 million 39 3612 million compared 3476 million year ended march 31 2014 primarily result approximately 25 million revenues related client assets reclassified aum aua previously discussed revenues associated included distribution service fees fiscal 2015 well increase average mutual fund aum subject distribution service fees increases offset part impact increased fee waivers related liquidity funds managed western asset year ended march 31 2014 distribution service fees increased 171 million 52 3476 million compared 3305 million year ended march 31 2013 resulting increase average fee rates received mutual fund aum subject distribution service fees operating expenses components total operating expenses millions dollar percentage changes periods follows nm meaningful total operating expenses year ended march 31 2015 remained relatively flat 232 billion compared 231 billion year ended march 31 2014 total operating expenses year ended march 31 2014 231 billion decrease 242 305 billion year ended march 31 2013 decrease primarily attributable 7340 million intangible asset impairment charges recorded fiscal 2013 discussed operating expenses years ended march 31 2015 2014 2013 incurred investment management affiliate level comprised approximately 70 total operating expenses year excluding impairment charges deemed corporate expenses remaining operating expenses comprised corporate costs including legg mason global distribution lmgd costs compensation benefits components total compensation benefits millions dollar percentage changes periods follows total compensation benefits year ended march 31 2015 increased 19 123 billion compared 121 billion year ended march 31 2014 year ended march 31 2014 increased 18 121 billion compared 119 billion year ended march 31 2013 • salaries incentives increased 274 million 9769 million year ended march 31 2015 compared 9495 million year ended march 31 2014 principally due increase 158 million incentivebased compensation distribution corporate personnel primarily related increased retail sales global distribution group 97 million increase net compensation investment affiliates also contributed increase net compensation investment affiliates primarily due acquisition martin currie impact increased revenues certain revenueshare based affiliates offset part impact sale lmic november 2014 sale small affiliate closing certain businesses connection previously discussed corporate initiatives fiscal 2014 • salaries incentives increased 229 million 9495 million year ended march 31 2014 compared 9266 million year ended march 31 2013 principally due 147 million increase net compensation investment affiliates primarily resulting higher revenues net increase 83 million incentivebased compensation salaries corporate distribution personnel partially result increased retail sales • benefits payroll taxes increased slightly 2147 million year ended march 31 2015 compared 2145 million year ended march 31 2014 primarily result increase payroll taxes recruiting costs • benefits payroll taxes increased 97 million 2145 million year ended march 31 2014 compared 2048 million year ended march 31 2013 primarily result 35 million increase costs associated certain employee benefit plans 25 million increase health insurance expense 22 million increase payrollrelated taxes • transition costs severance increased 24 million 318 million year ended march 31 2015 compared 294 million year ended march 31 2014 primarily due higher compensation costs associated previously discussed integration batterymarch lmgaa time qs investors compared compensation costs associated various corporate initiatives recognized prior year • transition costs severance increased 88 million 294 million year ended march 31 2014 compared 206 million year ended march 31 2013 primarily due higher compensation costs recognized fiscal 2014 associated previously discussed corporate initiatives integration batterymarch lmgaa time qs investors compared compensation costs recognized fiscal 2013 associated retention awards granted fiscal 2012 certain executives key employees connection prior chief executive officer stepping september 2012 subsequent reorganization executive committee year ended march 31 2015 compensation percentage operating revenues decreased 437 441 year ended march 31 2014 due impact decreased revenues certain revenue sharebased affiliates retain higher percentage revenues compensation offset part impact higher compensation costs corporate distribution personnel year ended march 31 2014 compensation percentage operating revenues decreased 441 455 year ended march 31 2013 due impact compensation decreases related reduction net market gains assets invested deferred compensation plans seed capital investments compensation impact winddown western assets participation ppip fiscal 2013 distribution servicing year ended march 31 2015 distribution servicing expenses decreased 39 5948 million compared 6191 million year ended march 31 2014 primarily due net decrease 209 million structuring fees related closedend fund launches year ended march 31 2014 distribution servicing expenses increased 31 6191 million compared 6006 million year ended march 31 2013 152 million increase due increase average aum certain products pay fees thirdparty distributors communications technology year ended march 31 2015 communications technology expense increased 155 1824 million compared 1579 million year ended march 31 2014 primarily due increases technology consulting data management depreciation expenses market data costs principally resulting cybersecurity data governance enhancements addition martin currie qs investors expenses year ended march 31 2014 communications technology expense increased 55 1579 million compared 1497 million year ended march 31 2013 primarily result increase technology consulting market data telephone expenses occupancy year ended march 31 2015 occupancy expense decreased 48 1097 million compared 1152 million year ended march 31 2014 primarily due decrease 20 million depreciation furniture leaseholds 19 million decrease rent expense principally result lease reserves taken vacant space fiscal 2014 year ended march 31 2014 occupancy expense decreased 330 1152 million compared 1719 million year ended march 31 2013 primarily due impact real estate related charges totaling 528 million recognized fiscal 2013 46 million decrease rent expense primarily result lease reserves taken vacant space fiscal 2013 decreases offset part 79 million real estate related charges taken fiscal 2014 connection previously discussed corporate initiatives amortization impairment intangible assets year ended march 31 2015 amortization intangible assets decreased 789 26 million compared 123 million year ended march 31 2014 primarily due certain management contracts becoming fully amortized october 2014 december 2013 sale lmic offset part additional amortization expense related acquisitions qs investors martin currie year ended march 31 2014 amortization intangible assets decreased 121 123 million compared 140 million year ended march 31 2013 primarily due certain management contracts becoming fully amortized december 2013 impairment intangible assets 7340 million year ended march 31 2013 impairment charges related domestic mutual fund contracts asset permal fundsofhedge fund contracts asset permal trade name impairment charges resulted number trends factors resulted reduction projected cash flows overall assessment fair value assets domestic mutual fund contracts asset permal fundsofhedge funds contracts asset permal trade name asset declined carrying values accordingly impaired 3960 million 3210 million 170 million respectively fiscal 2013 see note 5 notes consolidated financial statements discussion impairment charges year ended march 31 2015 expenses increased 26 million 13 1986 million compared 1960 million year ended march 31 2014 primarily due 59 million increase travel entertainment expenses 53 million increase advertising expenses 47 million increase professional fees increases offset part 142 million decrease expense reimbursements paid certain mutual funds year ended march 31 2014 expenses increased 76 million 40 1960 million compared 1884 million year ended march 31 2013 primarily due 147 million increase expense reimbursements paid certain mutual funds 50 million charge fair value adjustment increase contingent consideration liability related acquisition fauchier acquired business performed better initially projected increases offset part 80 million decrease franchise taxes well 53 million decrease professional fees nonoperating income expense components total nonoperating income expense millions dollar percentage changes periods follows nm meaningful interest income year ended march 31 2015 interest income increased 172 75 million compared 64 million year ended march 31 2014 driven higher yields earned investment balances year ended march 31 2014 interest income decreased 158 64 million compared 76 million year ended march 31 2013 driven impact lower average interestbearing investment balances interest expense year ended march 31 2015 interest expense increased 102 583 million compared 529 million year ended march 31 2014 primarily due increase interest accruals uncertain tax positions interest accretion contingent consideration liabilities related acquisitions qs investors martin currie year ended march 31 2014 interest expense decreased 159 529 million compared 629 million year ended march 31 2013 primarily result 56 million decrease interest accruals uncertain tax positions 44 million decrease due refinancing 25 convertible senior notes convertible notes may 2012 fiveyear term loan january 2014 income expense net year ended march 31 2015 income expense net decreased 1181 million expense 853 million compared income 328 million fiscal 2014 decrease primarily due 1071 million charge related refinancing 55 senior notes july 2014 reduction net market gains 76 million seed capital investments assets invested deferred compensation plans offset corresponding decreases compensation mentioned reduction net market gains 53 million corporate investments offset compensation also contributed decrease year ended march 31 2014 income expense net improved 508 million income 328 million expense 180 million fiscal 2013 increase primarily result impact 690 million loss debt extinguishment recognized connection repurchase convertible notes may 2012 offset part 195 million decrease net market gains seed capital investments assets invested deferred compensation plans offset corresponding decreases compensation discussed nonoperating income loss consolidated investment vehicles year ended march 31 2015 nonoperating income expense consolidated investment vehicles civs net increased 35 million income 59 million primarily due increase net market gains investments certain civs year ended march 31 2014 nonoperating income expense civs net improved 52 million income 24 million expense 28 million fiscal 2013 primarily due net market gains investments certain civs income tax provision benefit year ended march 31 2015 provision income taxes 1253 million compared 1378 million year ended march 31 2014 effective tax rate 340 year ended march 31 2015 compared 328 year ended march 31 2014 change effective rate primarily related impact income tax benefits recorded fiscal 2014 respect uk corporate rate reductions discussed impact civs decreased effective rate 05 percentage points year ended march 31 2015 increased effective rate 02 percentage points year ended march 31 2014 year ended march 31 2014 provision income taxes 1378 million compared income tax benefit 1509 million year ended march 31 2013 effective tax rate 328 year ended march 31 2014 compared effective benefit rate 295 year ended march 31 2013 change effective rate primarily related higher relative proportion pretax income loss jurisdictions higher tax rates result lower statutory rates jurisdictions certain intangible assets impaired fiscal 2013 held substantially offset adjustments deferred tax balances reserves july 2012 uk finance act 2012 enacted reduced main uk corporate tax rate 25 24 effective april 1 2012 23 effective april 1 2013 july 2013 finance bill 2013 enacted reducing main uk corporate tax rate 21 effective april 1 2014 20 effective april 1 2015 impact tax rate changes certain existing deferred tax assets liabilities resulted tax benefit 192 million 181 million revaluation deferred tax assets liabilities years ended march 31 2014 2013 respectively impacted effective rate 46 percentage points year ended march 31 2014 35 percentage points year ended march 31 2013 impact civs increased effective rate 02 percentage points year ended march 31 2014 reduced effective rate 05 percentage points year ended march 31 2013 net income loss attributable legg mason inc operating margin net income attributable legg mason inc year ended march 31 2015 totaled 2371 million 204 per diluted share compared 2848 million 233 per diluted share year ended march 31 2014 decrease primarily attributable pretax nonoperating charge 1071 million 685 million net income tax benefits 059 per diluted share related refinancing 55 senior notes fiscal year ended march 31 2015 offset part 207 million decrease costs related closedend fund launches net impact increased operating revenues operating margin 177 year ended march 31 2015 compared 157 year ended march 31 2014 net income attributable legg mason inc year ended march 31 2014 totaled 2848 million 233 per diluted share compared net loss attributable legg mason inc 3533 million 265 per diluted share year ended march 31 2013 increase primarily attributable impact pretax impairment charges 7340 million 5083 million net income tax benefits 381 per diluted share recorded fiscal 2013 impact 690 million pretax loss 448 million net income tax benefits 034 per diluted share debt extinguishment recognized connection repurchase 25 convertible notes may 2012 impact 528 million real estate related charges recognized fiscal 2013 net impact increased operating revenues previously discussed addition net income attributable legg mason inc per diluted share benefited reduction weightedaverage shares outstanding result share repurchases operating margin 157 year ended march 31 2014 compared 166 year ended march 31 2013 supplemental nongaap financial information supplemental information providing performance measures based methodologies generally accepted accounting principles “nongaap” adjusted income operating margin adjusted management uses benchmarks evaluating comparing periodtoperiod operating performance adjusted income decreased 3788 million 326 per diluted share year ended march 31 2015 4178 million 341 per diluted share year ended march 31 2014 decrease primarily attributable pretax nonoperating charge 1071 million 685 million net income tax 059 per diluted share related refinancing 55 senior notes year ended march 31 2015 offset part net impact increased operating revenues operating margin adjusted years ended march 31 2015 2014 230 220 respectively operating margin adjusted years ended march 31 2015 2014 reduced 17 15 percentage points respectively due costs associated integration batterymarch lmgaa time qs investors various corporate initiatives previously discussed operating margin adjusted year ended march 31 2014 also reduced 10 percentage point due structuring fees related closedend fund real estate investment trust launches fiscal year adjusted income increased 4178 million 341 per diluted share year ended march 31 2014 3472 million 261 per diluted share year ended march 31 2013 operating margin adjusted years ended march 31 2014 2013 220 175 respectively operating margin adjusted year ended march 31 2014 reduced 15 percentage points due costs associated previously discussed corporate initiatives restructuring charges related integration batterymarch lmgaa time qs investors 10 percentage point due structuring fees related closedend fund launch fiscal year operating margin adjusted year ended march 31 2013 reduced 35 percentage points due real estate related charges management transition compensation costs recorded fiscal year 10 percentage point due structuring fees related closedend fund real estate investment trust launches fiscal year adjusted income define adjusted income net income loss attributable legg mason inc plus amortization deferred taxes related intangible assets goodwill imputed interest tax benefits contingent convertible debt less deferred income taxes goodwill indefinitelife intangible asset impairment also adjust noncore items reflective economic performance intangible asset impairments impact fair value adjustments contingent consideration liabilities impact tax rate adjustments certain deferred tax liabilities related indefinitelife intangible assets loss extinguishment contingent convertible debt believe adjusted income provides useful representation operating performance adjusted noncash acquisition related items facilitate comparison results asset management firms issuedextinguished contingent convertible debt made significant acquisitions also believe adjusted income important metric estimating value asset management business adjusted income considers adjustments certain items relate operating performance comparability therefore readily reconcilable net income loss attributable legg mason inc determined gaap measure provided addition net income loss attributable legg mason inc substitute net income loss attributable legg mason inc may comparable nongaap performance measures including measures adjusted earnings adjusted income companies adjusted income liquidity measure used place cash flow measures determined gaap fair value adjustments contingent consideration liabilities may provide tax benefit depending tax attributes acquisition transaction consider adjusted income useful investors important metric measuring economic performance asset management companies indicator value facilitates comparison operating results asset management firms issuedextinguished contingent convertible debt made significant acquisitions calculating adjusted income adjust impact amortization management contract assets impairment indefinitelife intangible assets add subtract impact fair value adjustments contingent consideration liabilities arise acquisitions net income loss attributable legg mason inc reflect fact items distort comparisons operating results asset management firms engaged significant acquisitions deferred taxes indefinitelife intangible assets goodwill include actual tax benefits amortization deductions realized gaap absent impairment charge disposition related business fully expect realize economic benefit current period tax amortization add benefit net income loss attributable legg mason inc calculation adjusted income however net operating loss carryforward receive benefit current tax amortization time conversely subtract noncash income tax benefits goodwill indefinitelife intangible asset impairment charges uk tax rate adjustments excess book basis certain acquired indefinitelife intangible assets applicable recognized gaap also add back applicable noncash imputed interest extinguishment loss contingent convertible debt adjusted amounts allocated conversion feature well adding actual tax benefits imputed interest realized gaap adjust debt extinguishment losses resulting prepayment fees adjustments reflect items distort comparisons operating results prior periods results asset management firms engaged significant acquisitions including related impairments issuedextinguished contingent convertible debt disposition impairment charge noncore item occur impact adjusted income may distort actual changes operating performance value firm accordingly monitor items related impact including taxes adjusted income ensure appropriate adjustments explanations accompany disclosures although depreciation amortization fixed assets noncash expenses add charges calculating adjusted income charges related assets ultimately require replacement reconciliation net income loss attributable legg mason inc adjusted income thousands except per share amounts follows 1 calculating adjusted income per diluted share include weightedaverage unvested restricted shares deemed participating securities earnings allocated participating securities purposes nongaap performance measure earnings allocated ratio participating securities common shares result inclusion participating securities earnings allocated thereto impact per share amounts adjustments made net income loss per diluted share attributable legg mason inc shareholders operating margin adjusted calculate operating margin adjusted dividing operating income loss adjusted exclude impact compensation expense gains losses investments made fund deferred compensation plans impact compensation expense gains losses seed capital investments affiliates revenue sharing agreements amortization related intangible assets income loss civs impact fair value adjustments contingent consideration liabilities impairment charges ii operating revenues adjusted add back net investment advisory fees eliminated upon consolidation investment vehicles less distribution servicing expenses use approximate measure revenues passed third parties refer operating revenues adjusted compensation items removed operating income loss calculation offset equal amount nonoperating income expense thus impact net income loss attributable legg mason inc adjust impact amortization management contract assets impact fair value adjustments contingent consideration liabilities arise acquisitions reflect fact items distort comparison operating results asset management firms engaged significant acquisitions impairment charges income loss civs removed operating income loss calculation items reflective core asset management operations use operating revenues adjusted calculation show operating margin without distribution servicing expenses use approximate distribution revenues passed third parties direct cost selling products although distribution servicing expenses may include commissions paid connection launching closedend funds corresponding revenue period operating revenues adjusted also include advisory revenues receive civs eliminated consolidation gaap believe operating margin adjusted useful measure performance provides measure core business activities excludes items impact net income loss attributable legg mason inc indicates operating margin would without distribution revenues passed third parties direct cost selling products amortization related intangible assets changes fair value contingent consideration liabilities impairment charges impact consolidation certain investment vehicles described consolidation investment vehicles impact net income loss attributable legg mason inc measure provided addition operating margin calculated gaap substitute calculations margins gaap may comparable nongaap performance measures including measures adjusted margins companies effective april 1 2013 revised definition operating margin adjusted add back amortization intangible assets applied change periods presented impact results year ended march 31 2013 increase 07 percentage points calculation operating margin operating margin adjusted follows dollars thousands liquidity capital resources primary objective capital structure appropriately support business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may time involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt consolidation variable interest entities discussed impact liquidity capital resources rights benefits bear risks associated assets liabilities civs beyond investments investment advisory fees generated vehicles eliminated consolidation additionally creditors civs recourse general credit beyond level investment consider liabilities obligations assets consist primarily intangible assets goodwill cash equivalents investment securities investment advisory related fee receivables assets principally funded equity capital longterm debt results operations march 31 2015 cash equivalents total assets longterm debt stockholders equity 07 billion 71 billion 11 billion 45 billion respectively total assets include amounts related civs 01 billion cash equivalents primarily invested liquid domestic nondomestic money market funds hold principally domestic nondomestic corporate commercial paper bonds government agency securities bank deposits recognized losses investments monitoring cash equivalents partially mitigates potential material risks may associated balances following table summarizes consolidated statements cash flows years ended march 31 millions cash inflows provided operating activities fiscal 2015 5681 million primarily related net income adjusted noncash items net activity related civs cash inflows provided operating activities fiscal 2014 4373 million primarily related net income adjusted noncash items offset part net purchases trading investments decrease net activity related civs primarily due winddown consolidated loan obligation clo see note 16 notes consolidated financial statements additional information regarding clo cash inflows provided operating activities fiscal 2013 3033 million primarily related net sales trading investments results operations adjusted noncash items offset part allocation extinguished debt repayment payments accrued compensation cash outflows used investing activities fiscal 2015 2080 million primarily related payments associated acquisitions martin currie qs investors 1837 million net acquired cash payments made fixed assets 458 million offset part proceeds businesses sold 470 million cash inflows provided investing activities fiscal 2014 1376 million primarily related net activity related civs offset part payments made fixed assets cash outflows used investing activities fiscal 2013 110 million primarily related payments related acquisition fauchier payments made fixed assets offset part net activity related civs cash outflows used financing activities fiscal 2015 5070 million primarily related repayment longterm debt 6458 million repurchases 69 million shares common stock 3565 million repayment longterm debt civs 792 million dividends paid 708 million offset part proceeds issuance 6588 million longterm debt cash outflows used financing activities fiscal 2014 6390 million primarily related repayment longterm debt 5004 million repayment longterm debt civs 1330 million repurchase 97 million shares common stock 3600 million dividends paid 620 million offset part proceeds longterm debt issuances 3937 million cash outflows used financing activities fiscal 2013 7359 million primarily related repayment longterm debt 105 billion repurchase 162 million shares common stock 4255 million 2500 million repayment shortterm debt dividends paid 553 million offset part proceeds subsequent longterm debt issuances 114 billion financing transactions table reflects primary sources financing thousands march 31 2015 capital plan financing transactions may 2012 announced capital plan included refinancing outstanding convertible notes refinancing effected issuance 650 million 55 senior notes due 2019 55 senior notes net proceeds together cash hand 250 million remaining borrowing capacity existing revolving credit facility used repurchase 125 billion convertible notes terms repurchase included repayment convertible notes par plus accrued interest prepayment fee 63 million issuance warrants holders convertible notes warrants replaced conversion feature convertible notes provide purchase aggregate subject adjustment 142 million shares common stock net share settled basis exercise price 88 per share warrants expire july 2017 settled election either shares common stock cash connection extinguishment convertible notes hedge transactions purchased call options warrants executed connection initial issuance convertible notes also terminated also pursuant capital plan june 2012 entered unsecured credit agreement provided 500 million revolving credit facility 500 million term loan repaid fiscal 2014 discussed proceeds term loan used repay 500 million outstanding borrowings previous revolving credit facility terminated january 2014 issued 400 million 5625 senior notes due 2044 net proceeds together cash hand used repay 450 million outstanding borrowings fiveyear term loan entered conjunction unsecured credit agreement noted 5625 senior notes sold discount 63 million amortized interest expense 30 year term also january 2014 entered 250 million incremental revolving credit facility contemplated addition 500 million revolving credit facility available existing credit agreement revolving credit facilities available fund working capital needs general corporate purposes expire june 2017 borrowings outstanding either revolving credit facilities either march 31 2015 2014 june 2014 issued 250 million 27 senior notes due 2019 discount 06 million 250 million 395 senior notes due 2024 discount 05 million additional 150 million 5625 senior notes due 2044 premium 98 million july 2014 proceeds 659 million net related fees together cash hand used redeem outstanding 650 million 55 senior notes retirement 55 senior notes resulted pretax nonoperating charge 1071 million july 2014 consisting cash makewhole premium payment 986 million net 06 million reverse treasury lock call 55 senior notes 85 million associated existing deferred costs original issue discount financial covenants bank debt agreement include maximum net debt ebitda ratio 25 1 minimum ebitda interest expense ratio 40 1 debt defined include obligations borrowed money excluding nonrecourse debt civs capital leases net debt covenants debt reduced amount unrestricted cash excess greater subsidiary cash 375 million ebitda defined consolidated net income loss plusminus tax expense benefit interest expense depreciation amortization intangibles extraordinary expense losses noncash charges defined agreements march 31 2015 net debt ebitda ratio 13 1 ebitda interest expense ratio 135 1 therefore maintained compliance applicable covenants net income loss significantly declines spend available cash may impact ability maintain compliance financial covenants determine compliance covenants may pressure time either outstanding borrowings facilities want utilize available borrowings otherwise desire keep borrowings available may elect take number actions including reducing expenses order increase ebitda using available cash repay portion outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments outstanding bank debt agreement currently impacted ratings two rating agencies interest rate annual commitment fee revolving lines credit based higher credit rating two rating agencies june 2011 rating one agencies downgraded one grade agency downgrade rating absent upgrade former agency interest costs rise modestly addition board directors authorized 10 billion additional purchases common stock 14 million remained available march 31 2015 capital plan contemplates using 65 cash generated future operations purchase shares common stock current approach use 90 million per quarter share repurchases subject market conditions potential uses cash january 2015 board directors authorized 10 billion additional purchases common stock transactions expect next 12 months cash generated operating activities available cash hand adequate support operating investing cash needs planned share repurchases however would likely need raise financing potentially utilizing borrowing capacity revolving credit facility elect make acquisitions currently intend utilize available resources number potential activities including limited acquisitions seed capital investments new products repurchase shares common stock repayment outstanding debt payment increased dividends addition ordinary operating cash needs anticipate cash needs next 12 months discussed october 1 2014 acquired outstanding equity interests martin currie acquisition required initial payment approximately 203 million using foreign exchange rate october 1 2014 £125 million contract amount funded existing cash resources addition contingent consideration payments may due march 31 following first second third anniversaries closing aggregating approximately 483 million using foreign exchange rate march 31 2015 maximum £325 million contract amount inclusive payment certain potential pension obligations dependent achievement certain financial metrics specified share purchase agreement march 31 2016 2017 2018 contingent consideration liability established closing acquisition date fair value 752 million using foreign exchange rate october 1 2014 actual payments made may also include amounts certain potential pension obligations accounted separately march 31 2015 fair value contingent consideration liability 701 million decrease 51 million october 1 2014 substantially attributable changes exchange rate net accretion addition martin currie trustees pension plan referenced recently received notice pensions regulator uk reviewing plan’s current structure funding status review commencing assurance review result accelerated funding see note 2 notes consolidated financial statements additional information effective may 31 2014 completed acquisition qs investors transaction included initial cash payment 11 million funded existing cash resources addition contingent consideration 10 million 20 million second fourth anniversary payments may due july 2016 july 2018 respectively dependent achievement certain net revenue targets subject potential catchup adjustment fourth anniversary payment second anniversary payment shortfall contingent consideration liability established closing acquisition date fair value 134 million accreted 136 million march 31 2015 connection integration time two existing affiliates batterymarch lmgaa qs investors incurred approximately 38 million total restructuring transition costs approximately 10 noncash charges approximately 29 million paid date additional charges related integration expected material see note 2 notes consolidated financial statements additional information march 2013 completed acquisition outstanding share capital fauchier leading european based manager fundsofhedge funds bnp paribas investment partners sa transaction included initial cash payment 634 million funded existing cash resources march 31 2015 approximately 22 million using exchange rate march 31 2015 maximum £15 million payment amount due agreements governing acquisition fauchier second anniversary contingent consideration amount funded existing cash resources paid may 2015 addition contingent consideration approximately 30 million using exchange rate march 31 2015 £20 million maximum contractual amount may due fourth anniversary closing dependent achieving certain levels revenue net distribution costs fair value contingent consideration liability approximately 271 million march 31 2015 222 million relates previously discussed second anniversary payment decrease 24 million march 31 2014 attributable changes exchange rate net accretion executed currency forwards economically hedge risk movements exchange rate us dollar british pound estimated contingent liability payment amounts denominated june 2013 march 2014 implemented affiliate management equity plans entitle certain key employees permal clearbridge respectively participate 15 future growth respective enterprise value subject appropriate discounts discussed notes 1 11 notes consolidated financial statements repurchases units granted plans may impact future liquidity requirements certain asset management affiliates maintain various credit facilities general operating purposes certain affiliates subject capital requirements various regulatory agencies affiliates met respective capital adequacy requirements periods presented see notes 2 6 notes consolidated financial statements additional information related acquisitions fauchier qs investors martin currie debt respectively future outlook described currently project cash flows operating activities sufficient fund present foreseeable nearterm liquidity needs march 31 2015 approximately 400 million cash equivalents excess working capital requirements previously discussed intend utilize 90 million cash generated future operations purchase shares common stock quarter year ending march 31 2016 subject market conditions cash needs march 31 2015 also undrawn revolving credit facilities totaling 750 million expiring june 2017 currently expect raise incremental debt equity financing next 12 months beyond current levels unless enter one acquisitions however assurances expectations projections could prove incorrect events may occur require additional liquidity excess amounts revolving credit facility opportunity refinance indebtedness market conditions might significantly worsen affecting results operations generation available cash events result operations available cash insufficient fund liquidity needs would likely seek manage available resources taking actions reducing future share repurchases reducing operating expenses reducing expected expenditures investments selling assets investment securities repatriating earnings foreign subsidiaries reducing dividend modifying arrangements affiliates andor employees types actions prove insufficient acquisition refinancing opportunity arise would likely utilize borrowing capacity revolving credit facility seek raise additional equity debt liquid assets include cash equivalents certain current investment securities march 31 2015 total liquid assets approximately 10 billion included 378 million cash investments held foreign subsidiaries net working capital amounts foreign subsidiaries significant order increase cash available us general corporate purposes plan utilize 257 million foreign cash next several years 16 million accumulated foreign earnings due certain tax planning strategies anticipate generate tax benefit approximately 12 million respect repatriation adjusted tax reserve accordingly fiscal 2014 repatriation accumulated prior period foreign earnings currently planned however circumstances change provide pay applicable additional us taxes connection repatriation offshore funds practical time determine income tax liability would result repatriation accumulated foreign earnings credit liquidity risk cash equivalent deposits involve certain credit liquidity risks maintain cash equivalents number high quality financial institutions funds time may concentrations one institutions balances financial institutions funds credit quality monitored ongoing basis offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations section follows consolidation discussed critical accounting policies notes 1 16 notes consolidated financial statements contractual contingent obligations contractual obligations make future payments principally connection longterm debt noncancelable lease agreements acquisition agreements service agreements see notes 6 8 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual obligations millions fiscal year excludes contractual obligations civs responsible liable obligations 1 amount contingent payments reflected year represents maximum amount could payable earliest possible date terms business purchase agreements using applicable exchange rate march 31 2015 amounts denominated us dollar related contingent consideration liabilities fair value 1108 million march 31 2015 net certain potential pension obligations related martin currie see notes 2 8 notes consolidated financial statements 2 table include approximately 343 million capital commitments investment partnerships legg mason limited partner obligations outstanding funded required end commitment periods running fiscal 2021 3 table include amounts uncertain tax positions 681 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated 4 table include redeemable noncontrolling interests primarily related civs 455 million timing related cash outflows cannot reliably estimated 5 table excludes potential obligations arising ultimate settlement awards affiliate management equity plans key employees permal clearbridge due uncertainty timing amounts ultimately payable see note 11 notes consolidated financial statements additional information regarding affiliate management equity plans market risk maintain enterprise risk management program oversee coordinate risk management activities legg mason subsidiaries program certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income loss majority revenue calculated market value aum accordingly decline value underlying securities cause aum thus revenues decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts ordinary course business may also reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets market conditions current historical low interest rate environment may lead us take actions performance fees may earned certain investment advisory contracts exceeding performance benchmarks strong markets tend increase fees declines market values aum result reduced fee revenues net income generally earn higher fees equity assets fees charged fixed income liquidity assets declines market values aum asset class greater impact revenues addition revenue sharing agreements certain affiliates retain different percentages revenues cover costs including compensation net income loss profit margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary trading nontrading assets trading nontrading assets comprised investment securities including seed capital sponsored mutual funds products limited partnerships limited liability companies certain investment products trading current investments excluding civs march 31 2015 2014 subject risk security price fluctuations summarized table thousands approximately 318 million 337 million trading current investments related longterm incentive compensation plans march 31 2015 2014 respectively offsetting liabilities fluctuation market value assets related liabilities material effect net income loss liquidity however impact compensation expense corresponding offset nonoperating income expense trading current investments 574 million 900 million march 31 2015 2014 respectively relate longterm incentive plans related liabilities completely offset due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income expense net income loss approximately 3655 million 3440 million trading current investments march 31 2015 2014 respectively investments proprietary fund products investments fluctuations market value impact nonoperating income expense amounts fluctuations market value related approximately 375 million 199 million proprietary fund products march 31 2015 2014 respectively offsetting compensation expense revenue share agreements fluctuations market value related approximately 1630 million 1098 million proprietary fund products march 31 2015 2014 respectively substantially offset gains losses market hedges therefore materially impact net income loss attributable legg mason inc investments proprietary fund products liquidated related fund establishes track record investors decision made longer pursue strategy nontrading assets excluding civs march 31 2015 2014 subject risk security price fluctuations summarized table thousands investment securities civs totaled 480 million 505 million march 31 2015 2014 respectively investments civs totaled 318 million march 31 2014 march 31 2015 2014 held equity investments civs 156 million 394 million respectively fluctuations market value investments civs excess equity investment impact net income loss attributable legg mason inc however may impact nonoperating income expense civs corresponding offset net income loss attributable noncontrolling interests valuation trading nontrading investments described within critical accounting policies heading valuation financial instruments see notes 1 14 notes consolidated financial statements discussion derivatives following summary effect 10 increase decrease market values financial instruments subject market valuation risks march 31 2015 thousands 1 gains losses related certain investments deferred compensation plans proprietary fund products directly offset corresponding adjustment compensation expense related liability addition investments proprietary fund products approximately 1630 million economically hedged limit market risk result 10 increase decrease unrealized market value financial instruments subject market valuation risks would result 264 million increase decrease pretax earnings march 31 2015 also march 31 2015 2014 cash equivalents included 3533 million 4566 million respectively money market funds foreign exchange sensitivity operate primarily us provide services earn revenues incur expenses outside us accordingly fluctuations foreign exchange rates currencies principally uk brazil japan canada singapore australia denominated euro may impact aum revenues expenses comprehensive income loss net income loss certain affiliates entered forward contracts manage portion impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect net income loss liquidity interest rate risk exposure interest rate changes outstanding debt substantially mitigated 250 million 395 senior notes due july 2024 550 million 5625 senior notes due july 2044 fixed interest rates june 2014 entered interest rate swap contract designated fair value hedge effectively convert 250 million 27 senior notes due july 2019 fixed rate debt floating rate debt march 31 2015 result interest rate swap estimate 1 change interest rates would result net annual change interest expense 25 million economic basis interest rate swap contract wholly partially hedges interest rate exposure operating cash see notes 6 14 notes consolidated financial statements additional discussion debt derivatives hedging respectively critical accounting policies estimates accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following critical accounting policies involve significant estimates judgments consolidation normal course business sponsor manage various types investment vehicles services entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees managed investment vehicles material march 31 2015 issued investment performance guarantees investment vehicles investors sell transfer assets investment vehicles accordance financial accounting standards consolidate certain sponsored investment vehicles designated civs certain investment vehicles sponsor manager considered variable interest entities vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights investment vehicles considered vres consolidated controlling financial interest investment vehicle absent substantive investor rights replace manager entity kickout rights may also fund initial cash investment certain vre investment vehicles generate investment performance track record order attract thirdparty investors product initial investment new product typically represents 100 ownership product discussed “seed capital investments” consolidated long maintain controlling financial interest product designated civs unless investment longerterm vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity potential controlling financial interest investment company vies sponsored investment funds deemed investment companies including money market funds determine primary beneficiary vie absorb majority vies expected losses receive majority vies expected residual returns determination expected residual returns excludes gross fees paid decision maker certain criteria met determining whether primary beneficiary investment company vie consider qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid us related party including employees’ ownership guarantees implied relationships determining primary beneficiary must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks determining whether vie significant disclosure purposes consider factors used determination primary beneficiary vies sponsored investment funds meet investment company criteria collateralized debt obligation entities clo entities determine fund basis primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits potentially could significant vie consider management fee structure including seniority level fees current expected economic performance entity well provisions included governing documents might restrict guarantee expected loss residual return evaluating whether obligation absorb losses right receive benefits could potentially significant vie consider factors regarding design terms characteristics investment vehicles including following qualitative factors involvement investment vehicle beyond providing management services hold equity debt interests investment vehicle transferred assets investment vehicle potential aggregate fees future periods insignificant relative potential cash flows investment vehicle variability expected fees relation potential cash flows investment vehicle insignificant must consolidate vie deemed primary beneficiary see notes 1 3 16 notes consolidated financial statements additional discussion civs vies revenue recognition vast majority revenues calculated percentage fair value aum underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager brokerdealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost approximates fair value vast majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs management fees aum fair values based unobservable inputs material march 31 2015 equity fixed income liquidity aum values aggregated 1994 billion 3761 billion 1272 billion respectively vast majority aum valued independent pricing services based upon observable market prices inputs believe market risk significant risk underlying value aum economic events financial market turmoil increased market price volatility however valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2015 less 1 total aum valued based unobservable inputs valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except portion longterm debt trading investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income loss comprehensive income loss depending underlying purpose instrument equity investments control investee primary beneficiary variable interest entity exert significant influence financial operating policies investee follow equity method accounting evaluation whether exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence may governing board investee legal rights investors entity pursuant funds operating documents relationship us investors entity substantially equity method investees investment companies record underlying investments fair value therefore equity method accounting share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense investments value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices evaluate nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2015 2014 excluding investments civs owned approximately 03 million financial investments valued assumptions estimates unobservable inputs march 31 2015 2014 also approximately 629 million 874 million respectively investments investment partnerships included noncurrent assets consolidated balance sheets approximately 483 million 630 million respectively accounted equity method remainder accounted cost method considers factors indicate may impairment value investments addition march 31 2015 2014 162 million 226 million respectively equity method investments included investment securities consolidated balance sheets accounting guidance fair value measurements disclosures defines fair value establishes framework measuring fair value accounting guidance defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance accounting guidance fair value measurements establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category may include repurchase agreements fixed income securities certain proprietary fund products category also includes clo loans derivative liabilities civ level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds clo debt civ category may also include certain proprietary fund products redemption restrictions valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products certain investments held civs valued net asset value nav determined fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient rely navs certain investments fair value navs provided investees derived fair values underlying investments reporting date march 31 2015 approximately 1 total assets 8 financial assets measured fair value 4 total liabilities 30 financial liabilities measured fair value meet definition level 3 excluding assets liabilities civs approximately 1 total assets 7 financial assets measured fair value 4 liabilities 30 financial liabilities measured fair value meet definition level 3 transfers categories measured beginning period see note 3 16 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2015 follows thousands identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth attrition rates acquired contracts based upon historical experience factors estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weightedaverage cost capital takes consideration premium representing degree risk inherent asset fully described goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred perform quantitative tests include critical reviews significant assumptions determine intangible assets goodwill impaired qualitatively concluded likely respective fair values exceed related carrying values perform tests indefinitelife intangible assets goodwill annually december 31 completed annual impairment tests goodwill indefinitelife intangible assets december 31 2014 determined impairment value assets december 31 2014 impairments values amortizable intangible assets recognized year ended march 31 2015 estimates related future cash flows exceeded asset carrying values also determined triggering events occurred march 31 2015 therefore additional indefinitelife intangible asset goodwill impairment testing necessary result uncertainty regarding future market conditions assessing fair value reporting unit intangible assets requires management exercise significant judgment acquisition martin currie legg mason resulted addition indefinitelife mutual fund contracts asset amortizable separate accounts asset trade name asset goodwill 135 million 15 million 7 million 158 million £84 million £9 million £4 million £98 million respectively using foreign exchange rate october 1 2014 fair values martin currie indefinitelife mutual fund contracts asset amortizable separate accounts asset fair values established october 1 2014 acquisition date december 31 2014 impairment consideration limited review aum trends critical valuation inputs noted significant changes amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates amortization periods longer appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows estimated remaining useful lives amortizable intangible assets currently range four 12 years weightedaverage life approximately 93 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined market participants perspective based projected discounted cash flows taking account values market participants would pay taxable transaction acquire respective assets two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names determine fair value intangible assets based upon discounted projected cash flows take consideration estimates future fees profit margins growth rates taxes discount rates determination fair values indefinitelife intangible assets highly dependent estimates changes inputs could result material impairment related carrying values asset determined impaired current implied fair value less recorded carrying value asset impaired difference current implied fair value carrying value asset reflected financial statements recognized operating expense period impairment determined exist contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset fauchier acquisition completed permal march 2013 included fundsofhedge fund business intended merged existing permal fund business common management shared resources including infrastructure employees processes cobranding initiatives accordingly related carrying values cash flows funds aggregated impairment testing projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth estimated net client flows projected market performance estimate projected cash flows projected growth rates affiliate used project aum cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income liquidity investment manager based upon among things historical experience expectations future market investment performance internal external sources currently market growth assumptions 6 equity 3 fixed income 0 liquidity products general assumption 2 organic growth products subject exceptions organic growth contraction nearterm periods starting point assumptions corporate planning process includes threeyear aum projections management operating affiliate consider specific business circumstances affiliate nearyear flow assumptions certain affiliates adjusted appropriate reflect market participant view beyond year three estimates move towards general organic growth assumption 2 appropriate affiliate asset class year 20 resulting cash flow growth rate year 20 held constant used project cash flows year 40 based projected aum affiliate asset class affiliate advisory fee rates applied determine projected revenues domestic mutual fund contracts projected revenues applied weightedaverage margin applicable affiliates manage aum margins based arrangements currently place affiliate projected operating income reduced appropriate tax rate calculate projected cash flows believe growth assumptions reasonable given consideration multiple inputs including internal external sources although assumptions subject change based fluctuations actual results market conditions assumptions also subject change due among factors poor investment performance one operating affiliates withdrawal aum clients changes business climate adverse regulatory actions loss key personnel consider risks development growth assumptions discount rates discussed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows process includes comparison actual results prior growth projections however differences actual results prior projections necessarily indicative need reassess estimates given discounted projected cash flow analyses include projections well beyond three years variances nearyears may offset subsequent years fair value assessments pointintime consistency fair value assessment indicators value reflect expectations market participants pointintime critical evidence soundness estimate value subsequent periods consider differences actual results prior projections considering reasonableness growth assumptions used current impairment testing discount rates based appropriately weighted estimated costs debt equity capital using market participant perspective estimate cost debt based published debt rates estimate cost equity capital based capital asset pricing model considers riskfree interest rate peergroup betas company equity risk premiums equity risk adjusted consider relative risk associated legg mason indefinitelife intangible asset reporting unit discount rates also calibrated based assessment relevant market values consistent standard valuation practices taxable transactions projected discounted cash flow analysis also factors tax benefit value appropriate tax benefit represents discounted tax savings third party purchased asset given valuation date would receive future tax deductions amortization purchase price 15 years permal fundsofhedge funds contracts 698 million account approximately 20 indefinitelife intangible assets supported permals fundofhedge funds business funds experienced outflows recent years increased risk associated portion permals business past several years seen declines traditional high net worth client fundofhedge funds business permals historical focus permal offset extent inflows institutional business fundofhedge fund managers subject certain regulatory market influences evidenced permals growth institutional funds separate accounts adding additional uncertainty estimates based upon projected discounted cash flow analyses fair value permal fundsofhedge funds contracts asset exceeded carrying value 88 million continues lowest level excess fair value carrying value significant mutual fund contract intangible assets cash flows permal fundsofhedge funds contracts assumed average annual growth rate approximately 7 however given current experience projected cash flows reflect moderate aum outflows year one net aum flows year two trending moderate aum inflows year three investment performance including expected impact future asset flows significant factor growth projections permal fundsofhedge funds contracts market performance projections supported fact permals two largest funds comprise approximately half contracts asset aum 10year average returns approximating 5 market projections supported industry statistics projected cash flows permal fundsofhedge funds contracts discounted 145 reflecting factors noted results 12 months december 31 2014 slightly lower growth assumptions related permal fundsofhedge funds contracts assets impairment testing december 31 2013 assuming factors remain actual results andor changes assumptions permal fundsofhedge funds contracts cash flow projections longterm would deviate 10 previous projections discount rate would raised 145 155 asset deemed impaired given relatively small excess fair value related carrying value current uncertainty regarding future market conditions including fundsofhedge funds environment discussed reasonably possible fund performance flows aum levels may decrease near term actual cash flows permal fundsofhedge funds contracts could deviate projections 10 asset could deemed impaired material amount domestic mutual fund contracts acquired citigroup asset management “cam” transaction 2106 million account approximately 65 indefinitelife intangible assets december 31 2014 approximately 157 billion aum primarily managed clearbridge western asset associated asset approximately 40 equity aum 30 longterm fixed aum liquidity aum although domestic mutual funds overall maintained strong recent market performance previously disclosed uncertainties regarding market conditions asset flows risks related potential regulatory changes liquidity business reflected projected discounted cash flow analyses based projected discounted cash flow analyses related fair value exceeded carrying value approximately 865 million impairment test cash flows domestic mutual fund contracts assumed annual growth rates average approximately 6 reflect moderate aum inflows years 1 2 projected cash flows domestic mutual fund contracts discounted 135 results 12 months december 31 2014 compared favorably growth assumptions related domestic mutual fund contracts asset impairment testing december 31 2013 assuming factors remain actual results andor changes assumptions domestic mutual fund contracts cash flow projections longterm would deviate 30 previous projections discount rate would raised 135 165 asset deemed impaired despite higher excess fair value related carrying value given current uncertainty regarding future market conditions reasonably possible fund performance flows aum levels may decrease near term actual cash flows domestic mutual funds contracts could deviate projections 30 asset could deemed impaired material amount trade names account 2 indefinitelife intangible assets primarily related permal tested intangible assets using assumptions similar described indefinitelife contracts resulting fair values trade names significantly exceeded related carrying amounts goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition legg mason continues managed one global asset management operating segment internal management reporting discrete financial information regularly received chief operating decision maker chief executive officer consolidated global asset management business level result goodwill recorded evaluated one global asset management reporting unit level global asset management reporting unit consists operating businesses asset management affiliates centralized global distribution operations impairment testing process consolidated assets except certain tax benefits liabilities allocated single global asset management reporting unit similarly projected operating results reporting unit include holding company corporate costs overhead including costs associated executive management finance human resources legal compliance internal audit central corporate functions goodwill principally originated acquisitions cam permal royce recently martin currie value reporting unit based part projected consolidated net cash flows including cash flows assets managed mutual funds closedend funds proprietary funds addition separate account assets managers significant assumptions used assessing implied fair value reporting unit discounted cash flow method consistent methodology discussed indefinitelife intangible assets also reporting unit level future corporate costs estimated consolidated projected operating results affiliates actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows discount rates based appropriately weighted estimated costs debt using market participant perspective also consistent methodology discussed indefinitelife intangible assets also perform marketbased valuation reporting unit value applies average ebitda multiples paid change control transactions peer companies ebitda results two estimates value reporting unit discounted cash flow ebitda multiple analyses compared significant differences assessed determine reasonableness value whether adjustment either result warranted values accepted appropriately weighted average two reporting unit valuations discounted cash flow ebitda multiple analyses used implied fair value global asset management reporting unit december 31 2014 exceeded carrying value material amount considering relative merits details involved valuation process used equal weighting two values december 2014 testing assess accuracy reporting unit value determined valuation methods comparing results market capitalization determine implied control premium reasonableness implied control premium considered comparing control premiums paid relevant actual change control transactions assessment provides evidence underlying assumptions analyses reporting unit fair value reasonable calculating market capitalization purposes market volatility significant impact capitalization appropriate may consider average market prices stock period one two months test date determine market capitalization control premium arises fact acquisition typically premium paid current market prices publicly traded companies relates ability control operations acquired company assessments control premiums asset management industry difficult many acquisitions involve privately held companies involve portions public company control premium calculated based analysis consideration believe implied control premium determined reporting unit value estimation december 31 2014 lower end observed range reasonable contingent consideration liabilities connection business acquisitions may required pay additional future consideration based achievement certain designated financial metrics estimate fair value potential future obligations time business combination consummated record contingent consideration liability consolidated balance sheet fair values contingent consideration liabilities revised quarterly reporting date march 31 2015 fair values contingent consideration liabilities aggregate 111 million relating acquisitions martin currie fauchier qs investors estimate fair value contingent consideration liabilities using probabilityweighted modeling specific business acquisition arrangement contingent consideration estimated payments discounted present value measurement date martin currie purchase agreement requires us pay additional consideration based achievement certain financial metrics specified share purchase agreement certain future dates three onehalf year earnout term modeling martin currie contingent payment arrangement includes monte carlo simulation projected aum performance fees product performance determine related estimated payment amounts expected payment amounts subsequently change contingent consideration liabilities reduced increased current period resulting gain loss reflected within operating expense consolidated statements income significant increases decreases projected aum performance fee levels martin currie would result significantly higher lower contingent consideration liability fair value resulting changes could material operating results fauchier qs investors purchase agreements require us pay additional consideration based whether certain future revenue thresholds achieved likewise significant increases decreases projected revenue levels fauchier qs investors would result significantly higher lower contingent consideration liability fair value resulting changes could material operating results stockbased compensation stockbased compensation plans include stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units affiliate management equity plans deferred compensation payable stock compensation plans issue equity awards directors officers key employees accordance applicable accounting guidance compensation expense years ended march 31 2015 2014 2013 includes compensation cost nonvested sharebased awards grant date fair value amortized respective vesting periods straightline method also accounting guidance cash flows related income tax deductions excess less stockbased compensation expense classified financing cash flows granted 09 million 12 million 10 million stock options fiscal 2015 2014 2013 respectively fiscal 2014 also implemented management equity plans two affiliates granted units certain employees entitle participate 15 future growth respective affiliates enterprise value subject appropriate discounts additional information sharebased compensation see note 11 notes consolidated financial statements determine fair value option grant using blackscholes optionpricing model except marketbased grants use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate exception grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal expected life options estimate volatility equally weighted historical prices stock period equal expected life option implied volatility market listed options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different also determine fair value affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts inputs blackscholes model generally determined fashion similar fair value grants options stock described however affiliates private companies without quoted stock prices utilize discounted cash flow analyses marketbased valuations similar discussed heading “intangible assets goodwill” determine respective business enterprise values subject appropriate discounts lack control marketability income taxes subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes management assesses likelihood able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision substantially deferred tax assets relate us federal state uk taxing jurisdictions march 31 2015 us federal deferred tax assets aggregated 7022 million realization expected require 35 billion future us earnings deferred tax assets generated us jurisdictions resulting net operating losses generally expire 20 years generated resulting foreign tax credits generally expire 10 years generated based estimates future taxable income using assumptions consistent used goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realizable respect resulting foreign tax credit carryforwards likely tax benefits relating utilization approximately400 million foreign taxes credits realized valuation allowance established prior period except relates martin curries deferred tax assets additional federal valuation allowance required fiscal 2015 addition valuation allowance established prior years substantial portion deferred tax assets relating uk foreign taxing jurisdictions tax planning may enhance tax positions realization tax benefits deferred tax assets valuation allowances provided dependent implementation significant tax strategies march 31 2015 us state deferred tax assets aggregated 1869 million due limitations utilization net operating loss carryforwards taking consideration state tax planning strategies valuation allowance 346 million established prior years state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized valuation allowance 94 million released fiscal 2015 due updated forecasts state law changes planned future implementation various tax planning strategies due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary march 31 2015 also valuation allowance approximately 18 million deferred tax assets related martin currie entities amount approximately 17 million established purchase accounting adjustment recorded upon acquisition based historical current net operating losses martin currie extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets event determine portion deferred tax assets already subject valuation allowance realizable required establish valuation allowance charge income tax provision period determination made depending facts circumstances charge could material earnings calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risk revenues net income loss critical accounting policies intangible assets goodwill previously discussed item 7aitem 7 managements discussion analysis financial condition results operations executive overview legg mason inc holding company together subsidiaries collectively legg mason global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally us uk also offices australia bahamas brazil canada chile china dubai france germany italy japan singapore spain switzerland taiwan references fiscal 2017 2016 2015 refer fiscal year ended march 31 year terms us company refer legg mason operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks hurdle rates largest portion performance fees earned based 12month performance periods end differing quarters year portion based quarterly performance periods also earn performance fees alternative products lock end varying investment periods multipleyear intervals per terms certain recent acquisitions performance fees earned preclose assets management aum acquired entities fully passed compensation expense therefore impact net income loss attributable legg mason inc distribution service fees received distributing investment products services providing support services investment portfolios providing nondiscretionary advisory services assets advisement aua generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level aum aua fee rates thus affected factors securities market conditions ability attract maintain aum key investment personnel investment performance aum changes period primarily due inflows outflows client assets market performance well changes foreign exchange rates client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services fees charge investment services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions fees charge investment services vary based upon factors type underlying investment product amount aum asset management affiliate provides services type services investment objectives provided general fees earned asset management services highest alternative assets followed equity assets fixed income assets liquidity assets accordingly revenues average operating revenue yields affected composition aum changes relative level alternative equity assets typically significantly impacting revenues average operating revenue yields average operating revenue yields calculated ratio annualized total operating revenue less performance fees average aum addition ordinary course business may reduce waive investment management fees total expenses certain products services particular time periods limit fund expenses reasons help retain increase managed assets industry continues impacted generally low growth low return environment continued migration active passive strategies tend lower fees together regulatory reform continue put pressure fees revenue sharing arrangements place certain asset management affiliates specified percentages affiliates revenues required distributed us balance revenues retained affiliates pay operating expenses including compensation expenses excluding certain expenses income taxes revenuesharing arrangements asset management affiliates retain different percentages revenues cover costs affiliates operate budgetary processes net income loss attributable legg mason inc operating margin compensation percentage operating revenues impacted based affiliates products generate aum change aum one affiliate respect one product class products different effect revenues earnings equal change another affiliate another product class products addition time may agree changes revenue sharing arrangements asset management personnel may impact compensation expenses profitability significant component cost structure employee compensation benefits majority variable nature includes incentive compensation portion based upon revenue levels noncompensation related operating expense levels revenue sharebased affiliates performance fees passed compensation expense overall profitability next largest component cost structure distribution servicing expense consists primarily fees paid thirdparty distributors selling asset management products services largely variable nature certain operating costs typically consistent period occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions global financial markets results individual period considered representative future results profitability sensitive variety factors including amount composition aum volatility general level securities prices interest rates changes currency exchange rates among things periods unfavorable market conditions likely adverse effect profitability addition diversification services products offered investment performance access distribution channels reputation market attraction retention key employees client relations significant factors determining whether successful attraction retention clients last years industry seen flows products currently garner significant market share including particular passive products corresponding flows products market share financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms commercial banks insurance companies financial services companies industry impacted continued economic uncertainty constant introduction new products services technological changes consolidation financial services firms mergers acquisitions industry operate also subject extensive regulation federal state foreign laws like firms continue impacted regulatory legislative changes responding changes keeping abreast regulatory developments required continue require us incur costs impact profitability discussion factors may affect results operations refer item 1a risk factors included herein strategic priorities focused four primary areas listed management keeps strategic priorities mind evaluates operating performance financial condition consistent approach also presented table important initiatives management currently focuses evaluating performance financial condition strategic priorities discussed designed drive improvements net flows earnings cash flows aum key metrics including operating margin certain key metrics discussed annual results discussion follow connection strategic priorities • april 13 2016 acquired majority equity interest clarion partners llc clarion partners diversified real estate firm headquartered new york clarion partners managed approximately 42 billion aum closing across real estate riskreturn spectrum years ended march 31 2017 2016 incurred acquisitionrelated costs 259 million 28 million respectively connection transaction including 152 million fiscal 2017 related implementation affiliate management equity plan management team clarion partners see note 11 notes consolidated financial statements additional information regarding clarion partners management equity plan • may 2 2016 acquired majority equity interest entrust capital entrust combined permal group limited permal existing hedge fund platform form entrustpermal entrust independent hedge fund investor alternative asset manager headquartered new york approximately 10 billion aum closing years ended march 31 2017 2016 incurred transitionrelated costs 418 million 433 million respectively acquisitionrelated costs 70 million 35 million respectively connection combination expect achieve approximately 35 million annual savings fiscal 2018 pretransaction cost structures two businesses • august 17 2016 acquired 82 equity interest financial guard llc financial guard online registered investment adviser innovative technologyenabled wealth management investment advice platform • fiscal 2017 sold ownership interests two small nonstrategic investment managers share joint venture aggregate net proceeds 195 million sales resulted disposition 48 billion aum material impact results operations • fiscal 2017 launched several exchangetraded fund etf products expect etfs growth opportunity investor interest tended trend away traditional mutual funds intend continue focus increasing etf product offerings fiscal 2018 see note 2 notes consolidated financial statements additional information regarding acquisitions dispositions net income attributable legg mason inc year ended march 31 2017 2273 million 218 per diluted share compared net loss attributable legg mason inc 250 million 025 per diluted share year ended march 31 2016 addition transitionrelated acquisitionrelated costs discussed net income loss attributable legg mason inc years ended march 31 2017 2016 included pretax impairment charges related intangible assets 35 million 026 per diluted share 3710 million 276 per diluted share respectively pretax noncash charges 46 million 214 million respectively related grant equity units royce associates royce management equity plan pretax contingent consideration credit adjustments 395 million 334 million respectively items fully discussed average aum total revenues increased approximately 5 8 respectively fiscal 2017 compared fiscal 2016 discussed total aum increased year ended march 31 2017 due acquisitions clarion partners entrust impact positive market performance offset part net client outflows liquidity longterm aum following discussion analysis provides additional information regarding financial condition results operations business environment results operations fiscal 2017 three major us equity indices improved significantly reached historic highs fiscal year uncertainty regarding us presidential election timing increase interest rates federal reserve resulted volatility first half fiscal year equity markets rallied following us presidential election economic political uncertainty continued impact equity markets addition economic market uncertainty impacted shifting political military paradigms europe asia june 2016 uk held referendum voters approved exit european union commonly referred brexit announcement brexit temporary impact domestic markets date created volatility international currency markets industry continues impacted generally low growth low return environment continued migration active passive strategies together regulatory reform continues put pressure fees contributing consolidation products managers distribution platforms example december 2016 quarter active us mutual funds experienced 157 billion outflows although active us mutual fund outflows subsided march 2017 quarter likely trend asset flows passive products continue factors continue create significant flow pressure active managers like three major us equity market indices increased significantly fiscal 2017 decreasing slightly fiscal 2016 bond indices mixed illustrated table 1 indices trademarks dow jones company mcgrawhill companies inc nasdaq stock market inc barclays capital respectively affiliated legg mason 2 excludes impact reinvestment dividends stock splits december 2015 federal reserve board increased target federal funds rate first time since 2006 025 050 federal reserve board increased target funds rate december 2016 050 075 march 2017 075 100 economic outlook us remained positive recent years impacted increased uncertainty financial environment operate continues reflect heightened level sensitivity continued pressure fees previously discussed move fiscal 2018 following table sets forth periods indicated amounts consolidated statements income loss percentage operating revenues increase decrease item percentage amount previous period nm meaningful 1 calculated based change actual amounts fiscal years percentage prior year amount assets management assets advisement assets management aum primarily managed across following asset classes equity fixed income alternative liquidity large cap growth us intermediate investment grade real estate us managed cash large cap value us credit aggregate hedge funds us municipal cash equity income global opportunistic fixed income listed international equity global government infrastructure small cap core us municipal large cap core us long duration sector equity global fixed income small cap value us limited duration mid cap value high yield global equity emerging markets debt emerging markets equity components changes aum billions years ended march 31 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 primarily reclassification 04 billion 05 billion 128 billion client assets aum aua fiscal 2017 2016 2015 respectively reinvestment dividends 3 includes 415 billion 96 billion related acquisitions clarion partners entrust respectively offset part 48 billion related disposition two small investment managers share joint venture year ended march 31 2017 68 billion 01 billion related acquisitions rare infrastructure pk investments llp pk investments respectively year ended march 31 2016 95 billion 50 billion related acquisitions martin currie qs investors respectively offset part 95 billion related disposition legg mason investment counsel trust lmic year ended march 31 2015 aum march 31 2017 7284 billion increase 588 billion 9 compared march 31 2016 total net client outflows 289 billion consisting net client outflows liquidity longterm asset classes 273 billion 16 billion respectively longterm asset net outflows comprised alternative equity net outflows 72 billion 52 billion respectively partially offset fixed income net inflows 108 billion beginning fiscal 2017 present alternative assets separate asset class aum alternative asset class consists aum managed clarion partners entrustpermal rare infrastructure glouston capital partners prior sale march 31 2017 prior periods revised present alternative asset class alternative net outflows primarily products managed entrustpermal rare infrastructure equity net outflows primarily products managed royce qs investors brandywine global investment management llc brandywine offset part equity net inflows martin currie fixed income net inflows primarily products managed western asset management company western asset offset part fixed income net outflows brandywine generally earn higher fees profits alternative equity aum outflows asset classes negatively impact revenues net income loss attributable legg mason inc would outflows fixed income liquidity asset classes market performance 427 billion negative impact foreign currency exchange rate fluctuations 13 billion acquisitions dispositions net totaled 463 billion included 415 billion related acquisition clarion partners april 2016 96 billion related acquisition entrust may 2016 offset part 48 billion related disposition two small investment managers portion joint venture aum march 31 2016 6696 billion decrease 331 billion 5 march 31 2015 total net client outflows 261 billion consisting net client outflows liquidity longterm asset classes 149 billion 112 billion respectively longterm asset net outflows comprised equity alternative net outflows 97 billion 19 billion respectively offset fixed income net inflows 04 billion equity net outflows primarily products managed royce clearbridge offset part equity net inflows qs investors alternative net outflows primarily products managed legacy permal fixed income net inflows primarily products managed brandywine offset part fixed income net outflows western asset market performance 153 billion positive impact foreign currency exchange rate fluctuations 14 billion acquisitions 69 billion primarily relate acquisition rare infrastructure october 2015 investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds manage may redeem investments funds time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients thirdparty distributors relationships loss key investment management personnel financial market performance aum asset class aum asset class billions years ended march 31 follows nm meaningful average aum asset class billions years ended march 31 follows nm meaningful component changes aum asset class billions fiscal years ended march 31 2017 2016 2015 follows 1 primarily reclassification client assets aum aua fiscal 2017 2016 2015 04 billion 05 billion 128 billion respectively reinvestment dividends 2 includes 415 billion 96 billion related acquisitions clarion partners entrust respectively offset part 48 billion related disposition two small investment managers portion joint venture year ended march 31 2017 68 billion 01 billion related acquisitions rare infrastructure pk investments respectively year ended march 31 2016 95 billion 50 billion related acquisitions martin currie qs investors respectively offset part 95 billion related disposition lmic year ended march 31 2015 aum distribution channel broadly two principal distribution channels global distribution affiliateother sell variety investment products services global distribution consists centralized global distribution operations principally sells us international mutual funds commingled vehicles retail separately managed account programs subadvisory accounts insurance companies similar clients affiliateother consists distribution operations within asset managers principally sell institutional separate account management liquidity money market funds real estate privately placed investment funds fundsofhedge funds component changes aum distribution channel billions years ended march 31 2017 2016 2015 follows 1 excludes 159 billion 103 billion 82 billion aua march 31 2017 2016 2015 respectively net client cash flows years ended march 31 2017 2016 2015 excludes 37 billion 21 billion 28 billion aua net inflows 2 includes 415 billion 96 billion related acquisitions clarion partners entrust respectively offset part 48 billion related disposition two small investment managers share joint venture year ended march 31 2017 68 billion 01 billion related acquisitions rare infrastructure pk investments respectively year ended march 31 2016 95 billion 50 billion related acquisitions martin currie qs investors respectively offset part 95 billion related disposition lmic year ended march 31 2015 operating revenue yield overall operating revenue yield less performance fees across asset classes distribution channels 39 basis points 38 basis points 39 basis points years ended march 31 2017 2016 2015 respectively fees managing alternative equity assets generally higher alternative assets averaging 73 basis points 105 basis points 140 basis points years ended march 31 2017 2016 2015 respectively equity assets averaging 67 basis points 70 basis points 73 basis points years ended march 31 2017 2016 2015 respectively average fee rate managing alternative assets declined last year due acquisitions clarion partners april 2016 entrust may 2016 rare infrastructure october 2015 whose products typically earn lower average fees legacy alternative asset products average fee rate managing equity assets declined last four years due shift mix equity assets higher fee equity products lower fee equity products compares fees fixed income assets averaged approximately 27 basis points 29 basis points 28 basis points years ended march 31 2017 2016 2015 respectively liquidity assets averaged approximately 12 basis points 9 basis points 7 basis points years ended march 31 2017 2016 2015 respectively average fee rate managing liquidity assets years ended march 31 2017 2016 2015 reflects impact current advisory fee waivers due low interest rate environment average fee rate managing liquidity assets increased last year due reduction fee waivers result withdrawals interest rate increases fee waivers competitive regulatory reasons decreased approximately 22 million year ended march 31 2017 compared approximately 70 million year ended march 31 2016 expect fee waivers competitive regulatory reasons continue fiscal 2018 equity assets primarily managed clearbridge royce brandywine qs investors martin currie alternative assets managed clarion partners entrustpermal rare infrastructure fixed income assets primarily managed western asset brandywine liquidity assets managed western asset fee rates assets distributed legg mason global distribution predominately retail nature averaged approximately 45 basis points years ended march 31 2017 2016 approximately 50 basis points year ended march 31 2015 fee rates assets distributed affiliateother channel averaged approximately 35 basis points years ended march 31 2017 2016 2015 investment performance overall investment performance aum years ended march 31 2017 2016 2015 mixed compared relevant benchmarks year ended march 31 2017 year ended march 31 2017 us indices produced positive returns best performing russell 2000 returned 262 returns achieved volatile economic environment defined decision uk leave european union newly elected administration us fixed income markets federal reserve raised target rate 025 december 2016 march 2017 continuing federal reserves steps toward monetary policy normalization expectations future federal reserve interest rate increases remained unchanged resulted yield curve continuing flatten fiscal year many longdated yields declined lowest performing fixed income sector year ended march 31 2017 us government bonds measured barclays us government index declined 13 best performing fixed income sector year ended march 31 2017 high yield bonds measured barclays us high yield index returned 164 year ended march 31 2016 year ended march 31 2016 us indices produced mixed returns best performing index dow jones industrial average returned 21 returns achieved economic environment characterized unexpected declines oil prices strong us dollar along slowtorecover us economy chinese currency devaluation fixed income markets december 2015 federal reserve raised target rate 025 representing federal reserves first step toward monetary policy normalization however expectations future federal reserve interest rate increases lessened forecasts pointed fewer future rate increases resulted yield curve continuing flatten fiscal year many longdated yields declined lowest performing fixed income sector year ended march 31 2016 high yield bonds measured barclays us high yield index declined 37 best performing fixed income sector year ended march 31 2016 us government bonds measured barclays us government index returned 24 year ended march 31 2015 year ended march 31 2015 us indices produced positive returns best performing nasdaq composite returned 167 returns achieved economic environment characterized uneven global growth heightened sensitivity economic news declining oil prices unrest middle east fixed income markets federal reserve kept target rate discount rate steady signaling increase federal reserve funds target rate near term overall yield curve flattened fiscal year many longdated yields declined lowest performing fixed income sector year ended march 31 2015 high yield bonds measured barclays us high yield index returned 20 best performing fixed income sector year ended march 31 2015 corporate bonds measured barclays us credit index returned 67 following table presents summary percentages aum strategy1 outpaced respective benchmarks march 31 2017 2016 2015 trailing 1year 3year 5year 10year periods following table presents summary percentages us mutual fund assets2 outpaced lipper category averages march 31 2017 2016 2015 trailing 1year 3year 5year 10year periods na applicable 1 purposes investment performance comparisons strategies aggregation portfolios separate accounts investment funds products single group represents particular investment objective case separate accounts investment performance account based upon performance strategy account assigned asset managers specific guidelines including portfolios strategies managers manage separate accounts investment funds strategy performance comparison assets based upon performance separate account march 31 2017 2016 2015 88 91 90 total aum included strategy aum respectively although strategies 3year 5year 10year histories total strategy aum includes liquidity assets certain assets included reported performance comparisons include accounts managed accordance guidelines outlined accounts strategies marketed potential clients accounts yet assigned strategy certain smaller products affiliates past performance indicative future results aum included institutional retail separate accounts investment funds included strategy separate accounts performance comparisons based grossoffee performance investment funds managed separate account format performance comparisons based netoffee performance fundsofhedge funds generally specified benchmarks purposes comparison performance products net fees compared relevant hfrx index performance comparisons reflect actual performance specific separate account investment fund individual separate account investment fund performance may differ 2 source lipper inc includes openend closedend variable annuity funds march 31 2017 2016 2015 us longterm mutual fund assets represented data accounted 18 19 21 respectively total aum performance us longterm mutual fund assets included strategies following table presents summary absolute relative performance compared applicable benchmark representative sample funds within aum net management fees end period presented 1year 3year 5year 10year periods funds inception table includes representative sample funds significant subclass investment strategies ie large cap equity small cap equity etc funds within group representative performance significant investment strategies offer march 31 2017 constituted aggregate approximately 426 billion approximately 58 total aum meaningful exclusion funds alternative fund strategies primarily involve privately placed hedge funds privately placed real estate funds represent 5 total aum march 31 2017 investment performance made publicly available presenting investment returns funds provides relevant representation performance avoiding many complexities relating factors multiple fee structures bundled pricing asset level break points would arise reporting performance strategies product aggregations na applicable na applicable 1 listed order size based aum fund within subcategory 2 absolute performance actual performance ie rate return fund relative performance difference variance performance fund stated benchmark assets advisement march 31 2017 2016 2015 aua approximately 43 billion 39 billion 35 billion respectively aua march 31 2017 comprised approximately 18 billion related qs investors approximately 12 billion related clearbridge approximately 10 billion related western asset approximately 2 billion related entrustpermal approximately 1 billion related brandywine aua fee rates vary level nondiscretionary service provided average annualized fee rate related aua approximately 15 basis points 10 basis points years ended march 31 2017 2016 respectively low single digit basis points year ended march 31 2015 increase average fee rate fiscal 2015 fiscal 2016 due redemption approximately 80 billion low fee aua single client quarter ended march 31 2015 results operations accordance financial accounting standards consolidation consolidate separately identify certain sponsored investment products consolidation investment products impact net income loss attributable legg mason inc material impact consolidated operating results also hold investments consolidated sponsored investment funds change value investments recorded nonoperating income expense reflected net income loss attributable legg mason inc see notes 1 3 17 notes consolidated financial statements additional information regarding consolidation investment products operating revenues components total operating revenues millions dollar percentage changes periods follows nm meaningful total operating revenues year ended march 31 2017 289 billion increase 8 266 billion year ended march 31 2016 increase primarily due incremental revenues related acquisitions clarion partners entrust inclusion full year revenues rare infrastructure acquired october 2015 total operating revenues year ended march 31 2017 included 608 million performance fees earned clarion partners passed employees compensation per terms acquisition agreement operating revenue yield excluding performance fees increased 39 basis points year ended march 31 2017 compared 38 basis points year ended march 31 2016 average longterm aum comprised higher percentage total average aum year ended march 31 2017 compared year ended march 31 2016 total operating revenues year ended march 31 2016 266 billion decrease 6 282 billion year ended march 31 2015 decrease primarily due decrease operating revenue yield excluding performance fees 39 basis points 38 basis points 3 decrease average aum decrease performance fees although average longterm aum comprised higher percentage total average aum year ended march 31 2016 compared year ended march 31 2015 operating revenue yield excluding performance fees declined due less favorable product mix lower yielding products comprising higher percentage total average aum year ended march 31 2016 compared year ended march 31 2015 investment advisory fees separate accounts year ended march 31 2017 investment advisory fees separate accounts increased 991 million 9252 million compared 8261 million year ended march 31 2016 increase 602 million due clarion partners acquired april 2016 350 million due entrust acquired may 2016 148 million due higher average fixed income assets managed western asset brandywine 129 million due full year results rare infrastructure acquired october 2015 increases offset part decrease 152 million due lower average equity assets managed martin currie brandywine qs investors decrease 116 million due lower average alternative assets managed legacy permal year ended march 31 2016 investment advisory fees separate accounts increased 19 million 8261 million compared 8242 million year ended march 31 2015 increase 114 million due inclusion rare infrastructure acquired october 2015 87 million due full year results martin currie acquired october 2014 68 million result higher average equity assets managed brandywine 69 million result higher average fixed income assets managed brandywine 31 million result higher average assets managed legacy permal increases substantially offset decrease 277 million due sale lmic november 2014 decrease 69 million due lower averaged fixed income assets managed western asset investment advisory fees funds year ended march 31 2017 investment advisory fees funds increased 730 million 5 148 billion compared 141 billion year ended march 31 2016 primarily due increases 1253 million due clarion partners acquired april 2016 636 million due entrust acquired may 2016 220 million due higher average equity assets managed martin currie 137 million due fees liquidity assets largely related reduction fee waivers liquidity funds managed western asset 97 million primarily due including full year results rare infrastructure acquired october 2015 60 million due higher average fixed income assets managed western asset increases offset part decreases 847 million due lower average alternative assets managed legacy permal 735 million due lower average equity assets managed royce clearbridge 116 million due lower average fixed income assets managed brandywine year ended march 31 2016 investment advisory fees funds decreased 1355 million 9 141 billion compared 154 billion year ended march 31 2015 decrease 1049 million due lower average equity assets managed royce 439 million due lower average assets managed legacy permal approximately 28 million related revenues due change distributor certain funds may 2015 longer included advisory fee revenue revenues related funds included distribution service fees beginning fiscal 2016 decreases offset part increase 288 million due higher average fixed income assets managed western asset brandywine net increase 183 million fees liquidity assets largely due reduction fee waivers liquidity funds managed western asset investment advisory performance fees total aum march 31 2017 2016 2015 approximately 11 7 accounts eligible earn performance fees year ended march 31 2017 investment advisory performance fees increased 663 million 1083 million compared 420 million year ended march 31 2016 primarily due 608 million performance fees earned clarion partners assets invested prior closing april 2016 fees earned entrust acquired may 2016 higher fees earned assets managed brandywine western asset offset part lower fees earned assets managed legacy permal performance fees earned preclose aum clarion partners accounts approximately 35 performance fee eligible aum march 31 2017 fully passed clarion partners management team per terms acquisition agreement recorded compensation expense therefore impact net income loss attributable legg mason inc pass clarion partners performance fees applies historic aum place closing acquisition expect pass performance fees phase approximately five years postclosing year ended march 31 2016 investment advisory performance fees decreased 415 million 420 million compared 835 million year ended march 31 2015 primarily due lower fees earned assets managed legacy permal brandywine distribution service fees year ended march 31 2017 distribution service fees decreased 148 million 4 3667 million compared 3815 million year ended march 31 2016 primarily due decrease 216 million related decline average mutual fund aum subject distribution service fees offset part increase 94 million advisement fees associated aua year ended march 31 2016 distribution service fees increased 203 million 6 3815 million compared 3612 million year ended march 31 2015 primarily result approximately 29 million revenue included distribution service fees fiscal 2016 due change distributor certain funds may 2015 revenues related funds previously included investment advisory fees funds increase 116 million advisement fees associated aua also contributed increase increases offset part decline average mutual fund aum subject distribution service fees operating expenses components total operating expenses millions dollar percentage changes periods follows nm meaningful total operating expenses year ended march 31 2017 decreased 1453 million 6 246 billion compared 261 billion year ended march 31 2016 decrease primarily due reduction intangible asset impairment charges 336 million year ended march 31 2017 offset part increase compensation benefits discussed total operating expenses year ended march 31 2016 increased 2891 million 12 261 billion compared 232 billion year ended march 31 2015 increase primarily due intangible asset impairment charges 371 million recorded year ended march 31 2016 discussed operating expenses years ended march 31 2017 2016 2015 incurred investment management affiliate level comprised approximately 70 total operating expenses year excluding impairment charges deemed corporate expenses remaining operating expenses impairment charges comprised corporate costs including costs global distribution operations compensation benefits components total compensation benefits millions dollar percentage changes periods follows nm meaningful total compensation benefits year ended march 31 2017 increased 16 140 billion compared 120 billion year ended march 31 2016 year ended march 31 2016 decreased 2 120 billion compared 123 billion year ended march 31 2015 • salaries incentives increased 1091 million 10249 million year ended march 31 2017 compared 9158 million year ended march 31 2016 driven 921 million increase net compensation investment affiliates primarily due acquisitions clarion partners april 2016 entrust may 2016 offset part impact reduction operating revenue sharebased affiliates creates offsetting decrease compensation per applicable revenue share arrangements salaries incentives decreased 611 million 9158 million year ended march 31 2016 compared 9769 million year ended march 31 2015 primarily due decrease 586 million net compensation investment affiliates substantially result reduction operating revenue sharebased affiliates creates offsetting decrease compensation per applicable revenue share arrangements sale lmic november 2014 offset part acquisition martin currie october 2014 • benefits payroll taxes increased 129 million 2455 million year ended march 31 2017 compared 2326 million year ended march 31 2016 primarily due acquisitions clarion partners april 2016 entrust may 2016 offset part decrease legacy permal benefits payroll taxes increased 179 million 2326 million year ended march 31 2016 compared 2147 million year ended march 31 2015 primarily result increase costs associated certain employee benefit plans • transition severance costs remained relatively flat 363 million year ended march 31 2017 compared 362 million year ended march 31 2016 273 million 322 million march 31 2017 2016 respectively associated previously discussed restructuring permal combination entrust remaining amounts period primarily comprised severance costs related corporate distribution personnel transition severance costs increased 44 million 362 million year ended march 31 2016 compared 318 million year ended march 31 2015 transition severance costs year ended march 31 2016 primarily comprised 322 million costs associated previously discussed restructuring permal combination entrust year ended march 31 2015 transition severance costs primarily comprised 246 million costs associated integration batterymarch lmgaa qs investors 43 million related sale lmic • management equity plan charges year ended march 31 2017 comprised 152 million associated implementation management equity plan management team clarion partners previously discussed 46 million associated additional grant equity units royce management equity plan management equity plan charges year ended march 31 2016 represent charge arising initial grant equity units royce management equity plan see note 11 notes consolidated financial statement additional information regarding management equity plans • performance fee pass represents clarion partners performance fees fully passed clarion partners employees compensation expense discussed year ended march 31 2017 compensation percentage operating revenues increased 486 453 year ended march 31 2016 primarily due impact acquisition clarion partners april 2016 including impact performance fees earned clarion partners passed fully compensation expense impact charges associated implementation clarion partners management equity plan grant additional units royce management equity plan offset impact decreased revenues certain revenue sharebased affiliates retain relatively higher percentage revenues compensation impact charge associated initial royce management equity plan grant fiscal 2016 year ended march 31 2016 compensation percentage operating revenues increased 453 437 year ended march 31 2015 due impact charge associated initial royce management equity plan grant impact acquisition martin currie october 2014 impact higher transition severance costs fiscal 2016 offset part impact decreased revenues certain revenue sharebased affiliates retain relatively higher percentage revenues compensation distribution servicing year ended march 31 2017 distribution servicing expenses decreased 9 4991 million compared 5457 million year ended march 31 2016 primarily due impact lower average aum certain products pay fees thirdparty distributors year ended march 31 2016 distribution servicing expenses decreased 8 5457 million compared 5948 million year ended march 31 2015 primarily due impact lower average aum certain products pay fees thirdparty distributors communications technology year ended march 31 2017 communications technology expense increased 6 2089 million compared 1979 million year ended march 31 2016 result increase costs related data management technology maintenance consulting due part addition expenses related clarion partners acquisition april 2016 entrust acquisition may 2016 year ended march 31 2016 communications technology expense increased 8 1979 million compared 1824 million year ended march 31 2015 result increase technology consulting license fees software product implementations fiscal 2016 addition martin currie acquired october 2014 occupancy year ended march 31 2017 occupancy expense decreased 7 1137 million compared 1226 million year ended march 31 2016 net real estate related charges 123 million recognized year ended march 31 2017 connection restructuring permal combination entrust offset part 27 million reduction previously existing lease reserve real estate related charges 177 million recognized year ended march 31 2016 connection reduced space requirements restructuring permal combination entrust year ended march 31 2016 occupancy expense increased 12 1226 million compared 1097 million year ended march 31 2015 real estate related charges 177 million recognized fiscal 2016 related reduced space requirements restructuring permal combination entrust real estate related charges 82 million recognized fiscal 2015 connection integration batterymarch lmgaa qs investors amortization year ended march 31 2017 amortization intangible assets increased 262 million compared 50 million year ended march 31 2016 due additional amortization expense related acquisitions clarion partners april 2016 entrust may 2016 rare infrastructure october 2015 year ended march 31 2016 amortization intangible assets increased 50 million compared 26 million year ended march 31 2015 primarily due additional amortization expense related acquisition rare infrastructure october 2015 impairment charges impairment charges 350 million year ended march 31 2017 compared 3710 million year ended march 31 2016 impairment charges recognized fiscal 2017 comprised 180 million related rare infrastructure amortizable management contracts asset 170 million related permal trade name asset impairment rare infrastructure amortizable management contracts asset resulted client attrition related decline revenues reduction estimated remaining useful life contracts 11 years eight years impairment permal trade name resulted decrease revenues reduction royalty rate reflecting decline value separate permal trade name due combination entrust impairment charges recognized fiscal 2016 comprised 3640 million related legacy permal indefinitelife fundofhedge funds management contracts asset 70 million related permal trade name asset resulted number current trends factors resulted decreased cash flow projections see critical accounting policies note 5 notes consolidated financial statements discussion impairment charges see note 18 notes consolidated financial statements regarding aggregate 34 million impairment rare infrastructure amortizable asset management contracts asset trade name indefinitelife intangible asset subsequent march 31 2017 year ended march 31 2017 expenses increased 171 million 10 1801 million compared 1630 million year ended march 31 2016 primarily result 91 million increase travel entertainment expenses 46 million increase insurance costs largely due costs incurred connection acquisitions clarion partners entrust 63 million increase professional fees increases offset 61 million increase credits related fair value adjustments decrease contingent consideration liabilities 395 million credits recognized year ended march 31 2017 related acquisitions martin currie rare infrastructure qs investors financial guard 334 million credits recognized year ended march 31 2016 related acquisitions martin currie fauchier year ended march 31 2016 expenses decreased 356 million 18 1630 million compared 1986 million year ended march 31 2015 primarily due 334 million credit related fair value adjustments decrease contingent consideration liabilities associated acquisitions martin currie fauchier 146 million decrease expense reimbursements paid certain mutual funds decreases partially offset 136 million increase professional fees due part costs associated acquisitions clarion partners entrust nonoperating income expense components total nonoperating income expense millions dollar percentage changes periods follows nm meaningful interest expense year ended march 31 2017 interest expense increased 648 million 1132 million compared 484 million year ended march 31 2016 increase primarily due issuance 450 million 475 senior notes due 2026 notes 250 million 6375 junior subordinated notes due 2056 63754 2056 notes march 2016 net proceeds used fund acquisitions clarion partners april 2016 entrust may 2016 replenish cash used acquire rare infrastructure october 2015 500 million 545 junior subordinated notes due 2056 545 2056 notes august 2016 net proceeds used repay outstanding borrowings revolving credit facility year ended march 31 2016 interest expense decreased 17 484 million compared 583 million year ended march 31 2015 decrease 99 million primarily due decrease interest accruals uncertain tax positions offset part interest accretion contingent consideration liabilities related acquisitions martin currie rare infrastructure income expense net year ended march 31 2017 income expense net totaled income 417 million compared expense 260 million year ended march 31 2016 change primarily due 346 million increase net market gains corporate investments offset corresponding increase compensation expense 156 million increase net market gains seed capital investments assets invested deferred compensation plans offset corresponding increase compensation expense gains totaling 87 million associated disposition two small investment managers share joint venture fiscal 2017 79 million increase net market gains investments consolidated sponsored investment vehicles designated consolidated investment vehicles civs impact net income loss attributable legg mason inc losses fully attributable noncontrolling interests year ended march 31 2016 expense net decreased 593 million expense 260 million compared expense 853 million year ended march 31 2015 primarily due 1071 million charge recognized fiscal 2015 related refinancing 55 senior notes july 2014 decrease offset part net market losses 270 million corporate investments offset compensation net market losses 106 million seed capital investments assets invested deferred compensation plans offset corresponding increases compensation net market losses 56 million investments consolidated sponsored investment products designated civs impact net income loss attributable legg mason inc losses fully attributable noncontrolling interests 45 million loss foreign currency forward contract related acquisition rare infrastructure nonoperating income loss consolidated investment vehicles year ended march 31 2017 nonoperating income expense consolidated investment vehicles net totaled income 133 million compared expense 72 million year ended march 31 2016 primarily due consolidation additional civs result adoption updated consolidation accounting guidance effective april 1 2016 well increase net market gains investments certain civs see notes 1 17 notes consolidated financial statements additional information regarding adoption updated guidance year ended march 31 2016 nonoperating income expense consolidated investment vehicles net totaled expense 72 million compared income 59 million year ended march 31 2015 primarily due deconsolidation civ quarter ended march 31 2015 net market losses investments certain civs income tax provision year ended march 31 2017 provision income taxes 842 million compared 77 million year ended march 31 2016 effective tax rate 227 year ended march 31 2017 compared 305 year ended march 31 2016 change effective tax rate largely due impact 3710 million impairment charges recognized fiscal 2016 lower tax rate jurisdictions also fiscal 2017 part larger strategic initiative restructured certain holding company businesses increased amount foreign tax credits available utilization reduced effective tax rate 50 percentage points september 2016 uk finance act 2016 enacted reduced main uk corporate tax rate effective april 1 2020 18 17 impact tax rate reduction certain existing deferred tax assets liabilities resulted tax benefit 41 million reduced effective tax rate 11 percentage points fiscal 2017 noncontrolling interests entrustpermal clarion partners royce structured partnerships pass related tax attributes related noncontrolling interest holders consolidated financial statements generally include tax provisionbenefit associated net income allocated noncontrolling interests caused effective tax rate reduced 43 percentage points year ended march 31 2017 impact civs decreased effective rate 11 percentage points year ended march 31 2017 increased effective rate 238 percentage points year ended march 31 2016 year ended march 31 2016 provision income taxes 77 million compared 1253 million year ended march 31 2015 effective tax rate 305 year ended march 31 2016 compared 340 year ended march 31 2015 change effective tax rate largely due impact 3710 million impairment charges recognized fiscal 2016 lower tax rate jurisdictions november 2015 uk finance bill 2015 enacted reduced main uk corporate tax rate 20 19 effective april 1 2017 18 effective april 1 2020 reductions uk corporate tax rate resulted tax benefits 84 million fiscal 2016 impact civs increased effective rate 238 percentage points year ended march 31 2016 decreased effective rate 05 percentage points year ended march 31 2015 net income loss attributable legg mason inc operating margin net income attributable legg mason inc year ended march 31 2017 2273 million 218 per diluted share compared net loss attributable legg mason inc 250 million 025 per diluted share year ended march 31 2016 increase primarily attributable impairment charges 3710 million 276 per diluted share recognized fiscal 2016 incremental net income related acquisitions clarion partners entrust fiscal 2017 inclusion full year results rare infrastructure acquired october 2015 pretax charge 214 million recognized fiscal 2016 connection initial grant equity units royce management equity plan increases offset part impairment charges 350 million 026 per diluted share recognized fiscal 2017 increase 247 million acquisition costs primarily related acquisitions clarion partners entrust including 152 million related implementation clarion partners management equity plan net impact reduced operating revenue certain legacy affiliates operating margin 146 year ended march 31 2017 compared 19 year ended march 31 2016 increase primarily attributable decrease impairment charges net loss attributable legg mason inc year ended march 31 2016 totaled 250 million 025 per diluted share compared net income attributable legg mason inc 2371 million 204 per diluted share year ended march 31 2015 decrease primarily attributable impact pretax impairment charges 3710 million 2968 million net income tax benefits 276 per diluted share related indefinitelife intangible assets year ended march 31 2016 offset part pretax nonoperating charge 1071 million 685 million net income tax benefits 059 per diluted share recognized year ended march 31 2015 connection refinancing 55 senior notes operating margin 19 year ended march 31 2016 compared 177 year ended march 31 2015 decrease primarily attributable impairment charges supplemental nongaap financial information supplemental information providing performance measure operating margin adjusted liquidity measure adjusted ebitda based methodologies generally accepted accounting principles “nongaap” management uses measures benchmarks evaluating comparing periodtoperiod operating performance liquidity operating margin adjusted calculate operating margin adjusted dividing operating income adjusted exclude impact compensation expense gains losses investments made fund deferred compensation plans impact compensation expense gains losses seed capital investments affiliates revenue sharing arrangements amortization related intangible assets income loss civs impact fair value adjustments contingent consideration liabilities impairment charges ii operating revenues adjusted add back net investment advisory fees eliminated upon consolidation investment vehicles less distribution servicing expenses use approximate measure revenues passed third parties less performance fees passed compensation expense net income loss attributable noncontrolling interests refer operating revenues adjusted deferred compensation items removed operating income calculation offset equal amount nonoperating income expense net thus impact net income loss attributable legg mason inc adjust impact amortization management contract assets impact fair value adjustments contingent consideration liabilities arise acquisitions reflect fact items distort comparison operating results asset management firms engaged significant acquisitions impairment charges income loss civs removed operating income calculation items reflective core asset management operations use operating revenues adjusted calculation show operating margin without distribution servicing expenses use approximate distribution revenues passed third parties direct cost selling products although distribution servicing expenses may include commissions paid connection launching closedend funds corresponding revenue period also use operating revenues adjusted calculation show operating margin without performances fees passed compensation expense net income loss attributable noncontrolling interests per terms certain recent acquisitions operating revenues adjusted also include advisory revenues receive consolidated investment vehicles eliminated consolidation gaap believe operating margin adjusted useful measure performance provides measure core business activities excludes items impact net income loss attributable legg mason inc indicates operating margin would without distribution revenues passed third parties direct cost selling products performance fees passed compensation expense net income loss attributable noncontrolling interests per terms certain recent acquisitions amortization related intangible assets changes fair value contingent consideration liabilities impairment charges impact consolidation certain investment vehicles described consolidation investment vehicles impact net income loss attributable legg mason inc measure provided addition operating margin calculated gaap substitute calculations margins gaap may comparable nongaap performance measures including measures adjusted margins companies calculation operating margin operating margin adjusted follows dollars thousands operating margin adjusted years ended march 31 2017 2016 2015 197 186 230 respectively operating margin adjusted year ended march 31 2017 reduced 18 percentage points due transitionrelated costs incurred connection restructuring permal combination entrust 08 percentage points due acquisitionrelated costs incurred connection clarion partners entrust acquisitions 07 percentage points due charge associated implementation clarion partners management equity plan operating margin adjusted year ended march 31 2016 reduced 20 percentage points due costs associated restructuring permal combination entrust 10 percentage point due compensation charge associated initial royce management equity plan grant 04 percentage points real estate related charges recognized fiscal 2016 associated reduced space requirements operating margin adjusted year ended march 31 2015 reduced 17 percentage points due costs associated integration batterymarch lmgaa qs investors various corporate initiatives adjusted ebitda define adjusted ebitda cash provided used operating activities plus minus interest expense net accretion amortization debt discounts premiums current income tax expense benefit net change assets liabilities net income loss attributable noncontrolling interests net gains losses earnings investments net gains losses consolidated investment vehicles net change assets liabilities adjustment aligns consolidated statements cash flows adjusted ebitda reduced equitybased compensation expense including management equity plan noncash issuancerelated charges management equity plan units may put called us cash payment although terms require occur believe measure useful investors us provides additional information regard ability meet working capital requirements service debt return capital shareholders measure provided addition cash provided operating activities may comparable nongaap performance measures liquidity measures companies including measures ebitda adjusted ebitda measure confused net income loss cash provided operating activities measures earnings cash flows gaap provided supplement replacement gaap measures previously disclosed adjusted ebitda conformed calculations required debt covenants adjusted certain items required cash settlement part current definition calculation adjusted ebitda follows dollars thousands adjusted ebitda years ended march 31 2017 2016 5602 million 5614 million respectively adjusted ebitda remained relatively flat net impact reduction operating revenues certain legacy affiliates substantially offset incremental earnings clarion partners entrust inclusion full year results rare infrastructure adjusted ebitda years ended march 31 2016 2015 5614 million 6583 million respectively 968 million decrease adjusted ebitda primarily result net impact reduction operating revenues liquidity capital resources primary objective capital structure appropriately support business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may time involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt consolidation variable interest entities discussed impact liquidity capital resources rights benefits bear risks associated assets liabilities civs consolidated sponsored investment products beyond investments investment advisory fees generated products eliminated consolidation additionally creditors civs consolidated sponsored investment products recourse general credit beyond level investment consider liabilities obligations assets consist primarily intangible assets goodwill cash equivalents investment securities investment advisory related fee receivables assets principally funded equity capital longterm debt results operations march 31 2017 cash equivalents total assets longterm debt net stockholders equity 07 billion 83 billion 22 billion 40 billion respectively total assets include amounts related civs 01 billion cash equivalents primarily invested liquid domestic nondomestic money market funds hold principally domestic nondomestic government agency securities bank deposits corporate commercial paper recognized losses investments monitoring cash equivalents partially mitigates potential material risks may associated balances following table summarizes consolidated statements cash flows years ended march 31 millions cash inflows provided operating activities fiscal 2017 5398 million primarily related net income adjusted noncash items net sales investment securities cash inflows provided operating activities fiscal 2016 4545 million primarily related net loss adjusted noncash items cash inflows provided operating activities fiscal 2015 5681 million primarily related net income adjusted noncash items net activity related civs cash outflows used investing activities fiscal 2017 10 billion primarily related payments associated acquisitions clarion partners entrust aggregating 9979 million net cash acquired cash outflows used investing activities fiscal 2016 2446 million primarily related payments associated acquisitions rare infrastructure pk investments investment precidian investments aggregating 2341 million net acquired cash outflows used investing activities fiscal 2015 2080 million primarily related payments associated acquisitions martin currie qs investors 1837 million net acquired cash payments made fixed assets 458 million offset part proceeds businesses sold 470 million cash outflows provided financing activities fiscal 2017 1169 million primarily related 4824 million net proceeds issuance 545 2056 notes august 2016 offset part repurchase 117 million shares common stock 3817 million cash inflows provided financing activities fiscal 2016 4657 million primarily related proceeds issuance 6998 million longterm debt offset part repurchase 45 million shares common stock 2096 million cash outflows used financing activities fiscal 2015 5070 million primarily related repayment longterm debt 6458 million repurchase 69 million shares common stock 3565 million repayment longterm debt civs 792 million dividends paid 708 million offset part proceeds issuance 6588 million longterm debt financing transactions table reflects primary sources financing thousands march 31 2017 longterm debt august 2016 issued aggregate principal amount 500 million 545 2056 notes net proceeds together cash hand used repay total 500 million outstanding borrowings revolving credit facility discussed march 2016 issued 250 million 6375 2056 notes 450 million 475 2026 notes net proceeds offerings used partially finance acquisitions clarion partners april 2016 entrust may 2016 previously discussed june 2014 issued 250 million 27 senior notes due 2019 discount 06 million 250 million 395 senior notes due 2024 discount 05 million additional 150 million 5625 senior notes due 2044 premium 98 million july 2014 proceeds 659 million net related fees together cash hand used redeem 650 million outstanding 55 senior notes retirement 55 senior notes resulted pretax nonoperating charge 1071 million july 2014 consisting cash makewhole premium payment 986 million net 06 million reverse treasury lock settlement call 55 senior notes 85 million associated existing deferred costs original issue discount january 2014 issued 400 million 5625 senior notes due 2044 discount 63 million net proceeds together cash hand used repay 450 million outstanding borrowings fiveyear term loan revolving credit agreements december 2015 entered unsecured credit agreement provided 10 billion multicurrency revolving credit facility march 31 2017 unsecured credit agreement amended reduce amount available revolving credit facility 10 billion 500 million revolving credit facility may increased aggregate amount 500 million 10 billion subject approval lenders expires december 2020 repaid time revolving credit facility available fund working capital needs general corporate purposes may 2016 borrowed 460 million revolving credit facility partially finance acquisition entrust replenish cash used complete acquisitions clarion partners april 2016 rare infrastructure october 2015 december 2015 borrowed 40 million revolving credit facility remained outstanding march 31 2016 borrowings used repay 40 million outstanding borrowings previous revolving credit facility used partially finance acquisition rare infrastructure october 2015 discussed august 2016 total 500 million outstanding borrowings revolving credit facility repaid using net proceeds 545 2056 notes together cash hand previously discussed financial covenants credit agreement include maximum net debt ebitda ratio modified march 2017 35 1 period january 1 2017 march 31 2018 30 1 thereafter minimum ebitda interest ratio 40 1 debt defined include obligations borrowed money excluding nonrecourse debt civs capital leases net debt covenants debt reduced amount unrestricted cash excess greater subsidiary cash 300 million lesser 50 aggregate amount seed capital investments 125 million amount equal 50 hybrid capital securities ebitda defined consolidated net income loss plusminus tax expense benefit interest expense depreciation amortization intangibles extraordinary expense losses noncash charges certain transitionrelated costs defined agreements march 31 2017 legg masons net debt ebitda ratio 26 1 ebitda interest expense ratio 57 1 therefore legg mason maintained compliance applicable covenants net income significantly declines spend available cash may impact ability maintain compliance financial covenants credit agreement determine compliance covenants may pressure time either outstanding borrowings facility want utilize available borrowings otherwise desire keep borrowings available may elect take number actions including reducing expenses order increase ebitda using available cash repay portion outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments outstanding revolving credit facility agreement currently impacted ratings two rating agencies interest rate annual commitment fee revolving line credit based higher credit rating two rating agencies june 2011 rating one agencies downgraded one grade agency downgrade rating absent upgrade former agency borrowings outstanding revolving credit facility interest costs rise modestly may 2012 refinanced outstanding 25 senior convertible notes convertible notes terms repurchase included issuance warrants holders convertible notes warrants replaced conversion feature convertible notes provide purchase aggregate subject adjustment 142 million shares common stock net share settled basis exercise price 88 per share warrants expire july 2017 settled election either shares common stock cash see note 6 notes consolidated financial statements additional information regarding debt transactions expect next 12 months cash generated operating activities available cash hand adequate support operating cash needs planned share repurchases currently intend utilize available resources number potential activities including limited acquisitions repurchase shares common stock seed capital investments new existing products repayment outstanding debt payment increased dividends addition ordinary operating cash needs anticipate cash needs next 12 months discussed acquisitions march 31 2017 various commitments pay contingent consideration relating business acquisitions following table presents summary maximum remaining aggregate contingent consideration contingent consideration liability millions acquisitions additional details regarding contingent consideration significant recent acquisition discussed 1 using applicable exchange rate march 31 2017 amounts denominated currencies us dollar 2 includes amounts related acquisitions financial guard pk investments described may obligated settle noncontrolling interests related certain affiliates following table presents summary affiliate noncontrolling interests millions excluding amounts related management equity plans march 31 2017 ultimate timing noncontrolling interest settlements uncertain project accuracy august 17 2016 acquired majority interest financial guard acquisition closing required cash payment funded existing cash resources contingent consideration 3 million may due one year closing date amount ultimate contingent payment based certain metrics also committed contribute 5 million additional working capital financial guard paid two year period following acquisition 13 million paid march 31 2017 march 31 2017 contingent consideration expected paid may 2 2016 closed transaction combine permal entrust create entrustpermal 65 transaction required cash payment 400 million funded borrowings revolving credit facility well portion proceeds 2026 notes 6375 2056 notes issued march 2016 connection combination march 31 2017 incurred restructuring transitionrelated costs approximately 85 million approximately 15 noncash charges approximately 66 million paid significant portion 19 million costs paid relate lease charges paid remaining lease term combination substantially complete expect incur additional costs totaling 5 million 6 million fiscal 2018 2019 see note 2 notes consolidated financial statements additional information noncontrolling interests 35 outstanding equity subject put call provisions may result future cash outlays april 13 2016 acquired majority interest clarion partners acquisition required cash payment approximately 632 million including payment cash delivered 37 million coinvestments 16 million funded portion proceeds issuance 2026 notes 6375 2056 notes march 2016 also implemented affiliate management equity plan management team clarion partners discussed conjunction acquisition committed provide 100 million seed capital clarion partners products second anniversary transaction closing noncontrolling interests 18 outstanding equity subject put call provisions may result future cash outlays january 22 2016 acquired minority equity position precidian investments llc precidian transaction required cash payment funded existing cash resources terms transaction acquired series b preferred units precidian entitle us approximately 20 voting economic interests precidian sole option 48 months following initial investment earlier within nine months secs approval precidians application operate active sharessm product may subject satisfaction certain closing conditions upon payment consideration convert preferred units 75 common equity precidian fully diluted basis equity conversion put call options would attach noncontrolling interests 25 outstanding equity may result future cash outlays december 31 2015 martin currie acquired certain assets pk investments purchase price comprised initial cash payment 5 million contingent payment due december 31 2017 currently estimated approximately 3 million amount ultimate contingent payment based certain financial metrics initial cash payment funded existing cash resources october 21 2015 acquired majority interest rare infrastructure acquisition required initial cash payment approximately 214 million using foreign exchange rate october 21 2015 296 million australian dollar payment funded 40 million net borrowings previous revolving credit facility well existing cash resources contingent consideration may due march 31 2018 aggregating approximately 81 million using foreign exchange rate march 31 2017 maximum 106 million australia dollar amount per contract dependent achievement certain net revenue targets subject potential catchup adjustments extending march 31 2019 contingent consideration payable first potential payment due march 31 2017 noncontrolling interests 25 subject put call provisions may result future cash outlays october 1 2014 acquired outstanding equity interests martin currie transaction included initial cash payment 203 million using foreign exchange rate october 1 2014 £125 million payment funded existing cash contingent consideration payments may due march 31 following third anniversary closing aggregating approximately 407 million using foreign exchange rate march 31 2017 maximum £325 million contract amount inclusive payment certain potential pension obligations dependent achievement certain financial metrics specified share purchase agreement march 31 2018 contingent consideration payment due march 31 2017 second anniversary payment march 31 2016 first anniversary payment actual payments made may also include amounts certain potential pension obligations accounted separately addition pensions regulator uk regulator reviewing pension plan’s current structure funding status review still process regulator expressed certain concerns plan transactions effected around acquisition closing detrimental plan martin currie trustees pension plan dispute regulators concerns cooperating regulator revised plan structure likely result certain changes plan structure including additional guarantees potential accelerated funding portion plans benefit obligations effective may 31 2014 completed acquisition qs investors august 2016 paid 66 million second anniversary contingent consideration funded existing cash resources addition contingent consideration 20 million fourth anniversary payment 34 million potential catchup adjustment second anniversary payment shortfall may due july 2018 dependent achievement certain net revenue targets march 2013 completed acquisition outstanding share capital fauchier may 2015 paid contingent consideration 228 million using exchange rate may 5 2015 second anniversary payment additional contingent consideration paid connection acquisition fauchier see note 2 notes consolidated financial statements additional information regarding acquisitions affiliate management equity plans conjunction acquisition clarion partners april 2016 implemented affiliate management equity plan entitles certain key employees clarion partners participate 15 future growth enterprise value subject appropriate discounts subsequent date grant march 2016 implemented affiliate management equity plan management royce management equity plan march 31 2017 noncontrolling interests equivalent 190 royce entity issued management team addition implemented affiliate management equity plan march 2014 entitles certain key employees clearbridge participate 15 future growth enterprise value subject appropriate discounts june 2013 implemented affiliate management equity plan entitled key employees permal participate 15 future growth enterprise value subject appropriate discounts april 2016 conjunction combination permal entrust permal management equity plan liquidated payment 72 million participants march 31 2017 estimated redemption value units management equity plans aggregated 723 million repurchases units granted plans may impact future liquidity requirements however amounts timing repurchases uncertain project accuracy see note 11 notes consolidated financial statements additional information regarding affiliate management equity plans certain asset management affiliates maintain various credit facilities general operating purposes certain affiliates subject capital requirements various regulatory agencies affiliates met respective capital adequacy requirements periods presented january 2015 board directors authorized 10 billion additional purchases common stock approximately 423 million remained available march 31 2017 past several years focused returning capital shareholders share repurchases capital management priorities evolved fiscal 2018 currently plan return capital approximately 450 million combination share repurchases payment increased dividends currently expect aggregate approximately 340 million 110 million respectively subject market conditions cash needs future outlook march 31 2017 approximately 459 million cash equivalents excess working capital regulatory requirements 459 million includes amounts expected used fund accrued compensation payments primarily first quarter fiscal 2018 previously discussed fiscal 2018 currently plan return capital approximately 450 million combination share repurchases payment increased dividends subject market conditions cash needs march 31 2017 approximately 500 million available borrowing capacity revolving credit facility subject compliance applicable covenants expires december 2020 increased another 500 million approval lenders currently expect raise incremental debt equity financing next 12 months however next 12 months intend grow etf business exploring various options seed new products going forward assurances expectations projections could prove incorrect events may occur require additional liquidity excess amounts revolving credit facility opportunity refinance indebtedness market conditions might significantly worsen affecting results operations generation available cash events result operations available cash insufficient fund liquidity needs may seek manage available resources taking actions reducing future share repurchases reducing operating expenses reducing expected expenditures investments selling assets investment securities repatriating earnings foreign subsidiaries reducing dividend modifying arrangements affiliates andor employees types actions prove insufficient acquisition refinancing opportunity arise would likely utilize borrowing capacity revolving credit facility seek raise additional equity debt liquid assets include cash equivalents certain current investment securities march 31 2017 total liquid assets approximately 999 million included 336 million cash equivalents investments held foreign subsidiaries net working capital amounts foreign subsidiaries significant order increase cash available us general corporate purposes plan utilize approximately 276 million foreign cash next several years 43 million accumulated foreign earnings additional tax provision associated repatriations previously recognized see note 7 notes consolidated financial statements discussion repatriation foreign earnings repatriation accumulated prior period foreign earnings currently planned however circumstances change provide pay applicable additional us taxes connection repatriation offshore earnings practical time determine income tax liability would result repatriation accumulated foreign earnings credit liquidity risk cash equivalent deposits involve certain credit liquidity risks maintain cash equivalents number high quality financial institutions funds time may concentrations one institutions balances financial institutions funds credit quality monitored ongoing basis offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations section follows consolidation discussed critical accounting policies notes 1 17 notes consolidated financial statements contractual contingent obligations contractual obligations make future payments principally connection longterm debt noncancelable lease agreements acquisition agreements service agreements see notes 6 8 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual obligations millions fiscal year excludes contractual obligations civs consolidated sponsored investment products responsible liable obligations 1 amount contingent payments reflected year represents maximum amount could payable earliest possible date terms business purchase agreements using applicable exchange rate march 31 2017 amounts denominated currencies us dollar related contingent consideration liabilities aggregate fair value 368 million march 31 2017 net certain potential pension obligations related martin currie see notes 2 8 notes consolidated financial statements 2 table include approximately 355 million capital commitments investment partnerships limited partner outstanding funded required end commitment periods running fiscal 2029 100 million coinvestment commitment associated clarion partners acquisition funded second anniversary transaction closing 37 million remaining additional working capital commitment associated financial guard acquisition funded two year period ending august 2018 3 table include amounts uncertain tax positions 697 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated 4 table include redeemable noncontrolling interests primarily related minority equity interests affiliates 6193 million march 31 2017 timing amount related cash outflows cannot reliably estimated noncontrolling interests civs 585 million march 31 2017 obligations relation amounts 5 table excludes potential obligations arising ultimate settlement awards affiliate management equity plans key employees clarion partners clearbridge royce due uncertainty timing amounts ultimately payable see note 11 notes consolidated financial statements additional information regarding affiliate management equity plans 6 table excludes net pension benefit obligations 375 million due uncertainty timing amounts ultimately payable market risk maintain enterprise risk management program oversee coordinate risk management activities legg mason subsidiaries program certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income loss majority revenue calculated market value aum accordingly decline value underlying securities cause aum thus revenues decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts ordinary course business may also reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets market conditions current historical low interest rate environment may lead us take actions performance fees may earned certain investment advisory contracts exceeding performance benchmarks strong markets tend increase fees declines market values aum result reduced fee revenues net income generally earn higher fees equity assets alternative assets fees charged fixed income liquidity assets declines market values aum asset classes greater impact revenues addition revenue sharing arrangements certain affiliates retain different percentages revenues cover costs including compensation affiliates operate different levels margins net income loss profit margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary trading nontrading assets trading nontrading assets comprised investment securities including seed capital sponsored mutual funds products limited partnerships limited liability companies certain investment products trading current investments excluding civs subject risk security price fluctuations march 31 2017 2016 summarized table thousands trading current investments 1585 million 1130 million march 31 2017 2016 respectively relate longterm incentive plans offsetting liabilities end respective vesting periods related liabilities may completely offset end reporting period due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income expense dependent vesting provisions plan net income loss approximately 2651 million 4023 million trading current investments march 31 2017 2016 respectively investments proprietary fund products investments fluctuations market value impact nonoperating income expense amounts fluctuations market value related approximately 235 million 358 million proprietary fund products march 31 2017 2016 respectively offsetting compensation expense revenue share arrangements fluctuations market value related approximately 1363 million 1413 million proprietary fund products march 31 2017 2016 respectively substantially offset gains losses market hedges therefore materially impact net income loss attributable legg mason inc investments proprietary fund products liquidated related fund establishes track record investors decision made longer pursue strategy nontrading assets excluding civs subject risk security price fluctuations march 31 2017 2016 summarized table thousands investment securities civs totaled 587 million 487 million march 31 2017 2016 respectively march 31 2017 2016 held equity investments civs 283 million 136 million respectively fluctuations market value investments civs excess equity investment impact net income loss attributable legg mason inc however may impact nonoperating income expense civs corresponding offset net income loss attributable noncontrolling interests valuation trading nontrading investments described within critical accounting policies heading valuation financial instruments see notes 1 15 notes consolidated financial statements discussion derivatives following summary effect 10 increase decrease market values financial instruments subject market valuation risks march 31 2017 thousands 1 gains losses related investments deferred compensation plans directly offset full vesting period corresponding adjustment compensation expense related liability addition investments proprietary fund products approximately 1363 million economically hedged limit market risk result 10 increase decrease unrealized market value financial instruments subject market valuation risks would result 194 million increase decrease pretax earnings march 31 2017 also march 31 2017 2016 cash equivalents included 4036 million 11 billion respectively money market funds foreign exchange sensitivity operate primarily us provide services earn revenues incur expenses outside us accordingly fluctuations foreign exchange rates currencies principally uk brazil australia singapore denominated euro may impact aum revenues expenses comprehensive income loss net income loss certain affiliates entered forward contracts manage portion impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect net income loss liquidity interest rate risk exposure interest rate changes outstanding debt substantially mitigated 250 million 27 senior notes due july 2019 250 million 395 senior notes due july 2024 450 million 475 senior notes due march 2026 550 million 5625 senior notes due july 2044 250 million 6375 junior subordinated notes due march 2056 500 million 545 junior notes due september 2056 fixed interest rates see note 6 notes consolidated financial statements additional discussion debt critical accounting policies estimates accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following critical accounting policies involve significant estimates judgments consolidation normal course business sponsor manage various types investment products services entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees managed investment products material march 31 2017 issued investment performance guarantees investment products investors sell transfer assets investment products accordance financial accounting standards consolidate certain sponsored investment products designated civs certain investment products sponsor manage considered variable interest entities vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights sponsored investment products considered vres consolidated controlling financial interest investment product absent substantive investor rights replace manager entity kickout rights may fund initial cash investment certain vre investment products generate investment performance track record order attract thirdparty investors product initial investment new product typically represents 100 ownership product discussed “seed capital investments” consolidated long maintain controlling financial interest product designated civs unless investment longerterm vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity potential controlling financial interest must consolidate vie deemed primary beneficiary updated consolidation accounting guidance effective april 1 2016 adopted updated consolidation accounting guidance modified retrospective basis updated guidance limited partners sponsored investment product structured limited partnership similar entity either substantive kickout substantive participation rights general partner entities vies sponsor manager investment product may deemed decision maker accounting guidance fees paid decision maker marketbased fees considered variable interests vie additionally employee interests sponsored investment product made circumvent consolidation guidance financed sponsor included variable interests assessment included primary beneficiary determination decision maker deemed primary beneficiary vie power direct activities significantly impact economic performance vie obligation absorb losses receive benefits variable interests could significant vie determining whether primary beneficiary vie consider qualitative quantitative factors voting rights equity holders guarantees implied relationships fee paid decision maker marketbased included primary beneficiary determination prior consolidation accounting guidance prior accounting guidance sponsored investment fund vies deemed investment companies including money market funds determination expected residual returns excluded gross fees paid decision maker certain criteria relating fees met determining whether primary beneficiary vie considered qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid us related party ownership guarantees implied relationships sponsored investment funds meet investment company criteria determined primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits could significant vie considered management fee structure including seniority level fees current expected economic performance entity well provisions included governing documents might restrict guarantee expected loss residual return see notes 1 3 17 notes consolidated financial statements additional discussion civs vies revenue recognition vast majority revenues calculated percentage fair value aum underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith march 31 2017 equity fixed income alternative liquidity aum values aggregated 1798 billion 3943 billion 679 billion 864 billion respectively majority aum valued independent pricing services based observable market prices inputs believe market risk significant risk underlying value aum economic events financial market turmoil increased market price volatility however discussed valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2017 approximately 5 total aum valued based unobservable inputs majority related real estate funds discussed mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager brokerdealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost approximates fair value majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs significant portion aum fair value determined based unobservable inputs certain real estate funds values real estate investments prepared giving consideration income cost sales comparison approaches estimating property value income approach estimates income stream property discounts income plus reversion presumed sale present value risk adjusted rate yield rates growth assumptions utilized approach derived market transactions well financial industry data discount rate exit capitalization rate significant inputs valuations rates based location type nature property current anticipated market conditions cost approach estimates replacement cost building less physical depreciation plus land value sales comparison approach compares recent transactions appraised property adjustments made dissimilarities typically provide range value many factors also considered determination fair value including limited operating cash flows financial performance properties property types geographic locations physical condition asset prevailing market capitalization rates prevailing market discount rates general economic conditions economic conditions specific market assets located specific rights terms associated investment inherent uncertainties valuation values may materially differ values would determined negotiations held parties sale transaction valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value trading investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income loss comprehensive income loss depending underlying purpose instrument equity investments control investee primary beneficiary vie exert significant influence financial operating policies investee follow equity method accounting evaluation whether exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence may governing board investee legal rights investors entity pursuant funds operating documents relationship us investors entity equity method investees investment companies record underlying investments fair value therefore equity method accounting share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense investments value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices evaluate nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2017 2016 owned 676 million 299 million respectively investments partnerships limited liability companies accounted equity method included noncurrent assets consolidated balance sheets amounts 293 million 06 million respectively valued based assumptions estimates unobservable inputs remainder valued using net asset value nav practical expedient discussed march 31 2017 2016 also owned 147 million 154 million investments partnerships limited liability companies accounted cost method considers factors indicate may impairment value investments addition march 31 2017 2016 101 million 154 million respectively equity method investments included investment securities consolidated balance sheets accounting guidance fair value measurements disclosures defines fair value establishes framework measuring fair value accounting guidance defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance accounting guidance fair value measurements establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category may include fixed income securities certain proprietary fund products certain longterm debt level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds real estate funds category may also include certain proprietary fund products redemption restrictions contingent consideration valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products certain investments held civs valued nav determined fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity funds real estate funds investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient rely navs certain investments fair value navs provided investees derived fair values underlying investments reporting date effective april 1 2016 adopted updated accounting guidance fair value measurements removed requirement categorize within fair value hierarchy investments fair value measured using nav practical expedient march 31 2017 approximately 1 total assets 4 financial assets measured fair value 1 total liabilities 89 financial liabilities measured fair value meet definition level 3 excluding assets liabilities civs change percentages transfers categories measured beginning period see note 3 17 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2017 follows thousands identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth attrition rates acquired contracts based upon historical experience factors estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weightedaverage cost capital takes consideration premium representing degree risk inherent asset fully described goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred perform quantitative tests include critical reviews significant assumptions determine intangible assets goodwill impaired qualitatively concluded likely respective fair values exceed related carrying values perform tests indefinitelife intangible assets goodwill annually december 31 completed annual impairment tests goodwill indefinitelife intangible assets december 31 2016 also completed periodic impairment review amortizable intangible assets december 31 2016 result impairment tests rare infrastructure amortizable asset management contracts asset permal trade name indefinitelife intangible asset determined partially impaired resulting pretax operating charges 18 million 17 million respectively neither goodwill indefinitelife intangible assets deemed impaired impairments values amortizable intangible assets recognized year ended march 31 2017 estimates related future cash flows exceeded asset carrying values also determined triggering events occurred march 31 2017 therefore additional indefinitelife intangible asset goodwill impairment testing necessary result uncertainty regarding future market conditions assessing fair value reporting unit intangible assets requires management exercise significant judgment details intangible assets goodwill related impairment tests follow see note 18 notes consolidated financial statements regarding aggregate 34 million impairment rare infrastructure amortizable asset management contracts asset trade name indefinitelife intangible asset subsequent march 31 2017 acquisitions clarion partners entrust resulted addition indefinitelife fund management contracts assets 505 million 262 million respectively amortizable separate accounts assets 103 million 66 million respectively trade name assets 23 million 7 million respectively goodwill 80 million 411 million respectively fair values clarion partners entrust indefinitelife assets amortizable separate accounts assets established april 13 2016 may 2 2016 acquisition dates respectively december 31 2016 impairment consideration limited qualitative review aum trends critical valuation inputs noted significant changes amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates time amortization periods become longer appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows nine months ended december 31 2016 revenues related rare infrastructure separate account contracts asset declined due client withdrawals assets based revised attrition estimates remaining useful life acquired contracts decreased 11 years eight years december 31 2016 result client attrition related decline revenues revised estimate remaining useful life evaluation december 31 2016 indicated amortized carrying value 61 million would fully recoverable projected cash flows remaining acquired contracts indicated fair value 43 million impairment charge 18 million asset recorded year ended march 31 2017 significant assumptions used cash flow analysis used determine fair value included projected aum growthattrition rates 713 discount rate 155 future decreases cash flow projections increases discount rate resulting actual results changes assumptions due client attrition related reduction revenues investment performance market conditions factors may result impairment asset assurance continued client attrition asset outflows market uncertainty factors produce additional impairment asset march 31 2017 estimated remaining useful lives amortizable intangible assets range two 10 years weightedaverage life approximately 80 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined market participants perspective based projected discounted cash flows taking account values market participants would pay taxable transaction acquire respective assets two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names determine fair value intangible assets based upon discounted projected cash flows take consideration estimates future fees profit margins growth rates taxes discount rates determination fair values indefinitelife intangible assets highly dependent estimates changes inputs could result material impairment related carrying values asset determined impaired current implied fair value less recorded carrying value asset impaired difference current implied fair value carrying value asset reflected financial statements recognized operating expense period impairment determined exist contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset discussed note 2 notes consolidated financial statements entrust combined permal form entrustpermal common management shared resources including infrastructure employees processes branding initiatives accordingly completing annual impairment testing process december 31 2016 indefinitelife funds management contracts asset related entrust acquisition combined indefinitelife fundsofhedge funds management contracts asset related legacy permal business related carrying values cash flows funds continue aggregated future impairment testing projected cash flows based annualized cash flows applicable contracts projected forward 40 years shorter periods terminal value assumption assuming annual cash flow growth estimated net client flows projected market performance estimate projected cash flows projected fund growth rates affiliate used project aum cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income alternative liquidity investment manager based upon among things historical experience expectations future market investment performance internal external sources currently market growth assumptions 6 equity 3 fixed income 4 alternative 0 liquidity products general assumption 2 organic growth products subject exceptions organic growth contraction generally years one five starting point assumptions corporate planning process includes threeyear aum projections management operating affiliate consider specific business circumstances affiliate flow assumptions years one five certain affiliates adjusted appropriate reflect market participant view beyond year three estimates move towards general organic growth assumption 2 appropriate affiliate asset class year 20 appropriate resulting cash flow growth rate year 20 held constant used project cash flows year 40 based projected aum affiliate asset class affiliate advisory fee rates applied determine projected revenues domestic mutual fund contracts projected revenues applied weightedaverage margin applicable affiliates manage aum margins based arrangements currently place affiliate projected operating income reduced appropriate tax rate calculate projected cash flows believe growth assumptions reasonable given consideration multiple inputs including internal external sources although assumptions subject change based fluctuations actual results market conditions assumptions also subject change due among factors poor investment performance one operating affiliates withdrawal aum clients changes business climate adverse regulatory actions loss key personnel consider risks development growth assumptions discount rates discussed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows process includes comparison actual results prior growth projections however differences actual results prior projections necessarily indicative need reassess estimates given discounted projected cash flow analyses include projections well beyond three years variances nearyears may offset subsequent years fair value assessments pointintime consistency fair value assessment indicators value reflect expectations market participants pointintime critical evidence soundness estimate value subsequent periods consider differences actual results prior projections considering reasonableness growth assumptions used current impairment testing discount rates based appropriately weighted estimated costs debt equity capital using market participant perspective estimate cost debt based published debt rates estimate cost equity capital based capital asset pricing model considers riskfree interest rate peergroup betas company equity risk premiums equity risk adjusted consider relative risk associated indefinitelife intangible asset reporting unit discount rates also calibrated based assessment relevant market values consistent standard valuation practices taxable transactions projected discounted cash flow analysis also factors tax benefit value appropriate tax benefit represents discounted tax savings third party purchased asset given valuation date would receive future tax deductions amortization purchase price relevant amortization period 15 years us december 31 2016 permal fundsofhedge funds contracts 334 million accounted approximately 10 indefinitelife intangible assets supported fundsofhedge funds business funds continued experience periods moderate inflows outflows recent years certain increased risks follows past several years seen declines fundofhedge fund business particularly traditional high net worth client portion business permals historical focus permal offset extent inflows institutional business fundsofhedge fund managers subject certain market influences evidenced permals growth institutional funds separate accounts adding additional uncertainty estimates result continued risk uncertainty funds business nearterm growth assumptions contracts reduced compared managements threeyear aum projections based upon projected discounted cash flow analyses fair value permal fundsofhedge funds contracts asset exceeded carrying value approximately 15 million cash flows permal fundsofhedge funds contracts assumed average annual growth rate approximately 9 4 market 5 organicother however given current experience projected nearyear cash flows reflect moderate aum outflows years one two three trend modest aum inflows year four investment performance including expected impact future asset flows significant factor growth projections permal fundsofhedge funds contracts market performance projections supported fact two largest funds comprise approximately half contracts asset aum 10year average returns approximating 5 market projections supported industry statistics projected cash flows permal fundsofhedge funds contracts discounted 160 reflecting factors noted previously discussed completing annual impairment testing process december 31 2016 indefinitelife funds management contracts asset related entrust acquisition combined indefinitelife fundsofhedge funds management contracts asset related legacy permal business completed qualitative impairment test combined asset impairment indicators noted december 31 2016 rare infrastructure mutual funds contracts 123 million using exchange rate december 31 2016 accounted approximately 3 indefinitelife intangible assets based projected discounted cash flow analyses fair value mutual funds contracts asset exceeded carrying value 4 million impairment test cash flows rare infrastructure mutual fund contracts assumed annual growth rates averaging approximately 7 reflect moderate aum inflows years 1 2 projected cash flows rare infrastructure mutual fund contracts discounted 155 assuming factors remain actual results andor changes assumptions rare infrastructure mutual fund contracts cash flow projections longterm would deviate 4 projections discount rate would raised 155 160 asset deemed impaired despite excess fair value related carrying value given current uncertainty regarding future market conditions reasonably possible fund performance flows aum levels may decrease near term actual cash flows rare infrastructure mutual funds contracts could deviate projections 4 asset could deemed impaired material amount domestic mutual fund contracts acquired citigroup asset management “cam” transaction 21 billion account approximately 55 indefinitelife intangible assets december 31 2016 approximately 150 billion aum primarily managed clearbridge western asset associated asset approximately 35 equity aum 40 fixed income aum 25 liquidity aum although domestic mutual funds overall maintained strong recent market performance previously disclosed uncertainties regarding market conditions asset flows risks related potential regulatory changes liquidity business reflected projected discounted cash flow analyses based projected discounted cash flow analyses related fair value exceeded carrying value material amount impairment test cash flows domestic mutual fund contracts assumed annual growth rates averaging approximately 6 reflect moderate aum inflows years 1 2 projected cash flows domestic mutual fund contracts discounted 130 trade names account 2 indefinitelife intangible assets primarily related permal clarion partners carrying values 38 million 23 million respectively tested intangible assets using relief royalty approach discounted cash flow methods similar described indefinitelife contracts determined carrying value permal trade name exceeded fair value resulted impairment charge 17 million impairment charge primarily result decrease revenues reduction royalty rate reflecting decline value permal trade name due change branding decline use separate permal name following combination entrust significant assumptions used cash flow analysis included projection annual revenue growth rates 3 9 average 7 royalty rate 15 discount rate 160 future decreases cash flow projections increases discount rate resulting actual results changes assumptions resulting flow aum levels investment performance market conditions factors may result impairment asset assurance asset outflows market uncertainty factors produce additional impairment asset resulting fair values trade names significantly exceeded related carrying amounts goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition continue managed one global asset management operating segment internal management reporting discrete financial information regularly received chief operating decision maker chief executive officer consolidated global asset management business level result goodwill recorded evaluated one global asset management reporting unit level global asset management reporting unit consists operating businesses asset management affiliates centralized global distribution operations impairment testing process consolidated assets except certain tax benefits liabilities allocated single global asset management reporting unit similarly projected operating results reporting unit include holding company corporate costs overhead including costs associated executive management finance human resources legal compliance internal audit central corporate functions goodwill principally originated acquisitions cam permal royce martin currie rare infrastructure recently clarion partners entrust value reporting unit based part projected consolidated net cash flows including cash flows assets managed mutual funds closedend funds proprietary funds addition separate account assets managers significant assumptions used assessing implied fair value reporting unit discounted cash flow method consistent methodology discussed indefinitelife intangible assets also reporting unit level future corporate costs estimated consolidated projected operating results affiliates actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows discount rates based appropriately weighted estimated costs equity using market participant perspective also consistent methodology discussed indefinitelife intangible assets also perform marketbased valuation reporting unit value applies average ebitda multiples paid change control transactions peer companies ebitda results two estimates value reporting unit discounted cash flow ebitda multiple analyses compared significant differences assessed determine reasonableness value whether adjustment either result warranted values accepted appropriately weighted average two reporting unit valuations discounted cash flow ebitda multiple analyses used implied fair value global asset management reporting unit december 31 2016 exceeded carrying value 14 approximately 550 million considering relative merits details involved valuation process used equal weighting two values december 2016 testing changes assumptions underlying projected cash flows reporting unit ebitda multiple resulting market conditions reduced aum factors could result impairment goodwill impairment could potentially material impact results operations financial condition assess accuracy reporting unit value determined valuation methods comparing results market capitalization determine implied control premium reasonableness implied control premium considered comparing control premiums paid relevant actual change control transactions assessment provides evidence underlying assumptions analyses reporting unit fair value reasonable calculating market capitalization purposes market volatility significant impact capitalization appropriate may consider average market prices stock period one two months test date determine market capitalization control premium arises fact acquisition typically premium paid current market prices publicly traded companies relates ability control operations acquired company assessments control premiums asset management industry difficult many acquisitions involve privately held companies involve portions public company control premium calculated recent market evidence regarding control premiums suggests values 14 54 average 34 realistic common believe premiums reasonable range estimates equity value based analysis consideration believe implied control premium 43 determined reporting unit value estimation december 31 2016 reasonable relation observed relevant market control premium values contingent consideration liabilities connection business acquisitions may required pay additional future consideration based achievement certain designated financial metrics estimate fair value potential future obligations time business combination consummated record contingent consideration liability consolidated balance sheet fair values contingent consideration liabilities revised quarterly reporting date march 31 2017 fair values contingent consideration liabilities aggregate 368 million relating acquisitions rare infrastructure martin currie qs investors financial guard pk investments see note 18 notes consolidated financial statements regarding 115 million reduction contingent consideration liability related acquisition rare infrastructure subsequent march 31 2017 estimate fair value contingent consideration liabilities using probabilityweighted modeling specific business acquisition arrangement contingent consideration estimated payments discounted present value measurement date martin currie purchase agreement requires us pay additional consideration based achievement certain financial metrics specified share purchase agreement certain future dates three onehalf year earnout term modeling martin currie contingent payment arrangement includes monte carlo simulation projected aum performance fees product performance determine related estimated payment amounts expected payment amounts subsequently change contingent consideration liabilities reduced increased current period resulting gain loss reflected within operating expense consolidated statements income loss significant increases decreases projected aum performance fee levels martin currie would result significantly higher lower contingent consideration liability fair value resulting changes could material operating results rare infrastructure qs investors purchase agreements require us pay additional consideration based whether certain future revenue thresholds achieved likewise significant increases decreases projected revenue levels rare infrastructure qs investors would result significantly higher lower contingent consideration liability fair value resulting changes could material operating results stockbased compensation stockbased compensation plans include stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units affiliate management equity plans deferred compensation payable stock compensation plans issue equity awards directors officers key employees accordance applicable accounting guidance compensation expense years ended march 31 2017 2016 2015 includes compensation cost nonvested sharebased awards grant date fair value amortized respective vesting periods may reduced retirementeligible recipients straightline method also accounting guidance cash flows related income tax deductions excess less stockbased compensation expense classified financing cash flows granted 08 million 09 million 09 million stock options fiscal 2017 2016 2015 respectively determine fair value option grant using blackscholes optionpricing model except marketbased grants use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate exception grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal expected life options estimate volatility equally weighted historical prices stock period equal expected life option implied volatility market listed options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different fiscal 2017 implemented affiliate equity management plan entitles certain key employees clarion partners participate 15 future growth affiliates enterprise value subject appropriate discounts subsequent date grant fiscal 2016 implemented affiliate management equity plan royce resulted issuance minority equity interests affiliate management team fiscal 2016 fiscal 2017 interests allow holders receive quarterly distributions affiliates net revenues amounts equal percentage ownership represented equity hold fiscal 2014 also implemented management equity plans permal clearbridge granted units certain employees entitle participate 15 future growth respective affiliates enterprise value subject appropriate discounts fiscal 2017 connection combination permal entrust permal management equity plan liquidated additional information sharebased compensation see notes 1 11 notes consolidated financial statements also determine fair value optionlike affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts inputs blackscholes model generally determined fashion similar fair value grants options stock described however affiliates private companies without quoted stock prices utilize discounted cash flow analyses marketbased valuations similar discussed heading “intangible assets goodwill” determine respective business enterprise values subject appropriate discounts lack control marketability noncontrolling interests noncontrolling interests include affiliate minority interests thirdparty investor equity consolidated sponsored investment products vested affiliate management equity plan interests noncontrolling interests holder may able request settlement classified redeemable reported estimated settlement values settlement expected occur future date changes expected settlement value recognized settlement period nonredeemable noncontrolling interests permit holder request settlement reported issuance value together undistributed net income allocated noncontrolling interests estimate settlement value noncontrolling interests fair value consolidated sponsored investment products investor may request withdrawal time fair value based market quotes underlying securities held investment vehicles affiliate minority interests affiliate management equity plan interests fair value reflects related total business enterprise value appropriate discounts lack marketability control may also features equity interests dividend subordination contemplated valuations fair value optionlike management equity plan interests also relies blackscholes option pricing model calculations noted income taxes subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions relevant jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes intent ability implement certain tax planning strategies management assesses likelihood able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision substantially deferred tax assets relate us federal state uk taxing jurisdictions march 31 2017 us federal deferred tax assets aggregated 732 million realization expected require 37 billion future us earnings 811 million must foreign sourced earnings deferred tax assets generated us jurisdictions resulting net operating losses generally expire 20 years generated resulting foreign tax credits generally expire 10 years generated based estimates future taxable income using assumptions consistent used goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realizable respect resulting foreign tax credit carryforwards likely tax benefits relating utilization approximately 61 million foreign taxes credits realized valuation allowance established estimates assumptions contemplate certain possible future changes ownership legg mason stock us internal revenue code could limit utilization net operating loss foreign tax credit benefits march 31 2017 change federal valuation allowances aggregated 111 million decrease federal valuation allowances prior year primarily relates 104 million expiring foreign tax credits reclassified net operating losses offset part additional valuation allowances 13 million related foreign tax credits 06 million related martin currie’s operating losses also decrease valuation allowance 26 million related charitable contributions march 31 2017 us state deferred tax assets aggregated 174 million due limitations utilization net operating loss carryforwards taking consideration state tax planning strategies related valuation allowance 291 million substantially relates prior years state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary foreign jurisdictions net increase valuation allowances 05 million fiscal 2017 primarily relates statutory rate changes revised estimates realization deferred tax benefits extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals including future increases relating tax amortization goodwill indefinitelife intangible assets well planning strategies measure value realizability deferred tax assets event determine portion deferred tax assets already subject valuation allowance realizable required establish valuation allowance charge income tax provision period determination made value deferred tax assets based enacted corporate tax rates future periods legislative changes related rates would require remeasurement deferred tax assets period enactment depending facts circumstances charge could material earnings calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due currently proposals significantly change us federal income tax rules include proposals reduce tax rates limit deductibility interest expense changes taxation nonus earnings although details yet available changes could impact carrying value deferred tax balances result one time cash tax payments transitional period impact effective tax rate going forward time insufficient detail reform proposals estimate impact certainty recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risk revenues net income loss critical accounting policies intangible assets goodwill previously discussed item 7aitem 7 managements discussion analysis results operations financial condition legg mason inc subsidiaries company principally engaged providing securities brokerage investment advisory investment banking mortgage banking services individuals institutions corporations municipalities companys profitability sensitive variety factors including volume trading securities volatility general level market prices demand investment banking mortgage banking services fiscal year ended march 31 1995 interest rate levels rose sharply adversely impacting companys investment banking securities brokerage revenues contrast prior years results successful companys history achieved favorable corporate municipal finance environment companys investment advisory activities contribution operating results grown significantly internal growth acquisition past ten years fiscal 1995 company acquired batterymarch financial management inc batterymarch gray seifert co gray seifert described note 2 notes consolidated financial statements batterymarch acquired january 1995 manages approximately 5 billion emerging markets international us equity portfolios institutional clients gray seifert acquired april 1994 manages 680 million equity balanced accounts individuals family groups endowments foundations two additions assets management institutions companysponsored mutual funds private accounts managed companys subsidiaries 246 billion march 31 1995 47 167 billion year earlier 526 million ten years ago earnings investment advisory services tend stable securities brokerage investment banking activities less affected changes securities market conditions results individual period considered representative future profitability many companys activities fixed operating costs decline reduced levels volume company attempts reduce costs particularly periods low volume general rule attempt personnel reduction accordingly sustained periods unfavorable market conditions may adversely affect profitability results operations following table sets forth periods indicated items consolidated statements earnings percentages total revenues increase decrease item percentage amount previous period fiscal 1995 revenues net earnings per share declined record levels reached prior fiscal year revenues 3716 million 7 decrease revenues 3975 million fiscal 1994 net earnings 163 million 55 net earnings 360 million prior fiscal year primary earnings per share declined 56 130 298 revenues derived securities transactions individual investors constituted approximately 50 companys total revenues fiscal 1995 company believes continue largest single source revenues foreseeable future revenues commissions fell 15 1207 million fiscal 1995 principally result lower sales nonaffiliated mutual funds listed overthecounter securities commission revenues adversely affected rising interest rates investor caution particularly part individual investors fiscal 1994 commissions rose 21 1414 million levels fiscal 1993 principally increases sales listed securities nonaffiliated mutual funds variable annuities overthecounter securities fiscal 1994 commission revenues benefited active rising stock market attributable part investors seeking higher investment returns available money market accounts shortterm investments principal transactions revenues principal transactions rose 10 595 million fiscal 1995 principally result increased sales municipal corporate debt securities offset part lower sales mortgagebacked securities higher sales municipal securities secondary markets substantially offset sharp declines municipal new issue volume sales corporate debt securities benefited companys expansion taxable fixedincome marketing capabilities fiscal 1994 principal transactions fell 2 539 million lower sales taxable fixedincome securities decline profits firmowned securities positions substantially offset increased sales overthecounter securities investment advisory related fees investment advisory related fees rose 35 fiscal 1995 883 million principally result addition fees earned batterymarch gray seifert growth assets management companysponsored mutual funds companys fixedincome advisory subsidiary excluding fees earned batterymarch gray seifert investment advisory related fees rose 19 fiscal 1995 fees assets management feebased brokerage accounts accounted 24 total revenues fiscal 1995 16 prior year fiscal 1994 investment advisory related fees rose 29 growth assets management companysponsored mutual funds companys fixedincome advisory subsidiary well growth various types feebased brokerage accounts graph depicts growth investment advisory related fees revenue assets management five fiscal periods ended march 31 1995 investment banking investment banking revenues declined 56 347 million fiscal 1995 record levels achieved prior fiscal year significantly higher interest rates led industrywide declines corporate municipal securities offerings fiscal 1994 investment banking revenues rose 19 793 million result selling concessions management fees earned substantially higher level corporate underwritings particularly comanaged offerings real estate investment trusts closedend fund issuances low interest rates higher securities valuations important factors growth investment banking revenues fiscal 1994 revenues rose 6 291 million primarily increased account maintenance fees rental income office building purchased fiscal 1995 fiscal 1994 revenues rose 21 primarily increased mortgage banking loan origination fees addition certain fees earned fairfield group subsequent acquisition april 1993 expenses compensation benefits compensation benefits fell 5 2170 million fiscal 1995 lower commission profitabilitybased compensation partially offset personnel additions certain product support areas twelve new branch office locations fiscal 1994 compensation benefits rose 18 2290 million reflecting higher sales compensation increased commissionbased revenues personnel additions higher profitabilitybased compensation substantial part compensation expense fluctuates proportion level business activity compensation costs primarily salaries benefits fixed may decline reduced levels volume therefore profitability may adversely affected sustained periods unfavorable market conditions slow revenue growth acquired businesses new product areas occupancy equipment rental occupancy equipment rental rose 11 298 million inclusion expenses batterymarch gray seifert higher depreciation data processing expenses related branch office product area expansion fiscal 1994 occupancy equipment rental rose 15 269 million principally increased transactionrelated data processing costs higher rental payments corporate headquarters certain branch office locations communications costs rose 13 259 million fiscal 1995 principally reflecting increased quote services branch offices product areas higher printing paper expenses fiscal 1994 communications costs rose 14 reflecting increases telephone transactionrelated variable expenses attributable increased business activity floor brokerage clearing fees floor brokerage clearing fees fell 13 50 million fiscal 1995 following 4 increase fiscal 1994 reflecting changes securities transaction volume expense rose 28 17 fiscal 1995 1994 respectively increased litigationrelated expenses including 20 million current year charge proposed settlement class action lawsuit discussed note 8 notes consolidated financial statements higher promotional programming expense addition fiscal 1995 includes expenses batterymarch gray seifert subsequent acquisitions interest revenue expense interest revenue increased 31 393 million fiscal 1995 primarily result higher interest rates earned substantially larger customer margin account balances stock loan conduit activity offset part reduction interest earned proprietary securities positions interest expense increased 11 171 million higher interest rates paid customer credit conduit stock loan balances offset part decline interest paid shortterm borrowings fiscal 1994 interest revenue increased 25 300 million result increased stock loan conduit activity larger customer margin account balances investment proceeds companys 680 million convertible subordinated debenture offering completed april 1993 increases partially offset lower interest earnings proprietary fixedincome securities positions interest expense increased 32 154 million primarily debt service convertible subordinated debentures increased stock loan conduit activity result substantially larger customer margin account balances higher interest rates companys net interest margin increased 564 fiscal 1995 487 fiscal 1994 graph depicts interest revenue interest expense five fiscal periods ended march 31 1995 income taxes income taxes fell 51 114 million fiscal 1995 lower pretax earnings companys effective tax rate increased 413 391 result federal tax law changes higher effective state income tax rates fiscal 1994 income taxes increased 23 higher pretax earnings companys effective tax rate increased 391 383 result higher corporate income tax rates following enactment 1993 omnibus budget reconciliation act liquidity capital resources companys assets primarily liquid consisting mainly cash assets readily convertible cash assets financed primarily free credit balances equity capital convertible debentures bank lines credit payables year ended march 31 1995 cash equivalents increased 171 million cash flows operating activities provided 623 million primarily attributable reduction regulatory deposits fiscal 1995 net earnings adjusted depreciation amortization offset part increased customer receivables company invested cash 267 million principally related acquisition batterymarch offset part net decrease resale agreements investment securities cash flows financing activities used 185 million primarily repay shortterm borrowings fiscal 1995 company acquired batterymarch utilizing 541 million cash see note 2 notes consolidated financial statements regarding future payments may required business combination companys brokerdealer subsidiaries subject requirements secs net capital rule designed measure general financial soundness liquidity brokerdealers march 31 1995 brokerage subsidiaries aggregate net capital 907 million exceeded minimum net capital requirements 829 million principal sources companys funds investment advisory brokerdealer subsidiaries amount brokerdealers net assets may distributed subject restrictions applicable net capital rules addition company revolving bank line credit amount 500 million none currently outstanding companys subsidiaries lines credit aggregating 960 million pursuant may borrow shortterm demand basis generally prevailing broker call rates management believes funds available operations lines credit sufficient meet present reasonably foreseeable capital needs although company may augment capital funds continued expansion internal growth acquisition company borrows lends securities normal course business facilitate settlement customer proprietary transactions addition company engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis effects inflation companys assets significantly affected inflation primarily monetary consisting cash resale agreements securities receivables however rate inflation affects various expenses including employee compensation occupancy communications may readily recoverable charges services provided company recent accounting development statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed issued financial accounting standards board march 1995 company expects adopt provisions statement 121 beginning fiscal 1996 based companys current evaluation impact adoption material companys financial position results operations item 8item 7 managements discussion analysis results operations financial condition business description legg mason inc parent wholly owned subsidiaries collectively company principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities companys profitability sensitive variety factors including volume trading securities volatility general level securities prices demand investment banking mortgage banking services fiscal 2000 us equity markets experienced record trading volume price levels principally continuing economic growth gains corporate earnings modest inflation result company achieved fifth consecutive year record net revenues net earnings attributable growth asset management private client businesses total assets management institutions companysponsored mutual funds private accounts managed companys subsidiaries 112 billion march 31 2000 26 89 billion year earlier earnings asset management services tend stable private client capital markets activities affected less changes securities market conditions revenues asset management activities included asset management private client segments represented 43 companys net revenues fiscal 2000 companys asset management activities contribution operating results grown significantly internal growth acquisition past ten years past fiscal year company acquired berkshire asset management inc berkshire johnson fry holdings plc johnson fry entered joint venture bingham dana llp fiscal 1998 company acquired brandywine asset management inc brandywine see note 2 notes consolidated financial statements additional information regarding acquisitions berkshire manages assets approximately 600 million johnson fry manages approximately 16 billion brandywine manages approximately 65 billion institutional clients high net worth individuals net interest income continued stable growing source earnings primarily result significant growth retail brokerage margin loan customer credit balances larger firm investment balances results individual period considered representative future profitability many companys activities fixed operating costs decline reduced levels volume company attempts reduce costs particularly periods low volume general rule attempt personnel reductions accordingly sustained periods unfavorable market conditions may affect profitability adversely company operates within four business segments asset management private client capital markets operations contained within business segment segments financial information last three fiscal years summarized asset management millions years ended march 31 2000 1999 1998 net revenues 3492 2648 2131 pretax earnings 1143 793 534 businesses contained within asset management segment primarily provide asset management services companysponsored mutual funds management assets institutional individual clients companys asset management subsidiaries private client millions years ended march 31 2000 1999 1998 net revenues 6895 5203 4445 pretax earnings 1108 672 536 private client distributes wide range financial products branch distribution network including equity fixedincome securities proprietary nonaffiliated mutual funds annuities net interest profit customers margin loan credit balances included segment march 31 2000 excluding assets managed legg mason funds capital markets millions years ended march 31 2000 1999 1998 net revenues 1606 1303 1264 pretax earnings 89 120 204 capital markets segment includes companys equity fixedincome capital markets businesses including originations institutional sales trading segment also includes realized unrealized gains losses merchant banking activities warrants acquired connection investment banking activities millions years ended march 31 2000 1999 1998 net revenues 372 357 314 pretax earnings 51 97 10 business segment primarily includes companys real estate service business unallocated corporate revenues expenses 1999 pretax earnings included noncash deferred compensation expense 104 million related change accounting treatment nonqualified deferred compensation stock plan see note 13 notes consolidated financial statements results operations following table sets forth periods indicated items consolidated statements earnings percentages net revenues increase decrease item percentages amount previous period nmnot meaningful fiscal 2000 compared fiscal 1999 fiscal 2000 revenues net earnings per share reached record levels substantially higher prior fiscal year net revenues increased 30 12 billion total revenues 14 billion increase 31 revenues 10 billion fiscal 1999 net earnings 1425 million 60 net earnings prior fiscal year basic earnings per share increased 53 251 164 diluted earnings per share increased 50 233 155 accordance emerging issues task force eitf 9714 results fiscal 2000 fiscal 1999 include noncash deferred compensation credit 11 million noncash expense 104 million respectively related change accounting treatment nonqualified deferred compensation stock plan related compensation arrangements see note 13 notes consolidated financial statements revenues investment advisory related fees investment advisory related fees increased 37 5349 million result growth assets management companysponsored mutual funds feebased brokerage accounts fixedincome investment advisory accounts investment advisory revenues assets management graph appears investment advisory related fee assets revenues management millions billions b 1996 1621 354 1997 2082 438 1998 2956 710 1999 3902 889 2000 5349 1118 commissions commission revenues rose 30 3629 million fiscal 2000 primarily result increases listed overthecounter securities transactions increases sales nonaffiliated mutual funds annuity products principal transactions revenues principal transactions increased 34 1263 million principally result increases sales trading revenues equity fixedincome securities investment banking investment banking revenues declined 9 689 million primarily result decline corporate banking advisory fees interest revenue expense millions dollars graph appears interest expense interest revenue 1996 26187 57125 1997 43364 84129 1998 73706 127268 1999 94910 160292 2000 134322 222901 interest revenue expense interest revenue increased 39 2229 million result increased firm investments predominantly funds segregated regulatory purposes customer margin loan balances stock borrow balances interest expense increased 42 1343 million primarily due larger interestbearing customer credit balances stock loan balances result significantly higher levels stock borrow stock loan balances companys net interest margin declined 397 fiscal 2000 408 fiscal 1999 companys net interest profit increased 35 886 million fiscal 2000 654 million fiscal 1999 revenues rose 19 549 million primarily result unrealized gain warrants acquired connection private placement company went public fourth quarter gain sale merchant banking investment revenue recorded capitalizing mortgage servicing assets loans originated fiscal 2000 required financial accounting standards board fasb statement 125 accounting transfers servicing financial assets extinguishments liabilities expenses compensation benefits compensation benefits increased 27 7439 million result higher sales incentive compensation increased revenues profits higher fixed compensation costs primarily attributable increase number employees substantial part compensation expense fluctuates proportion level business activity compensation costs primarily salaries benefits fixed may decline reduced levels volume therefore profitability may affected adversely sustained periods unfavorable market conditions slow revenue growth acquired businesses new product areas occupancy equipment rental occupancy equipment rental increased 25 806 million result increased costs acquired companies additional expanded branch office locations continued investments technology communications expense increased 14 544 million due higher business volume gave rise increased costs quote services printed materials postage telephone usage floor brokerage clearing fees floor brokerage clearing fees increased 17 78 million reflecting higher securities transaction volume noncash deferred compensation fiscal 2000 fiscal 1999 accordance eitf 9714 company recorded noncash deferred compensation credit 11 million noncash deferred compensation charge 104 million respectively related change accounting treatment nonqualified deferred compensation stock plan related compensation arrangements see note 13 notes consolidated financial statements expenses increased 27 1117 million increase primarily attributable addition expenses johnson fry increased intangible amortization expense related acquired companies higher loss error litigation charges income tax provision income tax provision rose 63 966 million fiscal 2000 result increased pretax earnings companys effective tax rate increased 404 fiscal 2000 compared 400 prior year fiscal 1999 compared fiscal 1998 fiscal 1999 revenues net earnings per share reached thenrecord levels substantially higher prior fiscal year net revenues 9511 million increase 17 prior year total revenues 10 billion increase 18 revenues 8891 million fiscal 1998 net earnings 893 million 17 net earnings prior fiscal year basic earnings per share increased 17 164 140 diluted earnings per share increased 18 155 131 revenues investment advisory related fees investment advisory related fees increased 32 3902 million result growth assets management companysponsored mutual funds fixedincome investment advisory accounts feebased brokerage accounts commissions commission revenues rose 16 2791 million fiscal 1999 primarily result increases securities transaction volume principal transactions revenues principal transactions increased 8 941 million principally result increases fixedincome sales equity trading operations investment banking investment banking revenues declined 22 761 million primarily result decreased public offerings equity securities particularly comanaged public offerings real estate investment trusts interest revenue expense interest revenue increased 26 1603 million result increased firm investments predominantly funds segregated regulatory purposes customer margin loan balances interest expense increased 29 949 million primarily due larger interestbearing customer credit balances result significantly higher levels interestbearing customer credit balances companys net interest margin declined 408 fiscal 1999 421 fiscal 1998 companys net interest profit increased 22 654 million fiscal 1999 536 million fiscal 1998 revenues rose 13 461 million primarily result proceeds key man life insurance policy increase remarketing fees loan originations companys commercial mortgage banking subsidiaries expenses compensation benefits compensation benefits increased 14 5848 million result higher sales compensation increased revenues higher fixed compensation costs primarily attributable increased number employees occupancy equipment rental occupancy equipment rental increased 13 643 million result continued investments technology full year expenses related companys new corporate headquarters additional expanded branch office locations communications expense increased 12 480 million due higher business volume gave rise increased costs telephone usage quote services printed materials postage floor brokerage clearing fees floor brokerage clearing fees increased 22 67 million reflecting higher securities transaction volume noncash deferred compensation fiscal 1999 accordance eitf 9714 company incurred noncash deferred compensation charge 104 million related change accounting treatment nonqualified deferred compensation stock plan related compensation arrangements expenses increased 25 882 million attributable increased loss error litigation charges higher promotional expenses income tax provision income tax provision rose 14 594 million fiscal 1999 result increased pretax earnings companys effective tax rate 400 fiscal 1999 compared 407 prior year liquidity capital resources companys total assets increased 48 billion march 31 2000 35 billion march 31 1999 primarily reflecting higher customer receivables securities borrowed companys assets consist primarily cash equivalents collateralized shortterm receivables securities collateralized receivables consist primarily margin loans securities purchased agreements resell securities borrowed secured us government agency securities corporate debt equity securities highly liquid nature companys assets provides company flexibility financing managing business year ended march 31 2000 cash equivalents increased 09 million cash flows operating activities provided 1647 million primarily attributable net earnings adjusted noncash charges funds provided operations primary source funds used investing activities investing activities include payments 876 million acquisitions berkshire johnson fry 50 interest joint venture see note 2 notes consolidated financial statements description acquisitions investing activities include 231 million capital expenditures enhancements technology expansion companys headquarters additional branch offices opened fiscal 2000 addition increase securities purchased agreements resell utilized 296 million cash equivalents primary objective companys capital structure funding practices ensure capital base appropriately support companys business strategies well regulatory capital requirements subsidiaries provide needed liquidity times company emphasizes diversification funding sources seeks minimize exposure refinancing risk companys assets funded payables customers securities loaned bank loans longterm debt equity company obtains shortterm financing primarily secured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized us government agency securities corporate debt equity securities shortterm funding generally obtained rates related federal funds libor money market rates company maintains uncommitted credit facilities several banks financial institutions uncommitted facilities consist credit lines company advised available contractual lending obligations exist company committed unsecured revolving credit facility 50 million matures june 30 2000 facility restrictive covenants require among things company maintain specified levels net worth borrowings outstanding facility march 31 2000 company process obtaining 100 million committed unsecured revolving credit facility become effective current facility expires company outstanding 100 million senior notes due february 15 2006 bear interest 65 notes originally issued discount yield 657 march 31 2000 company 50 million available issuance additional debt convertible debt securities pursuant shelf registration statement company expects 450 million shelf registration statement filed securities exchange commission issuance debt convertible debt securities become effective fiscal 2001 shelf filings permit company register securities advance sell financing needs arise market conditions favorable company intends use shelf general corporate purposes including expansion diversification asset management private client businesses described note 17 notes consolidated financial statements company completed acquisition perigee inc canadian money manager terms agreement company issued approximately 52 million exchangeable shares economic equivalent companys common shares companys brokerdealer subsidiaries subject requirements securities exchange commissions uniform net capital rule designed measure general financial soundness liquidity brokerdealers march 31 2000 brokerage subsidiaries aggregate net capital 2627 million exceeded minimum net capital requirements 2330 million amount brokerdealers net assets may distributed subject restrictions applicable net capital rules companys overall capital funding needs continually reviewed ensure capital base support estimated needs businesses company continues explore potential acquisition opportunities means expanding businesses opportunities may involve acquisitions material size may require raising additional capital risk management risk inherent part companys business activities extent company properly effectively identifies assesses monitors manages various types risk involved activities critical soundness profitability company seeks identify assess monitor manage following principal risks involved companys business activities funding market credit operational legal risk management company multifaceted process requires communication judgment knowledge financial products markets companys senior management takes active role risk management process requires specific administrative business functions assist identification assessment control various risks companys risk management policies procedures methodologies evolutionary nature subject ongoing review modification funding risk discussed liquidity capital resources section managements discussion analysis results operations financial condition market risk potential changes value companys financial instruments owned referred market risk companys market risk generally represents risk loss may result change value financial instrument result fluctuations interest rates credit spreads equity prices correlation among along level volatility interest rate risks result primarily exposure changes yield curve volatility interest rates mortgage prepayments credit spreads equity price risks result exposure changes prices volatilities individual equities equity baskets equity indices company makes dealer markets equity debt securities facilitate customer order flow company may required equity debt securities trading inventory accounts company hedges exposure market risk managing net long short position example company may hedge municipal portfolio taking offsetting position related futures contract position limits trading inventory accounts established monitored ongoing basis day consolidated position exposure reports prepared distributed various levels company management enable management monitor inventory levels results trading groups company also monitors inventory aging pricing concentration securities ratings accordance securities exchange commissions risk disclosure requirements following table categorizes companys market risk sensitive financial instruments financial instruments market risk march 31 2000 table includes net long short fair values consistent way risk exposure managed see notes 4 5 notes consolidated financial statements related gross long short fair values financial instruments owned investments table also includes 903 million treasury securities segregated regulatory purposes purpose johnson fry finance subsidiaries see note 2 notes consolidated financial statements raise funds issuing secured fixedrate loan securities use proceeds invest portfolio bonds issued various financial institutions generally available public tranches small enough retail investor 2416 million investments finance subsidiaries 2393 million notes payable finance subsidiaries directly related offsetting risk characteristics represent material market risk company additionally claims note holders limited assets finance subsidiaries limits companys exposure default risk investments addition financial instruments included table company 100 million senior notes payable mature 2006 bear fixed coupon 65 notes issued discount yield 657 exposure foreign currency commodity market risk material credit risk credit risk represents loss company would incur counterparty issuer securities instruments held company fails perform contractual obligations company credit risk related various investing financing activities reduced industry practice obtaining maintaining collateral credit exposure associated companys private client business consists primarily customer margin accounts monitored daily company monitors exposure industry sectors individual securities performs sensitivity analysis regular basis connection margin lending activities company adjusts margin requirements believes risk exposure appropriate based market conditions operational risk operational risk refers generally risk loss resulting companys operations including limited improper unauthorized execution processing transactions deficiencies companys operating systems inadequacies breaches companys control process company operates different businesses diverse markets reliant ability employees systems process high numbers transactions event breakdown improper operation systems improper action employees company could suffer financial loss regulatory sanctions damage reputation order mitigate control operational risk company developed continues enhance specific policies procedures designed identify manage operational risk appropriate levels example company procedures require transactions accurately recorded properly reflected companys books records confirmed timely basis position valuations subject periodic independent review procedures collateral adequate documentation obtained counterparties appropriate circumstances disaster recovery plans exist critical systems redundancies built systems deemed appropriate company also uses periodic selfassessments internal audit reviews check operational risk legal risk legal risk includes risk noncompliance applicable legal regulatory requirements company generally subject extensive regulation different jurisdictions conducts business company various procedures addressing issues regulatory capital requirements sales trading practices use safekeeping customer funds credit granting collection activities moneylaundering record keeping effects inflation companys assets significantly affected inflation primarily monetary consisting cash securities purchased agreements resell securities receivables however rate inflation affects various expenses including employee compensation occupancy communications may readily recoverable charges services provided company recent accounting developments june 1998 fasb issued statement 133 accounting derivative instruments hedging activities statement 133 establishes standards accounting reporting derivative instruments hedging activities june 1999 fasb issued statement 137 accounting derivative instruments hedging activitiesdeferral effective date fasb statement 133 delayed effective date fiscal quarters fiscal years beginning june 15 2000 impact adopting statement 133 expected material companys consolidated financial statements year 2000 processing issue fiscal 2000 company spent approximately 19 million ensure internal information noninformation technology systems service providers systems prepared process year 2000 total cost year 2000related planning testing upgrades replacements hardware software approximately 35 million company experienced significant disruptions internal systems change year 1999 2000 forwardlooking statements information statements provided behalf company time including within report form 10k may contain certain forwardlooking information including information relating anticipated growth revenues earnings per share anticipated changes businesses amount client assets management anticipated expense levels expectations regarding financial market conditions company cautions readers forwardlooking information provided behalf company guarantee future performance actual results may differ materially forwardlooking information result various factors including limited discussed forwardlooking statements speak date statements made company undertakes obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events companys future revenues may fluctuate due numerous factors volume trading securities volatility general level market prices total value composition assets management relative investment performance companysponsored mutual funds compared competing offerings market indices sentiment investor confidence ability company maintain investment management administrative fees current levels competitive conditions companys business segments demand investment banking mortgage banking services effects acquisitions companys future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred company result changes number total employees competitive factors reasons variations expenses capital costs including depreciation amortization noncash charges incurred company maintain administrative infrastructure unanticipated costs may incurred company time protect client goodwill connection litigation effects acquisitions companys business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect companys business results operations item 7aitem 7 managements discussion analysis results operations financial condition business description legg mason inc parent holding company subsidiaries collectively parent legg mason principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities terms us company refer legg mason legg mason operations principally united states america united kingdom canada also offices spain switzerland singapore financial services industry legg mason operates competitive highly regulated profitability sensitive variety factors including amount assets management volume trading securities volatility general level securities prices interest rates level customer margin credit account balances demand investment banking services addition overall market conditions diversification services products offered investment performance client relations significant factors determining whether successful retaining attracting clients past decade experienced substantial expansion due internal growth strategic acquisition asset management firms provided among things broader range investment expertise additional product diversification increased assets management legg mason currently operates four business segments asset management private client capital markets business segments based upon factors services provided distribution channels utilized certain services offer provided clients one business segments revenue category may reflected multiple segments allocate certain common income expense items among business segments based upon various methodologies factors asset management segment provides investment advisory services companysponsored investment funds asset management services institutional individual clients investment advisory related fees earned asset management vary based upon factors type underlying investment product amount assets management type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks private client segment distributes wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities march 31 2002 private clients financial advisors operated 134 retail branch offices primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds fees earned feebased brokerage managed accounts net interest customers margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets segment consists equity fixed income institutional sales trading corporate public finance advisory underwriting activities fixed income institutional sales trading include transactions taxable municipal products although maintain securities inventory primarily facilitate customer transactions capital markets also realizes profits losses trading activities sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also include realized unrealized gains losses investments acquired connection merchant banking investment banking activities segment consists principally real estate service business unallocated corporate revenues expenses references fiscal 2002 2001 2000 refer march 31 fiscal year ended business environment us economy fiscal 2002 period slower economic growth declines corporate earnings rising unemployment levels fiscal 2002 equity markets continued volatile weak particularly technology telecommunications sectors corporate failures associated accounting questions also contributed negative market conditions low investor confidence finally events september 11 terrorist attacks political unrest abroad also contributed sluggish economy effort stimulate lagging economy us federal reserve significantly lowered overnight interest rate 11 times 65 last 15 months although physically impacted events september 11 effect economy investor confidence negatively impacted business particular private client business despite difficult market conditions able achieve record net revenues primarily result addition fees acquired entities growth fixed income investment advisory accounts results operations financial position results operations materially affected overall trends conditions financial markets particularly united states results individual period considered representative future results many activities fixed operating costs decline reduced levels business activity accordingly sustained periods unfavorable market conditions likely affect profitability adversely following table sets forth periods indicated items consolidated statements earnings percentages net revenues increase decrease item percentage amount previous period fiscal 2002 compared fiscal 2001 financial overview fiscal 2002 net revenues reached record levels increased 7 145 billion primarily result increase investment advisory related fees august 1 2001 acquired private capital management lp affiliated entities pcm high net worth investment manager naples florida acquisition date pcm managed 86 billion assets primarily small midcap stocks october 1 2001 acquired royce associates inc royce investment manager located new york city acquisition date royce managed 47 billion assets primarily small microcap mutual funds acquisitions accounted purchase transactions purchase accounting net assets results operations pcm royce included financial statements respective dates acquisition revenues investment advisory related activities including distribution fees mutual funds rose 1276 million 20 7816 million fiscal 2002 primarily result acquisitions pcm royce contributed 971 million increase remainder increase primarily attributable growth assets management fixed income advisory accounts revenues securities brokerage activities including commissions principal transactions declined 3 4698 million result decrease retail securities transactions nonaffiliated mutual fund variable annuity sales declines offset part increases fixed income equity institutional securities transaction volume revenues investment banking activities increased 55 1022 million primarily due 342 million increase new issue sales concessions increased municipal banking fees revenues increased 12 570 million primarily result realized unrealized gains firm investments increase loan origination fees partially offset sale merchant banking related investment prior fiscal year net interest profit declined 62 408 million 1068 million prior fiscal year result lower average interest rates earned firm investments lower customer margin account balances increase acquisitionrelated debt net interest profit accounted 16 consolidated pretax profits significantly 40 prior fiscal year despite increase net revenues fiscal 2002 net earnings declined 2 1529 million fiscal 2001 result increased expenses including profitabilitybased incentive compensation addition expenses acquired entities litigationrelated costs fiscal 2002 basic earnings per share declined 4 235 245 fiscal 2001 diluted earnings per share fiscal 2002 declined 3 224 230 fiscal 2001 results fiscal 2002 also include effect adopting statement financial accounting standards sfas 142 goodwill intangible assets resulted expense reduction 78 million 67 million net tax expense reduction increased basic diluted earnings per share 010 fiscal 2002 investment advisory revenues assets management assets management investment advisory related fee billionsb revenues millions 98 710b 3158m 99 889b 4147m 00 1118b 5635m 01 1399b 6540m 02 1770b 7816m revenues segment following table sets forth periods indicated net revenues pretax earnings segment years ended march 31 millions 2002 2001 2000 net revenues asset management 5579 4450 3767 private client 6182 7074 6942 capital markets 2422 1743 1571 330 342 372 total 14513 13609 12652 pretax earnings asset management 1592 1323 1295 private client 533 1133 1142 capital markets 393 155 50 14 47 57 total 2532 2658 2544 asset management net revenues asset management increased 25 5579 million primarily result acquisitions pcm royce asset management represented 38 consolidated net revenues fiscal 2002 increase 33 fiscal 2001 revenues asset management tend stable private client capital markets less affected changes securities market conditions total assets management 1770 billion march 31 2002 increase 371 billion 27 march 31 2001 march 31 2002 approximately 672 billion 38 assets management equity related products 1098 billion 62 fixed income related products fiscal 2002 pcm royce contributed fees 971 million internal growth core fixed income institutional manager increased revenues 292 million performance fees included investment advisory related fees increased 206 million fiscal 2002 60 million fiscal 2001 principally due fees earned pcm royce well additional fees earned subsidiaries private client difficult market conditions fiscal 2002 well significantly lower interest rates lower retail transaction volume negatively impacted private client accordingly net revenues decreased 13 6182 million fiscal 2002 private client represented 43 consolidated net revenues fiscal 2002 decrease 52 prior fiscal year net interest profit private client decreased 35 571 million fiscal 2002 significantly lower average interest rates lower average customer margin account balances offset part increase average firm investment balances principally funds segregated regulatory purposes commissions retail securities transactions including listed overthecounter trading decreased approximately 386 million 26 fiscal 2002 prior year net revenues also declined decreases retail generated principal transactions sales nonaffiliated mutual funds annuities capital markets capital markets achieved record net revenues fiscal 2002 net revenues increased 39 2422 million fiscal 2002 primarily result higher institutional equity fixed income transaction volume capital markets represented 17 consolidated net revenues fiscal 2002 increase 13 fiscal 2001 consists principally results real estate service business unallocated corporate revenues expenses net revenues slightly fiscal year 342 million 330 million primarily due decrease interest income resulting lower interest rates expenses interest expense interest expense primarily consists interest paid customers credit account balances interest incurred connection long shortterm borrowings interest expense declined 481 million 27 fiscal 2002 principally due sharp decrease average interest rates paid customer credit account balances stock borrow balances offsetting declines incurred 302 million interest expense longterm debt issued fiscal 2002 fund acquisitions pcm royce see note 8 notes consolidated financial statements information regarding legg masons longterm debt compensation benefits compensation benefits expense increased 10 8834 million primarily attributable significantly higher profitabilitybased incentive compensation increased 369 million addition 282 million expenses result acquisitions pcm royce increase vested deferred compensation 108 million fiscal 2002 increases offset part decline variable sales commissions 106 million substantial part compensation expense fluctuates proportion level business activity compensation costs primarily salaries benefits fixed typically decline reduced levels business activity communications technology communications technology expense declined 4 990 million result decreased costs telephone usage quote services printing offset part addition expenses acquired entities occupancy costs increased 20 622 million fiscal 2002 517 million fiscal 2001 result full year impact prior year expansion including operations center new branch offices well addition expenses acquired entities amortization intangible assets amortization intangible assets increased 64 million 52 188 million prior fiscal year primarily attributable 110 million amortization pcms asset management contracts offset part impact adopting sfas 142 goodwill indefinite life intangible assets longer amortized see note 6 notes consolidated financial statements expenses increased 9 1347 million primarily attributable increase litigationrelated costs 127 million net recoveries 111 million fiscal 2002 net litigationrelated costs 151 million compared 24 million fiscal 2001 income tax provision income tax provision decreased 9 1003 million fiscal 2002 due lower pretax earnings lower state income taxes legg masons effective income tax rate 396 fiscal 2002 412 fiscal 2001 due lower state income taxes impact adopting sfas 142 eliminated nondeductible amortization goodwill book purposes fiscal 2001 compared fiscal 2000 financial overview fiscal 2001 revenues net earnings per share higher fiscal 2000 achieved record levels net revenues increased 8 14 billion total revenues 15 billion increase 10 revenues 14 billion fiscal 2000 investment advisory related fees increased 16 654 million primarily result growth assets management fixed income advisory accounts feebased brokerage accounts company sponsored mutual funds well results acquired subsidiaries net interest profit increased 21 1068 million fiscal 2001 886 million fiscal 2000 due increased interest income higher margin account balances average firm investments well higher average interest rates net earnings 1562 million 4 net earnings prior fiscal year basic earnings per share increased 1 245 243 diluted earnings per share increased 1 230 227 revenues segment asset management net revenues asset management rose 18 4450 million fiscal 2001 primarily result growth assets management fixed income investment advisory accounts companysponsored mutual funds full year fees earned legg mason investors holdings plc legg mason investors acquired december 1999 total assets management march 31 2001 1399 billion 25 1118 billion march 31 2000 total assets management march 31 2001 approximately 33 equity related products approximately 67 fixed income related products private client net revenues private client 2 6942 million fiscal 2000 7074 million fiscal 2001 primarily result 14 increase net interest income 884 million driven higher average interest rates higher levels customer margin account balances firm investments predominately funds segregated regulatory purposes sales nonproprietary mutual funds also increased offsetting increases lower volumes retail overthecounter listed fixed income transactions capital markets fiscal 2001 net revenues capital markets increased 11 1743 million result increase institutional equity securities transaction volume sales trading profits taxable fixed income products increases offset part decline investment banking fees primarily equity municipal underwritings fiscal 2001 net revenues declined 8 342 million result decline loan origination fees parents real estate services subsidiary expenses interest expense interest expense increased 31 1754 million primarily due higher interestbearing customer credit account balances higher average interest rates compensation benefits compensation benefits expense increased 7 8048 million result higher fixed compensation costs primarily attributable increase number employees higher incentive sales compensation related asset management activities communications technology communications technology expense increased 16 1028 million due new expanded branch office locations increased investments technology increased quote telephone usage due increase number employees occupancy costs increased 7 517 million result additional costs new expanded branch office locations impact acquired companies amortization intangible assets amortization intangible assets increased 14 million 13 due business acquisitions expenses increased 8 1234 million increase primarily attributable impact full year expenses legg mason investors increased promotional expenses costs associated acquisition perigee investment counsel inc increases offset part decrease floor brokerage clearing fees income tax provision income tax provision rose 5 1096 million fiscal 2001 result increased pretax earnings increase legg masons effective tax rate 412 fiscal 2001 409 prior year increase effective tax rate primarily attributable nondeductible foreign losses higher statutory tax rates foreign jurisdictions liquidity capital resources primary objective capital structure funding practices appropriately support legg masons business strategies well regulatory capital requirements subsidiaries provide needed liquidity times liquidity access liquidity essential success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses continue explore potential acquisition opportunities means diversifying businesses opportunities may involve acquisitions material size may require among things raising additional capital andor issuance additional debt emphasize diversification funding sources seek manage exposure refinancing risk legg mason committed shortterm financing secured unsecured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized shortterm us government agency securities highlyrated corporate debt money market funds equity securities shortterm funding generally obtained rates based upon benchmarks federal funds libor money market rates maintain committed unsecured revolving credit facility 100 million matures june 30 2003 general corporate purposes facility restrictive covenants require us among things maintain specified levels net worth debttoequity ratios borrowings outstanding facility march 31 2002 2001 real estate service subsidiary two committed shortterm financing facilities mature september 15 2002 used connection business operations first 50 million warehouse line credit national bank 36 million 49 million outstanding march 31 2002 2001 respectively used provide interim financing funding commercial mortgage loans parent guarantor credit facility weighted average interest rates fiscal 2002 fiscal 2001 380 558 respectively second credit facility financing agreement national bank allows borrowing funds shortterm investing 125 million interest rate 080 based upon amount customer escrow funds deposit bank credit facility collateralized securities purchased funds primarily shortterm us government agency securities highly rated corporate commercial paper money market funds outstanding balances line march 31 2002 2001 maintained compliance applicable covenants facilities throughout year event fail meet covenants specified credit facilities lines credit may available us legg mason also maintains uncommitted credit facilities several banks financial institutions uncommitted facilities consist lines credit advised available contractual lending obligation exists uncommitted facilities would likely unavailable us material adverse effect financial condition occurred relied issuance shortterm commercial paper fund operating needs utilize unconsolidated special purpose entities provide operating liquidity legg masons assets consist primarily cash equivalents collateralized shortterm receivables investment advisory fee receivables securities owned borrowed intangible assets goodwill assets principally funded payables customers securities loaned bank loans longterm debt equity collateralized shortterm receivables consist primarily customer margin loans securities purchased agreements resell securities borrowed secured us government agency securities corporate debt equity securities investment advisory fee receivables although collateralized shortterm nature collectibility reasonably certain excess cash currently invested primarily institutional money market funds highly liquid nature assets provides us flexibility financing managing anticipated operating needs legg masons total assets increased 12 billion 47 billion march 31 2001 59 billion march 31 2002 increase principally due net increase intangible assets goodwill 4466 million 3413 million respectively primarily result acquisitions pcm royce increase intangible assets goodwill accompanied corresponding increase longterm debt 6797 million primary source funds acquisitions pcm royce stockholders equity surpassed one billion dollar mark first time legg masons history march 31 2002 stockholders equity 11 billion cash equivalents decreased 878 million primarily reflects use cash connection acquisitions pcm royce fiscal 2002 cash flows operating activities provided approximately 863 million primarily attributable net earnings adjusted noncash charges cash securities segregated regulatory purposes deposited clearing organizations increased 4863 million reflecting increase customer credit account balances decrease customer margin account balances march 31 2002 legg mason three longterm fixed rate debt facilities 100 million outstanding senior notes due february 15 2006 bear interest stated rate 65 notes originally issued february 1996 discount yield 657 fiscal 2002 issued longterm fixed rate debt fund acquisitions june 6 2001 issued 567 million principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 resulting net proceeds approximately 244 million convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year upon certain events including sale price stock reaching certain thresholds convertible notes rated specified credit ratings convertible notes called redemption note convertible 77062 shares common stock subject adjustment may redeem convertible notes cash june 6 2006 accreted value addition may required repurchase convertible notes accreted value option holders june 6 2003 2005 2007 2011 every five years thereafter 2026 upon change control legg mason repurchases paid cash shares common stock combination approximately 44 million shares common stock reserved issuance upon conversion july 2 2001 issued 425 million principal amount senior notes due july 2 2008 bear interest 675 notes sold discount yield 680 net proceeds approximately 421 million august 1 2001 legg mason purchased pcm cash 682 million excluding acquisition costs transaction includes two contingent payments based pcms revenue growth years ending third fifth anniversaries closing aggregate purchase price 14 billion may required make maximum payments amount 400 million august 1 2004 300 million august 1 2006 certain conditions met october 1 2001 completed acquisition royce cash 115 million excluding acquisition costs transaction includes three contingent payments based royces revenue growth years ending third fourth fifth anniversaries closing aggregate purchase price 215 million may therefore required make maximum payment amount 100 million october 1 2004 part acquisition certain conditions met option pay much 50 remaining purchase price royce common stock expect fund commitments operations available lines credit capital markets addition pcm royce acquired two smaller investment management firms approximately 76 million cash march 31 2002 75 million remaining issuance additional debt convertible debt securities pursuant shelf registration statement shelf filing permits us register securities advance sell financing needs arise market conditions favorable intend use shelf registration general corporate purposes including expansion business assurances terms securities may issued pursuant shelf registration since depend market conditions interest rates time issuance certain finance subsidiaries legg mason previously issued secured fixed rate longterm debt connection investment operations longterm debt finance subsidiaries scheduled mature fiscal 2003 described market risk specific assets purchased proceeds debt mature available sale meet obligation fiscal 2002 board directors authorized legg mason discretion purchase 3 million shares common stock march 31 2002 repurchased 136800 shares 71 million fiscal 2002 2001 paid cash dividends 251 million 236 million respectively parents brokerdealer subsidiaries subject requirements securities exchange commissions uniform net capital rule designed measure general financial soundness liquidity brokerdealers march 31 2002 brokerdealer subsidiaries aggregate net capital 3106 million exceeded minimum net capital requirements 2894 million amount brokerdealers net assets may distributed subject restrictions applicable net capital rules parents trust subsidiary subject requirements office thrift supervision requires compliance two overlapping sets regulatory capital standards believe trust subsidiary met capital adequacy requirements subject contractual contingent obligations legg mason contractual obligations make future payments connection short longterm debt noncancelable lease agreements addition may also required make contingent payments business purchase agreements certain future events occur see notes 2 7 8 9 notes consolidated financial statements additional disclosure related commitments following table sets forth contractual contingent obligations fiscal year contractual contingent obligations amount reflected longterm borrowings due 2003 represents notes payable finance subsidiaries obligation funded proceeds related investments mature available sale 2003 payments 2004 reflect amounts may due holders zerocoupon contingent convertible senior notes represents accreted value earliest possible date holders may require us purchase notes legg mason may choose pay purchase price cash shares common stock combination b amount contingent payments reflected year represents maximum amount could payable earliest possible date terms business purchase agreements c table include approximately 103 million capital commitments investment partnerships legg mason limited partner obligations funded required end commitment periods range 2005 2010 risk management risk inherent part business activities extent properly effectively identify assess monitor manage various types risk involved activities critical soundness profitability seek identify assess monitor manage following principal risks involved business activities funding market credit operational legal risk management legg mason multifaceted process requires communication judgment knowledge financial products markets senior management takes active role risk management process requires specific administrative business functions assist identification assessment control various risks currently four formal risk management committees credit capital markets commitments new products new business risk management policies procedures methodologies fluid nature subject ongoing review modification funding risk discussed liquidity capital resources market risk potential changes value financial instruments referred market risk market risk generally represents risk loss may result change value financial instrument result fluctuations interest rates credit spreads equity prices correlation among along level volatility interest rate risks result primarily exposure changes yield curve volatility interest rates mortgage prepayments credit spreads equity price risks result exposure changes prices volatilities individual equities equity baskets equity indices legg mason makes dealer markets equity debt securities facilitate customer order flow may required equity debt securities trading inventory accounts majority trading inventory accounts consist fixed income debt instruments attempt hedge exposure market risk managing net long short position example may hedge municipal portfolio taking offsetting position related futures contract due imperfections correlations gains losses occur even positions hedged position limits trading inventory accounts established monitored ongoing basis day consolidated position exposure reports prepared distributed various levels management enable management monitor inventory levels results trading groups also monitor inventory aging pricing concentration securities ratings following table categorizes legg masons market risk sensitive financial instruments financial instruments market risk march 31 2002 financial instruments market risk march 31 2001 tables include net long short values consistent way firm manages risk exposure see notes 4 5 notes consolidated financial statements related gross long short fair values financial instruments owned investments fair value financial instruments includes us treasury securities segregated regulatory purposes 1229 million 644 million march 31 2002 2001 respectively purpose legg mason investors finance subsidiaries see note 2 notes consolidated financial statements raise funds issuing secured fixed rate loan securities use proceeds invest portfolio bonds issued various financial institutions generally available public tranches small enough retail investor investments finance subsidiaries notes payable finance subsidiaries consolidated statements financial condition directly related offsetting risk characteristics represent material market risk legg mason additionally claims note holders limited assets finance subsidiaries limits exposure default risk investments assets liabilities finance subsidiaries mature available sale fiscal 2003 addition financial instruments included table three longterm debt facilities described liquidity capital resources net investments foreign subsidiaries impacted fluctuations foreign exchange rates fluctuations recorded component stockholders equity material financial condition fiscal 2002 impact currency fluctuations results operations material credit risk credit risk represents loss would incur client counterparty issuer securities instruments held legg mason fails perform contractual obligations us follow industry practice reduce credit risk related various investing financing activities obtaining maintaining collateral credit exposure associated private client business consists primarily customer margin accounts monitored daily monitor exposure industry sectors individual securities perform sensitivity analyses regular basis connection margin lending activities adjust margin requirements believe risk exposure appropriate based market conditions operational risk operational risk generally refers risk loss resulting operations including limited improper unauthorized execution processing transactions deficiencies operating systems business disruptions inadequacies breaches internal control processes operate different businesses diverse markets reliant ability employees systems process high numbers transactions often within short time frames event breakdown improper operation systems human error improper action employees legg mason could suffer financial loss regulatory sanctions damage reputation order mitigate control operational risk developed continue enhance policies procedures designed identify manage operational risk appropriate levels example procedures require transactions confirmed timely basis position valuations subject periodic independent review procedures collateral adequate documentation obtained counterparties appropriate circumstances september 11 heightened need comprehensive disaster recovery plans disaster recovery plans exist critical systems redundancies built systems deemed appropriate believe disaster recovery program including offsite backup technology operational facilities adequate handle reasonable business disruption however assurances disaster directly affecting headquarters operations center would material adverse impact insurance safeguards might partially reimburse us losses also use periodic selfassessments internal audit reviews independent consultants check operational risk exposure legal risk legal risk includes risk noncompliance applicable legal regulatory requirements legg mason subject extensive regulation different jurisdictions conduct business various procedures addressing issues regulatory capital requirements sales trading practices use safekeeping customer funds credit granting collection activities moneylaundering record keeping critical accounting policies accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position legg mason see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following among legg masons current accounting policies involve significant estimates judgments valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value cash securities segregated regulatory purposes deposited clearing organizations financial instruments owned investment securities investments finance subsidiaries financial instruments sold yet purchased consolidated statements financial condition include forms financial instruments unrealized gains losses related financial instruments reflected net earnings comprehensive income depending underlying purpose instrument available use prices independent sources listed market prices broker dealer price quotations investments illiquid privately held securities readily determinable fair values determination fair value requires management estimate value securities based upon available information projected cash flows review financial market conditions underlying company instances security subject transfer restrictions value security based primarily quoted price security without restriction may reduced amount estimated reflect restrictions addition even value security derived independent market price broker dealer quote certain assumptions may required determine fair value instance generally assume size positions securities hold would large enough affect quoted price securities sell sale would happen orderly manner however assumptions may incorrect actual value realized upon disposition could different current carrying value evaluate nontrading securities temporary impairment may exist fair value investment security current value extended period time temporary impairment determined exist difference value investment security recorded financial statements current fair value recognized charge earnings period impairment determined march 31 2002 approximately 46 million financial instruments valued solely assumptions estimates intangible assets goodwill july 2001 financial accounting standards board fasb issued sfas 141 business combinations sfas 142 sfas 141 requires business combinations initiated june 30 2001 accounted using purchase method addition provides cost acquired entity must allocated assets acquired including identifiable intangible assets liabilities assumed based estimated fair values date acquisition excess cost fair value net assets acquired must recognized goodwill sfas 142 provides goodwill longer amortized value identifiable intangible asset must amortized useful life unless asset determined indefinite useful life allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired primarily asset management contracts trade names based upon certain estimates assumptions including projected future cash flows growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates investment performance determination estimated contract lives requires judgement based upon historical client turnover attrition rates probability contracts termination dates renewed value contracts manage assets mutual funds value trade names classified indefinitelife intangible assets assignment indefinite lives mutual fund contracts based upon assumption foreseeable limit contract period manage mutual funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely significant acquisitions including pcm royce engage services third party consultants perform independent valuations assets acquired liabilities assumed march 31 2002 4434 million goodwill 1587 million indefinitelife intangible assets 3353 million amortizable intangible assets estimated useful lives amortizable intangible assets range 5 20 years intangible assets subject amortization reviewed impairment reporting period utilizing undiscounted cash flow analysis sfas 142 requires intangible assets indefinite lives goodwill reviewed impairment least annually based fair value analysis asset impaired difference value asset reflected financial statements current fair value must recognized expense period impairment occurs intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill impaired carrying amount reporting unit exceeds fair value reporting unit estimating fair value reporting unit use valuation techniques based multiples revenues discounted cash flows similar models employ analyzing purchase price acquisition target substantially goodwill assigned asset management operating segment defined asset management reporting units wealth management institutional mutual funds one level operating segment fiscal 2002 legg mason recognized impairment charge 12 million related terminated asset management contracts acquired prior business combination march 31 2002 determined goodwill indefinite life intangible assets impaired based upon methods described business acquisitions pcm royce involved closely held companies certain key employees also owners companies establishing overall purchase price may include contingent consideration whereby portion purchase price paid acquisition date contingent payments consistent methods valuing establishing purchase price record payments additional purchase price compensation contingencies met generally contingent payments recorded additional goodwill reserves losses contingencies legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental self regulatory agency investigations proceedings accordance sfas 5 accounting contingencies established reserves potential losses may result complaints legal actions investigations proceedings establishing reserves use judgment determine probability losses may incurred reasonable estimate amount losses making decisions base judgments knowledge situations consultation legal counsel experience judgments prove incorrect reserves may accurately reflect actual losses result actions could materially affect results period expenses ultimately determined see note 9 notes consolidated financial statements additional disclosures regarding contingencies special purpose entities special purpose entities spes trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse utilize spes form financing provide liquidity recognized gains sale assets spes primary relationship spes involves one asset management subsidiaries collateral manager collateralized debt obligation cdo spe cdo established fiscal 2002 vehicle investors issued approximately 383 million debt acquired portfolio consisting primarily high quality assetbacked securities sell assets cdo services collateral manager receive senior subordinated management fees approximately 15 million annually may removed collateral manager certain conditions currently equity interest entity however entered derivative contract whereby may purchase 42 million preference shares approximately 1 entity four years derivative financial commitments guarantees cdo underlying debt nonrecourse us collateral manager consolidate entity fasb currently undertaken project address accounting spes continue monitor fasbs project determine whether consolidation cdo required future earnings per share basic earnings per share eps calculated dividing net earnings weighted average number common shares outstanding diluted eps similar basic eps adjusts effect potential common shares diluted eps include 44 million shares may issued upon conversion zerocoupon contingent convertible senior notes due contingent nature conversion feature provides conversion limited circumstances including sale price common stock reaching certain thresholds notes rated specified credit ratings notes called redemption event notes become convertible shares common stock shares required included eps diluted eps likely negatively impacted forwardlooking statements information statements provided behalf legg mason time including within report may contain certain forwardlooking information including information relating anticipated growth revenues earnings per share anticipated changes businesses amount client assets management anticipated expense levels expected effects acquisitions expectations regarding financial market conditions caution readers forwardlooking information provided behalf legg mason guarantee future performance actual results may differ materially forwardlooking information result various factors outside control including limited discussed item 1 businessfactors affecting company financial services industry forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events legg masons future revenues may fluctuate due numerous factors total value composition assets management volume trading securities volatility general level securities prices interest rates relative investment performance companysponsored investment funds asset management products compared competing offerings market indices investor sentiment confidence general economic conditions ability legg mason maintain investment management administrative fees current levels level margin customer account balances competitive conditions business segments demand investment banking services ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred legg mason result changes number total employees competitive factors reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill connection litigation effects acquisitions legg masons business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation based todays modest inflationary rates assets primarily monetary nature consisting cash equivalents securities receivables believe assets significantly affected inflation rate inflation however affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us recent accounting developments fasb issued following pronouncements adopted legg mason fiscal 2003 sfas 143 accounting asset retirement obligations requires fair value liability recorded costs associated retirement tangible longlived assets period liability incurred reasonably estimated sfas 144 accounting impairment disposal longlived assets supercedes sfas 121 accounting impairment longlived assets longlived assets disposed statement principally deals implementation issues sfas 121 including developing single accounting model longlived assets disposed sale sfas 145 rescission fasb statements nos 4 44 64 amendment fasb statement 13 technical corrections april 2002 sfas 145 primarily provides guidance reporting gains losses extinguishments debt saleleaseback transactions currently evaluating provisions sfas nos 143 144 145 determine potential impacts legg masons consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations executive overview legg mason inc holding company subsidiaries collectively comprise “legg mason” global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally united states america united kingdom also offices australia bahamas brazil canada chile dubai france germany hong kong japan luxembourg poland puerto rico singapore spain taiwan december 1 2005 completed strategic acquisition become pure asset management company transferred private client capital markets businesses “pccm” citigroup inc “citigroup” portion consideration exchange substantially citigroup’s asset management business “cam” prior closing transaction reported pccm businesses separate operating segments however businesses included discontinued operations periods presented effective november 1 2005 also purchased permal group ltd “permal” leading global fundsofhedge funds manager expand global asset management business following consummation cam permal acquisitions sale pccm businesses process reorganizing assimilating acquired businesses upon substantial completion integration organizational undertakings assess appropriate managerial reporting structures business time managing continuing operations comprehensive asset management business three divisions mutual funds managed services institutional wealth management see notes 2 3 notes consolidated financial statements additional information related transaction citigroup acquisition permal result sale pccm businesses citigroup portion parent company interest income expense general corporate overhead costs previously allocated businesses included continuing operations addition distribution fees earned companysponsored investment funds reported continuing operations distribution fee revenue substantial portion passed third parties including parties related prior sale distribution servicing expense periods presented restated reflect changes operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution service fees received distributing investment products services providing support services investment portfolios generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level assets management thus affected factors securities market conditions ability attract maintain assets management key investment personnel investment performance rates charge investment services vary based upon factors type underlying investment product amount assets management type services investment objectives provided rates charged equity asset management services generally higher rates charged fixed income asset management services accordingly revenues affected composition assets management significant component cost structure employee compensation benefits majority variable nature includes incentive compensation primarily based upon revenue levels profits next largest component cost structure distribution servicing fees primarily fees paid third party distributors selling asset management products services largely variable nature majority distribution service fee revenue passed third parties distribution servicing expense certain operating costs fixed nature occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly united states increasingly countries operate results individual period considered representative future results profitability sensitive variety factors including amount composition assets management volatility general level securities prices interest rates among things sustained periods unfavorable market conditions likely affect profitability adversely addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients past decade experienced substantial expansion due internal growth strategic acquisition asset management firms provided among things broader range investment expertise additional product diversification increased assets management financial services business engaged extremely competitive competition includes numerous national regional local asset management firms brokerdealers commercial banks industry affected consolidation financial services firms mergers acquisitions industry operate also subject extensive regulation federal state foreign laws like firms impacted regulatory legislative changes postenron era addition financial services industry subject number regulatory proceedings requirements last years including proceedings regarding number mutual funds sales practices sarbanesoxley act continues require us implement new policies review existing policies respect corporate governance auditor independence internal controls financial reporting significant impact fiscal 2006 result acquisitions cam permal responding changes required us add employees incur costs impacted profitability discontinued operations result sale pccm businesses private client capital markets segments reflected discontinued operations private client distributed wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds feebased account fees net interest customers’ margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets consisted equity fixed income institutional sales trading corporate public finance investment banking primary sources revenue equity fixed income institutional sales trading included commissions principal credits transactions corporate municipal products maintained proprietary fixed income equity securities inventory primarily facilitate customer transactions result recognized trading profits losses proprietary trading activities investment banking revenues included underwriting fees advisory fees private placements mergers acquisitions sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also included realized unrealized gains losses investments acquired connection merchant investment banking activities references fiscal 2006 2005 2004 refer fiscal year ended march 31 year terms “we” “us” “our” “company” refer legg mason business environment financial environment united states fiscal 2006 mixed despite investor concerns rising interest rates record high fuel prices hurricane damage gulf coast region three major market indexes showed strong returns fiscal year dow jones industrial average1 nasdaq composite index2 sp 5003 6 17 10 respectively fiscal year fiscal 2006 us federal reserve raised federal funds rate eight times bring federal funds rate 475 275 end fiscal 2005 financial services industry continues impacted legislative regulatory changes participants industry responded reacted numerous regulatory investigations inquiries proposals adoptions new regulations revised enhanced interpretations existing laws regulations regulatory investigations mutual fund trading practices within financial services industry uncovered instances conflicts interest insufficient internal controls related mutual funds resulted negative public perception mutual fund industry numerous regulatory proposals strict regulatory environment significant fines penalties fee reductions number financial services companies 1 dow jones industrial average trademark dow jones company affiliated legg mason 2 nasdaq trademark nasdaq stock market inc affiliated legg mason 3 sp trademark standard poor’s division mcgrawhill companies inc affiliated legg mason results operations following table sets forth periods indicated items consolidated statements income percentage operating revenues increase decrease item percentage amount previous period nm meaningful 1 calculated based change actual amounts fiscal years percentage prior year amount fiscal 2006 compared fiscal 2005 financial overview since strategic transaction citigroup completed december 1 2005 acquired cam business sold pccm businesses retroactively reflected results operations pccm businesses discontinued operations periods presented effective november 1 2005 completed acquisition permal result acquisitions results continuing operations fiscal year ended march 31 2006 include five months results permal four months results cam operating revenues increased 68 26 billion result higher revenues significantly increased levels assets management primarily cam permal acquisitions net income diluted earnings per share year ended march 31 2006 also increased significantly compared prior year net income increased 11 billion 4084 million 180 diluted earnings per share increased 880 353 149 part due net gain sale discontinued operations 6440 million 494 per share income continuing operations totaled 4337 million 47 prior year primarily due acquisitions cam permal higher levels assets management western asset management company “western asset” legg mason capital management inc “lmcm” also contributed increase operating income margin 26 31 prior year income continuing operations income tax margin 27 30 fiscal 2005 decreases margins primarily due significant increase fund revenues substantial portion passed third parties distribution servicing expense transactionrelated compensation costs related cam acquisition diluted earnings per share continuing operations 335 increase 31 256 weighted average diluted shares increased 11 1303 million due primarily issuance common nonvoting convertible preferred shares connection acquisition cam income discontinued operations net tax totaled 664 million 41 prior year primarily due sale pccm businesses december 1 2005 diluted earnings per share discontinued operations 051 decrease 47 097 prior year share earnings per share numbers restated fiscal 2005 2004 appropriate 3 2 stock split effective september 24 2004 assets management components changes assets management billions years ended march 31 follows assets management march 31 2006 8676 billion 4931 billion 132 march 31 2005 acquisitions cam permal responsible approximately 4261 billion 86 net increase market performance including currency translation 369 billion 8 increase net client cash flows responsible 356 billion 7 institutional asset management division represented 51 total assets managed year end mutual funds managed services division represented 41 wealth management division represented 8 nonus domiciled clients accounted 30 total assets management compares 24 nonus client assets march 31 2005 primarily due acquisition nonus assets managed cam permal assets management division billions march 31 follows fiscal 2005 restated include certain previously excluded client assets principally assets subadvised unaffiliated parties certain nondiscretionary accounts result reported assets management “legacy” advisers increased 16 billion march 31 2005 cam’s fixed income international equity separate accounts included institutional division us equity separate accounts mutual proprietary fund assets management included mutual fundsmanaged services division permal’s assets management included wealth management division assets management type billions march 31 2006 2005 follows following discussion separately addresses results continuing operations results discontinued operations results continuing operations revenues continuing operations year ended march 31 2006 26 billion 68 16 billion prior year result growth assets management cam permal acquisitions accounted 70 increase revenues strong growth aggregate assets management experienced western asset lmcm also contributed increase performance fees rose 527 million 1016 million fiscal 2006 primarily attributable acquisition permal investment advisory fees separate accounts including performance fees increased 40 12 billion primarily result acquisition cam growth assets managed western asset cam western asset accounted 41 27 increase respectively collectively lmcm brandywine global investment management llc “brandywine” private capital management lp “pcm” accounted 23 increased investment advisory fees separate accounts investment advisory fees funds increased 127 10 billion primarily result acquisitions cam permal cam permal accounted 84 increase investment advisory fees funds increases fund assets managed royce associates llc “royce” lmcm accounted 10 increase distribution service fees increased 63 4256 million 1205 million 73 increase due addition cam’s distribution service fees operating revenues decreased 18 226 million primarily result declines commissions earned pcm’s related brokerdealer operating revenues asset management division millions years ended march 31 follows increase operating revenues mutual funds managed services institutional divisions primarily due acquisition cam increase operating revenues wealth management division primarily due inclusion permal’s revenues operating expenses compensation benefits increased 70 11 billion primarily result addition transactionrelated compensation costs acquired businesses including compensation related cam acquisition increased revenue sharebased incentive expense higher revenues certain subsidiaries transactionrelated compensation costs primarily include recognition previously deferred compensation cam employees prior citigroup plans accruals retention compensation transitional cam employees costs severance cam included purchase price allocation reflected results operations compensation percentage operating revenues 426 year ended march 31 2006 421 resulting transactionrelated compensation discussed offset part significant increase fund revenues substantial portion passed third parties distribution servicing expense distribution servicing expenses increased 122 5618 million primarily result addition 1834 million distribution service fee expense cam permal also contributed increase communications technology expense increased 93 892 million primarily result addition cam’s expenses market data consulting fees technology depreciation amortization occupancy increased 85 509 million primarily due impact cam permal acquisitions amortization intangible assets increased 81 385 million 213 million prior year primarily result cam acquisition litigation award settlement reflects reversal 82 million charges recorded fiscal 2004 result settlement civil copyright infringement lawsuit current period expenses increased 49 1060 million primarily due increased promotional costs cam professional fees connection acquisition cam sale pccm businesses legg mason citigroup entered mutual transition services agreements provide certain administrative services investment advisory services provided seller transferred business ordinary course prior date sale agreement respective services provided eighteen months provision additional sixmonth renewal service recipient may terminate services individual basis notice four months ended march 31 2006 expenses include approximately 149 million costs services provided cam operations citigroup 168 million expense reductions cost services provided citigroup support sold businesses income expense interest income increased 279 million 480 million primarily result higher average interest rates higher average firm investment account balances interest expense increased 79 million 526 million due additional debt incurred connection cam acquisition offset part conversion 4799 million principal amount maturity zerocoupon contingent convertible senior notes common stock income increased 340 million 404 million result net gains firm investments gains trading investments held consolidated variable interest entities “vies” result permal acquisition offset part corresponding minority interests allocation provision income taxes provision income taxes increased 57 2756 million primarily result increase income continuing operations effective tax rate increased 385 372 prior year’s period primarily due higher provision state income taxes result acquisitions cam permal operate state local jurisdictions higher tax rates supplemental financial information cash income continuing operations rose 46 fiscal year 5271 million 406 per diluted share 3617 million 313 per diluted share primarily increase income continuing operations due acquisitions cam permal supplemental information providing performance measure based methodology generally accepted accounting principles “nongaap” “cash income continuing operations” management uses cash income continuing operations benchmark evaluating operating performance company subsidiaries define “cash income continuing operations” income continuing operations plus amortization deferred taxes related intangible assets stockbased compensation costs measure provided addition income continuing operations substitute income continuing operations may comparable nongaap performance measures including measures cash earnings cash income companies legg mason considers cash income continuing operations useful representation operating performance represents legg mason’s income continuing operations adjusted certain noncash items calculating cash income continuing operations add tax impact amortization intangible assets acquisitions management contracts income continuing operations reflect fact noncash expense represent actual decline value intangible assets deferred taxes intangible assets including goodwill represent actual tax benefits expected realized gaap purposes since deferred tax assets realized gaap absent impairment charge disposition related business add income continuing operations calculation cash income continuing operations stockbased compensation costs noncash expenses therefore also added income continuing operations calculate cash income continuing operations although depreciation amortization fixed assets noncash expenses add charges calculating cash income continuing operations charges represent decline value related assets ultimately require replacement calculation diluted cash income per share continuing operations divisor number total weighted average diluted common shares outstanding used calculation diluted earnings per share continuing operations reconciliation income continuing operations cash income continuing operations follows 1 stockbased compensation generate tax benefits market appreciation excess related amounts expensed financial statement purposes benefits derived market appreciation stock believe would inappropriately inflate cash income therefore excluded calculation results discontinued operations since announcement transaction sell pccm businesses june 2005 businesses reflected discontinued operations periods presented see notes 2 3 notes consolidated financial statements additional information related transaction citigroup prior sale december 1 2005 pccm operating segments due sale pccm businesses december 1 2005 current fiscal year reflects results eight months compared twelve months prior year’s period results fiscal 2006 also negatively affected announcement transaction result net revenues discontinued operations year ended march 31 2006 decreased 3107 million 36 5457 million income discontinued operations income tax decreased 785 million 42 diluted earnings per share discontinued operations 051 decrease 47 097 prior year financial results discontinued operations business segment follows 1 represents distribution fees proprietary mutual funds historically reported private client reclassified asset management distribution fee revenue corresponding distribution expense reflect legg mason’s continuing role funds’ distributor fiscal 2005 compared fiscal 2004 financial overview revenues increased 36 16 billion primarily result higher revenues significantly increased levels assets management net income increased 37 4084 million diluted earnings per share 353 33 income continuing operations increased 58 2954 million diluted earnings per share 256 52 operating income margin 31 28 prior year period income continuing operations income tax margin increased 30 26 income discontinued operations net taxes totaled 1130 million 9 prior year diluted earnings per share discontinued operations 097 increase 7 091 earnings per share fiscal 2005 included weighted impact 46 million shares issued underwritten offering common stock december 2004 net proceeds approximately 311 million included fiscal 2004 single litigation award charge 190 million resulting jury verdict subsequent judgment civil copyright infringement lawsuit assets management components changes assets management billions years ended march 31 follows assets management march 31 2005 3745 billion 883 billion 31 march 31 2004 net client cash flows primarily responsible 75 increase market performance including currency translation accounting 20 december 31 2004 acquisition four offices scudder private investment counsel responsible remainder strong increase assets management western asset principal fixed income manager primary driver equity assets declining percentage total managed assets 39 year ago 38 march 31 2005 institutional asset management division represented 66 total managed assets year end mutual funds division represented 21 wealth management division represented 13 assets management division billions march 31 follows march 31 2005 restated include certain previously excluded client assets principally assets subadvised unaffiliated parties certain nondiscretionary accounts result reported assets management “legacy” advisers increased 16 billion march 31 2005 increase assets management mutual fundsmanaged services division due primarily growth assets managed lmcm royce strong growth assets management western asset accounted 80 increase institutional division pcm accounted majority increase assets management wealth management division acquisition four offices scudder private investment counsel fiscal 2005 also contributed increase assets management wealth management division legg mason investments holdings limited “lmih” moved institutional division mutual fundmanaged services division fiscal 2005 reflect change focus business managing assets distributing investment funds change material impact assets management presented assets management type billions march 31 2005 2004 follows results continuing operations revenues continuing operations year ended march 31 2005 16 billion 36 12 billion prior year result growth assets management primarily resulting pcm western asset royce assets management increased 31 3745 billion performance fees rose slightly 489 million fiscal 2005 investment advisory fees separate accounts including performance fees increased 39 8210 million primarily result growth assets management increase revenues primarily attributable growth assets management pcm western accounted 69 increase lmcm brandywine batterymarch financial management inc also accounted 28 increase performance fees rose 74 million 489 million fiscal 2005 investment advisory fees funds increased 40 4606 million primarily result growth assets managed royce increased assets managed lmcm western asset also contributed increase distribution service fees increased 27 2616 million primarily due increases distribution fees proprietary mutual funds 305 million 1966 million fiscal 2005 fees reported continuing operations reflect continuing role funds’ distributor corresponding distribution expense also contributing overall increase impact increased sales subsequent growth royce offshore funds operating revenues increased 11 275 million primarily result increases commissions earned pcm’s related brokerdealer operating revenues asset management division millions years ended march 31 follows increase operating revenues mutual fund managed services division primarily due increased assets management royce accounted 41 increase fiscal 2005 lmih moved institutional division mutual fund managed services division reflect change focus business managing assets distributing investment funds transfer lmih accounted 31 increase operating revenues mutual fundmanaged services division increase institutional division primarily result increased assets managed western asset offset part transfer lmih mutual fundmanaged services division fiscal 2005 increase wealth management division’s operating revenues primarily due significant increase revenues pcm operating expenses compensation benefits increased 39 6618 million primarily result increased incentive compensation resulting increased revenues subsidiaries operating revenue sharing agreements compensation benefits percentage operating revenues increased 421 fiscal year 2005 414 fiscal 2004 primarily due changes percentages certain revenue sharing arrangements resulted net increase compensation fiscal 2005 distribution servicing expenses increased 30 2534 million result increase distribution fees proprietary mutual funds distribution fees paid thirdparty distributors increased sales subsequent growth offshore royce funds communications technology expense increased 32 463 million primarily result higher technology equipment depreciation consulting costs market data relocation western asset new office facility significant contributor increase technology equipment depreciation consulting costs occupancy increased 15 275 million primarily result increased rent operating expenses related western asset’s relocation amortization intangible assets increased 4 213 million primarily attributable acquisition four wealth management offices scudder private investment counsel december 2004 fiscal 2004 recorded litigation charge 190 million result jury verdict subsequent judgment copyright infringement lawsuit see note 10 notes consolidated financial statements expenses increased 28 713 million primarily result increases professional fees principally auditing consulting fees result additional legislative regulatory requirements higher promotional costs income expense interest income increased 58 million 201 million primarily result substantially higher interest rates earned firm investments interest expense 448 million remained relatively unchanged prior year income increased 63 million primarily result unrealized gains firm investments provision income taxes provision income taxes increased 54 1753 million primarily result increase income continuing operations effective tax rate declined 372 379 prior year’s period due lower provision income tax uncertainties fiscal 2005 results discontinued operations discontinued operations net revenues increased 6 10345 million 9759 million prior year pretax earnings increased 9 1879 million 1716 million net revenues excludes reclassification 1781 million 1485 million fiscal 2005 2004 respectively distribution fees proprietary mutual funds continuing operations reflect continuing role funds’ distributor private client private client net revenues increased 9 7279 million 6703 million prior year pretax earnings increased 14 1328 million investment advisory related fees increased 555 million principally result increases distribution fees companysponsored mutual funds fees earned feebased brokerage accounts commissions increased 51 million increased sales nonaffiliated mutual funds impact 74 million reduction mutual fund commissions breakpoint reimbursements clients fiscal 2004 partially offset lower listed commissions investment banking revenues decreased 210 million due decline retail corporate selling concessions net interest profit private client rose 21 572 million result higher average interest rates earned segregated customer margin account balances higher levels customer margin account balances partially offset increase interest rates paid customer credit account balances compensation benefits expense increased 279 million primarily due increased commissions paid higher distribution fees companysponsored mutual funds feebased brokerage revenues offset part decline commissions corporate selling concessions expenses increased 139 million primarily result increase allocated overhead costs capital markets capital markets net revenues increased 5 3066 million 2910 million prior year pretax earnings increased 3 551 million commissions increased 76 million primarily result increased institutional equity transaction volume principal transactions decreased 57 million primarily due decline institutional taxable municipal fixed income trading volume investment banking revenues increased 82 million primarily result higher corporate advisory underwriting fees higher municipal advisory fees partially offset decline corporate banking management fees revenue increased 63 million primarily due increased values firm investments compensation benefits expense increased 44 million primarily result increase fixed salaries benefits partially offset decrease taxable fixed income commissions impact deferring portion commission payouts new restricted stock program expenses increased 98 million primarily due increase management fees related international equity sales offices increase data communication costs liquidity capital resources primary objective capital structure funding practices appropriately support legg mason’s business strategies provide needed liquidity times addition certain subsidiaries subject regulatory capital requirements liquidity access liquidity important success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses acquisitions cam permal fiscal 2006 demonstrate efforts explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may time involve acquisitions material size may require among things raising additional equity capital andor issuance additional debt december 1 2005 completed acquisition cam exchange outstanding stock legg mason subsidiaries constitute pccm businesses ii 5393545 shares common stock 13346632 shares nonvoting legg mason convertible preferred stock convertible upon transfer 13346632 shares common stock iii 512 million cash borrowed 700 million fiveyear syndicated term loan facility terms agreement parties agreed postclosing purchase price adjustment may increase price paid us 300 million based retention certain assets management nine months closing expect pay additional amounts borrowing 300 million fiveyear credit agreement connection sale reflected assets liabilities pccm businesses assets liabilities discontinued operations held sale consolidated balance sheet march 31 2005 following table summarizes credit facilities executed connection cam acquisition credit facilities include agreements fund working capital needs general corporate purposes including acquisitions new facilities restrictive covenants require us among things maintain specific leverage ratios maintained compliance applicable covenants borrowing facilities 1 loan denominated chilean pesos floating rate linked bank chile offering rate 2 facility replaced previous 100 million revolving credit facility october 14 2005 legg mason entered syndicated fiveyear 700 million unsecured floatingrate term loan agreement primarily fund cash portion purchase price citigroup transaction closing borrowed 600 million 512 million used fund cash portion purchase remainder used fund acquisitionrelated expenses remaining 100 million 700 million loan facility drawn february 2006 additional acquisition related costs entire 700 million remains outstanding march 31 2006 effective closing citigroup transaction entered threeyear amortizing interest rate swap 400 million 700 million term loan fixed rate 49 also connection citigroup transaction one subsidiaries borrower 364day promissory note 832 million another subsidiary entered 160 million 3year term loan funded payment approximately 445 million taxes related gain sale pccm existing cash effective november 1 2005 acquired 80 outstanding equity permal concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares resulting legg mason owning 100 outstanding voting common stock permal right purchase preference shares next four years right exercised holders equity interests right require legg mason purchase interests general time frame approximately consideration aggregate consideration paid legg mason closing 800 million 200 million form 1889322 newly issued shares legg mason common stock remainder cash funded cash portion acquisition existing cash anticipated acquire remaining 20 ownership interest permal purchases made two four years initial closing prices based permal’s revenues maximum aggregate price including earnout payments related purchase based upon future revenue levels equity interests permal 1386 billion 961 million minimum price excluding acquisition costs may elect deliver 25 future payments form shares common stock addition pay minimum 39 million dividends preference shares 4 years assets continuing operations consist primarily intangible assets goodwill cash equivalents investment advisory related fees receivables assets principally funded equity capital longterm debt significant increase intangible assets goodwill fiscal 2006 resulted cam permal acquisitions investment advisory fee receivables shortterm nature collectibility reasonably certain excess cash generally invested institutional money market funds commercial paper securities purchased agreements resell highly liquid nature current assets provides us flexibility financing managing anticipated operating needs march 31 2006 total assets stockholders’ equity 93 billion 59 billion respectively fiscal 2006 stockholders’ equity increased approximately 36 billion primarily due issuance shares connection cam permal acquisitions net income year ended march 31 2006 cash equivalents increased 2283 million 7951 million march 31 2005 102 billion march 31 2006 cash flows operating activities provided 5448 million primarily attributable income continuing operations cash provided operating activities discontinued operations sale increase offset part approximately 445 million tax payment gain sale discontinued operations included current liabilities cash flows investing activities used 10 billion primarily attributable funding cam permal acquisitions financing activities provided 6873 million primarily due issuance longterm debt related acquisition cam amounts revised include activities attributable operating investing financing cash flows discontinued operations expect cash flows provided operating activities primary source working capital next year march 31 2006 debt outstanding balance 12 billion increase approximately 400 million prior year primarily attributable addition 700 million 5year term loan connection cam acquisition described offset part conversion zerocoupon contingent convertible senior notes maturity 1000 million principal amount senior notes february 15 2006 bore interest stated rate 65 1000 million senior notes repaid cash hand fiscal 2006 holders zerocoupon contingent convertible notes aggregating 4799 million principal amount maturity converted notes approximately 55 million shares common stock convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year remaining accreted balance march 31 2006 329 million legg mason expects redeem convertible notes cash june 6 2006 accreted value however notes may converted prior redemption included outstanding debt 4250 million principal amount senior notes due july 2 2008 bear interest 675 notes issued discount yield 680 accreted balance march 31 2006 4246 million proceeds longterm debt primarily used fund acquisition asset management entities debt ratings march 31 2006 bbb standard poor’s rating services a3 moody’s investor service inc august 1 2001 legg mason purchased pcm cash approximately 6820 million excluding acquisition costs transaction included two contingent payments based pcm’s revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion fiscal 2005 made maximum third anniversary payment 4000 million former owners pcm based upon revenue levels march 31 2006 pcm earned remaining fifth anniversary payment 3000 million payment due second quarter fiscal 2007 intend fund obligation cash operations available credit facilities necessary fiscal 2005 made final contingent payment 1000 million former owners royce represented maximum contingent amount due final contingent payment royce funded cash hand contingent payments recorded additional goodwill march 2005 filed 10 billion shelf registration statement increased approximately 125 billion amount available issuance additional debt equity securities shelf filing permits us register securities advance sell financing needs arise market conditions favorable intend use shelf registration general corporate purposes including expansion business assurances terms securities may issued pursuant shelf registration since dependent market conditions interest rates time issuance december 21 2004 legg mason sold 46 million shares common stock 7030 per share less underwriting fees net proceeds approximately 311 million used proceeds general corporate purposes included acquisitions board directors previously authorized us discretion purchase 30 million shares common stock repurchases fiscal 2006 fiscal 2005 2004 repurchased 734700 shares 407 million 1183950 shares 654 million respectively march 31 2006 maximum amount shares may yet purchased program 699200 fiscal 2006 2005 2004 paid cash dividends 786 million 517 million 352 million respectively anticipate continue pay quarterly dividends repurchase shares discretionary basis certain asset management subsidiaries maintain various credit facilities general operating purposes see notes 7 8 notes consolidated financial statements additional information certain subsidiaries also subject capital requirements various regulatory agencies subsidiaries met respective capital adequacy requirements offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission “sec” include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations contingent payments section follows special purpose variable interest entities notes 1 17 notes consolidated financial statements contractual obligations contingent payments legg mason contractual obligations make future payments connection longterm debt noncancelable lease agreements addition described liquidity capital resources expect make contingent payments business purchase agreements see notes 7 8 10 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual contingent obligations fiscal year contractual contingent obligations march 31 2006 1 included payments 2007 330 reflecting amounts due holders zerocoupon convertible senior notes represents accreted value exercised redemption call date june 6 2006 2 coupon interest floating rate longterm debt based rates outstanding march 31 2006 3 amount contingent payments reflected year represents maximum amount could payable earliest possible date terms business purchase agreements includes contingent payments fiscal 2007 pcm cam 3000 4 table include approximately 421 capital commitments investment partnerships legg mason limited partner obligations funded required end commitment periods range fiscal 2007 2011 market risk following describes certain aspects business sensitive market risk revenues net income majority revenue based market value assets management accordingly decline prices securities generally may cause assets management decrease addition fixed income liquidity assets management subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts performance fees may earned certain investment advisory contracts exceeding performance benchmarks declines market values assets management underperformance advisory contracts versus applicable performance benchmarks result reduced fee revenues net income investments legg mason invests sponsored mutual funds limited partnerships limited liability companies certain investment products value heldtomaturity investments march 31 2006 173 million legg mason also made certain availableforsale investments 75 million march 31 2006 declines market values investments may negatively impact legg mason’s revenues net income comprehensive income trading assets securities owned 1422 million classified trading assets substantially assets related longterm incentive compensation plans subsidiaries corresponding liabilities accordingly fluctuation market value assets related liabilities impact operating revenues material effect net income liquidity result sale pcmcm businesses december 1 2005 longer hold inventory trading securities normal course business therefore substantially lower level market risk related trading assets financial instruments foreign exchange sensitivity legg mason operates primarily united states provides services earns revenues incurs expenses outside united states accordingly fluctuations foreign exchange rates currencies principally united kingdom canada brazil australia may impact comprehensive income certain subsidiaries entered forward contracts manage impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect net income comprehensive income liquidity interest rate risk exposure interest rate changes outstanding debt material substantial portion debt fixed interest rates addition significant portion outstanding floating rate debt hedged interest rate swap reduces exposure rising interest rate environment gains losses market value swap recorded component comprehensive income long hedge effective cash flow hedge see note 8 notes consolidated financial statements additional disclosures regarding debt critical accounting policies accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following among current accounting policies involve significant estimates judgments intangible assets goodwill identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely goodwill represents residual amount acquisition cost identified tangible intangible assets assumed liabilities allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon certain estimates assumptions including projected future cash flows growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates investment performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination dates renewed march 31 2006 approximately 23 billion goodwill 39 billion indefinitelife intangible assets 6222 million net amortizable intangible assets estimated useful lives amortizable intangible assets currently range 5 20 years goodwill evaluated quarterly reporting unit level considered impaired carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted cash flows multiples revenues similar models employed analyzing purchase price acquisition target defined reporting units mutual fundsmanaged services institutional wealth management divisions significant assumptions used assessing implied fair value goodwill discounted cash flow method include projected cash flows generated reporting unit growth rate used projecting cash flows discount rate used determine present value cash flows projected cash flows based annualized fiscal year date cash flows reporting unit projected forward forty years annual cash flow growth rates based historical growth rates realized reporting unit wealth management mutual fundsmanaged services reporting units represent approximately 54 38 respectively goodwill wealth management goodwill principally attributable pcm mutual fundsmanaged services goodwill principally attributable cam projected cash flows divisions assumed grow 10 annually next five years longterm annual growth rate 5 projected cash flows discounted 16 determine present value discount rate based riskadjusted estimated weighted average cost capital wealth management reporting unit annual cash flows would fall 40 discount rate increased 20 asset deemed impaired mutual fundsmanaged services reporting unit annual cash flows would fall 45 discount rate increased 25 asset deemed impaired review fair value intangible assets quarterly basis considering factors projected cash flows revenue multiples determine whether assets impaired amortization periods appropriate asset determined impaired difference value asset reflected financial statements current implied fair value recognized expense period impairment determined amortization periods appropriate lives adjusted impact fair value assessed implied fair values intangible assets subject amortization determined reporting period using undiscounted cash flow analysis significant assumptions used assessing implied fair value management contract intangible assets include projected cash flows generated contracts attrition rates remaining lives contracts projected cash flows based fees generated current assets management applicable contracts assumed turnover evenly throughout life intangible asset expected life asset based upon factors average client retention client turnover rates management contract intangible assets related cam pcm represent approximately 47 35 respectively total amortizable intangible assets cam intangible asset related individual client contracts expected life 12 years represents annual contract turnover rate 8 contract cash flows cam contract would decline approximately 45 asset would deemed impaired client attrition decreases estimated life 50 would result impairment pcm intangible asset related client contracts original expected life 18 years represents annual contract turnover rate 6 expected remaining life 13 years march 31 2006 current expected client attrition rates cash flows generated underlying management contracts held pcm would decline approximately 60 asset become impaired similarly change profitability contracts client attrition would accelerate rate estimated useful life would decline approximately 65 asset would deemed impaired intangible assets lives indeterminable indefinite fair value determined based anticipated discounted cash flows two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names significant assumptions used assessing fair value indefinitelife intangible assets related proprietary fund contracts include projected cash flows generated contracts discount rate used determine present value cash flows projected cash flows based annualized cash flows applicable contracts projected forward forty years assuming annual cash flow growth approximating market returns contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund family included determining fair value intangible asset intangible assets related cam domestic mutual fund contracts permal fundsofhedge funds contracts comprise approximately 65 24 respectively indefinite life intangible assets cash flows cam permal contracts assumed grow longterm annual rates 5 8 respectively approximates expected average market returns underlying fund asset classes projected cash flows cam permal funds discounted 13 14 respectively based estimated weighted average cost capital respective businesses changes assumptions increased discount rate declining cash flows could result impairment current profitability levels cash flows generated cam mutual fund contracts would fall approximately 10 discount rate used test would raised 14 asset deemed impaired likewise cash flows generated permal fundsofhedge funds contracts would fall approximately 25 discount rate raised 18 asset deemed impaired given cam permal assets recently acquired implied fair values march 31 2006 significantly different values recorded acquisition business acquisitions pcm royce permal involved closely held companies certain key employees also owners companies establishing purchase price may include contingent consideration whereby portion purchase price paid acquisition date determination contingent payments consistent methods valuing establishing purchase price record payments additional purchase price compensation contingencies met historically contingent payments recorded additional goodwill see note 6 notes consolidated financial statements additional information regarding intangible assets goodwill loss contingencies legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency inquiries investigations proceedings sale private client capital markets businesses agreed indemnify citigroup customer complaints litigation regulatory liabilities result preclosing events similarly citigroup agreed liable legg mason customer complaints litigation regulatory liabilities cam business result preclosing events accordance statement financial accounting standards “sfas” 5 “accounting contingencies” established liabilities potential losses complaints legal actions investigations proceedings establishing liabilities use judgment determine probability losses incurred reasonable estimate amount losses making decisions base judgments knowledge situations consultations legal counsel historical experience resolving similar matters many lawsuits arbitrations regulatory proceedings possible determine whether liability incurred estimate amount liability matter close resolution however accruals reviewed monthly adjusted reflect estimates impact developments rulings advice counsel information pertinent particular matter inherent difficulty predicting ultimate outcome legal regulatory actions cannot predict certainty eventual loss range loss related matters judgments prove incorrect liability losses contingencies may accurately reflect actual losses result actions could materially affect results period expenses ultimately determined march 31 2006 2005 liability losses contingencies 43 million 273 million respectively significant component liability balance march 31 2005 reflects approximate 200 million verdict rendered october 2003 copyright infringement lawsuit subsequently settled fiscal 2006 11500 see note 10 notes consolidated financial statements additional disclosures regarding contingencies stockbased compensation stockbased compensation plans include stock options employee stock purchase plans restricted stock awards deferred compensation payable stock compensation plans issue stock options officers key employees nonemployee members board directors prior april 1 2003 accounted stockbased employee compensation plans accordance accounting principles board opinion “apb” 25 “accounting stock issued employees” permitted sfas 123 “accounting stockbased compensation” amended accordance apb 25 prior fiscal 2004 compensation expense recognized stock options intrinsic value date grant since exercise price options equal market value underlying common stock fiscal 2004 adopted fair value method sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure” prospectively stock options granted stock purchase plan transactions april 1 2003 using blackscholes optionpricing model marketbased performance grants valued monte carlo optionpricing model prospective method allowed sfas 148 compensation expense recognized based fair value stock options granted april 1 2003 applicable vesting period compensation expense recognized stock options granted prior april 1 2003 therefore expense related stockbased employee compensation included determination net income fiscal 2006 2005 2004 less would included fair value method applied awards accordance provisions sfas 148 provide disclosure note 13 notes consolidated financial statements pro forma results modified prospective fair value based method compensation expense associated stock option grants recognized respective vesting period accounted prior years’ stock option grants modified prospective fair value based method net income continuing operations would reduced 32 million 79 million 98 million fiscal 2006 2005 2004 respectively net income discontinued operations would reduced 40 million 61 million 75 million fiscal 2006 2005 2004 respectively reductions primarily result impact inclusion additional years expense actual results operations since adoption fiscal 2004 granted 1106105 574035 914475 stock options fiscal 2006 2005 2004 respectively determine fair value option grant using blackscholes optionpricing model except performance marketbased grants use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate except grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal vesting period options estimate volatility part based upon historical prices stock period equal expected life option part upon implied volatility marketlisted options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued marketbased performance option grants use monte carlo optionpricing model estimate fair value used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different december 2004 fasb revised sfas 123 “sfas 123r” requiring companies record sharebased payment transactions compensation expense fair market value either modified prospective modified retrospective transition method april 2005 sec delayed effective date sfas 123r start fiscal year 2007 legg mason adopt sfas 123r first quarter fiscal year 2007 using modified prospective transition method expected adoption sfas 123r reduce fiscal 2007 net income approximately 32 million income taxes legg mason subsidiaries subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes management assesses likelihood legg mason able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due determine estimates changed income tax provision adjusted period determination made see note 9 notes consolidated financial statements additional disclosures regarding income taxes recent accounting developments following relevant accounting pronouncements recently issued variable interest entities emerging issues task force “eitf” reached consensus june 2005 regarding issue 045 “determining whether general partner general partners group controls limited partnership similar entity limited partners certain rights” general partner limited partnership presumed control limited partnership unless limited partners substantive termination rights participating rights july 2005 financial accounting standards board “fasb” issued staff position “fsp” sop 7891 “interaction aicpa statement position 789 eitf issue 045” staff position eliminates concept “important rights” statement 789 replaces concept “kickout rights” “substantive participating rights” defined issue 045 eitf also reached consensus june 2005 issue 9616 “investors accounting investee investor majority voting interest minority shareholder shareholders certain approval veto rights” guidance standards effective general partners new limited partnerships formed existing limited partnerships partnership agreements modified june 29 2005 limited partnerships effective fiscal years beginning december 15 2005 adopted adopt guidance pronouncements applicable adoption accounting standards expected material impact consolidated financial statements sharebased compensation fasb issued sfas 123 r “sharebased payment” december 2004 2005 2006 fasb issued staff positions addressing implementation sfas 123 r fasb also issued staff position fsp eitf 00191 “application eitf issue 0019 freestanding financial instruments originally issued employee compensation” effective upon adoption sfas 123 r sec issued staff accounting bulletin 107 concerning staff positions sharebased payment adopt sfas 123 r first quarter fiscal year 2007 expect reduce net income year approximately 32 million additional information sharebased compensation see note 13 notes consolidated financial statements disclosed previously december 2004 fasb issued fsp fas 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” american jobs creation act signed law october 22 2004 provided onetime dividends received deduction repatriation certain foreign earnings us taxpayers determined repatriation foreign earnings made accordingly effect us income tax provision forwardlooking statements information statements provided behalf legg mason time including within annual report form 10k may contain certain “forwardlooking information” including information relating anticipated growth revenues earnings per share anticipated changes businesses amount client assets management anticipated future performance business anticipated expense levels changes expenses expected effects acquisitions expectations regarding financial market conditions caution readers forwardlooking information provided behalf legg mason guarantee future performance actual results may differ materially forwardlooking information result various factors outside control including limited discussed heading “risk factors” elsewhere annual report form 10k forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events future revenues may fluctuate due numerous factors total value composition assets management volatility general level securities prices interest rates relative investment performance companysponsored investment funds asset management products compared competing offerings market indices investor sentiment confidence general economic conditions ability maintain investment management administrative fees current levels competitive conditions business ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred result changes number total employees competitive factors changes percentages revenues paid compensation reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill connection litigation regulatory proceedings effects acquisitions business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible goodwill values see discussion “market risksrevenues net income” “critical accounting policiesintangibles goodwill” previously discussed item 7aitem 7 managements discussion analysis financial condition results operations executive overview legg mason inc holding company subsidiaries collectively comprise legg mason global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally united states america united kingdom also offices australia bahamas brazil canada chile china dubai france germany italy japan luxembourg poland singapore spain taiwan operate one reportable business segment asset management connection changes executive management fiscal 2009 desire expand multichannel distribution capabilities better align resources access new growth opportunities realigned management responsibilities result manage business two divisions operating segments americas international primarily based geographic location advisor domicile fund families manage division managers report directly chief executive officer americas division consists usdomiciled fund families separate account businesses usbased investment affiliates domestic distribution organization similarly international division consists fund complexes distribution teams investment affiliates located outside us believe structure provide greater focus allow us maximize distribution efforts efficiently take advantage growth opportunities locally abroad presentation previously reported amounts conformed new management structure operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution service fees received distributing investment products services providing support services investment portfolios generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level assets management thus affected factors securities market conditions ability attract maintain assets management key investment personnel investment performance assets management primarily vary period due inflows outflows client assets market performance client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions fees charge investment services vary based upon factors type underlying investment product amount assets management type services investment objectives provided fees charged equity asset management services generally higher fees charged fixed income liquidity asset management services accordingly revenues affected composition assets management addition ordinary course business may reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets revenue sharing agreements certain subsidiaries retain different percentages revenues cover costs including compensation net income profit margin compensation percentage operating revenues impacted based subsidiaries generate revenues change assets management one subsidiary dramatically different effect revenues earnings equal change another subsidiary significant component cost structure employee compensation benefits majority variable nature includes incentive compensation primarily based upon revenue levels profits next largest component cost structure distribution servicing fees primarily fees paid third party distributors selling asset management products services largely variable nature certain operating costs fixed nature occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly united states increasingly countries operate results individual period considered representative future results profitability sensitive variety factors including amount composition assets management volatility general level securities prices interest rates among things sustained periods unfavorable market conditions likely affect profitability adversely addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients economic downturn past year contributed significant contraction business financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms brokerdealers commercial banks industry dramatically impacted economic downturn past year prior years consolidation financial services firms mergers acquisitions fiscal years ended march 31 2009 2008 fixed income markets endured substantial turmoil one effect turmoil liquidity markets many types asset backed commercial paper medium term notes issued structured investment vehicles sivs became substantially reduced result protect clients entered several arrangements fiscal 2008 2009 provide support liquidity funds managed subsidiary invested siv securities industry operate also subject extensive regulation federal state foreign laws like firms impacted regulatory legislative changes responding changes required us incur costs continue impact profitability references fiscal 2009 2008 2007 refer fiscal year ended march 31 year terms us company refer legg mason business environment results operations financial environment globally united states volatile fiscal 2009 challenging market conditions persisted throughout fiscal year sharp decline equity markets continuing dislocations credit markets adversely affected entire financial sector fiscal 2009 equity markets suffered pullback consumer spending led weak performance global markets increased unemployment significant declines values assets owned financial institutions investors confidence continued weaken caused shift markets equity corporate bonds us treasury notes bonds result three major us equity market indices declined sharply fiscal year dow jones industrial average1 nasdaq composite index2 sp 5003 38 33 40 respectively fiscal year barclays capital us aggregate bond index4 increased 3 barclays capital global aggregate bond index4 decreased 5 fiscal 2009 federal reserve board reduced discount rate 200 current rate 025 results negatively impacted many factors financial environment operate continues challenging moving fiscal 2010 expect challenges presented credit markets persist throughout next fiscal year cannot predict uncertainties impact companys results 1dow jones industrial average trademark dow jones company affiliated legg mason 2nasdaq trademark nasdaq stock market inc affiliated legg mason 3sp trademark standard poors division mcgrawhill companies inc affiliated legg mason 4barclays capital us aggregate bond index barclays capital global aggregate bond index trademarks barclays capital affiliated legg mason following table sets forth periods indicated items consolidated statements operations percentage operating revenues increase decrease item percentage amount previous period nmnot meaningful 1calculated based change actual amounts fiscal years percentage prior year amount fiscal 2009 compared fiscal 2008 financial overview net loss year ended march 31 2009 totaled 19 billion 1385 per diluted share compared net income 2676 million 186 per diluted share prior year fiscal 2009 eliminated exposure sivs liquidity funds managed subsidiary purchasing subsequently selling reimbursing funds portion losses incurred selling securities issued sivs held liquidity funds held us majority siv securities supported capital support arrangements letters credit total return swap trs prior purchase transactions along charges related remaining capital support arrangements support securities sivs resulted aggregate charges fiscal year 23 billion also fiscal 2009 impairment charges 13 billion recorded related goodwill intangible assets primarily former wealth management division result declines assets management aum projected cash flows affiliates division reduction value certain acquired management contract intangible assets related trade name cash loss continuing operations see supplemental nongaap financial information 22 billion 1574 per diluted share compared cash income 4123 million 286 per diluted share prior year decreases primarily due increase net losses related elimination siv exposure net income tax benefits compensation related adjustments 11 billion 761 per diluted share increase pretax impairment charges 12 billion 825 per diluted share pretax profit margin continuing operations declined 940 96 prior year pretax profit margin continuing operations adjusted see supplemental nongaap financial information declined 1322 132 prior year fiscal 2009 losses related liquidity fund support impairment charge reduced pretax profit margin 662 percentage points 390 percentage points respectively reduced pretax profit margin adjusted 931 percentage points 548 percentage points respectively fiscal 2008 losses related liquidity fund support impairment charge reduced pretax profit margin 110 percentage points 33 percentage points respectively reduced pretax profit margin adjusted 151 percentage points 45 percentage points respectively assets management components changes aum billions years ended march 31 follows 1includes impact foreign exchange aum march 31 2009 6324 billion decrease 3177 billion 33 march 31 2008 decrease aum attributable net client outflows 159 billion market depreciation 158 billion approximately 10 related impact foreign currency exchange fluctuation net client outflows asset classes majority outflows fixed income 89 billion 56 outflows followed equity outflows liquidity outflows 47 billion 23 billion respectively majority fixed income outflows products managed western asset management company western asset experienced investment performance issues especially last fiscal year equity outflows primarily experienced key equity products managed clearbridge advisors llc clearbridge legg mason capital management inc lmcm permal due part investment performance issues experienced net equity outflows since fiscal 2007 generally earn higher fees profits equity aum outflows asset class negatively impact revenues net income would outflows asset classes addition due part recent investment performance issues experienced outflows fixed income asset class past five quarters investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds manage may redeem investments funds time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients third party distributors relationships loss key investment management personnel financial market performance response unprecedented market turmoil december quarter permal temporarily modified redemption notice timing require 95 day prior notification rather historical 20 days objective returning 20 day notice period january 2010 current 95 day notice period redemptions reduced 65 days beginning september 30 2009 redemption date march 31 2009 permal received approximately 24 billion gross redemption notices unless withdrawn redeemed june quarter aum asset class aum asset class billions march 31 follows component changes aum asset class billions fiscal year ended march 31 2009 follows average aum asset class billions year ended march 31 follows aum division aum division billions march 31 follows component changes aum division billions year ended march 31 2009 follows april 2009 estimate aum increased approximately 1 march 31 2009 result positive market performance 4 offset net client outflows 3 outflows consistent march quarter outflows equity assets increased 7 partially offset decrease liquidity assets 1 investment performance5 legg mason diversified global asset management company offers wide range investment products provide investment services retail institutional clients span many asset classes levels risk geographic locations investment styles march 31 2009 2008 equity assets accounted 20 29 respectively fixed income accounted 57 53 respectively liquidity accounted remaining 23 18 respectively assets management past 12 months characterized significant volatility erratic unprecedented price movements across variety markets significantly impacted failure major financial institutions freeze credit markets unprecedented government intervention addition downturn housing led us broader slowdown set financial turmoil continues result financial stocks led equity markets lower sp 500 financials index 63 compared broader sp 500 index dropped 38 march 31 2009 trailing 1year 3year 5year 10year periods approximately 49 53 58 88 marketed equity composite6 assets outpaced benchmarks respectively march 31 2008 trailing 1year 3year 5year 10year periods approximately 53 49 94 marketed equity composite assets outpaced benchmarks respectively 5index performance section includes reinvestment dividends capital gains 6a composite aggregation discretionary portfolios separate accounts investment funds single group represents particular investment objective strategy asset managers specific guidelines including portfolios marketed composites assets management managed accordance guidelines included composite march 31 2009 85 equity assets management 84 fixed income assets management marketed composites march 31 2008 86 equity assets management 83 fixed income assets management marketed composites fixed income markets economic crisis deepened governments numerous actions laid foundation recovery causing investor confidence improve modestly late march 2009 quarter new fiscal stimulus package designed aid economy governments intention issue public debt financing caused yields rise quarter 1year period treasury yields decreased significantly long term rates increased resulting steeper yield curve addition worst performing sectors home equity assetbacked securities investment grade corporate securities measured barclays abs home equity index returning 35 barclays us corporate investment grade index returning 7 1year period march 31 2009 trailing 1year 3year 5year 10year periods approximately 31 12 32 17 marketed fixed income composite assets outpaced benchmarks respectively march 31 2008 trailing 1year 3year 5year 10year periods approximately 4 21 54 74 fixed income marketed composite assets outpaced benchmarks respectively march 31 2009 trailing 1year 3year 5year 10year periods 43 52 47 75 us longterm mutual fund7 assets outpaced lipper category average respectively march 31 2008 trailing 1year 3year 5year 10year periods 41 45 57 85 us longterm mutual fund7 assets outpaced lipper category average respectively march 31 2009 trailing 1year 3year 5year 10year periods 47 60 49 76 us equity mutual fund7 assets outpaced lipper category average respectively march 31 2008 trailing 1year 3year 5year 10year periods 45 50 91 us equity mutual fund7 assets outpaced lipper category average respectively march 31 2009 trailing 1year 3year 5year 10year periods 38 41 45 72 us fixed income mutual fund7 assets outpaced lipper category average respectively march 31 2008 trailing 1year 3year 5year 10year periods 33 34 67 68 us fixed income mutual fund7 assets outpaced lipper category average respectively revenue division operating revenues division millions years ended march 31 follows decrease operating revenues americas division primarily due decreased mutual fund advisory fees assets managed lmcm clearbridge royce associates llc royce decreased separate account advisory fees assets managed private capital management lp pcm clearbridge lmcm decreased distribution service fee revenues us retail equity funds decrease operating revenues international division primarily due decline fund revenues performance fees permal lower separate account advisory fees assets managed western asset decreased distribution service fee revenues international balanced fixed income funds 7source lipper inc includes openend closedend variable annuity funds march 31 2009 2008 us longterm mutual fund assets represented data accounted 12 14 respectively total assets management performance us longterm mutual fund assets included marketed composites results operations operating revenues continuing operations year ended march 31 2009 34 billion 28 46 billion prior year primarily result 18 decrease average aum due decline average equity assets approximately 38 fixed income assets approximately 12 shift mix aum higher fee equity assets greater percentage fixed income liquidity assets also contributed revenue decline operating revenues also negatively impacted decline performance fees approximately 1153 million 87 investment advisory fees separate accounts decreased 4473 million 31 10 billion decrease 2731 million result lower average equity assets pcm clearbridge lmcm brandywine global investment management llc brandywine 809 million result lower average fixed income assets managed western asset 439 million result sale legg mason private portfolio group lmppg business see note 2 notes consolidated financial statements description sale investment advisory fees funds decreased 4834 million 21 18 billion decrease approximately 450 million result lower average equity assets managed primarily lmcm clearbridge permal royce approximately 76 million result lower average fixed income assets managed western asset offset approximately 42 million result increased liquidity assets managed primarily western asset performance fees decreased 87 1153 million 174 million fiscal 2009 primarily result decrease performance fees earned alternative investment products permal distribution service fees decreased 31 4750 million primarily result decline average aum retail share classes domestic international equity funds resulted decrease 1767 million operating expenses past year market conditions contributed reduction aum revenues earnings discussed although significant portion expenses variable largely increase decrease proportionately revenue portion expenses fixed decline reduced revenues result substantial decline revenues fiscal 2009 certain actions taken reduce corporate cost structure costsaving measures primarily include reductions headcount discretionary incentive compensation administrative business support functions significant reductions utilization consultants technology projects substantial curtailment travel entertainment costs measures less significant actions resulted elimination approximately 135 million costs annualized basis costs incurred achieve savings severance discussion operating expenses identifies amount variance attributable costsavings achieved fiscal 2009 applicable compensation benefits decreased 28 11 billion decrease primarily driven 341 million decrease revenue share based compensation related lower revenues fiscal 2009 impact cost savings initiatives reductions headcount discretionary incentives discretionary compensation lowered compensation approximately 86 million decrease deferred compensation obligations approximately 59 million resulting market losses invested assets deferred compensation plans largely offset losses nonoperating expense decreases offset part lower incentive compensation reductions 40 million related charges provide support certain liquidity funds held sivissued securities compensation percentage operating revenues decreased slightly 337 339 prior fiscal year compensation reductions related unrealized market losses deferred compensation plans substantially offset fixed compensation costs administrative sales personnel vary revenues distribution servicing expenses decreased 24 9700 million primarily result decrease average aum certain products pay fees thirdparty distributors communications technology expense decreased 2 1883 million primarily result cost savings initiatives led 113 million decrease technology consulting fees offset part 41 million increase market data costs services previously included expenses 32 million increase depreciation expense related investment management infrastructure occupancy expense increased 62 2095 million primarily result lease reserves related office vacancies totaling 701 million accelerated depreciation assets vacated space 90 million amortization intangible assets decreased 36 365 million primarily result sale lmppg business reduced amortization expense 106 million impact impairment intangible assets fiscal year 2008 reduced amortization expense 66 million impairment charges increased 13 billion approximately 12 billion total impairment charges relate goodwill intangible assets former wealth management division result significant declines aum reduction projected cash flows division remaining 146 million relates certain acquired management contracts result accelerated rate client attrition related trade name see critical accounting policies note 5 notes consolidated financial statements discussion impairment charges expenses decreased 278 million 1821 million primarily result cost savings initiatives resulted reduced travel entertainment costs 114 million lower professional fees 72 million lower advertising costs 54 million addition sale lmppg overlay implementation business eliminated support costs approximately 5 million operating expenses fiscal 2010 continue benefit cost reduction initiatives implemented fiscal 2009 addition planned process implementing additional cost reductions bring total amount 160 million annualized basis september 30 2009 however business dynamic requires us incur incremental expenses time totime grow better support business example operating expenses fiscal 2010 reflect incremental costs approximately 10 million associated relocation corporate headquarters addition time fill key positions take actions retain key talent would require additional compensation discussed fiscal 2010 relocate corporate headquarters currently pursuing subtenants certain floors lease unoccupied result headcount reductions given current commercial real estate market time secure sublease space deemed permanently abandoned likely recognize charge present value amount commitment lease exceeds amount due us expected sublease terms however subsequent charge occupancy expense reduced amount lease costs attributable sublet floors nonoperating income expense interest income decreased 27 563 million primarily result decline average interest rates earned investment balances decreased interest income 421 million offset part higher average investment account balances due proceeds issuance debt increased interest income 253 million interest expense increased 82 1505 million result higher debt levels raised 115 billion may 2008 issuing equity units 125 billion issuing 25 convertible senior notes january 2008 resulted increase approximately 831 million interest expense increases offset part impact repayment 425 million principal amount 675 senior notes july 2008 lower interest rates paid term loan together resulted decrease 286 million fiscal 2010 interest expense increase 323 million result adoption fasb staff position fsp apb 141 accounting convertible debt instruments may settled cash upon conversion including partial cash settlement related 25 convertible senior notes see recent accounting developments note 1 notes consolidated financial statements information fsp fund support losses increased 17 billion primarily result continued siv price deterioration elimination siv exposure see note 17 notes consolidated financial statements additional information nonoperating income expense decreased 1160 million loss 1092 million primarily result increase 583 million unrealized market losses assets held deferred compensation plans offset corresponding compensation reductions discussed 331 million unrealized market losses investments proprietary fund products income tax benefit income tax benefit 12 billion compared income tax expense 1760 million prior year primarily result losses related liquidity fund support charges impairment goodwill intangible assets effective tax rate benefit 384 current year compared 397 provision prior year current year benefit rate primarily driven impact sivrelated charges lower state tax benefits addition current year includes approximately 80 million tax benefits associated restructuring foreign subsidiary offset impact nondeductible portion goodwill impairment charge supplemental nongaap financial information cash income continuing operations supplemental information providing performance measure based methodology generally accepted accounting principles nongaap cash income continuing operations management uses benchmark evaluating comparing periodtoperiod operating performance legg mason define cash income continuing operations income loss continuing operations plus amortization deferred taxes related intangible assets goodwill less deferred income taxes goodwill indefinitelife intangible asset impairment believe cash income loss continuing operations provides good representation operating performance adjusted noncash acquisition related items facilitates comparison results asset management firms engaged significant acquisitions including related goodwill intangible asset impairments also believe cash income loss continuing operations important metric estimating value asset management business measure provided addition income continuing operations substitute income continuing operations may comparable nongaap performance measures including measures cash earnings cash income companies cash income continuing operations liquidity measure used place cash flow measures determined gaap consider cash income continuing operations useful investors important metric measuring economic performance asset management companies indicator value facilitates comparisons operating results asset management firms engaged significant acquisitions calculating cash income continuing operations add impact amortization intangible assets acquisitions management contracts income continuing operations reflect fact noncash expense makes difficult compare operating results asset management firms engaged significant acquisitions deferred taxes indefinitelife intangible assets goodwill represent actual tax benefits realized gaap absent impairment charge disposition related business actually receive tax benefits indefinitelife intangible assets goodwill time add income calculation cash income continuing operations conversely subtract income taxes impairment charges recognized gaap disposition impairment charge occur indefinitelife intangible assets goodwill impact cash income continuing operations may distort actual changes operating performance value firm accordingly monitor changes indefinitelife intangible assets goodwill related impact including taxes cash income continuing operations ensure appropriate adjustments explanations accompany disclosures cash income continuing operations although depreciation amortization fixed assets noncash expenses add charges calculating cash income continuing operations charges related assets ultimately require replacement reconciliation income continuing operations cash income continuing operations thousands except per share follows decrease cash income continuing operations primarily due increase pretax impairment charges 12 billion 825 per diluted share increase net losses related elimination siv exposure 11 billion 761 per diluted share pretax profit margin continuing operations adjusted believe pretax profit margin continuing operations adjusted distribution servicing expense useful measure performance indicates margins would without distribution revenues passed third parties direct cost selling products thus shows effect revenues margins measure provided addition companys pretax profit margin continuing operations calculated gaap substitute calculations margin gaap may comparable nongaap performance measures including measures adjusted margins companies reconciliation pretax profit margin continuing operations adjusted distribution servicing expense thousands follows fiscal 2009 losses related liquidity fund support impairment charges reduced pretax profit margin 662 percentage points 390 percentage points respectively reduced pretax profit margin adjusted 931 percentage points 548 percentage points respectively fiscal 2008 losses related liquidity fund support impairment management contracts reduced pretax profit margin 110 percentage points 33 percentage points respectively reduced pretax profit margin adjusted 151 percentage points 45 percentage points respectively fiscal 2008 compared fiscal 2007 financial overview fiscal 2008 entered several transactions provide support certain liquidity funds held securities issued sivs managed subsidiary transactions resulted aggregate charges fiscal year 6073 million also fiscal 2008 impairment charge 1510 million recorded reduction value certain acquired management contract intangible assets net income year ended march 31 2008 totaled 2676 million 186 per diluted share decrease 59 58 respectively prior year cash income continuing operations see supplemental nongaap financial information 4123 million 286 per diluted share representing decrease 51 prior year decreases primarily due net losses related liquidity fund support net income tax benefits compensation related adjustments 3137 million 218 per diluted share pretax impairment charge 1510 million 105 per diluted share pretax profit margin continuing operations declined 96 240 prior year pretax profit margin continuing operations adjusted see supplemental nongaap financial information declined 132 332 prior year fiscal 2008 losses related liquidity fund support impairment charge reduced pretax profit margin 110 percentage points 33 percentage points respectively reduced pretax profit margin adjusted 151 percentage points 45 percentage points respectively assets management components changes assets management aum billions years ended march 31 follows aum march 31 2008 9501 billion decrease 184 billion 2 march 31 2007 net client cash outflows fiscal year 263 billion driven outflows equity assets approximately 44 billion resulting part lower relative investment performance partially offset approximately 15 billion 3 billion fixed income liquidity inflows respectively aum asset class aum asset class billions march 31 follows average aum asset class billions year ended march 31 follows aum division aum division billions march 31 follows component changes aum division billions year ended march 31 2008 follows revenue division operating revenues division millions years ended march 31 follows increase operating revenues americas division primarily due increased mutual fund advisory fees assets managed western asset royce increased separate account advisory fees assets managed western asset brandywine partially offset decreased separate account advisory fees assets managed pcm decreased mutual fund advisory fees assets managed clearbridge decreased distribution service fee revenues us retail equity funds increase operating revenues international division primarily due increased fund revenues permal legg mason poland results operations operating revenues continuing operations year ended march 31 2008 46 billion 7 43 billion prior year primarily result 9 increase average aum principally liquidity fixed income asset classes investment advisory fees separate accounts increased 1 187 million 146 billion primarily result higher average assets managed western asset brandywine batterymarch financial management inc offset part decline advisory fees due lower average assets managed pcm clearbridge investment advisory fees funds increased 15 23 billion primarily result increase average assets managed permal western asset royce increases partially offset decrease average assets managed clearbridge performance fees decreased 7 95 million 1327 million fiscal 2008 primarily result decreases performance fees earned western asset lmcm partially offset increase performance fees earned permal distribution service fees decreased 3 6923 million primarily result decline average aum retail share classes domestic equity funds operating expenses compensation benefits remained flat 16 billion increased revenueshare based incentive expense higher revenues along higher salary benefits certain subsidiaries substantially offset incentive expense reductions related charges provide support certain liquidity funds hold sivissued securities see note 17 notes consolidated financial statements discussion charges related liquidity business compensation percentage operating revenues 339 fiscal 2008 361 fiscal 2007 primarily result reduction compensation resulting adjustments related liquidity fund support distribution servicing expenses increased 7 13 billion primarily result increased average aum permal liquidity assets pay higher relative fees third party distributors communications technology expense increased 11 1928 million primarily result increased depreciation expense technology maintenance expenditures related investment management business continuity infrastructure office relocations occupancy expense increased 29 1294 million primarily result higher rent new office locations impact duplicate rent facilities relocation periods expense impairment management contracts 1510 million related impairment certain acquired management contracts result accelerated rate client attrition previously estimated see note 5 notes consolidated financial statements discussion impairment management contracts operating expenses increased 1 2099 million driven primarily increased promotional expenses offset part decreased expenses transition services agreement citigroup related integration businesses acquired citigroup prior year losses disposal certain fixed assets result office relocations income expense interest income increased 180 million 769 million primarily result higher average firm investment account balances offset part decline average interest rates earned balances interest expense increased 112 million 827 million due 500 million new borrowings 10 billion unsecured revolving credit facility issuance 125 billion convertible senior notes january 2008 offset part 150 million principal reduction made 700 million term loan nonoperating income expense decreased 6287 million loss 6005 million primarily result losses related liquidity fund support approximately 6073 million excludes 10 million financing costs included interest expense see note 17 notes consolidated financial statements additional information provision income taxes provision income taxes decreased 56 1760 million primarily result lower earnings due losses related liquidity fund support impairment acquired management contract assets recorded fiscal 2008 effective tax rate increased 397 381 prior year primarily reflecting increase earnings higher state income tax rate jurisdictions result impairment liquidity fund support charges lower relative state income tax rates supplemental nongaap financial information cash income continuing operations reconciliation income continuing operations cash income continuing operations thousands except per share follows decrease cash income continuing operations fiscal 2008 primarily due net losses related liquidity fund support 3137 million 218 per diluted share impairment management contracts net income tax benefits 948 million 066 per diluted share pretax profit margin continuing operations adjusted reconciliation pretax profit margin continuing operations adjusted distribution servicing expense thousands follows fiscal 2008 losses related liquidity fund support impairment management contracts reduced pretax profit margin 110 percentage points 33 percentage points respectively reduced pretax profit margin adjusted 151 percentage points 45 percentage points respectively liquidity capital resources primary objective capital structure funding practices appropriately support business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations fiscal 2008 2009 entered series arrangements provide financial support certain liquidity funds managed subsidiary invested asset backed commercial paper medium term notes issued sivs arrangements described liquidity fund support section overall funding needs capital base continually reviewed determine capital base meets expected needs businesses order ensure adequate resources liquidity fund support transactions well general corporate purposes increased capital base 115 billion issuance equity units fiscal 2009 intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may time involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt assets consist primarily intangible assets goodwill cash equivalents refundable income taxes investment advisory related fee receivables investment securities assets principally funded equity capital longterm debt results ongoing operations march 31 2009 cash total assets longterm debt stockholders equity 11 billion 93 billion 30 billion 45 billion respectively following table summarizes consolidated statements cash flows years ended march 31 millions cash flows operating activities 4379 million fiscal 2009 compared cash flows 11443 million prior fiscal year decrease operating cash flows primarily due lower earnings driven aum revenue declines current year cash outflows investing activities fiscal 2009 11 billion primarily attributable purchase siv securities liquidity funds used 29 billion including 8018 million net cash collateral returned upon termination associated support agreements discussed liquidity fund support payments funded part portion proceeds two debt issuances calendar year 2008 outflows offset part proceeds sale securities purchased agreements resell siv securities 6046 million 5139 million respectively cash proceeds 1811 million received sale lmppg return portion contingent earnout payment pcm acquisition 1200 million previously funded escrow cash flows financing activities provided 3011 million primarily due 11 billion net proceeds offering equity units may offset part repayment 425 million 675 senior notes july 250 million repayment 500 million unsecured revolving credit facility march 2009 portion proceeds equity units offering 125 billion offering convertible senior notes january 2008 used help fund liquidity fund support senior notes repayment discussed fiscal 2009 2008 2007 paid cash dividends 1359 million 1328 million 1099 million respectively may 5 2009 board directors approved regular quarterly cash dividend amount 003 per share representing quarterly reduction 021 per share prior dividend expect next twelve months operating activities adequate support operating cash needs past year difficult market conditions contributed reduction aum revenues resulted reduction cash generated operations primary source added liquidity trend continues would expect available cash generated operations would continue decrease however effort mitigate effects declining market conditions lower revenue levels reduced corporate expenses approximately 135 million annualized basis march 31 2009 excluding costs achieve savings severance planned additional reductions approximately 25 million fiscal 2010 addition also expect receive approximately 600 million tax refunds fiscal 2010 primarily attributable carry back tax benefit realized losses incurred sale siv securities refunds expected received next six months fiscal 2008 initiated plan repatriate accumulated earnings approximately 225 million certain foreign subsidiaries order replenish funds used contingent acquisition payment us former owners permal repatriated approximately 36 million funds fiscal 2008 anticipate repatriating additional amounts starting fiscal year 2010 although timing currently uncertain repatriated amounts effectively increase available cash addition ordinary operating cash needs discussed anticipate several cash needs next twelve months november 2009 may required pay 286 million agreements governing permal acquisition amount payment determined based permals operating results final payment transaction november 2011 60 million 320 million based permals results amount fiscal 2010 payment may pay 25 payments shares common stock addition fiscal 2010 move new corporate headquarters expect incur total costs new building approximately 92 million primarily leasehold improvements fixtures furniture approximately 44 million paid year ended march 31 2009 discussed earnings remain current levels would expect repay portion bank debt december 2009 may also elect utilize available resources number activities including seed capital investments new products repayment outstanding debt acquisitions described currently project available cash flows operating activities sufficient fund liquidity needs accordingly currently expect raise additional debt equity financing next twelve months however assurances expectations projections could prove incorrect currently unexpected events may occur require additional liquidity acquisition opportunity market conditions might significantly worsen affecting results operations generation available cash occur would likely seek manage available resources taking actions additional costcutting reducing expected expenditures investments selling assets investment securities repatriating earnings foreign subsidiaries modifying arrangements affiliates andor employees types actions prove insufficient may seek raise additional equity debt however current market conditions would make difficult raise additional capital would increase costs addition debt covenants currently prevent us incurring 250 million additional indebtedness financing transactions table reflects primary sources financing thousands march 31 2009 may 2008 issued 23 million equity units 115 billion 50 million used pay issuance costs unit consists 5 interest 1000 principal amount 56 senior notes due june 30 2021 purchase contract purchase varying number shares common stock june 30 2011 notes purchase contracts separate distinct instruments terms structured simulate conversion debt equity potentially remarketed debt approximately three years issuance holders also receive quarterly contract adjustment payment purchase contract annual rate 14 commitment amount required pledge interests senior notes us collateral purchase commitment net proceeds equity units offering approximately 111 billion used general corporate purposes date primarily included purchase siv securities liquidity funds managed subsidiary repayment outstanding debt january 2008 increased capital base 125 billion sale 25 convertible senior notes proceeds strengthened balance sheet provided additional liquidity used general corporate purposes including purchase siv securities liquidity funds connection financing entered economic hedging transactions increase effective conversion price notes hedging transactions net cost us 83 million paid proceeds notes transaction closed january 31 2008 used approximately 180 million capital raised purchase retire preferred stock convertible 25 million shares common stock november 2007 borrowed aggregate 500 million unsecured revolving credit facility general corporate purposes facility matures october 14 2010 may prepaid time contains customary covenants default provisions january 3 2008 amended credit agreement increase maximum amount may borrow 500 million 1 billion march 4 2008 elected procure letter credit loc support 150 million certain sivissued holdings liquidity fund facility see discussion liquidity fund support march 2009 repaid 250 million outstanding borrowings credit facility amended credit agreement decrease maximum amount may borrow 1 billion 500 million modified covenants discussed december 1 2005 completed acquisition citigroups asset management business cam exchange outstanding stock subsidiaries constituted private client capital markets businesses ii 5393545 shares common stock 13346632 shares nonvoting convertible preferred stock convertible upon transfer 13346632 shares common stock iii 512 million cash borrowed 700 million fiveyear syndicated term loan facility terms agreement paid postclosing purchase price adjustment 847 million citigroup september 2006 based retention certain aum nine months closing fiscal 2009 2008 issued approximately 36 million 553 million common shares respectively upon conversion approximately 36 553 shares respectively convertible preferred stock issued cam acquisition fourth quarter fiscal 2008 repurchased 25 shares convertible 25 million common shares convertible preferred stock approximately 180 million cash october 2005 borrowed 700 million syndicated fiveyear unsecured floatingrate term loan agreement primarily fund cash portion purchase price citigroup transaction effective closing citigroup transaction entered 400 million threeyear amortizing interest rate swap hedge portion 700 million floating rate term loan fixed rate 49 march 2007 quarter swap began unwind accordance terms repaid corresponding 50 million debt fiscal 2008 repaid 100 million debt outstanding balance facility 550 million march 31 2009 swap fully matured december 2008 also connection citigroup transaction one subsidiaries borrowed 832 million 364day promissory note fiscal year ended march 31 2007 paid available cash balance outstanding note included outstanding debt march 31 2008 425 million principal amount senior notes due july 2 2008 bear interest 675 notes issued discount yield 680 accreted balance 425 million repaid available cash july 2008 agreements entered part january 2008 issuance 125 billion 25 convertible senior notes prevent us incurring additional debt exceptions debt ebitda ratio defined documents exceeds 25 may 2008 issuance equity units resulted debt ebitda ratio exceeding limit although received waiver covenant allow us complete transaction waiver prevents us issuing 250 million additional debt time debt ebitda ratio exceeds 25 sales siv securities fiscal year 2009 reduced ebitda definition thus increasing ratio purposes covenant result two events may subject limited exceptions incur 250 million new indebtedness effects sales siv securities longer trailing twelve month ebitda calculation substantially reduced outstanding indebtedness 500 million revolving line credit revised 250 million currently outstanding 550 million term loan also contain financial covenants include maximum debt ebitda ratio 30 minimum ebitda interest expense ratio 40 maximum debt ebitda ratio increased 25 30 november 2008 amendment march 2009 maximum debt ebitda ratio revised allow us reduce includable debt unrestricted cash excess 500 million working capital debt defined include obligations borrowed money excluding debt incurred equity units offering nonrecourse debt capital leases ebitda defined consolidated net income plusminus tax expense interest expense depreciation amortization intangibles extraordinary expenses losses noncash charges 30 billion realized losses resulting liquidity fund support march 31 2009 legg masons debt ebitda ratio 18 ebitda interest expense ratio 62 therefore legg mason compliance covenants net income remains current levels declines spend available cash may impact ability maintain compliance covenants determine compliance covenants may pressure may elect take number actions including reducing expenses order increase ebitda use available cash repay portion 800 million outstanding debt subject covenants seek negotiate lenders modify terms restructure debt based march run rate ebitda factoring projected cost savings would required repay half outstanding bank debt december 2009 maintain compliance covenants however based improved april run rate results repayment debt may required maintain compliance covenants anticipate available cash repay portion bank debt necessary using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments outstanding debt currently rated investment grade three rating agencies follow us moodys investor services moodys standard poors rating services standard poors fitch ratings current moodys rating a3 negative outlook current standard poors rating bbb negative outlook current fitch rating negative outlook event one level downgrade moodys standard poors interest rate fiveyear term loan revolving line credit increase 025 per annum effective november 1 2005 acquired 80 outstanding equity permal concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares resulting legg mason owning 100 outstanding voting common stock permal right purchase preference shares four years subsequent closing right exercised holders equity interests right require us purchase interests general time frame approximately consideration maximum aggregate price including earnout payments related purchase based upon future revenue levels equity interests permal 1386 billion excluding acquisition costs dividends fiscal 2008 payments 240 million made former owners permal representing earnout payments based upon permals revenues second anniversary date purchase 375 preference shares 208 million paid cash balance common stock anticipated acquire remaining 625 preference shares fiscal 2010 amounts based permals revenues time may required pay 286 million agreements governing permal acquisition final payment transaction sixth anniversary fiscal 2012 60 million 320 million based permals revenues amount fiscal 2010 payment may elect deliver 25 future payments form shares common stock addition fiscal 2009 2008 2007 paid aggregate amount approximately 315 million dividends preference shares pay minimum 75 million dividends preference shares fiscal 2010 payments preference shares including dividends recognized additional goodwill august 1 2001 purchased pcm cash approximately 682 million excluding acquisition costs transaction included two contingent payments based pcms revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion fiscal 2005 made maximum third anniversary payment 400 million former owners pcm fiscal 2007 paid available cash escrow maximum fifth anniversary payment 300 million 150 million remained escrow subject certain limited clawback provisions july 2009 fiscal 2009 contingency settled time 30 million released escrow sellers 120 million returned us recorded reduction goodwill april 2008 completed sale citigroup global markets inc affiliate citigroup acquired majority overlay implementation business lmppg including managed account trading technology platform sale produced cash proceeds approximately 181 million fiscal 2002 board directors previously authorized us discretion purchase 30 million shares common stock june 2007 quarter repurchased 40150 shares 40 million july 19 2007 board directors authorized us repurchase time 50 million shares common stock replace previous share repurchase authorization january 2008 board directors also authorized us repurchase nonvoting convertible preferred stock representing 4 million shares common stock proceeds convertible senior notes discussed february 2008 repurchased retired preferred stock convertible 25 million shares common stock 180 million also fiscal 2008 repurchased 11 million shares common stock 94 million new authorization addition 40150 shares repurchases fiscal 2009 2007 certain asset management subsidiaries maintain various credit facilities general operating purposes see notes 6 7 notes consolidated financial statements additional information certain subsidiaries also subject capital requirements various regulatory agencies subsidiaries met respective capital adequacy requirements liquidity fund support fiscal 2009 2008 entered series arrangements provide financial support certain liquidity funds fiscal 2009 purchased subsequently sold reimbursed funds portion losses incurred selling outstanding securities issued sivs held various liquidity funds managed one subsidiaries majority previously supported arrangements fiscal 2009 also sold canadian conduit securities purchased one liquidity funds fiscal 2008 fiscal 2009 provided additional support liquidity funds related siv securities march 31 2009 2008 support amounts related cash collateral thousands follows 1included restricted cash consolidated balance sheet 2pertains citi institutional liquidity fund plc usd fund prime cash reserves portfolio 3pertains citi institutional liquidity fund plc usd fund 4pertains legg mason western asset canadian money market fund 5securities issued sivs 6pertains citi institutional liquid reserves portfolio series master portfolio trust 7pertains western asset institutional money market fund citi institutional liquidity fund plc euro fund citi institutional liquidity fund plc sterling fund fiscal 2008 entered arrangements two third party banks provide locs aggregate amount approximately 485 million benefit three liquidity funds managed one subsidiaries discussed note 17 notes consolidated financial statements part loc arrangements agreed reimburse banks amounts may drawn locs support four agreements provided approximately 286 million cash collateral march 31 2008 additionally one arrangements supported 150 million excess capacity 1 billion revolving credit facility fiscal 2009 locs terminated accordance terms upon purchase underlying securities funds described 286 million collateral returned fiscal 2008 entered six capital support agreements csas terms csas agreed provide maximum 415 million support two liquidity funds certain circumstances upon funds realizing loss specific underlying securities provided 415 million collateral support csa maximum contribution amount fiscal 2009 200 million principal amount securities supported one csas matured paid full related csa terminated accordance terms collateral 15 million returned remaining csas terminated accordance terms upon purchase underlying securities funds described remaining 400 million collateral returned also fiscal year 2008 entered trs arrangement major bank pursuant bank purchased securities issued three sivs dublindomiciled liquidity fund managed one subsidiaries 890 million face amount commercial paper purchased bank cash aggregate amount 832 million represents estimate value determined collateral purposes addition reimbursed fund 595 million difference funds carrying value including accrued interest amount paid provided 1395 million cash collateral terms agreements could increased decreased based changes value upon maturities underlying securities fiscal 2009 provided additional support two liquidity funds form two standby letters credit total amount approximately 257 million provided collateral equal total support amount locs terminated accordance terms upon purchase underlying securities funds described 257 million collateral returned fiscal 2009 entered amended various capital support agreements terms new amended csas agreed provide maximum 107 billion support particular liquidity funds certain circumstances upon funds realizing loss specific underlying securities provided 107 billion collateral support csa maximum contribution amount csas aggregating 103 billion terminated accordance terms upon purchase underlying securities funds described 103 billion collateral returned contributions made csas result acquiring ownership interest fund four csas remaining march 31 2009 include recovery clause funds required reimburse us contributions made upon expiration csa extent funds subsequently receive payments issuer underlying securities upon sale disposition thereof exceed amortized cost underlying securities time amounts paid csas fiscal 2009 440 million principal amount securities previously supported trs arrangement matured paid full additional 95 million principal amount securities trs arrangement repaid also fiscal 2009 nonbank sponsored siv securities purchased dublindomiciled liquidity fund fiscal 2008 matured 82 million principal amount interest paid full fiscal 2009 paid 29 billion aggregate 30 billion principal amount plus 24 million accrued interest nonbank sponsored siv securities six liquidity funds previously supported twelve csas seven locs upon purchase securities twelve csas aggregating 14 billion seven locs aggregating 742 million terminated accordance terms collateral 20 billion returned includes return 103 billion 257 million collateral provided current fiscal year support new amended csas locs respectively fiscal 2009 30 billion purchased securities sold along 355 million securities previously supported trs 76 million canadian conduit securities held balance sheet third parties 6273 million net transaction costs trs terminated accordance terms upon sale securities 209 million collateral returned fiscal 2009 also paid 1812 million reimburse two funds portion losses incurred selling siv securities four remaining csas provide aggregate 42 million support investments nonsiv securities certain funds expire march 31 2010 funds continue hold underlying securities market conditions improved agreements expire likely required utilize cash address obligations support arrangements offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations contingent payments section follows variable interest entities liquidity fund support discussed notes 1 16 17 notes consolidated financial statements previously discussed fiscal 2009 2008 entered various offbalance sheet arrangements provide support certain liquidity funds arrangements terminated expired prior march 31 2009 included letters credit capital support agreements trs fully described note 17 notes consolidated financial statements january 2008 entered hedge warrant transactions convertible notes certain financial institution counterparties increase effective conversion price convertible senior notes see note 7 notes consolidated financial statements contractual obligations contingent payments contractual obligations make future payments connection longterm debt noncancelable lease agreements addition described liquidity capital resources made expect make contingent payments business purchase agreements see notes 6 7 9 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual contingent obligations millions fiscal year 1represents borrowing revolving line credit expire october 2010 however may elect repay debt fiscal 2010 sufficient available cash 2coupon interest floating rate longterm debt based rates march 31 2009 includes 14 contract adjustment payments equity units 3the amount commitments reflected year represents maximum amount could payable earliest possible date terms agreements 4the amount contingent payments reflected year represents maximum amount could payable earliest possible date terms business purchase agreements 5the amount contingent obligations capital support agreements represents maximum amount could payable time contracts termination dates 6the table include approximately 295 million capital commitments investment partnerships legg mason general limited partner obligations funded required end commitment periods range fiscal 2011 7the table include amounts uncertain tax positions 351 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated market risk management committee oversees coordinates risk management activities legg mason subsidiaries addition certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income majority revenue calculated market value aum accordingly decline value securities cause aum decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts performance fees may earned certain investment advisory contracts exceeding performance benchmarks declines market values aum result reduced fee revenues net income generally earn higher fees equity assets fees charged fixed income liquidity assets declines market values aum asset class disproportionately impact revenues addition revenue sharing agreements certain subsidiaries retain different percentages revenues cover costs including compensation net income profit margin compensation percentage operating revenues impacted based subsidiaries generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary trading nontrading assets liabilities trading nontrading assets liabilities comprised investment securities including seed capital sponsored mutual funds products securities issued sivs conduit investments derivative instruments limited partnerships limited liability companies certain investment products beginning november 2007 entered series arrangements provide credit support certain liquidity funds arrangements included locs csas trs arrangement purchase securities issued sivs conduits substantially increased exposure risk security price fluctuations fiscal 2009 purchased subsequently sold funds sold remaining securities issued sivs held liquidity funds effectively eliminating exposure prior purchase majority siv securities supported capital support arrangements letters credit trs various support arrangements terminated accordance terms upon purchase fiscal 2009 also sold canadian conduit securities purchased one liquidity funds fiscal 2008 march 31 2009 four csas provide maximum 415 million support net asset values four funds underlying investments 18 billion nonasset backed securities remain outstanding april 2009 one csas representing 70 million 415 million terminated incurring loss fund support arrangements related risks discussed trading investments march 31 2009 2008 subject risk security price fluctuations summarized thousands approximately 1190 million 1698 million trading investments related longterm incentive compensation plans march 31 2009 2008 respectively offsetting liabilities fluctuation market value assets related liabilities material effect net income liquidity however may impact compensation expense corresponding offset nonoperating income trading investments 98 million 375 million march 31 2009 2008 respectively relate longterm incentive plans related liabilities completely offset due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income net income approximately 2073 million 1403 million trading assets march 31 2009 2008 respectively investments proprietary fund products investments fluctuations market value impact nonoperating income amounts fluctuations market value approximately 463 million 674 million proprietary fund products march 31 2009 2008 respectively offsetting compensation expense revenue share agreements fluctuations market value approximately 166 million march 31 2009 related minority interest consolidated investment funds investments proprietary fund products liquidated related fund establishes track record investors decision made longer pursue strategy remaining trading assets march 31 2008 include 1415 million investments issued sivs acquired liquidity funds subsidiary manages 820 million matured paid full may 2008 fair value trading assets fluctuated market changes impacted nonoperating income net income march 31 2009 securities issued sivs sold nontrading assets liabilities march 31 2009 2008 subject risk security price fluctuations summarized thousands previously discussed march 31 2009 effectively eliminated exposure sivs march 31 2009 recorded derivative liabilities fund support arrangements 206 million exposure limited approximately 415 million termination one fund support arrangements april 2009 70 million current exposure additional potential losses supported securities 345 million 139 million respectively valuation trading nontrading investments described within critical accounting policies heading valuation financial instruments elimination siv exposure balance sheet money market funds march 31 2009 substantially reduced sensitivity financial position market risk see notes 1 17 notes consolidated financial statements discussion derivatives liquidity fund support actions following summary effect 20 increase decrease market values financial instruments subject market valuation risks march 31 2009 1gains losses related certain investments deferred compensation plans proprietary fund products directly offset corresponding adjustment compensation expense related liability minority interest result 20 increase decrease unrealized market value financial instruments subject market valuation risks would result 408 million increase decrease pretax earnings respectively march 31 2009 foreign exchange sensitivity operate primarily united states provide services earn revenues incur expenses outside united states accordingly fluctuations foreign exchange rates currencies principally brazil united kingdom poland australia japan may impact comprehensive income net income certain subsidiaries entered forward contracts manage impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect comprehensive income net income liquidity interest rate risk exposure interest rate changes outstanding debt mitigated substantial portion debt fixed interest rates march 31 2009 2008 approximately 806 million 1061 million respectively outstanding floating rate debt subject fluctuations interest rates impact nonoperating income net income march 31 2009 estimate 1 change interest rates would result net annual change interest expense 81 million see note 7 notes consolidated financial statements additional disclosures regarding debt critical accounting policies accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following among current accounting policies involve significant estimates judgments revenue recognition vast majority revenues calculated percentage fair value aum underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager brokerdealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost designed approximate fair value vast majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs management fees aum fair values based unobservable inputs material march 31 2009 equity fixed income liquidity aum values aggregated 1269 billion 3576 billion 1479 billion respectively vast majority aum valued independent pricing services based upon observable market prices inputs believe market risk significant risk underlying valuation aum recent economic events financial market declines increased market price volatility however valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2009 less 2 total aum valued based unobservable inputs valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except longterm debt trading investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income comprehensive income depending underlying purpose instrument investments value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices evaluate nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined fiscal 2009 2008 entered various credit support arrangements certain liquidity funds managed subsidiary qualify derivative transactions fair values derivative instruments based managements estimates expected outcomes derived pricing data underlying securities andor detailed collateral analyses fiscal 2009 purchased subsequently sold supported securities issued sivs held liquidity funds effectively eliminating exposure sivs various support arrangements terminated accordance terms upon purchase march 31 2009 four capital support arrangements support investments nonasset backed securities remained outstanding derivative liability 206 million included current liabilities consolidated balance sheet derivative asset recorded march 31 2009 march 31 2008 457 million derivative assets included current assets 5517 million derivative liabilities included current liabilities consolidated balance sheet exposure derivative instruments based underlying securities values related gains losses may vary significantly relation recorded balances none derivative transactions designated hedge accounting defined sfas 133 accounting derivative instruments hedging activities related gains losses included fund support consolidated statement operations fiscal 2009 2008 trading nontrading investments illiquid privately held securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2009 2008 owned approximately 422 million 1566 million respectively trading nontrading financial investments valued assumptions estimates unobservable inputs march 31 2009 2008 also approximately 595 million 817 million respectively investments investment partnerships included assets consolidated balance sheets investments generally accounted cost equity method effective april 1 2008 adopted statement 157 fair value measurements sfas 157 defines fair value establishes framework measuring fair value increases disclosures fair value measurements sfas 157 defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date sfas 157 fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance sfas 157 establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category may include repurchase agreements fixed income securities certain proprietary fund products level 3 financial instruments values based unobservable inputs including little market activity category includes derivative assets liabilities related fund support arrangements investments partnerships limited liability companies private equity funds category may also include certain proprietary fund products redemption restrictions valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products valued net asset value nav determined fund administrator funds typically invested exchangetraded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchangetraded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 liquidity fund support taken form csas locs trs arrangement purchases securities funds fully described note 17 csas locs trs arrangement considered derivative assets liabilities accounting purposes representing companys rights obligations support fair value based principally value underlying securities substantially underlying securities supported securities purchased liquidity funds issued sivs active market fair value determined based evaluation issuer trust underlying collateral primarily comprised asset mortgage backed securities corporate bonds collateralized debt obligations instruments may financial guaranty insurance total siv securities owned supported liquidity funds prior sale siv securities 60 underlying trust collateral securities valued based prices well recognized third party pricing services utilize available market data 35 collateral securities valued based spreads benchmark debt instruments available prices less 5 collateral values based broker quotes security prices including prices underlying trust collateral securities whether direct market quotes adjusted comparable security prices broker quotes subject internal analyses consider market observations broker quotes tests substantiate fair values broker quotes used indicative firm tradable bids exclusive internal analytics generally obtain one price per instrument unless relying broker quotes generally seek use average least two quotes prices utilized underlying trust collateral securities incorporated nonperformance liquidity risks inherent securities considerations credit risk necessary relating trust issuers sivs estimating fair values sivrelated financial assets liabilities securities owned fund support derivatives assumed value related siv security equaled percentage share sum values underlying collateral securities plus cash assets held trust net reported trust liabilities following valuation approach assume siv trust distribute holders income returns received collateral securities direct price particular collateral security available price based upon review available information including prices securities believe comparable use professional judgment consider adjustments appropriate including example based nature collateral issue date determinations may reflect whole part market observations inherently subjective possible quantify impact changes assumptions credit risk material factor fair value related derivative liabilities among things majority liquidity fund support required cash collateral available cash cover uncollateralized positions valuation processes supported purchased sivissued securities inherently required managements judgment therefore related assets liabilities classified level 3 market changes affecting underlying collateral primary contributor changes fair values liquidity fund support assets liabilities related gains losses march 31 2009 approximately 1 total assets less 1 total liabilities meet definition level 3 transfers categories measured beginning period see note 3 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2009 follows identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weighted average cost capital takes consideration premium representing degree risk inherent asset fully described indefinitelife intangible assets goodwill project impact net client flows market appreciationdepreciation cash flows nearterm generally first five years based yearbyyear assessment considers current market conditions past experience relevant publicly available statistics projections discussions market experts beyond five years projections net client flows market performance migrate towards relevant longterm rates line results industry growth statistics believe growth assumptions reasonable given consideration multiple inputs including internal external sources described however continues significant volatility uncertainty markets assumptions subject change based fluctuations actual results market conditions goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events triggering event occurred perform detail tests include critical reviews significant assumptions determine intangible assets goodwill impaired minimum perform detail tests indefinitelife intangible assets goodwill annually december 31 amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates amortization periods appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows management contract intangible assets related retail separately managed accounts sold brokerdealer sponsored programs acquired cam transaction cam management contracts represented approximately 1283 million 69 total net amortizable intangible assets december 31 2008 remaining life approximately 9 years however experienced recent trend increased client outflows associated contracts addition changes primary underlying program sponsor announced march quarter expected contribute trend combination events caused us reduce remaining expected life approximately 40 5 years impact reduced aum levels combined shorter expected life recovery period resulted cumulative expected future cash flows fall carrying value asset discounted cash flow basis resulted impairment charge 72 million impairment charge cam management contracts represent approximately 52 million 52 total net amortizable intangible assets result significant client attrition related declines aum associated revised estimate remaining useful lives evaluation fiscal 2009 pcms asset management contracts indicated carrying value would fully recoverable based upon projected cash flows remaining acquired contracts discounted rate 148 value contracts determined impaired recognized charges remaining book value totaling 266 million fiscal 2009 current cash flow projections significantly lower previous projections result continued aum outflows decreased market value resulting part recent severe market declines estimated useful lives amortizable intangible assets currently range 1 9 years weightedaverage life approximately 5 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined based projected discounted cash flows two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names discounted projected cash flows used value intangible assets take consideration estimates profit margins growth rates includes estimates aum flows market expectations asset class equity fixed income liquidity discount rates asset determined impaired current implied fair value less recorded carrying value asset impairment exists difference current implied fair value carrying value asset reflected financial statements recognized expense period impairment determined temporary projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth estimated net client flows projected market performance contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows domestic mutual fund contracts acquired cam acquisition 2502 million permal fundsofhedge funds contracts 947 million account approximately 65 25 respectively indefinitelife intangible assets result dramatic changes market conditions fiscal year revised growth assumptions downward project contraction minimal growth domestic mutual fund contracts contraction permal contracts next two years cash flows domestic mutual fund contracts assumed five year average annual growth rate approximately 40 longterm annual rate approximately 75 thereafter cash flows permal contracts assumed five year average annual growth rate approximately 25 longterm annual rate approximately 80 thereafter believe growth assumptions reasonable given consideration multiple inputs including internal external sources described however continues significant volatility uncertainty markets assumptions subject change based fluctuations actual results market conditions projected cash flows domestic mutual funds permal funds discounted 137 147 respectively changes assumptions increased discount rate declining cash flows could result impairment assuming factors remain actual results changes assumptions domestic mutual fund permal fundofhedge funds contracts would cause cash flow projections longterm deviate 16 20 respectively previous projections discount rate would raised 15 17 respectively assets deemed impaired continued deterioration markets unfavorable factors reasonably possible actual cash flows either domestic mutual fund permal fund contracts could deviate projections 16 20 respectively approximate fair values assets exceed carrying values 4803 million 2400 million respectively trade names account less 2 indefinitelife intangible assets significant decrease pcms assets management related cash flows generated assessed values resulted full impairment 47 million pcm trade name asset fiscal 2009 assessment trade name fair value based discounted cash flow model applying aftertax royalty rate pcms expected future revenues using discount rate 148 longterm annual growth 5 although discounted cash flow model resulted immaterial assessed value based qualitative factors believed remaining amount impaired goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows similar techniques employed analyzing purchase price acquisition target allocations goodwill divisions changes management structure acquisitions dispositions based relative fair values businesses added sold divisions significant assumptions used assessing implied fair value reporting unit discounted cash flow method include projected cash flows generated reporting unit including profit margins expected current longterm cash flow growth rates discount rate used determine present value cash flows cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income liquidity investment manager reporting unit based upon among things historical experience expectations future market performance internal external sources impact net client flows market appreciationdepreciation cash flows projected nearterm generally first five years based yearbyyear assessment considers current market conditions experience relevant publicly available statistics projections discussions market experts actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows discount rates based appropriately weighted estimated costs debt capital estimate cost debt based published debt rates estimate cost capital based capital asset pricing model considers riskfree interest rate market risk size premiums peergroup betas unsystematic risk discount rates also calibrated based assessment relevant market values goodwill americas reporting unit principally originated acquisitions cam royce value reporting unit based projected net cash flows assets managed us mutual funds closed end funds proprietary funds addition separate account assets us managers goodwill international reporting unit principally originated acquisitions permal international cam businesses projected cash flows discounted 140 145 respectively americas international divisions determine present value cash flows march 31 2009 implied fair values exceed carrying values americas international divisions projected cash flows aggregate basis across asset classes americas division assumed five year average annual growth rate approximately 4 longterm annual growth rate approximately 10 projected cash flows aggregate basis across asset classes international division assumed five year average annual growth rate approximately 6 longterm annual growth rate approximately 10 cash flow growth 4 6 americas international respectively next five years based separate factors equity fixed income liquidity products equity product growth projections based historical recovery trends following prior recessionary periods context longterm growth experience current market conditions fixed income product growth projections based past experience primary fixed income manager current market influences relevant business combined basis equity fixed income product types projections rely expectation markets relevant products stabilize rebalancing fixed income equity products fiscal 2010 longterm growth 10 divisions based historical experience available historic market statistics believe growth assumptions reasonable given consideration multiple inputs including internal external sources described however continues significant volatility uncertainty markets assumptions subject change based fluctuations actual results market conditions assuming factors remain actual results changes assumptions americas international reporting units would cause cash flow projections longterm deviate 42 34 respectively previous projections discount rate would increase approximately 5 4 percentage points respectively goodwill considered impairment prior management structure related reporting units managed investments institutional wealth management recognized impairment charge 1161900 wealth management division third quarter fiscal 2009 severe market turmoil experienced december quarter significant impact wealth management division divisions aum division decreased 30 result net client outflows market depreciation result dramatic changes market conditions december quarter growth assumptions revised downward project contraction next two years applicable discount rate increased 125 147 based changes interest rates market risk factors combined impact factors decreased projected cash flows wealth management division 60 prior projections resulting impairment charge prior impairment charge majority goodwill division arose acquisition pcm projected cash flows wealth management division assumed five year average annual growth rate approximately 30 longterm annual growth rate approximately 80 compared prior average growth rates 73 100 respectively growth 3 next five years based current market conditions past experience market statistics prospects significant managers division projections relied expectation markets relevant products division stabilize fiscal 2011 actual results invariably differ assumptions impact could material financial statements goodwill residual value reporting unit identifiable assets reporting unit valued including management contract intangible assets goodwill determined impaired variances assumptions impact value reporting unit generally also impact values identifiable assets within reporting unit greater extent impact goodwill example growth assumptions wealth management division related intangible assets decreased periods 1 goodwill impairment charge recorded division would increased less 2 intangible assets within division would correspondingly decreased value likewise discount rate wealth management division related intangible assets 157 1 percentage point higher goodwill impairment charge recorded division would increased less 2 indicated performed annual assessment goodwill december 31 however given restructuring reporting units fourth quarter fiscal 2009 reassessed fair values former reporting units march 31 2009 results indicated fair values reporting unit exceeded respective carrying value march 31 2009 considering relevant prices legg masons common shares based dilutive shares outstanding inclusive shares issuable equity units market capitalization along reasonable control premium approximates carrying value acquisition typically premium paid current market prices publicly traded companies relates ability control operations acquired company recent market evidence regarding control factor suggests premiums 30 45 higher realistic common legg mason believes premiums reasonable estimation equity value market evidence published source included 150 transactions quarter ended september 30 2008 although limited transaction data subsequent september 30 2008 recent transactions support exceed high end range exclude consideration transactions unique circumstances find transaction values asset management firms relative respective book values vary significantly relative transaction values industries continued disruption depressed financial markets increase potential impairment goodwill andor intangible asset carrying values stockbased compensation stockbased compensation plans include stock options employee stock purchase plans performance share awards restricted stock awards deferred compensation payable stock compensation plans issue equity awards officers key employees fiscal 2007 adopted sfas 123 r sharebased payment related pronouncements using modifiedprospective method related transition election method compensation expense years ended march 31 2009 2008 2007 includes compensation cost nonvested sharebased awards grantdate fair value amortized respective vesting periods straightline method unamortized deferred compensation recognized reduction additional paidin capital also sfas 123 r cash flows related income tax deductions excess less stockbased compensation expense classified financing cash flows granted 15 million 09 million 10 million stock options including grants nonemployee directors fiscal 2009 2008 2007 respectively additional information sharebased compensation see note 12 notes consolidated financial statements determine fair value option grant using blackscholes optionpricing model except marketbased grants use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate except grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal vesting period options estimate volatility equally weighted historical prices stock period equal expected life option part upon implied volatility marketlisted options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different income taxes legg mason subsidiaries subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes management assesses likelihood able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision substantially legg masons deferred tax assets relate us united kingdom uk taxing jurisdictions although legg mason historically profitable current year siv losses resulted us tax loss fiscal 2009 believe siv losses incurred liquidity fund guarantees unique isolated therefore analysis legg masons core us earnings expected recur future exclude incurred siv losses march 31 2009 us deferred tax assets accumulated 13 billion realization expected require 57 billion future us earnings based estimates future taxable income using assumptions used goodwill impairment testing likely current tax benefits realizable valuation allowance necessary time extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals tax planning may enhance positions realization current tax benefits dependent significant tax strategies march 31 2009 uk deferred tax assets material event determine portion deferred tax assets realizable required establish valuation allowance charge income provision period determination made depending facts circumstances charge could material earnings included refundable income taxes consolidated balance sheet march 31 2009 603 million tax refunds expected fiscal year 2010 275 million 271 million 57 million relates net operating capital loss carrybacks refunds respectively calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements forwardlooking statements made report form 10k time may otherwise make public filings press releases statements management forwardlooking statements within meaning private securities litigation reform act 1995 including information relating anticipated growth revenues earnings per share anticipated changes business amount client aum anticipated future performance business anticipated future investment performance subsidiaries expected future net client cash flows anticipated expense levels changes expenses expected effects acquisitions expectations regarding financial market conditions words phrases may expects may affect may depend believes estimate project anticipate similar words phrases intended identify forwardlooking statements forwardlooking statements subject various known unknown risks uncertainties caution readers forwardlooking information provided behalf legg mason guarantee future performance actual results may differ materially forwardlooking information result various factors beyond control including limited discussed heading risk factors elsewhere report form 10k public filings press releases statements management due risks uncertainties factors caution person receiving forwardlooking information place undue reliance statements forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events future revenues may fluctuate due numerous factors total value composition aum volatility general level securities prices interest rates relative investment performance company sponsored investment funds asset management products compared competing offerings market indices investor sentiment confidence general economic conditions ability maintain investment management administrative fees current levels competitive conditions business ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred result changes number total employees competitive factors changes percentages revenues paid compensation reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill otherwise support investment products connection litigation regulatory proceedings effects acquisitions dispositions business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risks revenues net income critical accounting policies intangible assets goodwill previously discussed item 7aitem 7 managements discussion analysis financial condition results operations 5operating margin adjusted nongaap performance measure calculate dividing operating income adjusted exclude impact compensation expense gains losses investments made fund deferred compensation plans impact compensation expense gains losses seed capital investments affiliates revenue sharing agreements impairment charges ii operating revenues less distribution servicing expenses passed thirdparty distributors refer adjusted operating revenues see supplemental nongaap information item 7 managements discussion analysis financial condition results operations 6calculated based total debt percentage total capital total stockholders equity plus total debt march 31 item 7 managements discussion analysis financial condition results operations executive overview legg mason inc holding company subsidiaries collectively comprise legg mason global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally united states america united kingdom also offices australia bahamas brazil canada chile china dubai france germany italy japan luxembourg poland singapore spain taiwan operate one reportable business segment asset management manage business two divisions operating segments americas international primarily based geographic location advisor domicile fund families manage division management reports directly chief executive officer americas division consists usdomiciled fund families separate account businesses usbased investment affiliates domestic distribution organization similarly international division consists fund complexes distribution teams investment affiliates located outside us believe structure provides greater focus allows us maximize distribution efforts efficiently take advantage growth opportunities locally abroad operating revenues primarily consist investment advisory fees separate accounts funds distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution service fees received distributing investment products services providing support services investment portfolios generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level assets management thus affected factors securities market conditions ability attract maintain assets management key investment personnel investment performance assets management primarily vary period due inflows outflows client assets market performance client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services fees charge investment services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions fees charge investment services vary based upon factors type underlying investment product amount assets management type services investment objectives provided fees charged equity asset management services generally higher fees charged fixed income liquidity asset management services accordingly revenues affected composition assets management addition ordinary course business may reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets revenue sharing agreements certain subsidiaries retain different percentages revenues cover costs including compensation net income attributable legg mason inc operating margin compensation percentage operating revenues impacted based subsidiaries generate revenues change assets management one subsidiary dramatically different effect revenues earnings equal change another subsidiary significant component cost structure employee compensation benefits majority variable nature includes incentive compensation primarily based upon revenue levels profits next largest component cost structure distribution servicing fees primarily fees paid thirdparty distributors selling asset management products services largely variable nature certain operating costs fixed nature occupancy depreciation amortization fixed contract commitments market data communication technology services usually decline reduced levels business activity conversely usually rise proportionately increased business activity financial position results operations materially affected overall trends conditions financial markets particularly united states increasingly countries operate results individual period considered representative future results profitability sensitive variety factors including amount composition assets management volatility general level securities prices interest rates among things sustained periods unfavorable market conditions likely affect profitability adversely addition diversification services products offered investment performance access distribution channels reputation market attracting retaining key employees client relations significant factors determining whether successful attracting retaining clients recent economic downturn contributed significant contraction business although experienced improvement past year financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms brokerdealers commercial banks industry dramatically impacted recent economic downturn prior years consolidation financial services firms mergers acquisitions fiscal years ended march 31 2009 2008 fixed income markets endured substantial turmoil one effect turmoil liquidity markets many types asset backed commercial paper medium term notes issued structured investment vehicles sivs became substantially reduced result protect clients entered several arrangements fiscal 2009 2008 provide support liquidity funds managed subsidiary invested siv securities arrangements remaining march 31 2010 industry operate also subject extensive regulation federal state foreign laws like firms impacted regulatory legislative changes responding changes required us incur costs continue impact profitability references fiscal 2010 2009 2008 refer fiscal year ended march 31 year terms us company refer legg mason business environment results operations financial environment globally united states rebounded fiscal 2010 challenging market conditions persisted throughout fiscal year due uncertainties surrounding regulatory reform mixed economic data equity markets increased due steady improvement consumer confidence stabilization still elevated unemployment rates improved performance corporate earnings across many sectors fiscal 2010 federal reserve board held discount rate 025 lowest history results positively impacted many factors cost saving measures began last fiscal year financial environment operate continues challenging moving fiscal 2011 cannot predict uncertainties impact companys results three major us equity market indices well barclays capital us aggregate bond index barclays capital global aggregate bond index increased significantly fiscal year illustrated table 1dow jones industrial average trademark dow jones company affiliated legg mason 2sp trademark standard poors division mcgrawhill companies inc affiliated legg mason 3nasdaq trademark nasdaq stock market inc affiliated legg mason 4barclays capital us aggregate bond index barclays capital global aggregate bond index trademarks barclays capital affiliated legg mason following table sets forth periods indicated amounts consolidated statements operations percentage operating revenues increase decrease item percentage amount previous period nmnot meaningful 1calculated based change actual amounts fiscal years percentage prior year amount fiscal 2010 compared fiscal 2009 financial overview net income attributable legg mason inc year ended march 31 2010 totaled 2044 million 132 per diluted share compared net loss attributable legg mason inc 197 billion 1399 per diluted share prior year increase primarily due impact 14 billion losses net income tax benefits compensation related adjustments related elimination exposure sivs liquidity funds managed subsidiary prior fiscal year impact impairment charges related goodwill intangible assets primarily former wealth management division see note 5 notes consolidated financial statements 8634 million net income tax benefits recorded prior fiscal year also contributed increase cash income adjusted see supplemental nongaap financial information 3813 million 245 per diluted share compared cash loss adjusted 12 billion 847 per diluted share prior year increase primarily due impact 17 billion net realized losses sale siv securities prior fiscal year operating margin increased 122 199 prior year primarily due impact impairment charges related goodwill intangible assets recorded prior fiscal year operating margin adjusted see supplemental nongaap financial information decreased 206 238 prior year assets management components changes assets management aum billions years ended march 31 follows 1subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2includes impact foreign exchange aum march 31 2010 685 billion increase 52 billion 8 march 31 2009 increase aum attributable market appreciation 134 billion approximately 6 resulted impact foreign currency exchange fluctuation partially offset net client outflows 82 billion majority outflows fixed income 64 billion 78 outflows followed equity outflows liquidity outflows 15 billion 3 billion respectively majority fixed income outflows products managed western asset management company western asset brandywine global investment management llc brandywine experienced past investment underperformance although performance improved significantly fiscal 2010 experienced outflows fixed income asset class since fiscal 2008 equity outflows primarily experienced products managed clearbridge advisors llc clearbridge batterymarch financial management inc batterymarch permal group ltd permal legg mason capital management inc lmcm due part investment performance issues experienced net equity outflows since fiscal 2007 although recent performance improved significantly fiscal 2010 rate outflows asset class generally lower recent quarters generally earn higher fees profits equity aum outflows asset class negatively impact revenues net income would outflows asset classes investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds manage may redeem investments funds time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients thirdparty distributors relationships loss key investment management personnel financial market performance effective fiscal 2010 alternative investment products classified investment funds reporting purposes prior period amounts reclassified conform current period presentation aum asset class aum asset class billions march 31 follows component changes aum asset class billions fiscal year ended march 31 2010 follows average aum asset class billions year ended march 31 follows aum division aum division billions march 31 follows component changes aum division billions year ended march 31 2010 follows investment performance1 investment performance assets management year ended march 31 2010 improved compared relevant benchmarks prior year although unemployment rate remains high us economy continues slowly show signs recovery strong rebound corporate earnings improvements existing home sales consumer spending stabilization financial services industry helped restore level investor confidence however uncertainty markets remains best evidenced may 6 2010 intraday selloff subsequent rebound concerns regarding credit quality certain european nations government stimulus initiatives continue globally debates inflation deflation loom march 31 2010 trailing 1year 3year 5year 10year periods approximately 49 61 72 86 respectively marketed equity composite2 assets outpaced benchmarks march 31 2009 trailing 1year 3year 5year 10year periods approximately 49 53 58 88 respectively marketed equity composite assets outpaced benchmarks fixed income markets government yields continued rise investors grew concerned need finance growing federal deficit demand government bonds decreased due investors returning appetite risk sector spreads declined past year investors returned riskier securities highyield bonds emerging market debt securities investment grade corporate bonds delivered strongest performance record 2000 basis points excess returns treasuries 2009 1index performance section includes reinvestment dividends capital gains 2a composite aggregation discretionary portfolios separate accounts investment funds single group represents particular investment objective strategy asset managers specific guidelines including portfolios marketed composites assets management managed accordance guidelines included composite march 31 2010 2009 87 85 equity assets management respectively period 82 84 fixed income assets management respectively marketed composites 1year period treasury yield curve remains historically steep federal reserve continues keep federal funds close 0 worst performing fixed income sector government bonds measured barclays us government bond returning 370 contrast high yield bonds returned 5821 2009 march 31 2010 trailing 1year 3year 5year 10year periods approximately 88 40 50 88 respectively marketed fixed income composite assets outpaced benchmarks march 31 2009 trailing 1year 3year 5year 10year periods approximately 31 12 32 17 respectively marketed fixed income composite assets outpaced benchmarks march 31 2010 trailing 1year 3year 5year 10year periods 62 68 70 80 respectively us longterm mutual fund3 assets outpaced lipper category average march 31 2009 trailing 1year 3year 5year 10year periods 43 52 47 75 respectively us longterm mutual fund3 assets outpaced lipper category average march 31 2010 trailing 1year 3year 5year 10year periods 51 63 65 78 respectively us equity mutual fund3 assets outpaced lipper category average march 31 2009 trailing 1year 3year 5year 10year periods 47 60 49 76 respectively us equity mutual fund3 assets outpaced lipper category average march 31 2010 trailing 1year 3year 5year 10year periods 81 78 83 87 respectively us fixed income mutual fund3 assets outpaced lipper category average march 31 2009 trailing 1year 3year 5year 10year periods 38 41 45 72 respectively us fixed income mutual fund3 assets outpaced lipper category average revenue division operating revenues division millions years ended march 31 follows decrease operating revenues americas division primarily due decreased mutual fund advisory fees assets managed western asset lmcm clearbridge decreased separate account advisory fees assets managed western asset clearbridge decreased distribution service fee revenues us retail equity funds decrease operating revenues international division primarily due decreased fund revenues permal results operations operating revenues total operating revenues year ended march 31 2010 26 billion 22 34 billion prior year primarily result 17 decrease average aum shift mix average aum higher fee equity assets greater percentage liquidity fixed income assets also contributed revenue decline investment advisory fees separate accounts decreased 2024 million 20 8148 million decrease 1043 million result lower average equity assets clearbridge private capital management lp pcm lmcm brandywine 955 million result lower average fixed income assets managed western asset 3source lipper inc includes openend closedend variable annuity funds march 31 2010 2009 us longterm mutual fund assets represented data accounted 16 12 respectively total assets management performance us longterm mutual fund assets included marketed composites investment advisory fees funds decreased 4691 million 26 14 billion decrease 3092 million result lower average equity assets managed primarily permal lmcm clearbridge 731 million result fee waivers related liquidity funds managed western asset primarily maintain certain yields investors 669 million result lower average liquidity assets managed western asset performance fees increased 310 540 million 715 million fiscal 2010 driven fees earned assets managed western asset permal distribution service fees decreased 21 3753 million primarily result decline average mutual fund aum impact increased fee waivers related liquidity funds managed western asset operating expenses result substantial declines revenues fiscal 2009 due challenging market conditions actions taken reduce corporate cost structure costsaving measures primarily included reductions fulltime employees discretionary incentive compensation business support functions significant reductions utilization consultants technology projects substantial curtailment promotional costs operating expenses fiscal 2010 continued benefit cost reduction initiatives implemented fiscal 2009 many significant actions implemented december 2008 quarter discussion operating expenses identifies amount variance attributable cost savings achieved fiscal 2010 2009 applicable compensation benefits decreased 2 11 billion decrease driven 1391 million decrease revenue sharebased compensation primarily resulting lower revenues fiscal 2010 impact offset part reductions operating expenses revenue sharebased affiliates net impact workforce reductions lowered compensation approximately 275 million reductions substantially offset increase deferred compensation revenue sharebased incentive obligations 1503 million resulting market gains assets invested deferred compensation plans seed capital investments offset gains nonoperating income expense compensation percentage operating revenues increased 422 337 prior fiscal year primarily result compensation increases related unrealized market gains assets invested deferred compensation plans investments proprietary fund products impact fixed compensation costs directly vary revenues distribution servicing expenses decreased 29 6919 million primarily result decrease average aum certain products pay fees thirdparty distributors impact liquidity fund fee waivers reduce amounts paid distributors communications technology expense decreased 13 1631 million primarily result cost savings initiatives contributed 136 million reduction technology consulting fees telecommunications market data services reductions printing costs lower technology depreciation expense resulted full depreciation certain assets prior fiscal 2010 77 million 45 million respectively also contributed decrease occupancy expense decreased 25 1570 million primarily due recognition 701 million lease charges related office vacancies recorded prior year offset part 193 million charge primarily resulting subleasing space corporate headquarters fiscal 2010 amortization intangible assets decreased 38 228 million primarily due impact intangible asset impairments fiscal 2009 reduced amortization expense 135 million impairment charges 13 billion fiscal 2009 approximately 12 billion total impairment charges related goodwill intangible assets former wealth management division result significant declines aum projected cash flows within division remaining 146 million related certain acquired management contracts result accelerated rate client attrition impairment trade name see note 5 notes consolidated financial statements discussion impairment charges expenses decreased 144 million 1676 million primarily result cost savings initiatives contributed reductions travel entertainment costs 156 million advertising costs 77 million decreases partially offset increase 115 million charges related impact investor settlement trading errors may 2010 announced plan streamline business model drive increased profitability growth includes 1 transitioning certain shared services investment affiliates closer actual client relationships delivered greater effectiveness 2 americas distribution group sharing revenue retailbased aum growth plan involves headcount reductions operations technology administrative areas corporate location may partially offset headcount increases affiliates ultimately enable us eliminate portion corporate office space dedicated operations technology employees project initiative result annual cost savings approximately 130 150 million expect achieve savings run rate basis fourth quarter fiscal 2012 initiative projected involve restructuring transitionrelated costs primarily include transition payments affiliates primarily compensation temporarily offset cost absorbing services charges severance retention incentives may also include costs early contract terminations asset disposals total expected costs range 190 210 million incurred next two fiscal years however achievement projected cost savings margin improvements well amount restructuring transitionrelated costs subject many factors including market conditions factors affecting financial results company affiliates rate aum growth addition business dynamic may require us incur incremental expenses timetotime grow better support business nonoperating income expense interest income decreased 87 74 million primarily result decline average interest rates lower average investment balances reduced interest income 362 million 129 million respectively interest expense decreased 31 1263 million primarily result exchange equity units august 2009 reduced interest expense 365 million 246 million decrease due repayment 250 million outstanding borrowings revolving credit facility march 2009 repayment 675 senior notes july 2008 repayment 550 million outstanding balance 700 million term loan january 2010 well lower interest rates paid term loan fiscal 2010 decreases partially offset increase 50 million amortization debt issuance costs primarily related early repayment 700 million term loan due increases net asset values previously supported liquidity funds fiscal 2010 reversed unrealized noncash losses recorded fiscal 2009 206 million related liquidity fund support arrangements offshore funds involve sivs fiscal 2009 fund support losses 17 billion primarily result siv price deterioration elimination siv exposure see note 17 notes consolidated financial statements additional information fund support nonoperating income expense increased 2135 million income 1043 million primarily result increase 1337 million unrealized market gains assets invested deferred compensation plans substantially offset corresponding compensation increases discussed 911 million unrealized market gains investments proprietary fund products partially offset corresponding compensation increases discussed increases offset part impact 220 million charges related exchange substantially equity units fiscal 2010 income tax benefit provision income taxes 1187 million compared benefit 12 billion prior year primarily result increased earnings due absence losses related liquidity fund support goodwill impairment charges effective tax rate 360 compared benefit rate 384 prior year current year rate beneficially impacted lower effective tax rates foreign jurisdictions prior years benefit rate driven impact sivrelated charges lower state tax benefits impact nondeductible portion goodwill impairment charge offset tax benefits associated restructuring foreign subsidiary supplemental nongaap financial information supplemental information providing performance measures based methodologies generally accepted accounting principles nongaap cash income cash income adjusted operating margin adjusted management uses benchmarks evaluating comparing periodtoperiod operating performance legg mason inc subsidiaries cash income loss adjusted define cash income net income loss attributable legg mason inc plus amortization deferred taxes related intangible assets goodwill imputed interest tax benefits contingent convertible debt less deferred income taxes goodwill intangible asset impairment define cash income adjusted cash income plus less net money market fund support losses gains impairment charges less net losses sale underlying siv securities believe cash income cash income adjusted provide good representations operating performance adjusted noncash acquisition related items indicators value facilitate comparison results asset management firms engaged money market fund support transactions issued contingent convertible debt made significant acquisitions including related goodwill intangible asset impairments also believe cash income cash income adjusted important metrics estimating value asset management business measures provided addition net income substitute net income may comparable nongaap performance measures including measures cash earnings cash income companies cash income cash income adjusted liquidity measures used place cash flow measures determined gaap legg mason considers cash income cash income adjusted useful investors important metrics measuring economic performance asset management companies indicators value facilitate comparisons legg masons operating results asset management firms engaged money market fund support transactions significant acquisitions issued contingent convertible debt calculating cash income add impact amortization intangible assets acquisitions management contracts net income reflect fact noncash expenses distort comparisons legg masons operating results asset management firms engaged significant acquisitions deferred taxes indefinitelife intangible assets goodwill represent actual tax benefits realized gaap absent impairment charge disposition related business actually receive tax benefits indefinitelife intangibles goodwill time add net income calculation cash income conversely subtract realized income tax benefits impairment charges recognized gaap also add back imputed interest contingent convertible debt noncash expense well actual tax benefits related contingent convertible debt realized gaap calculating cash income adjusted add subtract net money market fund support losses gains net losses sale underlying siv securities applicable impairment charges cash income reflect charges distort comparisons legg masons operating results prior periods results asset management firms engaged money market fund support transactions significant acquisitions including related impairments disposition impairment charge indefinitelife intangibles goodwill occur impact cash income cash income adjusted may distort actual changes operating performance value firm also realized losses money market fund support transactions reflective changes operating performance value firm accordingly monitor items related impact including taxes cash income cash income adjusted ensure appropriate adjustments explanations accompany disclosures although depreciation amortization fixed assets noncash expenses add charges calculating cash income cash income adjusted charges related assets ultimately require replacement reconciliation net income loss attributable legg mason inc cash income loss adjusted thousands except per share amounts follows 1includes related adjustments operating expenses applicable income tax provision benefit increase cash income loss adjusted primarily due impact net realized losses 17 billion sale siv securities prior fiscal year operating margin adjusted calculate operating margin adjusted dividing operating income adjusted exclude impact compensation expense gains losses investments made fund deferred compensation plans impact compensation expense gains losses seed capital investments affiliates revenue sharing agreements impairment charges ii operating revenues less distribution servicing expenses passed thirdparty distributors refer adjusted operating revenues compensation items removed operating income calculation offset equal amount nonoperating income expense thus impact net income use adjusted operating revenues calculation show operating margin without distribution revenues passed third parties direct cost selling products legg mason believes operating margin adjusted useful measure performance provides measure core business activities excluding items impact net income indicates legg masons operating margin would without distribution revenues passed third parties direct cost selling products measure provided addition companys operating margin calculated gaap substitute calculations margins gaap may comparable nongaap performance measures including measures adjusted margins companies operating margin adjusted relevant indicator operating performance management utilizes longer present pretax profit margin adjusted fiscal 2009 compared fiscal 2008 financial overview net loss attributable legg mason inc year ended march 31 2009 totaled 197 billion 1399 per diluted share compared net income attributable legg mason inc 2636 million 183 per diluted share prior year fiscal 2009 eliminated exposure sivs liquidity funds managed subsidiary purchasing subsequently selling reimbursing funds portion losses incurred selling securities issued sivs held liquidity funds held us majority siv securities supported capital support arrangements letters credit total return swap trs prior purchase transactions along charges related remaining capital support arrangements support securities sivs resulted aggregate charges fiscal year 23 billion also fiscal 2009 impairment charges 13 billion recorded related goodwill intangible assets primarily former wealth management division result declines aum projected cash flows affiliates division reduction value certain acquired management contract intangible assets related trade name cash loss adjusted see supplemental nongaap financial information 12 billion 847 per diluted share compared cash income adjusted 8795 million 611 per diluted share prior year decrease primarily due net realized losses sale siv securities 17 billion fiscal 2009 operating margin declined 199 227 fiscal 2008 primarily due impairment charges related goodwill intangible assets recorded fiscal 2009 operating margin adjusted declined 238 355 fiscal 2008 assets management components changes aum billions years ended march 31 follows 1subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2includes impact foreign exchange aum march 31 2009 6324 billion decrease 3177 billion 33 march 31 2008 decrease aum attributable net client outflows 159 billion market depreciation 158 billion approximately 10 related impact foreign currency exchange fluctuation net client outflows asset classes majority outflows fixed income 89 billion 56 outflows followed equity outflows liquidity outflows 47 billion 23 billion respectively majority fixed income outflows products managed western asset experienced investment performance issues particularly fiscal 2009 equity outflows primarily experienced key equity products managed clearbridge lmcm permal effective fiscal 2010 alternative investment products classified investment funds reporting purposes prior period amounts reclassified conform current period presentation aum asset class aum asset class billions march 31 follows component changes aum asset class billions fiscal year ended march 31 2009 follows average aum asset class billions year ended march 31 follows aum division aum division billions march 31 follows component changes aum division billions year ended march 31 2009 follows investment performance4 fiscal 2009 characterized significant volatility erratic unprecedented price movements across variety markets significantly impacted failure major financial institutions freeze credit markets unprecedented government intervention addition downturn housing led us broader slowdown set financial turmoil result financial stocks led equity markets lower sp 500 financials index 63 compared broader sp 500 index dropped 38 march 31 2009 trailing 1year 3year 5year 10year periods approximately 49 53 58 88 marketed equity composite5 assets outpaced benchmarks respectively march 31 2008 trailing 1year 3year 5year 10year periods approximately 53 49 94 marketed equity composite assets outpaced benchmarks respectively fixed income markets economic crisis deepened governments numerous actions laid foundation recovery causing investor confidence improve modestly late march 2009 quarter fiscal stimulus package designed aid economy governments intention issue public debt financing caused yields rise quarter 1year period treasury yields decreased significantly longterm rates increased resulting steeper yield curve addition worst performing sectors home equity assetbacked securities investment grade corporate securities measured barclays abs home equity index returning 35 barclays us corporate investment grade index returning 7 1year period march 31 2009 trailing 1year 3year 5year 10year periods approximately 31 12 32 17 marketed fixed income composite assets outpaced benchmarks respectively march 31 2008 trailing 1year 3year 5year 10year periods approximately 4 21 54 74 marketed fixed income composite assets outpaced benchmarks respectively march 31 2009 trailing 1year 3year 5year 10year periods 43 52 47 75 us longterm mutual fund6 assets outpaced lipper category average respectively march 31 2008 trailing 1year 3year 5year 10year periods 41 45 57 85 us longterm mutual fund6 assets outpaced lipper category average respectively march 31 2009 trailing 1year 3year 5year 10year periods 47 60 49 76 us equity mutual fund6 assets outpaced lipper category average respectively march 31 2008 trailing 1year 3year 5year 10year periods 45 50 91 us equity mutual fund6 assets outpaced lipper category average respectively march 31 2009 trailing 1year 3year 5year 10year periods 38 41 45 72 us fixed income mutual fund6 assets outpaced lipper category average respectively march 31 2008 trailing 1year 3year 5year 10year periods 33 34 67 68 us fixed income mutual fund6 assets outpaced lipper category average respectively 4index performance section includes reinvestment dividends capital gains 5a composite aggregation discretionary portfolios separate accounts investment funds single group represents particular investment objective strategy asset managers specific guidelines including portfolios marketed composites assets management managed accordance guidelines included composite march 31 2009 85 equity assets management 84 fixed income assets management marketed composites march 31 2008 86 equity assets management 83 fixed income assets management marketed composites 6source lipper inc includes openend closedend variable annuity funds march 31 2009 2008 us longterm mutual fund assets represented data accounted 12 14 respectively total assets management performance us longterm mutual fund assets included marketed composites revenue division operating revenues division millions years ended march 31 follows decrease operating revenues americas division primarily due decreased mutual fund advisory fees assets managed lmcm clearbridge royce decreased separate account advisory fees assets managed pcm clearbridge lmcm decreased distribution service fee revenues us retail equity funds decrease operating revenues international division primarily due decline fund revenues performance fees permal lower separate account advisory fees assets managed western asset decreased distribution service fee revenues international balanced fixed income funds results operations operating revenues total operating revenues year ended march 31 2009 34 billion 28 46 billion prior year primarily result 18 decrease average aum due decline average equity assets approximately 38 fixed income assets approximately 12 shift mix aum higher fee equity assets greater percentage fixed income liquidity assets also contributed revenue decline operating revenues also negatively impacted decline performance fees approximately 1153 million 87 investment advisory fees separate accounts decreased 4473 million 31 10 billion decrease 2731 million result lower average equity assets pcm clearbridge lmcm brandywine 809 million result lower average fixed income assets managed western asset 439 million result sale legg mason private portfolio group lmppg business see note 2 notes consolidated financial statements description sale investment advisory fees funds decreased 4834 million 21 18 billion decrease approximately 450 million result lower average equity assets managed primarily lmcm clearbridge permal royce approximately 76 million result lower average fixed income assets managed western asset offset approximately 42 million result increased liquidity assets managed primarily western asset performance fees decreased 87 1153 million 174 million fiscal 2009 primarily result decrease performance fees earned alternative investment products permal distribution service fees decreased 31 4750 million primarily result decline average aum retail share classes domestic international equity funds resulted decrease 1767 million operating expenses compensation benefits decreased 28 11 billion decrease primarily driven 341 million decrease revenue sharebased compensation related lower revenues fiscal 2009 impact cost savings initiatives reductions headcount discretionary incentives discretionary compensation lowered compensation approximately 86 million decrease deferred compensation obligations approximately 59 million resulting market losses invested assets deferred compensation plans largely offset losses nonoperating income expense decreases offset part lower incentive compensation reductions 40 million related charges provide support certain liquidity funds held sivissued securities compensation percentage operating revenues decreased slightly 337 339 prior fiscal year compensation reductions related unrealized market losses deferred compensation plans substantially offset fixed compensation costs administrative sales personnel vary revenues distribution servicing expenses decreased 24 9700 million primarily result decrease average aum certain products pay fees thirdparty distributors communications technology expense decreased 2 1883 million primarily result cost savings initiatives led 113 million decrease technology consulting fees offset part 41 million increase market data costs services previously included expenses 32 million increase depreciation expense related investment management infrastructure occupancy expense increased 62 2095 million primarily result lease reserves related office vacancies totaling 701 million accelerated depreciation assets vacated space 90 million amortization intangible assets decreased 36 365 million primarily result sale lmppg business reduced amortization expense 106 million impact impairment intangible assets fiscal year 2008 reduced amortization expense 66 million impairment charges increased 13 billion approximately 12 billion total impairment charges relate goodwill intangible assets former wealth management division result significant declines aum reduction projected cash flows division remaining 146 million relates certain acquired management contracts result accelerated rate client attrition related trade name see note 5 notes consolidated financial statements discussion impairment charges expenses decreased 278 million 1821 million primarily result cost savings initiatives resulted reduced travel entertainment costs 114 million lower professional fees 72 million lower advertising costs 54 million addition sale lmppg overlay implementation business eliminated support costs approximately 5 million nonoperating income expense interest income decreased 27 563 million primarily result decline average interest rates earned investment balances decreased interest income 421 million offset part higher average investment account balances due proceeds issuance debt increased interest income 253 million interest expense increased 105 1828 million result higher debt levels raised 115 billion may 2008 issuing equity units 125 billion january 2008 issuing 25 convertible senior notes resulted increase approximately 1089 million interest expense 258 million relates impact full year imputed interest 25 convertible senior notes increases offset part impact repayment 425 million principal amount 675 senior notes july 2008 lower interest rates paid term loan together resulted decrease 286 million fund support losses increased 17 billion primarily result continued siv price deterioration elimination siv exposure see note 17 notes consolidated financial statements additional information nonoperating income expense decreased 1160 million loss 1092 million primarily result increase 583 million unrealized market losses assets held deferred compensation plans offset corresponding compensation reductions discussed 331 million unrealized market losses investments proprietary fund products income tax benefit income tax benefit 12 billion compared income tax expense 1735 million prior year primarily result losses related liquidity fund support charges impairment goodwill intangible assets effective tax rate benefit 384 current year compared 397 provision prior year current year benefit rate primarily driven impact sivrelated charges lower state tax benefits addition current year includes approximately 80 million tax benefits associated restructuring foreign subsidiary offset impact nondeductible portion goodwill impairment charge supplemental nongaap financial information cash income adjusted reconciliation net income loss attributable legg mason inc cash income loss adjusted thousands except per share follows 1includes related adjustments operating expenses applicable income tax provision benefit decrease cash income adjusted primarily due net realized losses sale siv securities fiscal 2009 operating margin adjusted liquidity capital resources primary objective capital structure appropriately support business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may timetotime involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt assets consist primarily intangible assets cash equivalents goodwill investment securities investment advisory related fee receivables assets principally funded equity capital longterm debt results operations march 31 2010 cash total assets longterm debt stockholders equity 15 billion 86 billion 12 billion 58 billion respectively following table summarizes consolidated statements cash flows years ended march 31 millions cash flows operating activities 14277 million fiscal 2010 compared cash flows 4098 million prior fiscal year increase operating cash flows primarily attributable approximately 104 billion income tax refunds received fiscal 2010 cash outflows investing activities fiscal 2010 2767 million primarily attributable cash payments 180 million made connection acquisition permal payments fixed assets 841 million principally associated relocation corporate headquarters partially offset fund support collateral received 389 million due amendment termination expiration certain capital support agreements cash outflows financing activities 7467 million primarily due repayment january 2010 remaining 550 million outstanding balance 700 million 5year term loan 1350 million cash consideration paid equity units exchange offer described payment cash dividends expect next twelve months operating activities adequate support operating cash needs received approximately 580 million tax refunds june 2009 quarter primarily attributable tax benefits utilization 16 billion realized losses incurred fiscal 2009 sale securities issued sivs federal legislation enacted november 2009 extend net operating loss carryback period two five years enabled us utilize additional 13 billion net operating loss deductions result received additional 459 million tax refunds january 2010 federal net operating loss carryforwards 359 million future deductions purchased goodwill intangible assets aggregating approximately 35 billion reduce future taxable income related us federal tax payments may elect utilize available resources number activities including share repurchases seed capital investments new products repayment outstanding debt acquisitions fiscal 2008 initiated plan repatriate accumulated earnings approximately 225 million anticipated earnings would used contingent acquisition payment us former owners permal repatriated approximately 36 million funds fiscal 2008 intend repatriate remaining earnings order create lowertaxed foreign source income utilize foreign tax credits may otherwise expire unutilized repatriation beyond 225 million foreign earnings contemplated described currently project available cash flows operating activities sufficient fund liquidity needs also currently approximately 1 billion free cash excess working capital requirements portion intend utilize repurchase common stock accordingly currently expect raise additional debt equity financing next twelve months however assurances expectations projections could prove incorrect currently unexpected events may occur require additional liquidity acquisition opportunity market conditions might significantly worsen affecting results operations generation available cash occur would likely seek manage available resources taking actions additional costcutting reducing expected expenditures investments selling assets investment securities repatriating earnings foreign subsidiaries modifying arrangements affiliates andor employees types actions prove insufficient may seek raise additional equity debt connection announced plan streamline business model expect incur restructuringand transitionrelated costs range 190 210 million next two fiscal years portion restructuring transitionrelated costs approximately 15 paid shares restricted stock acceleration equity awards expect approximately 60 costs incurred end fiscal 2011 remainder fiscal 2012 project initiative result annual cost savings approximately 130 150 million expect achieve savings run rate basis fourth quarter fiscal 2012 excluding costs incurred achieve savings financing transactions table reflects primary sources financing thousands march 31 2010 may 2008 issued 23 million equity units 115 billion 50 million used pay issuance costs unit consists 5 interest 1000 principal amount 56 senior notes due june 30 2021 purchase contract purchase varying number shares common stock june 30 2011 notes purchase contracts separate distinct instruments terms structured simulate conversion debt equity potentially remarketed debt approximately three years issuance holders also receive quarterly contract adjustment payment purchase contract annual rate 14 commitment amount required pledge interests senior notes us collateral purchase commitment net proceeds equity units offering approximately 111 billion used general corporate purposes primarily purchase siv securities liquidity funds managed subsidiary repayment outstanding debt september 2009 quarter completed exchange offer equity units form corporate units order increase equity capital levels reduce amount outstanding debt related interest expense exchanged 91 outstanding corporate units 08881 share common stock 625 cash per corporate unit equating 186 million shares legg mason common stock 1350 million cash including cash paid lieu fractional shares transaction costs transaction increased interest coverage ratio bank credit facilities result lower interest expense connection transaction incurred transaction costs approximately 22 million 157 million cash january 2008 increased capital base 125 billion sale 25 convertible senior notes proceeds strengthened balance sheet provided additional liquidity used general corporate purposes including purchase siv securities liquidity funds senior notes bear interest 25 payable semiannually cash accreting carrying value principal amount maturity using imputed interest rate 65 effective borrowing rate nonconvertible debt time issuance expected life seven years resulting additional interest expense fiscal 2010 2009 approximately 344 million 323 million respectively connection financing entered economic hedging transactions increase effective conversion price notes hedging transactions net cost us 83 million paid proceeds notes transactions closed january 31 2008 november 2007 borrowed aggregate 500 million unsecured revolving credit facility general corporate purposes facility scheduled mature october 14 2010 however fiscal 2010 credit agreement amended extend maturity date february 11 2013 facility may prepaid time contains customary covenants default provisions january 2008 amended credit agreement increase maximum amount may borrow 500 million 1 billion march 2009 repaid 250 million outstanding borrowings credit facility amended credit agreement decrease maximum amount may borrow 1 billion 500 million modified covenants february 2010 amended credit agreement extend expiration commitments maturity date loans discussed modified covenants discussed fiscal 2009 2008 issued approximately 036 million 553 million common shares respectively upon conversion approximately 036 553 shares respectively convertible preferred stock issued acquisition citigroups asset management business fiscal 2006 fourth quarter fiscal 2008 repurchased 25 shares convertible 25 million common shares convertible preferred stock approximately 180 million cash using capital raised sale 25 convertible senior notes discussed october 2005 borrowed 700 million syndicated fiveyear unsecured floatingrate term loan agreement primarily fund cash portion purchase price citigroup transaction effective closing citigroup transaction entered 400 million threeyear amortizing interest rate swap hedge portion 700 million floating rate term loan fixed rate 49 march 2007 quarter swap began unwind accordance terms repaid corresponding 50 million debt fiscal 2008 repaid 100 million debt swap fully matured december 2008 fiscal 2010 repaid remaining 550 million outstanding balance debt agreements entered part january 2008 issuance 125 billion 25 convertible senior notes prevent us incurring additional debt exceptions debt ebitda ratio defined documents exceeds 25 order complete may 2008 issuance equity units received waiver covenant prevents us issuing 250 million additional debt time debt ebitda ratio exceeds 25 may subject limited exceptions incur 250 million new indebtedness substantially reduced outstanding indebtedness experience increase trailing twelve month ebitda march 31 2010 financial covenants bank agreements include maximum debt ebitda ratio 25 minimum ebitda interest expense ratio 40 maximum debt ebitda ratio decreased 30 25 february 2010 amendment february 2010 maximum debt ebitda ratio also revised reduce minimum amount unrestricted cash deducted outstanding debt calculating ratio covenant 500 million 375 million debt defined include obligations borrowed money excluding debt incurred equity units offering nonrecourse debt capital leases net debt covenants debt reduced amount unrestricted cash excess 375 million discussed ebitda defined consolidated net income plusminus tax expense interest expense depreciation amortization intangibles extraordinary expenses losses noncash charges 30 billion realized losses resulting liquidity fund support march 31 2010 debt ebitda ratio 09 ebitda interest expense ratio 74 maintained compliance covenants times fiscal 2010 net income significantly declines spend available cash may impact ability maintain compliance covenants determine compliance covenants may pressure may elect take number actions including reducing expenses order increase ebitda use available cash repay portion 250 million outstanding debt subject covenants seek negotiate lenders modify terms restructure debt anticipate available cash repay bank debt necessary using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments outstanding debt currently rated investment grade three rating agencies moodys investor services moodys standard poors rating services standard poors fitch ratings current moodys rating baa1 stable outlook current standard poors rating bbb negative outlook current fitch rating bbb stable outlook event downgrades moodys andor standard poors interest rate revolving line credit may increase effective november 1 2005 acquired 80 outstanding equity permal concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares resulting legg mason owning 100 outstanding voting common stock permal right purchase preference shares four years subsequent closing right exercised holders equity interests right require us purchase interests general time frame approximately consideration maximum aggregate price including earnout payments related purchase based upon future revenue levels equity interests permal 1386 billion excluding acquisition costs dividends fiscal 2008 payments 240 million made former owners permal representing earnout payments based upon permals revenues second anniversary date purchase 375 preference shares 208 million paid cash balance common stock fiscal 2010 paid aggregate 171 million cash acquire remaining 625 outstanding preference shares also elected purchase 9 million rights sellers preference shares receive earnout payment 149 million two years result transaction payments permal acquisition addition fiscal 2010 2009 2008 paid aggregate amount 270 million dividends preference shares payments preference shares including dividends recognized additional goodwill august 1 2001 purchased pcm cash approximately 682 million excluding acquisition costs transaction included two contingent payments based pcms revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion fiscal 2005 made maximum third anniversary payment 400 million former owners pcm fiscal 2007 paid available cash escrow maximum fifth anniversary payment 300 million 150 million remained escrow subject certain limited clawback provisions july 2009 fiscal 2009 contingency settled time 30 million released escrow sellers 120 million returned us recorded reduction goodwill april 2008 completed sale citigroup global markets inc affiliate citigroup acquired majority overlay implementation business lmppg including managed account trading technology platform sale produced cash proceeds approximately 181 million fiscal 2002 board directors authorized us discretion purchase 30 million shares common stock june 2007 quarter repurchased 40150 shares 40 million july 2007 board directors authorized us repurchase time 50 million shares common stock replace previous share repurchase authorization january 2008 board directors also authorized us repurchase nonvoting convertible preferred stock representing 40 million shares common stock proceeds convertible senior notes discussed february 2008 repurchased retired preferred stock convertible 25 million shares common stock 180 million also fiscal 2008 repurchased 11 million shares common stock 94 million new authorization addition 40150 shares discussed repurchases fiscal 2010 2009 may 10 2010 announced board directors replaced july 2007 share repurchase authorization new authorization purchase 1 billion common stock may 24 2010 announced entered agreements repurchase 300 million outstanding common stock accelerated share repurchase transactions funded available cash currently intend use portion available cash purchase additional approximately 100 million common stock end fiscal 2011 see note 11 notes consolidated financial statements additional information fiscal 2010 announced plan terminate exchangeable share arrangement related acquisition legg mason canada inc accordance terms may 2010 remaining outstanding exchangeable shares exchanged shares common stock april 27 2010 board directors approved regular quarterly cash dividend amount 004 per share representing increase 001 per share prior four quarters dividend fiscal 2010 reduced significantly fiscal 2009 order improve flexibility respond cash needs potential business opportunities requiring cash outflows certain asset management subsidiaries maintain various credit facilities general operating purposes see notes 6 7 notes consolidated financial statements additional information certain subsidiaries also subject capital requirements various regulatory agencies subsidiaries met respective capital adequacy requirements liquidity fund support fiscal 2009 2008 entered series arrangements provide financial support certain liquidity funds fiscal 2009 purchased subsequently sold reimbursed funds portion losses incurred selling outstanding securities issued sivs held various liquidity funds managed one subsidiaries majority previously supported arrangements fiscal 2009 also sold canadian conduit securities purchased one liquidity funds fiscal 2008 fiscal 2009 provided additional support liquidity funds related siv securities march 31 2010 support arrangements terminated expired march 31 2009 support amounts related cash collateral thousands follows 1included restricted cash consolidated balance sheet 2pertains western asset institutional money market fund western formerly citi institutional liquidity fund plc euro fund western formerly citi institutional liquidity fund plc sterling fund 3pertains western formerly citi institutional liquidity fund plc usd fund fiscal 2008 entered arrangements two thirdparty banks provide letters credit locs aggregate amount approximately 485 million benefit three liquidity funds managed one subsidiaries discussed note 17 notes consolidated financial statements part loc arrangements agreed reimburse banks amounts may drawn locs support four agreements provided approximately 286 million cash collateral march 31 2008 additionally one arrangements supported 150 million excess capacity revolving credit facility fiscal 2009 locs terminated accordance terms upon purchase underlying securities funds described 286 million collateral returned fiscal 2008 entered six capital support agreements csas terms csas agreed provide maximum 415 million support two liquidity funds certain circumstances upon funds realizing loss specific underlying securities provided 415 million collateral support csa maximum contribution amount fiscal 2009 200 million principal amount securities supported one csas matured paid full related csa terminated accordance terms collateral 15 million returned remaining csas terminated accordance terms upon purchase underlying securities funds described remaining 400 million collateral returned also fiscal year 2008 entered trs arrangement major bank pursuant bank purchased securities issued three sivs dublindomiciled liquidity fund managed one subsidiaries 890 million face amount commercial paper purchased bank cash aggregate amount 832 million represents estimate value determined collateral purposes addition reimbursed fund 595 million difference funds carrying value including accrued interest amount paid provided 1395 million cash collateral terms agreements could increased decreased based changes value upon maturities underlying securities fiscal 2009 provided additional support two liquidity funds form two standby letters credit total amount approximately 257 million provided collateral equal total support amount locs terminated accordance terms upon purchase underlying securities funds described 257 million collateral returned fiscal 2009 entered amended various capital support agreements terms new amended csas agreed provide maximum 107 billion support particular liquidity funds certain circumstances upon funds realizing loss specific underlying securities provided 107 billion collateral support csa maximum contribution amount csas aggregating 103 billion terminated accordance terms upon purchase underlying securities funds described 103 billion collateral returned fiscal 2009 440 million principal amount securities previously supported trs arrangement matured paid full additional 95 million principal amount securities trs arrangement repaid also fiscal 2009 nonbank sponsored siv securities purchased dublindomiciled liquidity fund fiscal 2008 matured 82 million principal amount interest paid full fiscal 2009 paid 29 billion aggregate 30 billion principal amount plus 24 million accrued interest nonbank sponsored siv securities six liquidity funds previously supported twelve csas seven locs upon purchase securities twelve csas aggregating 14 billion seven locs aggregating 742 million terminated accordance terms collateral 20 billion returned includes return 103 billion 257 million collateral provided current fiscal year support new amended csas locs respectively fiscal 2009 30 billion purchased securities sold along 355 million securities previously supported trs 76 million canadian conduit securities held balance sheet third parties 6273 million net transaction costs trs terminated accordance terms upon sale securities 209 million collateral returned fiscal 2009 also paid 1812 million reimburse two funds portion losses incurred selling siv securities fiscal 2010 four remaining csas provide 42 million support two liquidity funds terminated expired accordance terms amounts drawn thereunder 42 million collateral returned credit liquidity risk cash equivalent deposits involve certain credit liquidity risks maintain cash equivalents limited number high quality financial institutions time may concentrations one institutions balances financial institutions credit quality monitored ongoing basis offbalance sheet arrangements offbalance sheet arrangements defined securities exchange commission sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments classified equity material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations section follows variable interest entities liquidity fund support discussed critical accounting policies notes 1 16 17 notes consolidated financial statements previously discussed fiscal 2009 2008 entered various offbalance sheet arrangements provide support certain liquidity funds arrangements terminated expired prior march 31 2010 included letters credit capital support agreements trs fully described note 17 notes consolidated financial statements january 2008 entered hedge warrant transactions convertible notes certain financial institution counterparties increase effective conversion price convertible senior notes see note 7 notes consolidated financial statements contractual contingent obligations contractual obligations make future payments principally connection longterm debt noncancelable lease agreements see notes 6 7 9 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual obligations millions fiscal year 1represents borrowing revolving line credit expire february 2013 however may elect repay debt sooner sufficient available cash management elects utilize purpose 2interest floating rate longterm debt based rates march 31 2010 3the amount commitments reflected year represents maximum amount could payable earliest possible date terms agreements fiscal 2011 includes 290 million related putpurchase option agreement owner land building currently intend purchase land building could result forfeiture 4 million escrow deposit 4the amount contingent payments represents fair value expected payment determined closing date acquisition march 31 2010 maximum contingent payment could due fiscal year 70 million 5the table include approximately 457 million capital commitments investment partnerships legg mason general limited partner obligations funded required end commitment periods range fiscal 2018 6the table include amounts uncertain tax positions 421 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated market risk company maintains enterprise risk management program oversee coordinate risk management activities legg mason subsidiaries program certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income majority revenue calculated market value aum accordingly decline value securities cause aum decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts ordinary course business may also reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets performance fees may earned certain investment advisory contracts exceeding performance benchmarks declines market values aum result reduced fee revenues net income generally earn higher fees equity assets fees charged fixed income liquidity assets declines market values aum asset class disproportionately impact revenues addition revenue sharing agreements certain subsidiaries retain different percentages revenues cover costs including compensation net income profit margin compensation percentage operating revenues impacted based subsidiaries generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary trading nontrading assets liabilities trading nontrading assets liabilities comprised investment securities including seed capital sponsored mutual funds products derivative instruments limited partnerships limited liability companies certain investment products previously also included securities issued sivs conduit investments prior march 31 2009 trading investments march 31 2010 2009 subject risk security price fluctuations summarized thousands approximately 1498 million 1190 million trading investments related longterm incentive compensation plans march 31 2010 2009 respectively offsetting liabilities fluctuation market value assets related liabilities material effect net income liquidity however may impact compensation expense corresponding offset nonoperating income expense trading investments 173 million 98 million march 31 2010 2009 respectively relate longterm incentive plans related liabilities completely offset due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income net income approximately 2049 million 2073 million trading assets march 31 2010 2009 respectively investments proprietary fund products investments fluctuations market value impact nonoperating income amounts fluctuations market value approximately 330 million 463 million proprietary fund products march 31 2010 2009 respectively offsetting compensation expense revenue share agreements fluctuations market value approximately 177 million 166 million proprietary fund products march 31 2010 2009 respectively allocated noncontrolling interests consolidated investment funds therefore impact net income attributable legg mason inc fluctuations market value approximately 193 million proprietary fund products march 31 2010 substantially offset gains losses market hedges therefore materially impact net income attributable legg mason inc hedge risk proprietary fund products march 31 2009 investments proprietary fund products liquidated related fund establishes track record investors decision made longer pursue strategy beginning november 2007 entered series arrangements provide credit support certain liquidity funds arrangements included locs csas trs arrangement purchase securities issued sivs conduits substantially increased exposure risk security price fluctuations fiscal 2009 purchased subsequently sold funds sold remaining securities issued sivs held liquidity funds effectively eliminating exposure prior purchase majority siv securities supported capital support arrangements letters credit trs various support arrangements terminated accordance terms upon purchase fiscal 2009 also sold canadian conduit securities purchased one liquidity funds fiscal 2008 fiscal 2010 four remaining csas provide 42 million support expired terminated accordance terms losses realized nontrading assets liabilities march 31 2010 2009 subject risk security price fluctuations summarized thousands investments partnerships llcs march 31 2010 includes approximately 557 million investments related involvement us treasurys publicprivate investment program ppip previously discussed march 31 2009 effectively eliminated exposure sivs march 31 2009 recorded derivative liabilities fund support arrangements 206 million exposure limited approximately 415 million termination remaining fund support arrangements fiscal 2010 longer exposure additional potential losses related supported securities valuation trading nontrading investments described within critical accounting policies heading valuation financial instruments elimination siv exposure balance sheet money market funds march 31 2009 substantially reduced sensitivity financial position market risk see notes 1 17 18 notes consolidated financial statements discussion derivatives liquidity fund support actions following summary effect 20 increase decrease market values financial instruments subject market valuation risks march 31 2010 1gains losses related certain investments deferred compensation plans proprietary fund products directly offset corresponding adjustment compensation expense related liability noncontrolling interests addition investments proprietary fund products approximately 193 million hedged limit market risk result 20 increase decrease unrealized market value financial instruments subject market valuation risks would result 392 million increase decrease pretax earnings respectively march 31 2010 foreign exchange sensitivity operate primarily united states provide services earn revenues incur expenses outside united states accordingly fluctuations foreign exchange rates currencies principally brazil poland united kingdom australia canada may impact comprehensive income net income certain subsidiaries entered forward contracts manage impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect comprehensive income net income liquidity interest rate risk exposure interest rate changes outstanding debt mitigated substantial portion debt fixed interest rates march 31 2010 2009 approximately 2536 million 806 million respectively outstanding floating rate debt subject fluctuations interest rates impact nonoperating income net income march 31 2010 estimate 1 change interest rates would result net annual change interest expense 25 million see notes 6 7 notes consolidated financial statements additional disclosures regarding debt critical accounting policies estimates accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following among current accounting policies involve significant estimates judgments revenue recognition vast majority revenues calculated percentage fair value aum underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager broker dealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost designed approximate fair value vast majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs management fees aum fair values based unobservable inputs material march 31 2010 equity fixed income liquidity aum values aggregated 1738 billion 3643 billion 1464 billion respectively vast majority aum valued independent pricing services based upon observable market prices inputs believe market risk significant risk underlying valuation aum recent economic events financial market turmoil increased market price volatility however valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2010 less 2 total aum valued based unobservable inputs valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except longterm debt trading investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income comprehensive income depending underlying purpose instrument investments value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices evaluate nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined fiscal 2009 2008 entered various credit support arrangements certain liquidity funds managed subsidiary qualified derivative transactions fair values derivative instruments based managements estimates expected outcomes derived pricing data underlying securities andor detailed collateral analyses fiscal 2009 purchased subsequently sold supported securities issued sivs held liquidity funds effectively eliminating exposure sivs various support arrangements terminated accordance terms upon purchase march 31 2009 four capital support arrangements supported investments nonasset backed securities remained outstanding derivative liability 206 million included current liabilities consolidated balance sheet derivative asset recorded march 31 2009 fiscal 2010 four remaining capital support arrangements terminated expired accordance terms previously recorded unrealized losses 206 million recovered none derivative transactions designated hedge accounting defined accounting guidance derivative instruments hedging activities related gains losses included fund support consolidated statement operations fiscal 2010 2009 2008 trading nontrading investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2010 2009 owned approximately 484 million 422 million respectively trading nontrading financial investments valued assumptions estimates unobservable inputs march 31 2010 2009 also approximately 1365 million 595 million respectively investments investment partnerships included assets consolidated balance sheets investments generally accounted cost equity method exception 557 million investments march 31 2010 related involvement us treasurys ppip recorded fair value accounting guidance fair value measurement disclosures defines fair value establishes framework measuring fair value accounting guidance defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance accounting guidance fair value measurements establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category may include repurchase agreements fixed income securities certain proprietary fund products level 3 financial instruments values based unobservable inputs including little market activity category includes derivative assets liabilities related investments partnerships limited liability companies private equity funds previously category included derivative assets related fund support agreements certain owned securities issued sivs category may also include certain proprietary fund products redemption restrictions valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products valued nav determined fund administrator funds typically invested exchangetraded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchangetraded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 practical expedient rely nav certain investments fair value navs provided investees derived fair values underlying investments reporting date march 31 2010 approximately 2 total assets 36 financial assets measured fair value liabilities meet definition level 3 transfers categories measured beginning period see note 3 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2010 follows identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds fundsofhedge funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth attrition rates acquired contracts based upon historical experience estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weightedaverage cost capital takes consideration premium representing degree risk inherent asset fully described indefinitelife intangible assets goodwill project impact net client flows market appreciationdepreciation cash flows nearterm generally first five years based yearbyyear assessment considers current market conditions past experience relevant publicly available statistics projections discussions market experts beyond five years projections net client flows market performance migrate towards relevant longterm rates line results industry growth statistics believe growth assumptions reasonable given consideration multiple inputs including internal external sources described however continues significant volatility uncertainty markets assumptions subject change based fluctuations actual results market conditions goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events triggering event occurred perform tests include critical reviews significant assumptions determine intangible assets goodwill impaired minimum perform tests indefinitelife intangible assets goodwill annually december 31 completed annual impairment tests goodwill indefinitelife intangible assets december 31 2009 determined impairment value assets december 31 2009 impairment value amortizable intangible assets recognized year ended march 31 2010 estimates related future cash flows exceeded asset carrying values also determined triggering events occurred march 31 2010 therefore additional indefinitelife intangible asset goodwill impairment testing necessary amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates amortization periods appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows estimated useful lives amortizable intangible assets currently range 1 8 years weightedaverage life approximately 43 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined market participants perspective based projected discounted cash flows two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names determine fair value intangible assets based upon discounted projected cash flows take consideration estimates profit margins growth rates discount rates asset determined impaired current implied fair value less recorded carrying value asset impaired difference current implied fair value carrying value asset reflected financial statements recognized expense period impairment determined temporary projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth estimated net client flows projected market performance contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows domestic mutual fund contracts acquired citigroup asset management cam acquisition 2502 million permal fundsofhedge funds contracts 947 million account approximately 65 25 respectively indefinitelife intangible assets december 31 2009 annual impairment test cash flows domestic mutual fund contracts assumed 5year average annual growth rate approximately 8 longterm annual rate approximately 8 thereafter cash flows permal contracts assumed 5year average annual growth rate approximately 14 longterm annual rate approximately 9 thereafter projected cash flows domestic mutual fund permal funds discounted 147 151 respectively assuming factors remain actual results changes assumptions domestic mutual fund permal fundofhedge funds contracts would cause cash flow projections longterm deviate 5 34 respectively previous projections discount rate would raised 152 188 respectively asset deemed impaired approximate fair values assets exceed carrying values 144 million 484 million respectively trade names account 2 indefinitelife intangible assets primarily related permal tested intangible assets using assumptions similar described indefinitelife contracts goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows similar techniques employed analyzing purchase price acquisition target defined reporting units americas international divisions operating segments allocations goodwill divisions changes management structure acquisitions dispositions based relative fair values businesses added sold divisions see note 19 notes consolidated financial statements additional information related business segments significant assumptions used assessing implied fair value reporting unit discounted cash flow method include projected cash flows generated reporting unit including profit margins expected current longterm cash flow growth rates discount rate used determine present value cash flows cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income liquidity investment manager reporting unit based upon among things historical experience expectations future market performance internal external sources impact net client flows market performance cash flows projected nearterm generally first five years based yearbyyear assessment considers current market conditions experience internal financial projections relevant publicly available statistics projections discussions market experts actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows discount rates based appropriately weighted estimated costs debt capital using market participant perspective estimate cost debt based published debt rates estimate cost capital based capital asset pricing model considers riskfree interest rate market risk size premiums peergroup betas unsystematic risk discount rates also calibrated based assessment relevant market values goodwill americas reporting unit principally originated acquisitions cam royce value reporting unit based projected net cash flows assets managed us mutual funds closed end funds proprietary funds addition separate account assets us managers goodwill international reporting unit principally originated acquisitions permal international cam businesses december 31 2009 annual impairment test projected cash flows discounted 147 151 respectively americas international divisions determine present value cash flows december 31 2009 implied fair values materially exceeded carrying values americas international divisions projected cash flows aggregate basis across asset classes americas division assumed 5year average annual growth rate approximately 12 longterm annual growth rate approximately 9 projected cash flows aggregate basis across asset classes international division assumed fiveyear average annual growth rate approximately 15 longterm annual growth rate approximately 9 cash flow growth americas international divisions next five years based separate factors equity fixed income liquidity products equity product growth projections based historical recovery trends following prior recessionary periods context longterm growth experience current market conditions fixed income product growth projections based past experience primary fixed income manager market influences relevant business longterm growth 9 divisions based historical experience available historic market statistics estimates future expectations believe growth assumptions reasonable given consideration multiple inputs including internal external sources described however assumptions subject change based fluctuations actual results market conditions assuming factors remain actual results changes assumptions americas international reporting units would cause cash flow projections reporting units longterm deviate approximately 50 previous projections discount rate would increase approximately 6 7 percentage points respectively goodwill considered impairment december 31 2009 considering relevant prices common shares market capitalization along reasonable control premium exceeds aggregate carrying values reporting units stockbased compensation stockbased compensation plans include stock options employee stock purchase plans marketbased performance share awards restricted stock awards deferred compensation payable stock compensation plans issue equity awards directors officers key employees accordance applicable accounting guidance compensation expense years ended march 31 2010 2009 2008 includes compensation cost nonvested sharebased awards grant date fair value amortized respective vesting periods straightline method unamortized deferred compensation recognized reduction additional paidin capital also accounting guidance cash flows related income tax deductions excess less stockbased compensation expense classified financing cash flows granted 15 million 15 million 09 million stock options fiscal 2010 2009 2008 respectively additional information sharebased compensation see note 12 notes consolidated financial statements determine fair value option grant using blackscholes option pricing model except market based grants use monte carlo option pricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate except grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal vesting period options estimate volatility equally weighted historical prices stock period equal expected life option part upon implied volatility marketlisted options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different income taxes legg mason subsidiaries subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision financial statement purposes estimates judgments used determining tax basis assets liabilities calculation certain tax assets liabilities arise differences timing revenue expense recognition tax financial statement purposes management assesses likelihood able realize deferred tax assets likely deferred tax asset realized valuation allowance established corresponding increase deferred tax provision substantially deferred tax assets relate us united kingdom uk taxing jurisdictions march 31 2010 us federal deferred tax assets aggregated 611 million realization expected require 40 billion future us earnings approximately 116 million must form foreign sourced income deferred tax assets generated us jurisdictions resulting net operating losses generally expire 20 years generated resulting foreign tax credits generally expire 10 years generated based estimates future taxable income using assumptions used goodwill impairment testing likely current federal tax benefits realizable valuation allowance necessary time extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals tax planning may enhance positions realization current tax benefits dependent significant tax strategies march 31 2010 us state deferred tax assets aggregated 212 million due limitations net operating loss capital loss carryforwards taking consideration certain state tax planning strategies valuation allowance established state capital loss net operating loss benefits certain jurisdictions amount 492 million fiscal year 2010 due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary march 31 2010 uk deferred tax assets net valuation allowances material additional valuation allowance recorded 29 million foreign deferred tax assets relating various jurisdictions event determine portion deferred tax assets realizable required establish valuation allowance charge income tax provision period determination made depending facts circumstances charge could material earnings calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due consolidation special purpose entities spes trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse utilize spes form financing provide liquidity recognized gains losses sale assets spes accordance accounting guidance consolidation variable interest entities vies spes designated either voting interest entity vie vies subject consolidation party deemed primary beneficiary vie entity sufficient equity risk finance activities without additional subordinated financial support either contractual implied equity investors characteristics controlling financial interest generally limited partnership entities general partner substantive equity investment risk limited partners substantive rights remove general partner dissolve limited partnership also considered vies primary beneficiary entity absorb majority vies expected losses entity receive majority vies expected residual returns accordance accounting guidance determination expected residual returns excludes gross fees paid decision maker current guidance unlikely primary beneficiary vies created manage assets clients unless ownership interest including interests related parties vie substantial unless may earn significant performance fees vie unless considered material implied variable interest accounting guidance also requires disclosure vies sponsor considered significant variable interest determining whether variable interest significant consider factors used determination primary beneficiary determining whether primary beneficiary vies consider qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid us related party ownership guarantees implied relationships determining primary beneficiary must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks assumptions estimates significant bearing determination primary beneficiary together related party relationships determined primary beneficiary vie entity consolidated within financial statements assumptions estimates materially incorrect might required consolidate additional vies consolidation vies would result increase assets corresponding increase noncontrolling interests liabilities consolidated balance sheets decrease investment advisory fees increase decrease nonoperating income expense corresponding offset noncontrolling interests consolidated statements operations would impact net income attributable legg mason inc discussed note 1 notes consolidated financial statements amendments proposed amendments consolidation accounting may require us consolidate additional vies voting interest entities march 31 2010 primary beneficiary one sponsored investment fund vie resulted consolidation vie total assets total equity 527 million march 31 2010 482 million march 31 2009 investment vie 275 million 263 million march 31 2010 2009 respectively represents maximum risk loss see note 16 notes consolidated financial statements additional discussion variable interests recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements forwardlooking statements made report form 10k time may otherwise make public filings press releases statements management forwardlooking statements within meaning private securities litigation reform act 1995 including information relating anticipated growth revenues margins earnings per share anticipated changes business amount client aum anticipated future performance business anticipated future investment performance subsidiaries expected future net client cash flows anticipated expense levels changes expenses expected effects acquisitions expectations regarding financial market conditions words phrases may expects may affect may depend believes estimate project anticipate similar words phrases intended identify forwardlooking statements forwardlooking statements subject various known unknown risks uncertainties caution readers forwardlooking information provided behalf legg mason guarantee future performance actual results may differ materially forward looking information result various factors beyond control including limited discussed heading risk factors elsewhere report form 10k public filings press releases statements management due risks uncertainties factors caution person receiving forwardlooking information place undue reliance statements forwardlooking statements speak date statements made undertake obligations update forwardlooking statement reflect events circumstances date statement made reflect occurrence unanticipated events future revenues may fluctuate due numerous factors total value composition aum volatility general level securities prices interest rates relative investment performance companysponsored investment funds asset management products compared competing offerings market indices investor sentiment confidence general economic conditions ability maintain investment management administrative fees current levels competitive conditions business ability attract retain key personnel effects acquisitions including prior acquisitions future operating results also dependent upon level operating expenses subject fluctuation following reasons variations level compensation expense incurred result changes number total employees competitive factors changes percentages revenues paid compensation reasons variations expenses capital costs including depreciation amortization noncash charges incurred us maintain administrative infrastructure unanticipated costs may incurred legg mason time protect client goodwill otherwise support investment products connection litigation regulatory proceedings effects acquisitions dispositions business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements may substantial effect business results operations effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risks revenues net income critical accounting policies intangible assets goodwill previously discussed item 7aitem 7 managements discussion analysis financial condition results operations executive overview legg mason inc holding company together subsidiaries collectively legg mason global asset management firm acting subsidiaries provide investment management related services institutional individual clients companysponsored mutual funds investment vehicles offer products services directly various financial intermediaries operations principally us uk also offices australia bahamas brazil canada chile china dubai france germany italy japan singapore spain switzerland taiwan references fiscal 2018 2017 2016 refer fiscal year ended march 31 year terms us company refer legg mason operating revenues primarily consist investment advisory fees funds separate accounts distribution service fees investment advisory fees generally calculated percentage assets investment portfolios manage addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks hurdle rates largest portion performance fees earned based 12month performance periods end differing quarters year portion based quarterly performance periods also earn performance fees alternative products lock end varying investment periods multipleyear intervals per terms certain recent acquisitions performance fees earned preclose assets management aum acquired entities fully passed compensation expense net income loss attributable noncontrolling interests therefore impact net income loss attributable legg mason inc distribution service fees received distributing investment products services providing support services investment portfolios providing nondiscretionary advisory services assets advisement aua generally calculated percentage assets investment portfolio percentage new assets added investment portfolio revenues therefore dependent upon level aum aua related fee rates thus affected factors securities market conditions ability attract maintain aum key investment personnel investment performance aum changes period primarily due inflows outflows client assets market performance well changes foreign exchange rates client decisions increase decrease assets management decisions potential clients utilize services may based one number factors include reputation marketplace investment performance absolute relative benchmarks competitive products services fees charge investment services client potential clients situation including investment objectives liquidity needs investment horizon amount assets managed relationships distributors external economic environment including market conditions fees charge investment services vary based upon factors type underlying investment product amount aum asset management affiliate provides services type services investment objectives provided general fees earned asset management services highest alternative assets followed equity assets fixed income assets liquidity assets accordingly revenues average operating revenue yields affected composition aum changes relative level alternative equity assets typically significantly impacting revenues average operating revenue yields average operating revenue yields calculated ratio annualized total operating revenue less performance fees average aum addition ordinary course business may reduce waive investment management fees total expenses certain products services particular time periods limit fund expenses reasons help retain increase managed assets industry continues impacted disruption challenges continued migration active passive strategies tend lower fees together regulatory reform continue put pressure fees revenue sharing arrangements place certain asset management affiliates specified percentages affiliates revenues required distributed us balance revenues retained affiliates pay operating expenses including compensation expenses excluding certain expenses income taxes revenuesharing arrangements asset management affiliates retain different percentages revenues cover costs affiliates operate budget processes varying margin targets net income loss attributable legg mason inc operating margin compensation percentage operating revenues impacted based affiliates products generate aum change aum one affiliate respect one product class products different effect revenues earnings equal change another affiliate another product class products addition time may agree changes revenue sharing arrangements asset management personnel may impact compensation expenses profitability significant component cost structure employee compensation benefits majority variable nature includes incentive compensation portion based upon revenue levels noncompensation related operating expense levels revenue sharebased affiliates performance fees passed compensation expense overall profitability next largest component cost structure distribution servicing expense consists primarily fees paid thirdparty distributors selling asset management products services largely variable nature certain operating costs occupancy depreciation amortization fixed contract commitments market data communication technology services typically consistent period usually decline reduced levels business activity conversely usually rise proportionately increased business activity absence unusual events financial position results operations materially affected overall trends conditions global financial markets results individual period considered representative future results profitability sensitive variety factors including amount composition aum volatility general level securities prices interest rates changes currency exchange rates among things periods unfavorable market conditions likely adverse effect profitability addition diversification services vehicles products offered investment performance access distribution channels reputation market attraction retention key employees client relations significant factors determining whether successful attraction retention clients last years industry seen flows products currently garner significant market share including particular passive products corresponding flows products market share financial services business engaged extremely competitive competition includes numerous global national regional local asset management firms commercial banks insurance companies financial services companies industry continues experience disruption challenges including shift lowerfee passively managed products increased fee pressure including pressure arising shift lower fee passive products increased role technology asset management services constant introduction new products services consolidation financial services firms mergers acquisitions asset management industry also subject extensive evolving regulation federal state foreign laws like firms continue impacted regulatory legislative changes responding changes keeping abreast regulatory developments required continue require us incur costs impact profitability discussion factors may affect results operations refer item 1a risk factors included herein strategy expand client choice focus strategic operating priorities four primary areas listed management considers strategic priorities evaluating operating performance financial condition consistent approach also presented table initiatives management currently focuses evaluating performance financial condition strategic priorities discussed designed drive improvements net flows earnings cash flows aum key metrics including operating margin certain key metrics discussed annual results discussion fiscal 2018 expanded investment offerings response demand choice • offering new next generation products multiasset solutions new vehicles including launch six new exchange traded funds “etfs” • completing bolton acquisition adding new capabilities clarion partners • commercializing alternative products offered recently acquired asset managers • expanding alternative distribution strategies alternative product teams strategic hires • investing technology enhance capabilities expand choice global investors investor interest trended away traditional mutual funds intend continue focus increasing etf alternative separately managed account mulitasset solutions product offerings fiscal 2019 net income attributable legg mason inc year ended march 31 2018 2851 million 301 per diluted share compared 2273 million 218 per diluted share year ended march 31 2017 increase net income attributable legg mason inc largely result 2137 million 226 per diluted share onetime net noncash provisional tax benefit related hr 1 act provide reconciliation pursuant titles ii v concurrent resolution budget fiscal year 2018 tax law enacted december 22 2017 years ended march 31 2018 2017 also included impairment charges related intangible assets 2290 million 196 per diluted share 350 million 026 per diluted share respectively adjustments decrease fair value contingent consideration liabilities 313 million 033 per diluted share 395 million 036 per diluted share respectively year ended march 31 2018 included transitionrelated costs 70 million 005 per diluted share associated combination permal group permal entrust capital entrust year ended march 31 2017 included 751 million 048 per diluted share acquisition transitionrelated costs primarily associated acquisitions clarion partners entrust combination permal entrust items fully discussed addition connection regulatory matter discussed subsequent event note 18 notes consolidated financial statements accrued charge earnings approximately 670 million 071 per diluted share fiscal year 2018 charge became probable estimable date legg mason issued preliminary financial results quarter fiscal year ended march 31 2018 financial statements financial information report serves update preliminary financial results average aum total revenues increased approximately 5 9 respectively fiscal 2018 compared fiscal 2017 discussed total aum increased year ended march 31 2018 primarily due positive impact market performance includes reclassification effective april 1 2017 certain assets previously classified aua aum due change policy classification aua aum discussed net client inflows fixed income aum increases offset part net client outflows liquidity equity alternative aum following discussion analysis provides additional information regarding financial condition results operations business environment results operations fiscal 2018 us equity markets increased significantly largely due continued growth corporate earnings expanding economy international equity markets also improved due signs economic growth accommodative monetary policy industry continues impacted disruption competition continued migration active passive strategies together regulatory reform continues put pressure fees contributing consolidation products managers distribution platforms factors continue create significant flow challenges active managers like three major us equity market indices increased significantly fiscal 2018 fiscal 2017 decreasing slightly fiscal 2016 bond indices increased fiscal 2018 fiscal 2016 mixed fiscal 2017 illustrated table 1 indices trademarks dow jones company mcgrawhill companies inc nasdaq stock market inc barclays capital respectively affiliated legg mason 2 excludes impact reinvestment dividends stock splits december 2015 federal reserve board increased target federal funds rate first time since 2006 025 050 fiscal 2017 target federal funds rate increased 050 100 fiscal 2018 increased 100 175 economic outlook us remained positive recent years impacted increased uncertainty financial environment operate continues reflect heightened level sensitivity continued pressure fees move fiscal 2019 following table sets forth periods indicated amounts consolidated statements income loss percentage operating revenues increase decrease item percentage amount previous period nm meaningful 1 calculated based change actual amounts fiscal years percentage prior year amount assets management assets advisement assets management aum primarily managed across following asset classes strategies equity fixed income alternative liquidity large cap growth us intermediate investment grade real estate us managed cash large cap value us credit aggregate hedge funds us municipal cash equity income global opportunistic fixed income listed international equity global government infrastructure small cap core us municipal large cap core global fixed income sector equity high yield mid cap value us long duration small cap value us limited duration emerging markets equity emerging markets debt small cap growth global equity components changes aum billions years ended march 31 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 discussed due change policy classification aua aum effective april 1 2017 aum march 31 2018 includes 238 billion assets previously included aua comparable aua march 31 2017 2016 160 billion 105 billion respectively longterm separate account flows net year ended march 31 2018 includes 51 billion net inflows related aum net inflows related comparable aua 35 billion 21 billion years ended march 31 2017 2016 respectively excluded table see assets advisement additional information regarding aua 3 realizations represent investment managerdriven distributions primarily related sale assets realizations specific alternative managers include clientdriven distributions eg client requested redemptions liquidations asset transfers prior april 1 2017 realizations reported net client cash flows 4 year ended march 31 2018 includes reclassification effective april 1 2017 160 billion certain assets previously included aua aum year ended march 31 2018 also includes reinvestment dividends 37 billion reconciliation previously reported amounts years ended march 31 2017 2016 primarily includes reinvestment dividends 5 includes 415 billion 96 billion related acquisitions clarion partners entrust respectively offset part 48 billion related disposition two small investment managers share joint venture year ended march 31 2017 68 billion 01 billion related acquisitions rare infrastructure pk investments llp pk investments respectively year ended march 31 2016 aum march 31 2018 7541 billion increase 257 billion 4 compared march 31 2017 total net client outflows 226 billion comprised 243 billion net client outflows liquidity asset class offset part 17 billion net client inflows longterm asset classes longterm asset net inflows comprised fixed income net inflows 94 billion offset part equity net outflows 67 billion alternative net outflows 10 billion fixed income net inflows primarily products managed western asset management company western asset brandywine global investment management brandywine offset part net outflows products managed qs investors equity net outflows primarily products managed qs investors royce brandywine offset part equity net inflows products managed martin currie alternative net outflows primarily products managed entrustpermal rare infrastructure offset part net inflows products managed clarion partners generally earn higher fees profits alternative equity aum outflows asset classes negatively impact revenues net income loss attributable legg mason inc would outflows fixed income liquidity asset classes market performance 457 billion 160 billion relates reclassification effective april 1 2017 certain assets previously classified aua aum due change policy classification aua aum see assets advisement additional information regarding aua positive impact foreign currency exchange rate fluctuations 54 billion fiscal 2018 began separately report realizations investment manager driven distributions primarily related sale assets realizations specific alternative managers include clientdriven distributions eg requested redemptions liquidations asset transfers realizations year ended march 31 2018 26 billion realizations 13 billion included net client cash flows year ended march 31 2017 realizations year ended march 31 2016 aum march 31 2017 7284 billion increase 588 billion 9 compared march 31 2016 total net client outflows 289 billion consisting net client outflows liquidity longterm asset classes 273 billion 16 billion respectively longterm asset net outflows comprised alternative equity net outflows 72 billion 52 billion respectively partially offset fixed income net inflows 108 billion alternative net outflows primarily products managed entrustpermal rare infrastructure equity net outflows primarily products managed royce qs investors brandywine offset part equity net inflows martin currie fixed income net inflows primarily products managed western asset offset part fixed income net outflows brandywine market performance 427 billion negative impact foreign currency exchange rate fluctuations 13 billion acquisitions dispositions net totaled 463 billion included 415 billion related acquisition clarion partners april 2016 96 billion related acquisition entrust may 2016 offset part 48 billion related disposition two small investment managers portion joint venture investment advisory administrative contracts generally terminable upon relatively short notice investors mutual funds vehicles manage may redeem investments funds vehicles time without prior notice institutional individual clients terminate relationships us reduce aggregate amount assets management shift funds types accounts different rate structures number reasons including investment performance changes prevailing interest rates changes reputation marketplace changes management control clients thirdparty distributors relationships loss key investment management personnel financial market performance aum asset class aum asset class billions years ended march 31 follows nm meaningful average aum asset class billions years ended march 31 follows nm meaningful component changes aum asset class billions fiscal years ended march 31 2018 2017 2016 follows 1 subscriptions redemptions reflect gross activity funds include assets transferred funds share classes 2 year ended march 31 2018 includes reclassification effective april 1 2017 121 billion 39 billion certain equity fixed income assets respectively previously included aua aum equity fixed income separate account flows net year ended march 31 2018 include 32 billion 19 billion respectively net inflows related aum year ended march 31 2018 also includes reinvestment dividends 37 billion reconciliation previously reported amounts years ended march 31 2017 2016 primarily includes reinvestment dividends 3 includes 415 billion 96 billion related acquisitions clarion partners entrust respectively offset part 48 billion related disposition two small investment managers portion joint venture year ended march 31 2017 68 billion 01 billion related acquisitions rare infrastructure pk investments respectively year ended march 31 2016 4 realizations represent investment managerdriven distributions primarily related sale assets realizations specific alternative managers include clientdriven distributions eg client requested redemptions liquidations asset transfers prior april 1 2017 realizations reported net client cash flows aum distribution channel broadly two principal distribution channels global distribution affiliateother sell variety investment products services global distribution consists centralized global distribution operations principally sells us international mutual funds commingled vehicles retail separately managed account programs subadvisory accounts insurance companies similar clients affiliateother consists distribution operations within asset managers principally sell institutional separate account management liquidity money market funds real estate privately placed investment funds fundsofhedge funds component changes aum distribution channel billions years ended march 31 2018 2017 2016 follows 1 excludes 159 billion 103 billion 82 billion aua march 31 2017 2016 2015 respectively net client cash flows years ended march 31 2017 2016 excludes 35 billion 21 billion aua net inflows respectively effective april 1 2017 significant portion assets reclassified aua aum accordingly 238 billion assets previously included aua included aum march 31 2018 net client cash flows year ended march 31 2018 include 51 billion net inflows related aum 2 includes 415 billion 96 billion related acquisitions clarion partners entrust respectively offset part 48 billion related disposition two small investment managers share joint venture year ended march 31 2017 68 billion 01 billion related acquisitions rare infrastructure pk investments respectively year ended march 31 2016 3 realizations represent investment managerdriven distributions primarily related sale assets realizations specific alternative managers include clientdriven distributions eg client requested redemptions liquidations asset transfers prior april 1 2017 realizations reported net client cash flows 4 includes reclassification effective april 1 2017 160 billion certain assets previously included aua aum due change policy classification aua aum also includes reinvestment dividends 37 billion reconciliation previously reported amounts operating revenue yield overall operating revenue yield less performance fees across asset classes distribution channels 39 basis points years ended march 31 2018 2017 38 basis points year ended march 31 2016 fees managing alternative equity assets generally higher alternative assets averaging 65 basis points 73 basis points 105 basis points years ended march 31 2018 2017 2016 respectively equity assets averaging 63 basis points 67 basis points 70 basis points years ended march 31 2018 2017 2016 respectively average fee rate managing alternative assets declined last year due shift mix assets higher fee lower fee products declined prior year due acquisitions clarion partners april 2016 entrust may 2016 rare infrastructure october 2015 whose products typically earn lower average fees legacy alternative asset products average fee rate managing equity assets declined last year primarily due previously discussed reclassification certain assets aua aum increased aum denominator without corresponding increase operating revenue addition average fee rate managing equity assets declined last five years due shift mix equity assets higher fee equity products lower fee equity products lower fees earned certain existing products compares fees fixed income assets averaged approximately 27 basis points years ended march 31 2018 2017 29 basis points year ended march 31 2016 liquidity assets averaged approximately 13 basis points 12 basis points 9 basis points years ended march 31 2018 2017 2016 respectively average fee rate managing liquidity increased last three years due reduction fee waivers equity assets primarily managed clearbridge royce brandywine qs investors martin currie alternative assets managed clarion partners entrustpermal rare infrastructure fixed income assets primarily managed western asset brandywine liquidity assets managed western asset fee rates assets distributed legg mason global distribution predominately retail nature averaged 45 basis points years ended march 31 2018 2017 48 basis points year ended march 31 2016 fee rates assets distributed affiliateother channel averaged approximately 34 basis points 35 basis points 32 basis points years ended march 31 2018 2017 2016 respectively investment performance overall investment performance aum years ended march 31 2018 2017 2016 mixed compared relevant benchmarks year ended march 31 2018 year ended march 31 2018 us equity indices produced strong positive returns best performing index nasdaq returned 195 lowest performing index sp 400 returned 110 positive returns reflect growth corporate earnings expanding economy fixed income markets federal reserve raised target rate 025 june 2017 december 2017 march 2018 continuing federal reserves steps tighten monetary policy expectations future federal reserve interest rate increases expanded include two additional rate increases calendar year 2018 three increases calendar year 2019 expectations resulted yield curve continuing flatten fiscal year shortterm yields increased longterm yields best performing fixed income sector year ended march 31 2018 high yield bonds measured barclays us high yield index returned 38 lowest performing fixed income sector year ended march 31 2018 us government bonds measured barclays us government index returned 04 year ended march 31 2017 year ended march 31 2017 us equity indices produced positive returns best performing russell 2000 returned 262 returns achieved volatile economic environment defined decision uk leave european union newly elected president us fixed income markets federal reserve raised target rate 025 december 2016 march 2017 continuing federal reserves steps toward monetary policy normalization resulted yield curve continuing flatten fiscal year many longdated yields declined best performing fixed income sector year ended march 31 2017 high yield bonds measured barclays us high yield index returned 164 lowest performing fixed income sector year ended march 31 2017 us government bonds measured barclays us government index declined 13 year ended march 31 2016 year ended march 31 2016 us equity indices produced mixed returns best performing index dow jones industrial average returned 21 returns achieved economic environment characterized unexpected declines oil prices strong us dollar along slowtorecover us economy chinese currency devaluation fixed income markets december 2015 federal reserve raised target rate 025 representing federal reserves first step toward monetary policy normalization however expectations future federal reserve interest rate increases lessened forecasts pointed fewer future rate increases resulted yield curve continuing flatten fiscal year many longdated yields declined best performing fixed income sector year ended march 31 2016 us government bonds measured barclays us government index returned 24 lowest performing fixed income sector year ended march 31 2016 high yield bonds measured barclays us high yield index declined 37 following table presents summary percentages aum strategy1 outpaced respective benchmarks march 31 2018 2017 2016 trailing 1year 3year 5year 10year periods following table presents summary percentages us mutual fund assets2 outpaced lipper category averages march 31 2018 2017 2016 trailing 1year 3year 5year 10year periods na applicable 1 purposes investment performance comparisons strategies aggregation portfolios separate accounts investment funds products single group represents particular investment objective case separate accounts investment performance account based upon performance strategy account assigned asset managers specific guidelines including portfolios strategies managers manage separate accounts investment funds strategy performance comparison assets based upon performance separate account march 31 2018 2017 2016 87 88 91 total aum included strategy aum respectively although strategies 3year 5year 10year histories total strategy aum includes liquidity assets certain assets included reported performance comparisons include accounts managed accordance guidelines outlined accounts strategies marketed potential clients accounts yet assigned strategy certain smaller products affiliates past performance indicative future results aum included institutional retail separate accounts investment funds included strategy separate accounts performance comparisons based grossoffee performance investment funds managed separate account format performance comparisons based netoffee performance fundsofhedge funds generally specified benchmarks purposes comparison performance products net fees compared relevant hfrx index performance comparisons reflect actual performance specific separate account investment fund individual separate account investment fund performance may differ 2 source lipper inc includes openend closedend variable annuity funds march 31 2018 2017 2016 us longterm mutual fund assets represented data accounted 19 18 19 respectively total aum performance us longterm mutual fund assets included strategies following table presents summary absolute relative performance compared applicable benchmark representative sample funds within aum net management fees end period presented 1year 3year 5year 10year periods funds inception table includes representative sample funds significant subclass investment strategies ie large cap equity small cap equity etc funds within group representative performance significant investment strategies offer march 31 2018 constituted aggregate approximately 426 billion approximately 56 total aum meaningful exclusion funds alternative fund strategies primarily involve privately placed hedge funds privately placed real estate funds represent 5 total aum march 31 2018 investment performance made publicly available presenting investment returns funds provides relevant representation performance avoiding many complexities relating factors multiple fee structures bundled pricing asset level break points would arise reporting performance strategies product aggregations na applicable na applicable 1 listed order size based aum fund within subcategory 2 absolute performance actual performance ie rate return fund relative performance difference variance performance fund stated benchmark assets advisement march 31 2018 2017 2016 aua approximately 12 billion 43 billion 39 billion respectively aua comprised approximately 6 billion 4 billion 1 billion 1 billion related western asset qs investors brandywine entrustpermal respectively march 31 2018 approximately 18 billion 12 billion 10 billion 2 billion 1 billion related qs investors clearbridge western asset entrustpermal brandywine respectively march 31 2017 approximately 17 billion 10 billion 8 billion 2 billion 2 billion related qs investors western asset clearbridge permal brandywine respectively march 31 2016 aua generally comprised third party client assets including portfolio overlay model accounts advised us limited investment discretion aua fee rates vary level nondiscretionary service provided factors average annualized fee rate related aua approximately six basis points 12 basis points 10 basis points years ended march 31 2018 2017 2016 respectively decrease annualized fee rate related aua year ended march 31 2018 compared year ended march 31 2017 primarily due reclassification aua aum effective april 1 2017 certain assets totaling 160 billion due change policy classification aua aum specifically retail separately managed account programs operate fees comparable programs managed fully discretionary basis comparable aua programs march 31 2017 2016 160 billion 105 billion respectively results operations accordance financial accounting standards consolidation consolidate separately identify amounts relating certain sponsored investment products consolidation investment products impact net income loss attributable legg mason inc material impact consolidated operating results also hold investments consolidated sponsored investment funds change value investments recorded nonoperating income expense reflected net income loss attributable legg mason inc see notes 1 3 17 notes consolidated financial statements additional information regarding consolidation investment products operating revenues components total operating revenues millions dollar percentage changes periods follows nm meaningful total operating revenues year ended march 31 2018 314 billion increase 9 289 billion year ended march 31 2017 increase primarily due 1195 million increase performance fees 480 million earned clarion partners fully passed compensation expense per terms acquisition agreement 9 increase average longterm aum also contributed increase despite increase average longterm aum percentage total average aum operating revenue yield excluding performance fees remained flat 39 basis points years ended march 31 2018 2017 result less favorable product mix lower yielding products comprising higher percentage longterm average aum year ended march 31 2018 compared year ended march 31 2017 total operating revenues year ended march 31 2017 289 billion increase 8 266 billion year ended march 31 2016 increase primarily due incremental revenues related acquisitions clarion partners entrust inclusion full year revenues rare infrastructure acquired october 2015 total operating revenues year ended march 31 2017 included 608 million performance fees earned clarion partners passed employees compensation expense operating revenue yield excluding performance fees increased 39 basis points year ended march 31 2017 compared 38 basis points year ended march 31 2016 average longterm aum comprised higher percentage total average aum year ended march 31 2017 compared year ended march 31 2016 investment advisory fees separate accounts year ended march 31 2018 investment advisory fees separate accounts increased 956 million 102 billion compared 9252 million year ended march 31 2017 increase 575 million resulted inclusion revenues associated certain assets reclassified aua aum effective april 1 2017 previously discussed prior reclassification fiscal 2018 revenues related comparable aua included distribution service fees addition higher average equity assets managed clearbridge contributed 285 million increase higher average fixed income assets western asset contributed 167 million increase increases offset part decrease 98 million due lower average alternative assets managed rare infrastructure year ended march 31 2017 investment advisory fees separate accounts increased 991 million 9252 million compared 8261 million year ended march 31 2016 increase 602 million due clarion partners acquired april 2016 350 million due entrust acquired may 2016 148 million due higher average fixed income assets managed western asset brandywine 129 million due full year results rare infrastructure acquired october 2015 increases offset part decrease 152 million due lower average equity assets managed martin currie brandywine qs investors decrease 116 million due lower average alternative assets managed legacy permal investment advisory fees funds year ended march 31 2018 investment advisory fees funds increased 828 million 6 156 billion compared 148 billion year ended march 31 2017 increase 1011 million due higher average equity assets managed clearbridge martin currie 418 million due higher average fixed income assets managed western asset 191 million due higher revenues earned clarion partners acquired april 2016 due part inclusion full year revenues current year increases offset part decrease 435 million due lower average alternative assets managed entrustpermal decrease 261 million due disposition two small investment managers march 2017 december 2016 net decrease 138 million fees liquidity assets result lower average liquidity assets managed western asset offset part reduction fee waivers liquidity funds year ended march 31 2017 investment advisory fees funds increased 730 million 5 148 billion compared 141 billion year ended march 31 2016 primarily due increases 1253 million due clarion partners acquired april 2016 636 million due entrust acquired may 2016 220 million due higher average equity assets managed martin currie 137 million due fees liquidity assets largely related reduction fee waivers liquidity funds managed western asset 97 million primarily due including full year results rare infrastructure acquired october 2015 60 million due higher average fixed income assets managed western asset increases offset part decreases 847 million due lower average alternative assets managed legacy permal 735 million due lower average equity assets managed royce clearbridge 116 million due lower average fixed income assets managed brandywine investment advisory performance fees march 31 2018 2017 2016 approximately 11 12 9 respectively longterm aum accounts eligible earn performance fees point respective fiscal year performance fees earned clarion partners assets invested prior acquisition closing april 2016 fully passed clarion partners management team per terms acquisition agreement recorded compensation expense therefore impact net income loss attributable legg mason inc expect full pass performance fees clarion partners phase approximately five years postclosing exclusive performance fees approximately 7 8 longterm aum accounts performance fee eligible march 31 2018 2017 respectively years ended march 31 2018 2017 2016 61 47 52 respectively performancefee eligible aum earned performance fee year ended march 31 2018 investment advisory performance fees 2278 million 1088 million earned clarion partners passed compensation expense 596 million 325 million 269 million earned fixed income equity alternative assets respectively year ended march 31 2017 investment advisory performance fees 1083 million 608 million earned clarion partners passed compensation expense 319 million 109 million 48 million earned fixed income alternative equity assets respectively increase performance fees passed compensation expense primarily due aggregate 680 million increase performance fees earned assets managed martin currie western asset entrustpermal brandywine due part strong financial markets fiscal 2018 year ended march 31 2017 investment advisory performance fees increased 663 million 1083 million compared 420 million year ended march 31 2016 primarily due 608 million performance fees earned clarion partners assets invested prior acquisition closing passed compensation expense fees earned entrust acquired may 2016 higher fees earned assets managed brandywine western asset offset part lower fees earned assets managed legacy permal distribution service fees year ended march 31 2018 distribution service fees decreased 448 million 12 3219 million compared 3667 million year ended march 31 2017 decrease driven 390 million earned fiscal 2017 certain assets reclassified aua aum effective april 1 2017 revenue related assets included investment advisory fees separate accounts year ended march 31 2018 reduction average mutual fund aum subject distribution service fees also contributed decrease year ended march 31 2017 distribution service fees decreased 148 million 4 3667 million compared 3815 million year ended march 31 2016 primarily due decrease 216 million related decline average mutual fund aum subject distribution service fees offset part increase 94 million advisement fees associated aua operating expenses components total operating expenses millions dollar percentage changes periods follows nm meaningful total operating expenses year ended march 31 2018 increased 3516 million 14 282 billion compared 246 billion year ended march 31 2017 primarily due increase impairment intangible assets 1940 million increase compensation benefits discussed 670 million charge regulatory matter discussed subsequent event note 18 notes consolidated financial statements total operating expenses year ended march 31 2017 decreased 1453 million 6 246 billion compared 261 billion year ended march 31 2016 primarily due reduction impairment intangible assets 336 million offset part increase compensation benefits discussed operating expenses incurred investment management affiliate level comprised approximately 65 year ended march 31 2018 70 years ended march 31 2017 2016 total operating expenses excluding impairment charges remaining operating expenses excluding impairment charges corporate costs including costs global distribution operations compensation benefits components total compensation benefits millions dollar percentage changes periods follows nm meaningful total compensation benefits year ended march 31 2018 increased 8 15 billion compared 14 billion year ended march 31 2017 year ended march 31 2017 increased 16 14 billion compared 12 billion year ended march 31 2016 • salaries incentives increased 885 million 11 billion year ended march 31 2018 compared 10 billion year ended march 31 2017 driven 873 million increase net compensation investment affiliates primarily driven impact increased revenues certain revenueshare based affiliates typically creates corresponding increase compensation per applicable revenue share agreements salaries incentives increased 1091 million 102 billion year ended march 31 2017 compared 9158 million year ended march 31 2016 driven 921 million increase net compensation investment affiliates primarily due acquisitions clarion partners april 2016 entrust may 2016 offset part impact reduction operating revenue sharebased affiliates typically creates offsetting decrease compensation per applicable revenue share arrangements • benefits payroll taxes increased 174 million 2629 million year ended march 31 2018 compared 2455 million year ended march 31 2017 primarily due increase costs associated certain longterm incentive deferred compensation benefit plans well increase payrollrelated taxes benefits payroll taxes increased 129 million 2455 million year ended march 31 2017 compared 2326 million year ended march 31 2016 primarily due acquisitions clarion partners april 2016 entrust may 2016 offset part decrease legacy permal • transition costs severance decreased 249 million 114 million compared 363 million year ended march 31 2017 58 million 273 million years ended march 31 2018 2017 respectively associated restructuring permal combination entrust substantially complete remaining amounts period primarily severance costs corporate distribution personnel transition severance costs remained relatively flat 363 million year ended march 31 2017 compared 362 million year ended march 31 2016 273 million 322 million march 31 2017 2016 respectively associated previously discussed restructuring permal combination entrust remaining amounts period primarily severance costs related corporate distribution personnel see note 2 notes consolidated financial statements discussion transitionrelated costs • management equity plan charges year ended march 31 2017 comprised 152 million associated implementation management equity plan management team clarion partners 46 million associated additional grant equity units royce management equity plan management equity plan charges year ended march 31 2016 represent charge arising initial grant equity units royce management equity plan see note 11 notes consolidated financial statement additional information regarding management equity plans • performance fee pass represents clarion partners performance fees fully passed clarion partners employees compensation expense discussed year ended march 31 2018 compensation percentage operating revenues decreased 480 486 year ended march 31 2017 impact reduction transition severance costs primarily incurred connection restructuring permal combination entrust impact previously discussed management equity plan charges recognized prior year substantially offset impact increase performance fees earned clarion partners passed fully compensation expense year ended march 31 2017 compensation percentage operating revenues increased 486 453 year ended march 31 2016 primarily due impact acquisition clarion partners april 2016 including impact performance fees earned clarion partners passed fully compensation expense impact charges associated implementation clarion partners management equity plan grant additional equity units royce management equity plan offset part impact decreased revenues certain revenue sharebased affiliates retain relatively higher percentage revenues compensation impact charge associated initial royce management equity plan grant fiscal 2016 distribution servicing year ended march 31 2018 distribution servicing expenses decreased 2 4893 million compared 4991 million year ended march 31 2017 primarily due impact lower average aum certain products pay fees thirdparty distributors year ended march 31 2017 distribution servicing expenses decreased 9 4991 million compared 5457 million year ended march 31 2016 primarily due impact lower average aum certain products pay fees thirdparty distributors communications technology year ended march 31 2018 communications technology expense increased 2 2128 million compared 2089 million year ended march 31 2017 increase costs related implementation maintenance various technology initiatives offset part decrease technology depreciation printing costs year ended march 31 2017 communications technology expense increased 6 2089 million compared 1979 million year ended march 31 2016 result increase costs related data management technology maintenance consulting due part addition expenses related clarion partners acquisition april 2016 entrust acquisition may 2016 occupancy year ended march 31 2018 occupancy expense decreased 11 1008 million compared 1137 million year ended march 31 2017 primarily due net real estate charges 96 million recognized fiscal 2017 discussed year ended march 31 2017 occupancy expense decreased 7 1137 million compared 1226 million year ended march 31 2016 net real estate related charges 123 million recognized year ended march 31 2017 connection restructuring permal combination entrust offset part 27 million reduction previously existing lease reserve real estate related charges 177 million recognized year ended march 31 2016 connection reduced space requirements restructuring permal combination entrust amortization intangible assets year ended march 31 2018 amortization intangible assets decreased 246 million compared 262 million year ended march 31 2017 decrease primarily due reduction amortization expense result impairments rare infrastructure amortizable management contracts asset recognized fiscal 2018 fiscal 2017 offset part full year amortization expense recognized fiscal 2018 related acquisitions clarion partners april 2016 entrust may 2016 year ended march 31 2017 amortization intangible assets increased 262 million compared 50 million year ended march 31 2016 due additional amortization expense related acquisitions clarion partners april 2016 entrust may 2016 rare infrastructure october 2015 impairment intangible assets impairment intangible assets 2290 million 350 million 3710 million years ended march 31 2018 2017 2016 respectively impairment charges recognized year ended march 31 2018 comprised 1950 million related entrustpermal indefinitelife fund management contracts asset 320 million related rare infrastructure amortizable management contracts asset 20 million related rare infrastructure trade name asset impairment entrustpermal indefinitelife fund management contracts asset primarily result net client outflows legacy high net worth fund products including transfers client funds products entrustpermal separate accounts related decline revenues impairments rare infrastructure assets resulted losses separate account aum factors rare infrastructure related decline projected revenues revised estimate remaining useful life rare infrastructure separate account contracts intangible asset also contributed impairment asset impairment charges recognized year ended march 31 2017 comprised 180 million related rare infrastructure amortizable management contracts asset 170 million related permal trade name asset impairment rare infrastructure amortizable management contracts asset resulted client attrition related decline revenues reduction estimated remaining useful life contracts impairment permal trade name resulted decrease revenues reduction royalty rate reflecting decline value separate permal trade name due combination entrust impairment charges recognized year ended march 31 2016 comprised 3640 million related legacy permal indefinitelife fundofhedge funds management contracts asset 70 million related permal trade name asset resulted number current trends factors resulted decreased cash flow projections see critical accounting policies note 5 notes consolidated financial statements discussion impairment charges contingent consideration fair value adjustments contingent consideration fair value adjustments years ended march 31 2018 2017 2016 included credits aggregating 313 million 395 million 334 million respectively contingent consideration fair value adjustments year ended march 31 2018 comprised 320 million reduced contingent consideration liabilities related acquisitions rare infrastructure martin currie qs investors offset part expense 07 million increased contingent consideration liability related acquisition pk investments contingent consideration fair value adjustments year ended march 31 2017 reduced contingent consideration liabilities related acquisitions martin currie rare infrastructure qs investors financial guard contingent consideration fair value adjustments year ended march 31 2016 reduced contingent consideration liabilities related acquisitions martin currie fauchier partners management limited year ended march 31 2018 expenses increased 627 million 29 2823 million compared 2196 million year ended march 31 2017 primarily due 670 million charge regulatory matter discussed subsequent event note 18 notes consolidated financial statements year ended march 31 2017 expenses increased 232 million 12 2196 million compared 1964 million year ended march 31 2016 primarily result 91 million increase travel entertainment expenses 46 million increase insurance costs largely due costs incurred connection acquisitions clarion partners entrust 63 million increase professional fees nonoperating income expense components total nonoperating income expense millions dollar percentage changes periods follows nm meaningful interest expense year ended march 31 2018 interest expense increased 47 million 1179 million compared 1132 million year ended march 31 2017 primarily due net impact issuance 500 million 545 junior subordinated notes due 2056 545 2056 notes august 2016 proceeds used repay 500 million outstanding borrowings revolving credit facility year ended march 31 2017 interest expense increased 648 million 1132 million compared 484 million year ended march 31 2016 increase primarily due issuance 450 million 475 senior notes due 2026 notes 250 million 6375 junior subordinated notes due 2056 6375 2056 notes march 2016 net proceeds used fund acquisitions clarion partners april 2016 entrust may 2016 replenish cash used acquire rare infrastructure october 2015 issuance 545 2056 notes income expense net year ended march 31 2018 income expense net income 108 million compared income 417 million year ended march 31 2017 change primarily due 180 million reduction net market gains corporate investments offset corresponding increase compensation expense 87 million gain recognized fiscal 2017 connection disposition two small investment managers share joint venture year ended march 31 2017 income expense net income 417 million compared expense 260 million year ended march 31 2016 change primarily due 346 million increase net market gains corporate investments offset corresponding increase compensation expense 156 million increase net market gains seed capital investments assets invested deferred compensation plans offset corresponding increase compensation expense gains totaling 87 million associated disposition two small investment managers share joint venture fiscal 2017 79 million increase net market gains investments consolidated sponsored investment vehicles designated consolidated investment vehicles civs impact net income loss attributable legg mason inc losses fully attributable noncontrolling interests nonoperating income expense consolidated investment vehicles net year ended march 31 2018 nonoperating income expense consolidated investment vehicles net totaled income 98 million compared income 133 million year ended march 31 2017 change primarily due activity civs respective periods year ended march 31 2017 nonoperating income expense consolidated investment vehicles net totaled income 133 million compared expense 72 million year ended march 31 2016 primarily due consolidation additional civs result adoption updated consolidation accounting guidance effective april 1 2016 well increase net market gains investments certain civs see notes 1 17 notes consolidated financial statements additional information regarding consolidation sponsored investment vehicles net market gains investments certain civs income tax provision benefit year ended march 31 2018 income tax benefit 1025 million compared income tax provision 842 million year ended march 31 2017 effective benefit rate 438 year ended march 31 2018 compared effective tax rate 227 year ended march 31 2017 previously discussed december 22 2017 tax law enacted reduction us corporate tax rate well aspects tax law resulted onetime noncash provisional tax benefit 2209 million primarily due remeasurement certain existing deferred tax assets liabilities new 21 income tax rate addition noncash tax charge 73 million provisionally provided deemed repatriation unremitted foreign earnings provided tax law tax provision associated repatriations adjusted reflect impact tax law discussed note 7 notes consolidated financial statements continue evaluate various aspects impact tax law legg mason adjustments provisional items may made subsequent periods detailed information guidance obtained analyzed also year ended march 31 2018 effective benefit rate impacted 97 percentage points nondeductibility charge regulatory matter discussed subsequent event note 18 consolidated financial statements addition fiscal 2018 changes state apportionment state laws audit settlements discrete changes impacting state deferred tax liabilities resulted additional net tax expense 33 million reduced effective benefit rate 11 percentage points year ended march 31 2018 08 million discrete tax expense recognized respect equitybased compensation reduced effective benefit rate 03 percentage points year ended march 31 2017 provision income taxes 842 million compared 77 million year ended march 31 2016 effective tax rate 227 year ended march 31 2017 compared 305 year ended march 31 2016 change effective tax rate largely due impact 3710 million impairment charges recognized fiscal 2016 lower tax rate jurisdictions also fiscal 2017 part larger strategic initiative restructured certain holding company businesses increased amount foreign tax credits available utilization reduced effective tax rate 50 percentage points september 2016 uk finance act 2016 enacted reduced main uk corporate tax rate effective april 1 2020 18 17 impact tax rate reduction certain existing deferred tax assets liabilities resulted tax benefit 41 million reduced effective tax rate 11 percentage points fiscal 2017 noncontrolling interests entrustpermal clarion partners royce structured partnerships pass allocable portion tax attributes obligations related noncontrolling interest holders consolidated financial statements generally include tax provisionbenefit associated net income allocated noncontrolling interests increased effective benefit rate 59 percentage points year ended march 31 2018 reduced effective tax rate 43 percentage points year ended march 31 2017 impact civs consolidated sponsored investment products increased effective benefit rate 13 percentage points year ended march 31 2018 reduced effective tax rate 11 percentage points year ended march 31 2017 increased effective tax rate 238 percentage points year ended march 31 2016 net income loss attributable legg mason inc operating margin net income attributable legg mason inc year ended march 31 2018 totaled 2851 million 301 per diluted share compared 2273 million 218 per diluted share year ended march 31 2017 increase net income attributable legg mason inc largely result 2137 million 226 per diluted share onetime net noncash provisional tax benefit related tax law lower acquisition transitionrelated costs recognized fiscal 2018 70 million 005 per diluted share costs recognized year ended march 31 2018 compared 751 million 048 per diluted share recognized year ended march 31 2017 net impact increased operating revenues fiscal 2018 including 715 million increase performance fees passed compensation expense also contributed increase increases offset part 1940 million increase impairment charges 2290 million 196 per diluted share charges recognized year ended march 31 2018 compared 350 million 026 per diluted share charges recognized year ended march 31 2017 year ended march 31 2018 also impacted charge 670 million 071 per diluted share regulatory matter discussed subsequent event note 18 notes consolidated financial statements addition net income attributable legg mason inc per diluted share year ended march 31 2018 benefited reduction weightedaverage shares outstanding result share repurchases operating margin 103 year ended march 31 2018 compared 146 year ended march 31 2017 reflecting impact increase noncash impairment charges charge regulatory matter discussed net income attributable legg mason inc year ended march 31 2017 2273 million 218 per diluted share compared net loss attributable legg mason inc 250 million 025 per diluted share year ended march 31 2016 change primarily attributable impairment charges 3710 million 276 per diluted share recognized fiscal 2016 incremental net income related acquisitions clarion partners entrust fiscal 2017 inclusion full year results rare infrastructure acquired october 2015 pretax charge 214 million recognized fiscal 2016 connection initial grant equity units royce management equity plan increases offset part impairment charges 350 million 026 per diluted share recognized fiscal 2017 increase 247 million acquisition costs primarily related acquisitions clarion partners entrust including 152 million related implementation clarion partners management equity plan net impact reduced operating revenue certain legacy affiliates operating margin 146 year ended march 31 2017 compared 19 year ended march 31 2016 increase primarily attributable decrease impairment charges supplemental nongaap financial information supplemental information providing performance measure operating margin adjusted liquidity measure adjusted ebitda based methodologies generally accepted accounting principles “nongaap” management uses measures benchmarks evaluating comparing periodtoperiod operating performance liquidity operating margin adjusted calculate operating margin adjusted dividing operating income adjusted exclude impact compensation expense gains losses investments made fund deferred compensation plans impact compensation expense gains losses seed capital investments affiliates revenue sharing arrangements amortization related intangible assets income loss civs impact fair value adjustments contingent consideration liabilities unusual noncore charges including regulatory matter discussed subsequent event note 18 notes consolidated financial statements impairment charges ii operating revenues adjusted add back net investment advisory fees eliminated upon consolidation investment vehicles less distribution servicing expenses use approximate measure revenues passed third parties less performance fees passed compensation expense net income loss attributable noncontrolling interests refer operating revenues adjusted deferred compensation items removed operating income calculation offset equal amount nonoperating income expense net thus impact net income loss attributable legg mason inc adjust impact amortization management contract assets impact fair value adjustments contingent consideration liabilities arise acquisitions reflect fact items distort comparison operating results asset management firms engaged significant acquisitions impairment charges unusual noncore charges including regulatory matter discussed subsequent event note 18 notes consolidated financial statements income loss civs removed operating income calculation items reflective core asset management operations use operating revenues adjusted calculation show operating margin without distribution servicing expenses use approximate distribution revenues passed third parties direct cost selling products although distribution servicing expenses may include commissions paid connection launching closedend funds corresponding revenue period also use operating revenues adjusted calculation show operating margin without performances fees passed compensation expense net income loss attributable noncontrolling interests per terms certain recent acquisitions operating revenues adjusted also include advisory revenues receive consolidated investment vehicles eliminated consolidation gaap believe operating margin adjusted useful measure performance provides measure core business activities excludes items impact net income loss attributable legg mason inc indicates operating margin would without distribution revenues passed third parties direct cost selling products performance fees passed compensation expense net income loss attributable noncontrolling interests per terms certain recent acquisitions amortization related intangible assets changes fair value contingent consideration liabilities impairment charges unusual noncore charges including regulatory matter discussed subsequent event note 18 notes consolidated financial statements impact consolidation certain investment vehicles described consolidation investment vehicles impact net income loss attributable legg mason inc measure provided addition operating margin calculated gaap substitute calculations margins gaap may comparable nongaap performance measures including measures adjusted margins companies calculation operating margin operating margin adjusted follows dollars thousands operating margin adjusted years ended march 31 2018 2017 2016 246 197 186 respectively operating margin adjusted year ended march 31 2018 reduced 03 percentage points due transitionrelated costs incurred connection combination permal entrust operating margin adjusted year ended march 31 2017 reduced 18 percentage points due transitionrelated costs incurred connection combination permal entrust 08 percentage points due acquisitionrelated costs incurred connection clarion partners entrust acquisitions 07 percentage points due charge associated implementation clarion partners management equity plan operating margin adjusted year ended march 31 2016 reduced 20 percentage points due costs associated restructuring permal combination entrust 10 percentage point due compensation charge associated initial royce management equity plan grant 04 percentage points real estate related charges recognized fiscal 2016 associated reduced space requirements adjusted ebitda define adjusted ebitda cash provided used operating activities plus minus interest expense net accretion amortization debt discounts premiums current income tax expense benefit net change assets liabilities net income loss attributable noncontrolling interests net gains losses earnings investments net gains losses consolidated investment vehicles net change assets liabilities adjustment aligns consolidated statements cash flows adjusted ebitda reduced equitybased compensation expense including management equity plan noncash issuancerelated charges management equity plan units may put called us cash payment although terms require occur believe measure useful investors us provides additional information regard ability meet working capital requirements service debt return capital shareholders measure provided addition cash provided operating activities may comparable nongaap performance measures liquidity measures companies including measures ebitda adjusted ebitda measure confused net income loss cash provided operating activities measures earnings cash flows gaap provided supplement replacement gaap measures calculation adjusted ebitda follows dollars thousands adjusted ebitda years ended march 31 2018 2017 2016 6372 million 5602 million 5614 million respectively increase adjusted ebitda year ended march 31 2018 compared year ended march 31 2017 primarily due increase net income adjusted noncash items largely result reduction acquisition transitionrelated costs incurred connection acquisitions clarion partners entrust net impact increased operating revenues offset part impact charge related regulatory matter adjusted ebitda year ended march 31 2017 compared year ended march 31 2016 remained essentially flat net impact reduction operating revenues certain legacy affiliates substantially offset incremental earnings clarion partners entrust inclusion full year results rare infrastructure liquidity capital resources primary objective capital structure appropriately support business strategies provide needed liquidity times including maintaining required capital certain subsidiaries liquidity access liquidity important success ongoing operations overall funding needs capital base continually reviewed determine capital base meets expected needs businesses intend continue explore potential acquisition opportunities means diversifying strengthening asset management business opportunities may time involve acquisitions material size may require among things subject existing covenants raising additional equity capital andor issuance additional debt consolidation variable interest entities discussed impact liquidity capital resources however executed total return swap arrangements investors two etfs result receive related investment gains losses etfs required consolidate etfs march 31 2018 total return swap notional values aggregated 501 million otherwise rights benefits bear risks associated assets liabilities civs consolidated sponsored investment products beyond investments investment advisory fees generated products eliminated consolidation additionally creditors civs consolidated sponsored investment products recourse general credit beyond level investment consider liabilities obligations assets consist primarily intangible assets goodwill cash equivalents investment securities investment advisory related fee receivables assets principally funded equity capital longterm debt results operations march 31 2018 cash equivalents total assets longterm debt net stockholders equity 07 billion 82 billion 22 billion 39 billion respectively total assets include amounts related civs consolidated sponsored investment products 02 billion cash equivalents primarily invested bank deposits liquid domestic nondomestic money market funds hold principally domestic nondomestic government agency securities bank deposits corporate commercial paper recognized losses investments monitoring cash equivalents partially mitigates potential material risks may associated balances following table summarizes consolidated statements cash flows years ended march 31 millions cash inflows provided operating activities fiscal 2018 4929 million primarily related net income adjusted noncash items including 2290 million impairment charges 2137 million tax benefit recognized connection enactment tax law cash inflows provided operating activities fiscal 2017 5398 million primarily related net income adjusted noncash items net sales investment securities cash inflows provided operating activities fiscal 2016 4545 million primarily related net loss adjusted noncash items cash outflows used investing activities fiscal 2018 390 million primarily related payments made fixed assets increase restricted cash offset part returns capital received certain investments partnerships limited liability companies cash outflows used investing activities fiscal 2017 10 billion primarily related payments associated acquisitions clarion partners entrust aggregating 9979 million net cash acquired cash outflows used investing activities fiscal 2016 2446 million primarily related payments associated acquisitions rare infrastructure pk investments investment precidian investments aggregating 2341 million net acquired cash outflows used financing activities fiscal 2018 4623 million primarily related purchase 66 million shares common stock 2536 million open market purchases purchase 56 million shares common stock shanda asset management investment limited shanda 2255 million discussed dividends paid 1022 million offset part 1255 million net borrowings unsecured credit agreement amended time credit agreement fund purchase shares shanda cash outflows used financing activities fiscal 2017 1169 million primarily related repurchase 117 million shares common stock 3817 million dividends paid 879 million repayment 400 million shortterm borrowings offset part 4824 million net proceeds issuance 545 2056 notes august 2016 cash inflows provided financing activities fiscal 2016 4657 million primarily related proceeds issuance 6998 million longterm debt offset part repurchase 45 million shares common stock 2096 million financing transactions table reflects primary sources financing thousands march 31 2018 longterm debt august 2016 issued aggregate principal amount 500 million 545 2056 notes net proceeds together cash hand used repay total 500 million outstanding borrowings credit agreement discussed march 2016 issued 450 million 475 2026 notes 250 million 6375 2056 notes net proceeds offerings used partially finance acquisitions clarion partners april 2016 entrust may 2016 previously discussed revolving credit agreements december 2015 entered unsecured credit agreement provided 10 billion multicurrency revolving credit facility march 31 2017 credit agreement amended reduce amount available revolving credit facility 10 billion 500 million revolving credit facility may increased aggregate amount 500 million 10 billion subject approval lenders expires december 2020 repaid time revolving credit facility available fund working capital needs general corporate purposes december 2017 borrowed 2255 million credit agreement fund purchase shares shanda march 2018 repaid 100 million borrowings march 31 2018 1255 million remained outstanding borrowings outstanding credit agreement march 31 2017 august 2016 total 500 million outstanding borrowings credit agreement discussed repaid using net proceeds 545 2056 notes together cash hand may 2016 borrowed 460 million credit agreement partially finance acquisition entrust replenish cash used complete acquisitions clarion partners april 2016 rare infrastructure october 2015 december 2015 borrowed 40 million credit agreement remained outstanding march 31 2016 borrowings used repay 40 million outstanding borrowings previous revolving credit facility used partially finance acquisition rare infrastructure october 2015 discussed financial covenants credit agreement include maximum net debt ebitda ratio modified march 2017 35 1 period january 1 2017 march 31 2018 30 1 thereafter minimum ebitda interest ratio 40 1 debt defined include obligations borrowed money excluding nonrecourse debt civs capital leases net debt covenants debt reduced amount unrestricted cash excess greater subsidiary cash 300 million lesser 50 aggregate amount seed capital investments 125 million amount equal 50 hybrid capital securities ebitda defined consolidated net income loss plusminus tax expense benefit interest expense depreciation amortization intangibles extraordinary expense losses noncash charges certain transitionrelated costs defined agreements march 31 2018 net debt ebitda ratio 25 1 ebitda interest expense ratio 62 1 therefore maintained compliance applicable covenants june 2 2017 credit agreement amended include legg mason inc parent entity among entities permitted incur liens secure obligations including related cash collateral provisions hedging agreements aggregate amount exceed 200 million one time prior amendment certain subsidiaries permitted incur liens cash collateral provided legg mason inc connection certain hedging agreements considered lien assets purposes lien covenant result compliance terms credit agreement times amendment provides waiver defaults credit agreement may arisen prior date amendment resulting provision cash collateral net income significantly declines spend available cash may impact ability maintain compliance financial covenants credit agreement determine compliance covenants may pressure time either outstanding borrowings facility want utilize available borrowings otherwise desire keep borrowings available may elect take number actions including reducing expenses order increase ebitda using available cash repay portion outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt using available cash repay indebtedness would make cash unavailable uses might affect liquidity discussions conclusions entering modification restructuring debt would likely result additional fees interest payments credit agreement currently impacted ratings two rating agencies interest rate annual commitment fee revolving line credit based higher credit rating two rating agencies one rating agency gives us lower credit rating agency downgrade rating absent upgrade former agency borrowings outstanding revolving credit facility interest costs rise modestly discussed future outlook currently plan apply funds otherwise would used repurchase shares common stock make required payments resolution regulatory matter discussed subsequent event note 18 notes consolidated financial statements repay outstanding borrowings credit agreement end calendar year 2018 outstanding borrowings credit agreement fully repaid intend accumulate cash repay 250 million outstanding 2019 senior notes may 2012 refinanced outstanding 25 senior convertible notes convertible notes terms repurchase included issuance warrants holders convertible notes warrants replaced conversion feature convertible notes provided purchase aggregate subject adjustment 142 million shares common stock net share settled basis exercise price 88 per share warrants expired unexercised july 2017 see note 6 notes consolidated financial statements additional information regarding debt transactions expect next 12 months cash generated operating activities available cash hand adequate support operating cash needs currently intend utilize available resources number potential activities including limited repayment outstanding debt acquisitions repurchase shares common stock seed capital investments new existing products payment increased dividends addition ordinary operating cash needs resolution regulatory matter discussed subsequent event note 18 notes consolidated financial statements anticipate cash needs next 12 months discussed acquisitions march 31 2018 various commitments pay contingent consideration relating business acquisitions following table presents summary maximum remaining aggregate contingent consideration contingent consideration liability millions acquisitions additional details regarding contingent consideration significant recent acquisition discussed 1 using applicable exchange rate march 31 2018 amounts denominated currencies us dollar 2 includes amounts related two small acquisitions completed december 2017 described may obligated settle noncontrolling interests related certain affiliates following table presents summary affiliate redeemable noncontrolling interests millions excluding amounts related management equity plans march 31 2018 ultimate timing noncontrolling interest settlements uncertain project accuracy august 17 2016 acquired majority interest financial guard acquisition closing required cash payment funded existing cash resources contingent consideration 3 million potentially due one year closing date however payment due based relevant financial metrics also committed contribute 5 million additional working capital financial guard paid twoyear period following acquisition 25 million paid march 31 2018 may 2 2016 closed transaction combine permal entrust create entrustpermal 65 transaction required cash payment 400 million funded borrowings revolving credit facility well portion proceeds 2026 notes 6375 2056 notes issued march 2016 connection combination march 31 2018 incurred restructuring transitionrelated costs approximately 92 million approximately 15 noncash charges approximately 76 million paid combination substantially complete expect incur additional costs totaling 1 million 2 million fiscal 2019 see note 2 notes consolidated financial statements additional information noncontrolling interests 35 outstanding equity subject put call provisions may result future cash outlays april 13 2016 acquired majority interest clarion partners acquisition required cash payment approximately 632 million including payment cash delivered 37 million coinvestments 16 million funded portion proceeds issuance 2026 notes 6375 2056 notes march 2016 also implemented affiliate management equity plan management team clarion partners discussed conjunction acquisition committed provide 100 million seed capital clarion partners products second anniversary transaction closing noncontrolling interests 18 outstanding equity subject put call provisions may result future cash outlays january 22 2016 acquired minority equity position precidian investments llc precidian transaction required cash payment funded existing cash resources terms transaction acquired series b preferred units precidian entitle us approximately 20 voting economic interests precidian sole option 48 months following initial investment earlier within nine months security exchange commissions sec approval precidians application operate active sharessm product may subject satisfaction certain closing conditions upon payment consideration convert preferred units 75 common equity precidian fully diluted basis equity conversion put call options would attach noncontrolling interests 25 outstanding equity may result future cash outlays december 31 2015 martin currie acquired certain assets pk investments purchase price comprised initial cash payment 5 million contingent payment 32 million paid december 2017 payments funded existing cash resources additional consideration paid connection acquisition pk investments october 21 2015 acquired majority interest rare infrastructure acquisition required initial cash payment approximately 214 million using foreign exchange rate october 21 2015 296 million australian dollar payment funded 40 million net borrowings previous revolving credit facility well existing cash resources acquisition agreement provided potential contingent consideration payments due march 31 2017 2018 however payments due based relevant net revenue targets contingent consideration catchup adjustments 815 million using foreign exchange rate march 31 2018 maximum 106 million australian dollar amount per related agreements may due march 31 2019 dependent achievement certain net revenue targets however march 31 2018 payments expected due noncontrolling interests 25 subject put call provisions may result future cash outlays october 1 2014 acquired outstanding equity interests martin currie share purchase agreement provided potential first second third anniversary contingent payments due march 31 2016 2017 2018 respectively however payments due based relevant financial metrics addition martin currie legacy pension plan currently shortfall assets liabilities contingent payments earned would first applied cover shortfall connection review pensions regulator uk regulator pension plans current structure funding status martin currie trustees pension regulator agreed revised plan structure including redomiciliation plan uk additional guarantees provisions accelerated funding portion remaining benefit obligation certain circumstances martin currie agreed plan trustees contribute 33 million using exchange rate march 31 2018 £23 million annual contribution amount plan annual basis beginning fiscal 2019 continuing may 2024 final payment 21 million using exchange rate march 31 2018 £15 million final payment amount due november 2024 effective may 31 2014 completed acquisition qs investors august 2016 paid 66 million second anniversary contingent consideration funded existing cash resources addition contingent consideration 20 million fourth anniversary payment 34 million potential catchup adjustment second anniversary payment shortfall may due july 2018 dependent achievement certain net revenue targets march 2013 completed acquisition outstanding share capital fauchier may 2015 paid contingent consideration 228 million using exchange rate may 5 2015 second anniversary payment additional contingent consideration paid connection acquisition fauchier see notes 2 8 notes consolidated financial statements additional information regarding acquisitions affiliate management equity plans conjunction acquisition clarion partners april 2016 implemented affiliate management equity plan entitles certain key employees clarion partners participate 15 future growth enterprise value subject appropriate discounts subsequent date grant march 2016 implemented affiliate management equity plan management royce management equity plan march 31 2018 noncontrolling interests equivalent 190 royce entity issued management team addition implemented affiliate management equity plan march 2014 entitles certain key employees clearbridge participate 15 future growth enterprise value subject appropriate discounts june 2013 implemented affiliate management equity plan entitled key employees permal participate 15 future growth enterprise value subject appropriate discounts april 2016 conjunction combination permal entrust permal management equity plan liquidated payment 72 million participants march 31 2018 estimated redemption value units management equity plans aggregated 894 million repurchases units granted plans may impact future liquidity requirements however amounts timing repurchases uncertain project accuracy see note 11 notes consolidated financial statements additional information regarding affiliate management equity plans certain asset management affiliates maintain various credit facilities general operating purposes certain affiliates subject capital requirements various regulatory agencies affiliates met respective capital adequacy requirements periods presented january 2015 board directors authorized 10 billion additional purchases common stock previously discussed december 2017 board directors approved purchase 2255 million common stock shanda utilizing remaining 1690 million common stock available repurchase authorized january 2015 authorizing purchase additional 565 million common stock complete transaction march 31 2018 purchases common stock authorized future outlook march 31 2018 approximately 460 million cash equivalents excess working capital regulatory requirements 460 million includes amounts expected used fund accrued compensation payments primarily first quarter fiscal 2019 excluding purchase shares shanda discussed year ended march 31 2018 retired 2669 million shares including 132 million shares retired net share settlements annual deferred compensation award vesting made dividend payments totaling 1022 million december 2017 purchased 56 million shares common stock shanda 2255 million funded using 2255 million borrowings credit agreement aggregate purchase 2255 million effectively acceleration share repurchase program march 2018 applied funds otherwise would allocated share repurchases repay 100 million amounts borrowed credit agreement connection purchase shares shanda payment available cash amounts required resolution regulatory matter discussed subsequent event note 18 notes consolidated financial statements plan continue apply similar funds repay outstanding borrowings credit agreement end calendar year 2018 outstanding borrowings credit agreement fully repaid intend accumulate cash repay 250 million outstanding 2019 senior notes accordingly dividends increased currently intend repurchase significant additional shares common stock prior june 2019 march 31 2018 approximately 375 million available borrowing capacity credit agreement terminates december 2020 increased another 500 million approval lenders currently expect raise incremental debt equity financing next 12 months intend continue grow etf business continue explore implement various options facilitate launch provide capital new products going forward assurances expectations projections could prove incorrect events may occur require additional liquidity excess amounts available credit agreement opportunity refinance indebtedness market conditions might significantly worsen affecting results operations generation available cash events result operations available cash insufficient fund liquidity needs may seek manage available resources taking actions reducing operating expenses reducing expected expenditures investments selling assets investment securities repatriating earnings foreign subsidiaries reducing dividend modifying arrangements affiliates andor employees types actions prove insufficient acquisition refinancing opportunity arise would likely repay existing debt utilize borrowing capacity revolving credit facility seek raise additional equity debt liquid assets include cash equivalents certain current investment securities march 31 2018 total liquid assets approximately 942 million included 368 million cash equivalents investments held foreign subsidiaries net working capital amounts foreign subsidiaries significant order supplement cash available us general corporate purposes plan utilize approximately 24 million foreign cash annually next several years anticipate 12 million form debt service payments foreign affiliates remainder provided distribution forecasted future offshore earnings repatriation foreign earnings currently planned credit liquidity risk cash equivalent deposits involve certain credit liquidity risks maintain cash equivalents number high quality financial institutions funds time may concentrations one institutions balances financial institutions funds credit quality monitored ongoing basis offbalance sheet arrangements offbalance sheet arrangements defined sec include certain contractual arrangements pursuant company obligation certain contingent obligations certain guarantee contracts retained contingent interest assets transferred unconsolidated entity certain derivative instruments material variable interests unconsolidated entities provide financing liquidity market risk credit risk support disclosure required offbalance sheet arrangements reasonably likely material current future effect financial condition results operations liquidity capital resources generally enter offbalance sheet arrangements defined described contractual obligations section follows consolidation discussed critical accounting policies notes 1 17 notes consolidated financial statements derivatives hedging discussed notes 1 15 notes consolidated financial statements contractual contingent obligations contractual obligations make future payments principally connection longterm debt noncancelable lease agreements acquisition agreements service agreements see notes 6 8 notes consolidated financial statements additional disclosures related commitments following table sets forth contractual obligations millions fiscal year excludes contractual obligations civs consolidated sponsored investment products responsible liable obligations 1 represents borrowings credit agreement expire december 2020 2 represents contributions made martin currie legacy pension plan annual basis may 2024 final payment due november 2024 using exchange rate march 31 2018 £23 million annual committed contribution amount £15 million final payment amount see note 2 notes consolidated financial statements 3 amount contingent payments reflected year represents maximum amount could payable earliest possible date terms business purchase agreements using applicable exchange rate march 31 2018 amounts denominated currencies us dollar related contingent consideration liabilities aggregate fair value 56 million march 31 2018 see notes 2 8 notes consolidated financial statements contingent payment related acquisition martin currie reflected table payments due 4 table include approximately 448 million capital commitments investment partnerships limited partner outstanding funded required end commitment periods running fiscal 2030 100 million coinvestment commitment associated clarion partners acquisition approximately 25 million remaining additional working capital commitment associated financial guard acquisition funded period ending august 2018 5 table include amounts uncertain tax positions 496 million net federal benefit state tax liabilities timing related cash outflows cannot reliably estimated 6 table include redeemable noncontrolling interests related minority equity interests affiliates affiliate management equity plans key employees clarion partners clearbridge 6072 million march 31 2018 timing amount related cash outflows cannot reliably estimated redeemable noncontrolling interests civs 1250 million march 31 2018 also excluded table obligations relation amounts potential obligations arising ultimate settlement awards affiliate management equity plan key employees royce also excluded due uncertainty timing amounts ultimately payable see note 11 notes consolidated financial statements additional information regarding affiliate management equity plans 7 table include payments required resolution regulatory matter discussed subsequent event note 18 notes consolidated financial statements market risk maintain enterprise risk management program oversee coordinate risk management activities legg mason subsidiaries program certain risk activities managed subsidiary level following describes certain aspects business sensitive market risk revenues net income loss majority revenue calculated market value aum accordingly decline value underlying securities cause aum thus revenues decrease addition fixed income liquidity aum subject impact interest rate fluctuations rising interest rates may tend reduce market value bonds held various mutual fund portfolios separately managed accounts ordinary course business may also reduce waive investment management fees limit total expenses certain products services particular time periods manage fund expenses reasons help retain increase managed assets market conditions low interest rate environments may lead us take actions performance fees may earned certain investment advisory contracts exceeding performance benchmarks strong markets tend increase fees declines market values aum result reduced fee revenues net income generally earn higher fees alternative assets equity assets fees charged fixed income liquidity assets declines market values aum asset classes greater impact revenues addition revenue sharing arrangements certain affiliates retain different percentages revenues cover costs including compensation affiliates operate different levels margins net income loss profit margin compensation percentage operating revenues impacted based affiliates generate revenues change aum one subsidiary dramatically different effect revenues earnings equal change another subsidiary trading nontrading assets trading nontrading assets comprised investment securities including seed capital sponsored mutual funds products limited partnerships limited liability companies certain investment products trading current investments excluding civs subject risk security price fluctuations march 31 2018 2017 summarized table thousands trading current investments 1940 million 1585 million march 31 2018 2017 respectively relate longterm incentive plans offsetting liabilities end respective vesting periods related liabilities may completely offset end reporting period due vesting provisions therefore fluctuations market value trading investments impact compensation expense nonoperating income expense dependent vesting provisions plan net income loss approximately 2054 million 2651 million trading current investments march 31 2018 2017 respectively investments proprietary fund products investments fluctuations market value impact nonoperating income expense amounts fluctuations market value related approximately 286 million 235 million proprietary fund products march 31 2018 2017 respectively offsetting compensation expense revenue share arrangements fluctuations market value related approximately 1315 million 1363 million proprietary fund products march 31 2018 2017 respectively substantially offset gains losses market hedges therefore materially impact net income loss attributable legg mason inc investments proprietary fund products liquidated related fund establishes track record investors decision made longer pursue strategy nontrading assets excluding civs subject risk security price fluctuations march 31 2018 2017 summarized table thousands investment securities civs totaled 1491 million 587 million march 31 2018 2017 respectively fluctuations market value investments civs excess equity investment impact net income loss attributable legg mason inc however may impact nonoperating income expense civs corresponding offset net income loss attributable noncontrolling interests march 31 2018 2017 held equity investments civs 439 283 million respectively march 31 2018 fluctuations market value approximately 272 million equity investments civs substantially offset gains losses market hedges therefore materially impact net income loss attributable legg mason inc fluctuations market value remaining 167 million equity investments civs impact nonoperating income expense valuation trading nontrading investments described within critical accounting policies heading valuation financial instruments see notes 1 15 notes consolidated financial statements discussion derivatives following summary effect 10 increase decrease market values financial instruments subject market valuation risks march 31 2018 thousands 1 gains losses related investments deferred compensation plans directly offset full vesting period corresponding adjustment compensation expense related liability addition investments proprietary fund products investments civs totaling approximately 1587 million economically hedged limit market risk result 10 increase decrease unrealized market value financial instruments subject market valuation risks would result 106 million increase decrease pretax earnings attributable legg mason inc march 31 2018 also march 31 2018 2017 cash equivalents included 3501 million 4036 million respectively money market funds foreign exchange sensitivity operate primarily us provide services earn revenues incur expenses outside us accordingly fluctuations foreign exchange rates currencies principally uk brazil australia singapore japan denominated euro may impact aum revenues expenses comprehensive income loss net income loss certain affiliates entered forward contracts manage portion impact fluctuations foreign exchange rates results operations expect foreign currency fluctuations material effect net income loss liquidity interest rate risk exposure interest rate changes outstanding longterm debt substantially mitigated 250 million 27 senior notes due july 2019 250 million 395 senior notes due july 2024 450 million 475 senior notes due march 2026 550 million 5625 senior notes due july 2044 250 million 6375 junior subordinated notes due march 2056 500 million 545 junior notes due september 2056 fixed interest rates march 31 2018 1255 million floating rate borrowings outstanding credit agreement subject fluctuations interest rates impact nonoperating income loss net income loss march 31 2018 estimate 1 change interest rates would result net annual change interest expense 13 million see note 6 notes consolidated financial statements additional discussion debt critical accounting policies estimates accounting policies integral part preparation financial statements accordance accounting principles generally accepted united states america understanding policies therefore key factor understanding reported results operations financial position see note 1 notes consolidated financial statements discussion significant accounting policies information certain critical accounting policies require us make estimates assumptions affect amounts assets liabilities revenues expenses reported financial statements due nature estimates involve judgment based upon available information therefore actual results amounts could differ estimates difference could material impact consolidated financial statements consider following critical accounting policies involve significant estimates judgments consolidation normal course business sponsor manage various types investment products services entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees exposure risk entities except total return swap arrangements executed discussed generally limited equity investment made required make earned uncollected management fees uncollected management fees managed investment products material march 31 2018 issued investment performance guarantees investment products investors sell transfer assets investment products accordance financial accounting standards consolidate certain sponsored investment products designated civs financial information certain consolidated civs included consolidated financial statements threemonth lag based upon availability fund financial information certain investment products sponsor manage considered variable interest entities vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights sponsored investment products considered vres consolidated controlling financial interest investment product absent substantive investor rights replace manager entity kickout rights may fund initial cash investment certain vre investment products generate investment performance track record order attract thirdparty investors product initial investment new product typically represents 100 ownership product discussed “seed capital investments” consolidated long maintain controlling financial interest product designated civs unless investment longerterm vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity potential controlling financial interest must consolidate vie deemed primary beneficiary updated consolidation accounting guidance effective april 1 2016 adopted updated consolidation accounting guidance modified retrospective basis updated guidance limited partners sponsored investment product structured limited partnership similar entity either substantive investor rights replace manager kickout rights substantive participation rights general partner entities vies sponsor manager investment product may deemed decision maker accounting guidance fees paid decision maker marketbased fees considered variable interests vie marketbased fees customary commensurate level effort required services provided additionally employee interests sponsored investment product made circumvent consolidation guidance financed sponsor included variable interests assessment included primary beneficiary determination decision maker deemed primary beneficiary vie power direct activities significantly impact economic performance vie obligation absorb losses receive benefits variable interests could significant vie determining whether primary beneficiary vie consider qualitative quantitative factors voting rights equity holders guarantees implied relationships fee paid decision maker marketbased included primary beneficiary determination year ended march 31 2018 entered various total return swap arrangements financial intermediaries respect two legg mason sponsored etfs terms total return swaps absorb gains losses underlying etf investments financial intermediaries therefore variable interests two related funds deemed primary beneficiary consolidate two etfs designated civs prior consolidation accounting guidance years ending prior april 1 2016 prior accounting guidance sponsored investment fund vies deemed investment companies including money market funds determination expected residual returns excluded gross fees paid decision maker certain criteria relating fees met determining whether primary beneficiary vie considered qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid us related party ownership guarantees implied relationships sponsored investment funds meet investment company criteria determined primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits could significant vie considered management fee structure including seniority level fees current expected economic performance entity well provisions included governing documents might restricted guaranteed expected loss residual return see notes 1 3 17 notes consolidated financial statements additional discussion civs vies revenue recognition vast majority revenues calculated percentage fair value aum underlying securities within portfolios manage reflected within consolidated financial statements generally valued follows respect securities market quotations readily available market value securities ii respect securities assets fair value determined good faith march 31 2018 equity fixed income alternative liquidity aum values aggregated 2030 billion 4223 billion 661 billion 627 billion respectively majority aum valued independent pricing services based observable market prices inputs believe market risk significant risk underlying value aum economic events financial market turmoil increased market price volatility however discussed valuation vast majority securities held funds separate accounts continues derived readily available market price quotations march 31 2018 approximately 7 total aum valued based unobservable inputs majority related real estate funds discussed mutual funds pooled products boards directors similar bodies responsible establishing policies procedures related pricing securities board directors generally delegates execution various functions related pricing fund valuation committee turn may rely information various parties pricing securities independent pricing services fund accounting agent fund manager brokerdealers others combination thereof funds controls reasonably designed ensure prices assigned securities hold accurate management established policies ensure consistency application revenue recognition manager advisor separate accounts generally responsible pricing securities held client accounts may share responsibility others established policies govern valuation processes similar discussed mutual funds reasonably designed ensure consistency application revenue recognition management relies extensively data provided independent pricing services custodians pricing separate account aum separate account customers typically select custodian valuation processes aum dependent nature assets contractual provisions clients equity securities management market quotations available usually valued last reported sales price official closing price primary market exchange trade debt securities management usually valued bid mean last quoted bid asked prices provided independent pricing services based transactions debt obligations quotations bond dealers market transactions comparable securities various relationships securities shortterm debt obligations generally valued amortized cost approximates fair value majority aum valued based data third parties independent pricing services fund accounting agents custodians brokers varies slightly time based upon underlying composition asset class equity fixed income liquidity well actual underlying securities portfolio within asset class regardless valuation process pricing source established controls reasonably designed assess reasonableness prices provided market prices readily available determined reflect fair value may determined accordance established valuation procedures based among things unobservable inputs significant portion aum fair value determined based unobservable inputs certain real estate funds values real estate investments prepared giving consideration income cost sales comparison approaches estimating property value income approach estimates income stream property discounts income plus reversion presumed sale present value risk adjusted rate yield rates growth assumptions utilized approach derived market transactions well financial industry data discount rate exit capitalization rate significant inputs valuations rates based location type nature property current anticipated market conditions cost approach estimates replacement cost building less physical depreciation plus land value sales comparison approach compares recent transactions appraised property adjustments made dissimilarities typically provide range value many factors also considered determination fair value including limited operating cash flows financial performance properties property types geographic locations physical condition asset prevailing market capitalization rates prevailing market discount rates general economic conditions economic conditions specific market assets located specific rights terms associated investment inherent uncertainties valuation values may materially differ values would determined negotiations held parties sale transaction fully discussed note 1 notes consolidated financial statements effective april 1 2018 adopted updated accounting guidance revenue recognition modified retrospective basis adoption updated guidance significant impact revenue recognition practices valuation financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value trading investments investment securities derivative assets liabilities included consolidated balance sheets include forms financial instruments unrealized gains losses related financial instruments reflected net income loss comprehensive income loss depending underlying purpose instrument equity investments control investee primary beneficiary vie exert significant influence financial operating policies investee follow equity method accounting evaluation whether exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence may governing board investee legal rights investors entity pursuant funds operating documents relationship us investors entity equity method investees investment companies record underlying investments fair value therefore equity method accounting share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense investments value equity fixed income securities using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices evaluate nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist difference adjusted cost investment security current fair value recognized charge earnings period impairment determined investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires us estimate value securities using variety methods resources including current available financial information investment industry march 31 2018 2017 owned 600 million 676 million respectively investments partnerships limited liability companies accounted equity method included noncurrent assets consolidated balance sheets amounts 337 million 293 million respectively valued based assumptions estimates unobservable inputs remainder valued using net asset value nav practical expedient discussed march 31 2018 2017 also owned 95 million 147 million investments partnerships limited liability companies accounted cost method considers factors indicate may impairment value investments addition march 31 2018 2017 92 million 101 million respectively equity method investments included investment securities consolidated balance sheets accounting guidance fair value measurements disclosures defines fair value establishes framework measuring fair value accounting guidance defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance accounting guidance fair value measurements establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets us include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies us category may include fixed income securities certain proprietary fund products certain longterm debt level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds real estate funds category may also include certain proprietary fund products redemption restrictions contingent consideration valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products certain investments held civs valued nav determined fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 nav practical expedient based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity funds real estate funds investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient rely navs certain investments fair value navs provided investees derived fair values underlying investments reporting date investments fair value measured using nav practical expedient required categorized within fair value hierarchy march 31 2018 approximately 1 total assets 4 financial assets measured fair value less 1 total liabilities 45 financial liabilities measured fair value meet definition level 3 transfers categories measured beginning period see note 3 17 notes consolidated financial statements additional information intangible assets goodwill balances march 31 2018 follows thousands identifiable intangible assets consist primarily asset management contracts manage proprietary mutual funds hedge funds fundsofhedge funds trade names resulting acquisitions asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract contracts manage proprietary mutual funds hedge funds fundsofhedge funds real estate funds indefinitelife intangible assets assume foreseeable limit contract period due likelihood continued renewal little cost similarly trade names considered indefinitelife intangible assets expected generate cash flows indefinitely allocating purchase price acquisition intangible assets must determine fair value assets acquired determine fair values intangible assets acquired based upon projected future cash flows take consideration estimates assumptions including profit margins growth andor attrition rates acquired contracts based upon historical experience factors estimated contract lives discount rates projected net client flows market performance determination estimated contract lives requires judgment based upon historical client turnover attrition rates probability contracts termination provisions renewed discount rate employed weightedaverage cost capital takes consideration premium representing degree risk inherent asset fully described goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities given relative significance intangible assets goodwill consolidated financial statements quarterly basis consider triggering events occurred may indicate significant change fair values triggering events may include significant adverse changes business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred perform quantitative tests include critical reviews significant assumptions determine intangible assets goodwill impaired qualitatively concluded likely respective fair values exceed related carrying values perform tests indefinitelife intangible assets goodwill annually december 31 completed annual impairment tests goodwill indefinitelife intangible assets december 31 2017 result impairment tests combined entrustpermal indefinitelife funds management contracts asset determined partially impaired resulting pretax operating charge 195 million neither goodwill indefinitelife intangible assets deemed impaired also determined triggering events occurred march 31 2018 therefore additional indefinitelife intangible asset goodwill impairment testing necessary result uncertainty regarding future market conditions assessing fair value reporting unit intangible assets requires management exercise significant judgment details intangible assets goodwill related impairment tests follow amortizable intangible assets intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis significant assumptions used assessing recoverability management contract intangible assets include projected cash flows generated contracts remaining economic lives contracts projected cash flows based fees generated current aum applicable contracts generally assumed turnover evenly throughout life intangible asset remaining life asset based upon factors average client retention client turnover rates amortization periods longer appropriate expected lives adjusted impact fair value assessed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows exception rare infrastructure separate account contracts amortizable asset discussed impairments values amortizable intangible assets recognized year ended march 31 2018 estimates related future cash flows exceeded asset carrying values march 31 2018 clarion entrust separate account contracts amortizable assets net carrying values 822 million 498 million respectively comprise 80 total amortizable intangible asset management contracts aggregate carrying value march 31 2018 cumulative undiscounted cash flows related separate account contracts amortizable assets exceeded respective carrying values material amount however assurance future client attrition asset outflows market uncertainty factors produce impairment either assets march 31 2018 fair value rare infrastructure separate account contracts amortizable asset exceeded carrying value 9 million 25 despite excess fair value related carrying value future decreases cash flow projections resulting actual results changes assumptions due client attrition related reduction revenues investment performance market conditions factors may result impairment asset assurance continued client attrition asset outflows market uncertainty factors produce additional impairment asset three months ended june 30 2017 projected revenues related rare infrastructure separate account contacts amortizable asset declined due losses separate account aum factors including withdrawal approximately 15 billion institutional client june 2017 based revised attrition estimates remaining useful life acquired contracts decreased eight years five years june 30 2017 result decline projected revenues revised estimate remaining useful life amortized carrying value determined exceed fair value impairment charge 32 million recorded three months ended june 30 2017 significant assumptions used cash flow analysis june 30 2017 included projected aum growth rates 7 attrition rates 20 discount rate 165 estimated remaining useful lives amortizable intangible assets currently range one nine years weightedaverage life approximately 69 years indefinitelife intangible assets intangible assets lives indeterminable indefinite fair value determined market participants perspective based projected discounted cash flows taking account values market participants would pay taxable transaction acquire respective assets two primary types indefinitelife intangible assets proprietary fund contracts lesser extent trade names determine fair value intangible assets based upon discounted projected cash flows take consideration estimates future fees profit margins growth rates taxes discount rates determination fair values indefinitelife intangible assets highly dependent estimates changes inputs could result material impairment related carrying values asset determined impaired current implied fair value less recorded carrying value asset impaired difference current implied fair value carrying value asset reflected financial statements recognized operating expense period impairment determined exist contracts managed operated single unit contracts within family funds reviewed aggregate considered interchangeable investors transfer funds limited restrictions similarly cash flows generated new funds added fund group included determining fair value intangible asset discussed note 2 notes consolidated financial statements entrust combined permal form entrustpermal common management shared resources including infrastructure employees processes branding initiatives accordingly completing annual impairment testing process fiscal 2017 indefinitelife funds management contracts asset related entrust acquisition combined indefinitelife fundsofhedge funds management contracts asset related legacy permal business related carrying values cash flows funds aggregated impairment testing projected cash flows based annualized cash flows applicable contracts projected forward 40 years assuming annual cash flow growth estimated net client flows projected market performance estimate projected cash flows projected growth rates affiliate used project aum cash flow growth rates consider estimates aum flows market expectations asset class equity fixed income alternative liquidity investment manager based upon among things historical experience expectations future market investment performance internal external sources currently market growth assumptions 6 equity 3 fixed income 4 alternative 0 liquidity products general assumption 2 organic growth products subject exceptions organic growth contraction generally years one five starting point assumptions corporate planning process includes threeyear aum projections management operating affiliate consider specific business circumstances affiliate flow assumptions years one five certain affiliates adjusted appropriate reflect market participant view beyond year three estimates move towards general organic growth assumption 2 appropriate affiliate asset class year 20 resulting cash flow growth rate year 20 held constant used project cash flows year 40 based projected aum affiliate asset class affiliate advisory fee rates applied determine projected revenues domestic mutual fund contracts projected revenues applied weightedaverage margin applicable affiliates manage aum margins based arrangements currently place affiliate projected operating income reduced appropriate tax rate calculate projected cash flows believe growth assumptions reasonable given consideration multiple inputs including internal external sources although assumptions subject change based fluctuations actual results market conditions assumptions also subject change due among factors poor investment performance one operating affiliates withdrawal aum clients changes business climate adverse regulatory actions loss key personnel consider risks development growth assumptions discount rates discussed actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows process includes comparison actual results prior growth projections however differences actual results prior projections necessarily indicative need reassess estimates given discounted projected cash flow analyses include projections well beyond three years variances nearyears may offset subsequent years fair value assessments pointintime consistency fair value assessment indicators value reflect expectations market participants pointintime critical evidence soundness estimate value subsequent periods consider differences actual results prior projections considering reasonableness growth assumptions used current impairment testing discount rates based appropriately weighted estimated costs debt equity capital using market participant perspective estimate cost debt based published debt rates estimate cost equity capital based capital asset pricing model considers riskfree interest rate peergroup betas company equity risk premiums equity risk adjusted consider relative risk associated indefinitelife intangible asset reporting unit discount rates also calibrated based assessment relevant market values consistent standard valuation practices taxable transactions projected discounted cash flow analysis also factors tax benefit value appropriate tax benefit represents discounted tax savings third party purchased asset given valuation date would receive future tax deductions amortization purchase price 15 years tax rates used analyses adjusted new tax law appropriate december 31 2017 combined entrustpermal fund management contracts asset accounted approximately 11 indefinitelife intangible assets supported combined entrustpermal fund management business past several years seen declines traditional high net worth client fundsofhedge funds business including transfers client funds products entrustpermal separate account products result nearterm longterm growth assumptions contracts reduced led decreased projected cash flows business based upon projected discounted cash flow analyses entrustpermal fund management contracts asset carrying value 596 million exceeded fair value 401 million resulting impairment charge fiscal 2018 195 million excess base revenues related entrustpermal fund management contracts assumed annual growth contraction rates ranging 13 6 average 5 given current experience projected nearyear cash flows reflect aum outflows years one two three four trend modest aum inflows year five investment performance including expected impact future asset flows significant factor growth projections funds contracts market performance projections supported fact alternative assets 5year returns approximating 5 supported industry statistics projected cash flows entrustpermal fund management contracts discounted 150 reflecting factors noted future decreases cash flow projections increases discount rate resulting actual results changes assumptions resulting flow aum levels investment performance market conditions factors may result impairment asset assurance asset flows market uncertainty factors produce additional impairment asset could significant december 31 2017 rare infrastructure mutual funds contracts asset 133 million using exchange rate december 31 2017 accounted approximately 4 indefinitelife intangible assets based projected discounted cash flow analyses fair value mutual funds contracts asset exceeded carrying value 3 impairment test cash flows rare infrastructure mutual fund contracts assumed longterm annual growth rates averaging approximately 7 reflect moderate aum inflows years 1 2 projected cash flows rare infrastructure mutual fund contracts discounted 165 assuming factors remain actual results andor changes assumptions rare infrastructure mutual fund contracts cash flow projections longterm would deviate 3 projections discount rate would raised 165 170 asset deemed impaired despite excess fair value related carrying value given current uncertainty regarding future market conditions reasonably possible fund performance flows aum levels may decrease near term actual cash flows rare infrastructure mutual funds contracts could deviate projections 3 asset could deemed impaired material amount domestic mutual fund contracts acquired citigroup asset management “cam” transaction 21 billion account approximately 60 indefinitelife intangible assets december 31 2017 approximately 560 billion aum primarily managed clearbridge western asset associated asset approximately 53 equity aum 41 fixed income aum 6 liquidity aum although domestic mutual funds overall maintained strong recent market performance previously disclosed uncertainties regarding market conditions asset flows risks related potential regulatory changes liquidity business reflected projected discounted cash flow analyses based projected discounted cash flow analyses related fair value exceeded carrying value material amount impairment test cash flows domestic mutual fund contracts assumed annual growth rates averaging approximately 7 reflect moderate aum inflows years 1 2 projected cash flows domestic mutual fund contracts discounted 145 december 31 2017 clarion partners mutual funds contracts asset 505 million accounted approximately 14 indefinitelife intangible assets based projected discounted cash flow analyses related fair value exceeded carrying value 28 impairment test cash flows clarion partners mutual fund contracts assumed longterm annual growth rates averaging approximately 6 reflect moderate aum inflows throughout projection period projected cash flows clarion partners mutual fund contracts discounted 125 trade names account 2 indefinitelife intangible assets primarily related entrustpermal clarion partners carrying values 29 million 23 million respectively tested intangible assets using relief royalty approach discounted cash flow methods similar described indefinitelife contracts december 31 2017 fair value combined entrustpermal trade names exceeded carrying value 29 million 1 significant assumptions used cash flow analysis included projected annual revenue growth contraction rates 14 6 average 3 royalty rate 15 discount rate 145 future decreases cash flow projections increases discount rate resulting actual results changes assumptions resulting flow aum levels investment performance market conditions factors may result impairment asset assurance asset outflows market uncertainty factors produce additional impairment assets result aum losses factors tested rare infrastructure trade name asset impairment quarter ended june 30 2017 5 million carrying value trade name exceeded 3 million fair value resulted 2 million impairment significant assumptions used cash flow analysis june 30 2017 included average projected annual growth rates 8 royalty rate 10 discount rate 165 december 31 2017 fair value trade name exceeded carrying value 19 future decreases cash flow projections increases discount rate resulting actual results changes assumptions resulting flow aum levels investment performance market conditions factors may result impairment asset assurance asset outflows market uncertainty factors produce additional impairment asset december 31 2017 resulting fair values trade name assets significantly exceeded related carrying amounts assurance resolution regulatory matter discussed subsequent event note 18 notes consolidated financial statements impact entrustpermal intangible assets result impairment assets goodwill evaluated reporting unit level considered impairment carrying amount reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit use valuation techniques based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition continue managed one global asset management operating segment internal management reporting discrete financial information regularly received chief operating decision maker chief executive officer consolidated global asset management business level result goodwill recorded evaluated one global asset management reporting unit level global asset management reporting unit consists operating businesses asset management affiliates centralized global distribution operations impairment testing process consolidated assets except certain tax benefits liabilities allocated single global asset management reporting unit similarly projected operating results reporting unit include holding company corporate costs overhead including interest expense costs associated executive management finance human resources legal compliance internal audit central corporate functions goodwill principally originated acquisitions cam permal royce martin currie rare infrastructure clarion partners entrust value reporting unit based part projected consolidated net cash flows including cash flows assets managed mutual funds closedend funds proprietary funds addition separate account assets managers significant assumptions used assessing implied fair value reporting unit discounted cash flow method consistent methodology discussed indefinitelife intangible assets also reporting unit level future corporate costs estimated consolidated projected operating results affiliates actual cash flows one period may vary projected cash flows without resulting impairment charge variance one period must considered conjunction assumptions impact projected cash flows discount rates based appropriately weighted estimated costs debt using market participant perspective also consistent methodology discussed indefinitelife intangible assets also perform marketbased valuation reporting unit value applies average ebitda multiples paid change control transactions peer companies ebitda results two estimates value reporting unit discounted cash flow ebitda multiple analyses compared significant differences assessed determine reasonableness value whether adjustment either result warranted values accepted appropriately weighted average two reporting unit valuations discounted cash flow ebitda multiple analyses used implied fair value global asset management reporting unit december 31 2017 exceeded carrying value 30 considering relative merits details involved valuation process use equal weighting two values changes assumptions underlying projected cash flows reporting unit ebitda multiple resulting market conditions reduced aum factors could result impairment goodwill impairment could potentially material impact results operations financial condition assess accuracy reporting unit value determined valuation methods comparing results market capitalization determine implied control premium reasonableness implied control premium considered comparing control premiums paid relevant actual change control transactions assessment provides evidence underlying assumptions analyses reporting unit fair value reasonable calculating market capitalization purposes market volatility significant impact capitalization appropriate may consider average market prices stock period one two months test date determine market capitalization control premium arises fact acquisition typically premium paid current market prices publicly traded companies relates ability control operations acquired company assessments control premiums asset management industry difficult many acquisitions involve privately held companies involve portions public company control premium calculated recent market evidence regarding control premiums suggest values 0 67 average 27 realistic common believe premiums reasonable range estimation equity value based analysis consideration believe implied control premium 34 determined reporting unit value estimation december 31 2017 reasonable relation observed relevant market control premium values contingent consideration liabilities connection business acquisitions may required pay additional future consideration based achievement certain designated financial metrics estimate fair value potential future obligations time business combination consummated record contingent consideration liability consolidated balance sheet fair values contingent consideration liabilities revised quarterly reporting date march 31 2018 fair values contingent consideration liabilities aggregate 56 million primarily relating acquisition qs investors contingent consideration expected due related acquisition rare infrastructure estimate fair value contingent consideration liabilities using probabilityweighted modeling specific business acquisition arrangement contingent consideration estimated payments discounted present value measurement date rare infrastructure qs investors purchase agreements require us potentially pay additional consideration based whether certain future revenue thresholds achieved significant increases decreases projected revenue levels rare infrastructure qs investors would result significantly higher lower contingent consideration liability fair value resulting changes could material operating results martin currie purchase agreement also required us potentially pay additional consideration based achievement certain financial metrics specified share purchase agreement certain dates three onehalf year earnout term concluded march 31 2018 additional consideration due based relevant financial metrics modeling martin currie contingent payment arrangement prior march 31 2018 included monte carlo simulation projected aum performance fees product performance determine related estimated payment amounts stockbased compensation stockbased compensation plans include stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units affiliate management equity plans deferred compensation payable stock compensation plans issue equity awards directors officers key employees accordance applicable accounting guidance compensation expense years ended march 31 2018 2017 2016 includes compensation cost nonvested sharebased awards grant date fair value amortized respective vesting periods may reduced retirementeligible recipients straightline method effective april 1 2017 adopted updated accounting guidance stockbased compensation accounting updated guidance simplifies several aspects accounting stockbased compensation including income tax consequences clarifies classification criteria awards either equity liabilities classification related amounts statements cash flows updated guidance requires excess tax benefits deficiencies associated stockbased compensation recognized discrete items income tax provision benefit consolidated statements income loss reporting period occur thereby increasing volatility income tax provision benefit result fluctuations stock price adopted amendment modified retrospective basis upon adoption updated guidance elected prospectively account forfeitures occur also cash flows related income tax deductions excess less related stockbased compensation expense classified cash flows operating activities consolidated statements cash flows prior accounting guidance cash flows classified cash flows financing activities granted 04 million 08 million 09 million stock options fiscal 2018 2017 2016 respectively determine fair value option grant using blackscholes optionpricing model except marketbased grants use monte carlo optionpricing model models require management develop estimates regarding certain input variables inputs blackscholes model include stock price date grant exercise price option dividend yield volatility expected life riskfree interest rate exception grant date stock price exercise price require estimates assumptions calculate dividend yield based upon average historical quarterly dividend payments term equal expected life options estimate volatility equally weighted historical prices stock period equal expected life option implied volatility market listed options date grant expected life estimated length time option held either exercised canceled based upon historical option exercise experience riskfree interest rate available zerocoupon us government issues remaining term equal expected life options valued used different methods estimate variables blackscholes monte carlo models used different type optionpricing model fair value option grants might different fiscal 2017 implemented affiliate equity management plan entitles certain key employees clarion partners participate 15 future growth affiliates enterprise value subject appropriate discounts subsequent date grant fiscal 2016 implemented affiliate management equity plan royce resulted issuance minority equity interests affiliate management team fiscal 2017 fiscal 2016 royce interests allow holders receive quarterly distributions affiliates net revenues amounts equal percentage ownership represented equity hold fiscal 2014 also implemented management equity plans permal clearbridge granted units certain employees entitle participate 15 future growth respective affiliates enterprise value subject appropriate discounts fiscal 2017 connection combination permal entrust permal management equity plan liquidated also determine fair value optionlike affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts inputs blackscholes model generally determined fashion similar fair value grants options stock described however affiliates private companies without quoted stock prices utilize discounted cash flow analyses marketbased valuations similar discussed heading “intangible assets goodwill” determine respective business enterprise values subject appropriate discounts lack control marketability additional information stockbased compensation see notes 1 11 notes consolidated financial statements noncontrolling interests noncontrolling interests include affiliate minority interests thirdparty investor equity consolidated sponsored investment products vested affiliate management equity plan interests noncontrolling interests holder may able request settlement classified redeemable reported estimated settlement values settlement expected occur future date changes expected settlement value recognized settlement period nonredeemable noncontrolling interests permit holder request settlement reported issuance value together undistributed net income loss allocated noncontrolling interests estimate settlement value noncontrolling interests fair value consolidated sponsored investment products investor may request withdrawal time fair value based market quotes underlying securities held investment vehicles affiliate minority interests affiliate management equity plan interests fair value reflects related total business enterprise value appropriate discounts lack marketability control may also features equity interests dividend subordination contemplated valuations fair value optionlike management equity plan interests also relies blackscholes option pricing model calculations noted affiliate noncontrolling interests subsequent acquisition business enterprise values derived using various methods including discounted cash flows guideline public company guideline public transaction methods may engage thirdparty valuation experts perform independent determinations fair value review internally prepared valuations appropriate based relative significance related amounts related contractual provisions changes valuation inputs income taxes subject income tax laws federal state local jurisdictions us numerous foreign jurisdictions operate file income tax returns representing filing positions relevant jurisdiction due inherent complexities arising conducting business taxed substantial number jurisdictions must make certain estimates judgments determining income tax provision benefit financial statement purposes substantially deferred tax assets relate us federal state uk taxing jurisdictions march 31 2018 us federal deferred tax assets aggregated 551 million realization expected require 38 billion us earnings next 10 years 13 billion must foreign sourced earnings deferred tax assets generated us jurisdictions resulting net operating losses generally expire 20 years generated resulting foreign tax credits generally expire 10 years generated based estimates future taxable income using assumptions consistent used goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realized respect resulting foreign tax credit carryforwards likely tax benefits relating utilization approximately 16 million foreign taxes credits realized valuation allowance established estimates assumptions contemplate changes ownership legg mason stock could certain circumstances limit utilization net operating loss foreign tax credit benefits limitation would impact timing amount net operating loss foreign tax credit benefits ultimately realized expire year ended march 31 2018 federal valuation allowances decreased 64 million compared year ended march 31 2017 primarily result impact tax law ability utilize carryforward foreign tax credits march 31 2018 us state deferred tax assets aggregated 220 million offset valuation allowance 92 million primarily related state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized year ended march 31 2018 changes pennsylvania law liberalized annual limitation use net operating losses resulted 62 million increase state deferred tax assets offset valuation allowance 57 million due variability future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary foreign jurisdictions net decrease valuation allowances 11 million fiscal 2018 primarily relates revised estimates realization deferred tax benefits extent analysis realization deferred tax assets relies deferred tax liabilities considered timing nature jurisdiction reversals well available planning strategies value measure realizability deferred tax assets event determine portion deferred tax assets already subject valuation allowance realizable required establish valuation allowance charge income tax provision period determination made values deferred tax assets based enacted corporate tax rates future period tax attributes anticipated realized legislative changes rates would require remeasurement deferred tax assets period enactment depending facts circumstances charge could material earnings december 22 2017 tax law enacted tax law complex materially changes us corporate income tax rate 35 21 includes various changes impact us reduction us corporate tax rate resulted onetime noncash provisional tax benefit quarter ended december 31 2017 2209 million resulting remeasurement certain existing deferred tax assets liabilities new income tax rate addition noncash tax charge 73 million provisionally provided quarter ended december 31 2017 tax deemed repatriation unremitted foreign earnings tax law remeasurement deferred tax assets liabilities subject adjustments measurement period due complexity determining net deferred tax liability enactment date accounting tax unremitted foreign earnings incomplete due complexity determining various components calculation including relevant level foreign earnings profits amount earnings held cash specified assets additional adjustments provisional items may made subsequent periods detailed information guidance obtained analyzed tax law also created new taxes international operations including global intangible lowtaxed income gilti provision accounting guidance relevant gilti provision provides company elect measurement period either account tax expense period incurred factor measurement deferred taxes require additional time evaluate provision accounting implications yet elected related accounting policy tax law preliminary estimate future annual effective tax rate 22 26 impact actual cash taxes pay actual impact tax law us actual future effective tax rates may materially differ estimates due among things changes interpretations assumptions made determining estimates guidance may issued internal revenue service respect tax law actions may decide take future calculation tax liabilities involves uncertainties application complex tax regulations recognize liabilities anticipated tax uncertainties us tax jurisdictions based estimate whether extent additional taxes due recent accounting developments see discussion recent accounting developments note 1 notes consolidated financial statements effects inflation rate inflation directly affect various expenses including employee compensation communications technology occupancy may readily recoverable charges services provided us extent inflation adversely affects securities markets may impact revenues recorded intangible asset goodwill values see discussion market risk revenues net income loss critical accounting policies intangible assets goodwill previously discussed item 7a nannannannanitem 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis results operations financial condition liquidity capital resources risk management disclosure market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis results operations financial condition liquidity capital resources risk management disclosure market risk item 8item 7a quantitative qualitative disclosures market risks see “item 7 managements discussion analysis results operations financial conditionrisk management” disclosure market risk item 8item 7a quantitative qualitative disclosures market risk see “item 7 management’s discussion analysis financial condition results operations risk management” disclosure market risk item 8item 7a quantitative qualitative disclosures market risk see “item 7 management’s discussion analysis financial condition results operations risk management” disclosure market risk item 8item 7a quantitative qualitative disclosures market risk see “item 7 management’s discussion analysis financial condition results operationsmarket risk” disclosure market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosure market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosures market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosures market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosures market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosures market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosures market risk item 8item 7a quantitative qualitative disclosures market risk see “item 7 management’s discussion analysis financial condition results operations market risk” disclosure market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosures market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosures market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosures market risk item 8nanitem 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis results operations financial conditionliquidity capital resourcesrisk management disclosure market risk item8 financial statements supplementary data board directors stockholders legg mason inc opinion accompanying consolidated statements financial condition legg mason inc subsidiaries company related consolidated statements earnings changes stockholders equity cash flows present fairly material respects consolidated financial position legg mason inc subsidiaries march 31 2000 1999 consolidated results operations cash flows three years period ended march 31 2000 conformity accounting principles generally accepted united states financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits financial statements accordance auditing standards generally accepted united states require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp baltimore maryland may 4 2000 except note 17 date may 26 2000 consolidated statements earnings dollars thousands except per share amounts see notes consolidated financial statements consolidated statements financial condition dollars thousands see notes consolidated financial statements consolidated statements changes stockholders equity dollars thousands except share amounts adjusted reflect stock splits see notes consolidated financial statements consolidated statements cash flows dollars thousands see notes consolidated financial statements notes consolidated financial statements dollars thousands except per share amounts 1 summary significant accounting policies basis presentation legg mason inc parent wholly owned subsidiaries collectively company principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent wholly owned subsidiaries material intercompany balances transactions eliminated appropriate prior years financial statements reclassified conform current year presentation consolidated financial statements prepared accordance generally accepted accounting principles require management make assumptions estimates affect amounts reported financial statements accompanying notes actual amounts could differ estimates cash equivalents cash equivalents highly liquid investments original maturities 90 days less held sale ordinary course business securities purchased agreements resell company invests shortterm securities purchased agreements resell collateralized us government agency securities purchased agreements resell accounted collateralized financings policy company obtain possession collateral fair value excess principal amount loaned collateral valued daily company may require counterparties deposit additional collateral appropriate securities purchased agreements resell carried amounts securities subsequently resold specified respective agreements plus accrued interest securities transactions customer securities transactions recorded settlement date basis related commission revenues expenses recorded trade date basis financial instruments owned financial instruments used companys trading activities recorded trade date basis carried fair value unrealized gains losses reflected earnings fair values generally based listed market prices dealer price quotations similar instruments equity securities purchased received connection private equity activities carried original cost carrying value equity securities marked market changes underlying fair values readily ascertainable generally evidenced listed market prices transactions directly affect value equity securities downward adjustments relating equity securities made event company determines eventual net realizable value less quoted value securities lending securities borrowed loaned accounted collateralized financings recorded amount cash collateral advanced received securities borrowed transactions require company deposit cash collateral lender company generally receives collateral form cash securities loaned fee received paid company recorded interest revenue expense company monitors fair value securities borrowed loaned daily basis additional collateral obtained refunded necessary investments company holds debt equity investments classified availableforsale heldtomaturity debt equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders equity comprehensive income debt securities held companys finance subsidiaries positive intent ability hold maturity classified heldtomaturity investments recorded amortized cost amortization discount premium included current period earnings depreciation amortization equipment leasehold improvements reported cost net accumulated depreciation amortization 65788 58910 march 31 2000 1999 respectively depreciation amortization determined use straightline method estimated useful life asset remaining life lease maintenance repair costs expensed incurred intangible assets intangible assets consist principally goodwill asset management mortgage servicing contracts attributable business combinations reported cost net accumulated amortization company capitalizes costs incurred acquiring mortgage servicing rights loan origination activities accordance statement financial accounting standards sfas 125 accounting transfers servicing financial assets extinguishments liabilities intangibles amortized using straightline accelerated methods principally periods exceeding twenty years accumulated amortization march 31 2000 1999 48517 43914 respectively company periodically reviews accounting goodwill intangible assets considering factors historical profitability projected operating cash flows determine assets realizable amortization periods appropriate fair value financial instruments march 31 2000 1999 substantially financial instruments carried fair value amounts approximate fair value fair value senior notes estimated using current market prices 93150 100837 march 31 2000 1999 respectively translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates statement financial condition date revenues expenses translated average exchange rates year gains losses resulting translating foreign currency financial statements reported stockholders equity comprehensive income gains losses resulting foreign currency transactions included earnings investment advisory related fees company earns investment advisory fees assets accounts managed subsidiaries distribution fees assets companysponsored mutual funds assetbased fees various types singlefee brokerage accounts revenues investment advisory related activities recognized period services performed stockbased compensation company accounts stockbased compensation accordance accounting principles board opinion apb 25 accounting stock issued employees permitted sfas 123 accounting stockbased compensation companys stockbased compensation plans include stock options restricted awards stock bonus awards stock purchase plans deferred compensation payable stock accordance apb 25 compensation expense recognized stock options intrinsic value date grant pro forma effects sfas 123 net income earnings per share presented note 12 earnings per share basic earnings per common share eps calculated dividing net earnings weightedaverage number common shares outstanding diluted eps similar basic eps adjusts effect potential common shares following table presents computations basic diluted eps march 31 2000 1999 options purchase 57000 2718200 shares respectively included computation diluted earnings per share options exercise prices greater average price common shares period addition march 31 2000 1999 69405 1423619 shares respectively held employee stock trust antidilutive therefore excluded computation diluted earnings per share 2 business combinations december 1999 company completed acquisition johnson fry holdings plc johnson fry londonbased retail fund management company acquisition accounted purchase accordingly net assets results operations included companys consolidated financial statements date acquisition total purchase price approximately 72000 including 67000 cash 5000 liabilities excess purchase price tangible net assets acquired 63978 amortized straightline basis 20 years johnson fry two wholly owned finance subsidiaries purpose finance companies raise funds issuing secured fixedrate loan securities minimum maturity five years use proceeds invest portfolio bonds issued various financial institutions generally available public tranches small enough retail investor see notes 5 7 september 30 1999 company entered joint venture bingham dana llp bostonbased law firm acquire 50 interest trust administration business 10000 investment joint venture accounted equity method september 2 1999 company acquired assets berkshire asset management inc berkshire 18000 berkshire provides investment management services predominantly domestic equity fixedincome accounts high net worth individuals institutions acquisition accounted purchase accordingly net assets results operations included companys consolidated financial statements date acquisition excess purchase price tangible net assets acquired 17745 amortized straightline basis 12 years following unaudited pro forma consolidated results presented though acquisitions johnson fry berkshire occurred beginning period presented adjusted amortization excess cost net tangible assets acquired company acquired brandywine asset management inc brandywine january 1998 brandywine provides investment management services institutions high net worth individuals company issued 5148312 shares common stock acquire brandywine transaction accounted pooling interests accordingly years presented include results brandywine order conform companys fiscal year brandywines operating profit 920 quarter ended march 31 1997 reflected adjustment retained earnings acquisition material companys financial statements 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 2438020 2069350 march 31 2000 1999 respectively company pays interest certain customer free credit balances held investment purposes 4 financial instruments fair value securities positions consist following march 31 5 investments company two categories investments investment securities investments finance subsidiaries investments classified availableforsale heldtomaturity described note 1 investment securities consist highly liquid debt equity securities investments finance subsidiaries consist bonds issued various financial institutions investments march 31 2000 1999 follows 1 nonqualifying sfas 115 accounting certain investments debt equity securities purposes information regarding companys investments categorized maturity date follows proceeds gross realized gains losses sales maturities availableforsale investments follows 6 shortterm borrowings company obtains shortterm financing primarily secured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized us government agency securities corporate debt equity securities company outstanding loan balances 23290 49262 march 31 2000 1999 respectively companys weighted average interest rates 632 625 respectively company committed unsecured revolving credit facility 50000 matures june 30 2000 facility restrictive covenants require among things company maintain specified levels net worth borrowings outstanding facility march 31 2000 1999 company maintained compliance applicable covenants facility times 7 longterm debt company outstanding 100000 senior notes due february 15 2006 bear interest 65 notes issued discount yield 657 march 31 2000 company 50000 available issuance additional debt convertible debt securities pursuant shelf registration described note 2 companys finance subsidiaries issued series secured fixedrate notes minimum maturity five years obligations become due beginning august 2000 march 2003 interest rates ranging 63 70 notes outstanding march 31 2000 based contractual terms mature follows 8 commitments contingencies company leases office facilities equipment noncancelable operating leases also multiyear agreements data processing services leases service agreements expire varying dates 2013 certain leases provide renewal options contain escalation clauses providing increased rentals march 31 2000 minimum annual aggregate rentals service commitments follows total rental expense operating leases service contracts 51512 42818 37908 2000 1999 1998 respectively company enters whenissued underwriting commitments open transactions relating commitments march 31 2000 closed effect consolidated financial statements company would material company named defendant various legal actions arising primarily securities investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial involved certain governmental self regulatory agency investigations proceedings ultimate resolution matters cannot currently determined opinion management consultation legal counsel matters resolved material adverse effect consolidated financial condition company however period potential adverse contingency become probable results operations period could materially affected 9 income taxes company subsidiaries file consolidated federal income tax return provision income taxes consists reconciliation difference statutory federal income tax rate effective income tax rate follows components companys deferred tax assets liabilities included assets liabilities follows march 31 2000 1999 deferred tax valuation allowance primarily benefits related net operating losses net operating losses two components domestic state foreign state net operating losses expire 2004 2019 foreign net operating losses continue utilized otherwise expiration date 10 employee benefits company subsidiaries maintains various defined contribution plans covering substantially employees addition discretionary contributions company matches 50 employee 401k contributions 6 employee compensation maximum two thousand five hundred dollars per year contributions charged operations amounted 29478 18693 17155 2000 1999 1998 respectively addition employees make voluntary contributions certain plans 11 capital stock march 31 2000 authorized numbers common preferred shares 100 million 4 million respectively addition march 31 2000 1999 approximately 151 million 115 million shares common stock respectively reserved issuance companys stock option plans 52 million shares reserved connection perigee inc perigee transaction see note 17 dividends declared paid march 31 2000 1999 1998 4676 3660 3025 respectively company effected 2for1 stock split 4for3 stock split fiscal 1999 1998 respectively references consolidated financial statements number common shares per share amounts adjusted retroactively reflect stock splits except number issued common shares presented consolidated financial statements 12 stock plans march 31 2000 130 million shares authorized issued companys employee stock plans options companys employee stock plans granted prices less 100 fair value options generally exercisable 20 25 increments 4 5 years expire within 5 10 years date grant stock option transactions plans three years ended march 31 2000 summarized following information summarizes companys stock options outstanding march 31 2000 march 31 2000 1999 1998 options exercisable 2790652 2679080 2464746 shares respectively weightedaverage exercise prices 1454 1038 689 respectively following information summarizes companys stock options exercisable march 31 2000 fiscal 1999 company granted 80000 restricted shares common stock fair value 2816 per share restricted shares granted companys employee stock plans vest 25 increments four years compensation expense recognized fouryear vesting period restricted stock award noncash transaction additionally fiscal 1999 company entered stock purchase related loan transaction officer purchased 120000 shares common stock valued 3379 fiscal 2000 company recognized 674 compensation expense grants made companys stock plans pro forma results based fair value method prescribed statement 123 follows weightedaverage fair value stock options granted fiscal 2000 1999 1998 using optionpricing model 1300 927 550 per option share respectively following weightedaverage assumptions used model grants fiscal 2000 1999 1998 respectively expected dividend yield 110 134 155 riskfree interest rate 602 540 606 expected volatility 2768 2346 2199 expected lives 603 years 637 years 490 years pro forma compensation expense associated option grants recognized vesting period initial impact applying sfas 123 representative potential impact pro forma net earnings future years include compensation expense related vesting fiscal 1996 subsequent grants company also adopted legg mason inc stock option plan nonemployee directors options granted plan immediately exercisable price equal fair value shares date grant options issuable plan limited 11 million shares aggregate term ten years date grant march 31 2000 options 435920 shares granted 352610 currently outstanding company employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject 4333334 total share limit plan purchases made payroll deductions company matching 5 employees contributions charges earnings significant respect plan 13 deferred compensation employee stock trust july 1998 emerging issues task force eitf reached consensus eitf issue 9714 accounting deferred compensation arrangements amounts earned held rabbi trust invested eitf 9714 assets trust must consolidated employer value employers stock held rabbi trust must classified stockholders equity generally accounted manner similar treasury stock certain situations corresponding deferred compensation liability must recorded fair value shares held rabbi trust changes fair value deferred compensation liability september 30 1998 must recognized earnings company adopted eitf 9714 account deferred compensation employee stock trust plan effective september 30 1998 fiscal 2000 company recorded noncash credit 1063 credit represents change fair value stock held trust april 1 1999 june 2 1999 fiscal 1999 company recorded noncash charge earnings 10352 charge represents change fair value stock held trust september 30 1998 march 31 1999 june 2 1999 company amended plan limit distributions plan assets shares companys common stock accordance provisions eitf 9714 changes value stock held plan subsequent june 2 1999 longer affect companys earnings addition result plan amendment obligation previously recorded deferred compensation liability reclassified stockholders equity accordingly trust shares 2345667 march 31 2000 corresponding liability presented components stockholders equity march 31 2000 14 offbalance sheet risk concentration credit normal course business company executes settles finances customer proprietary securities transactions activities expose company balance sheet risk event customers parties fail satisfy obligations securities transactions generally settle three business days trade date customer broker fail deliver cash securities agreed company may required purchase sell securities unfavorable market prices company extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include purchases securities sales securities yet purchased option contracts company continually monitors margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose company risk event margin requirements insufficient fully cover customer losses company invests shortterm securities purchased agreements resell collateralized us government agency securities company generally takes possession securities purchased agreements transactions expose company risk event counterparty repurchase securities value collateral held less underlying receivable company monitors value collateral daily requests additional collateral necessary company borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral addition company engages conduit securities borrowing lending activities facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 fair value securities exchanged monitors adequacy collateral levels daily basis company sells securities currently obligated subsequently purchase securities prevailing market prices company exposed risk loss securities prices increase prior closing transactions company periodically borrows banks collateralized basis utilizing firm customer margin securities compliance securities exchange commission rules counterparty fail return customer securities pledged company subject risk acquiring securities prevailing market prices order satisfy customer obligations 15 regulatory requirements companys brokerdealer subsidiaries subject securities exchange commissions uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 2000 brokerdealer subsidiaries aggregate net capital defined 262674 exceeded required net capital 232969 companys principal brokerdealer subsidiary must maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows brokerdealer maintain required amounts cash qualified securities 16 business segment information company provides financial services four business segments asset management private client capital markets segment results include direct revenues expenses operating units segment allocations indirect expenses based specific methodologies asset management provides investment advisory services companysponsored mutual funds asset management institutional individual clients private client distributes wide range financial products branch distribution network including equity fixedincome securities proprietary nonaffiliated mutual funds annuities net interest profit customers margin loan credit balances included segment capital markets consists companys equity fixedincome institutional sales trading syndicate corporate public finance activities sales credits associated underwritten offerings reported private client sold retail distribution channels capital markets sold institutional distribution channels segment also includes realized unrealized gains losses merchant banking activities warrants acquired connection investment banking activities businesses principally companys real estate business unallocated corporate revenues expenses fiscal 2000 pretax earnings include noncash deferred compensation credit 1063 fiscal 1999 pretax earnings include noncash deferred compensation charge 10352 see note 13 business segment financial results follows companys revenues earnings presented substantially derived domestic operations results international operations significant company report asset information business segment 17 subsequent event may 26 2000 company completed acquisition perigee one canadas leading institutional investment managers terms agreement outstanding share perigee exchanged 0387 exchangeable share legg mason canada holdings subsidiary company exchangeable shares economic equivalent common shares company may exchanged shares oneforone basis time company issued approximately 52 million exchangeable shares transaction acquisition accounted pooling interests presented unaudited pro forma combined net revenues net earnings years ended march 31 2000 1999 respectively though acquisition completed beginning period presented quarterly financial data dollars thousands except per share amounts unaudited adjusted reflect stock splits item 9 changes disagreements accountants accounting financial disclosure none part iii item 10 directors executive officers registrant information required item contained caption election directors pages 1 3 companys definitive proxy statement 2000 annual meeting stockholders caption compliance section 16a securities exchange act 1934 page 16 proxy statement information incorporated herein reference proxy statement see part item 4a report information regarding certain executive officers company item 11 executive compensation information required item contained caption compensation directors page 4 companys definitive proxy statement 2000 annual meeting stockholders caption executive compensation pages 7 8 companys definitive proxy statement 2000 annual meeting stockholders information incorporated herein reference proxy statement item 12 security ownership certain beneficial owners management information required item contained caption security ownership management principal stockholders pages 5 6 companys definitive proxy statement 2000 annual meeting stockholders information incorporated herein reference proxy statement item 13 certain relationships related transactions information required item contained caption certain transactions page 13 companys definitive proxy statement 2000 annual meeting stockholders information incorporated herein reference proxy statement part iv item 14 exhibits financial statement schedules reports form 8k documents filed part report 1 following consolidated financial statements included item 8item 7a quantitative qualitative disclosures market risks see item 7 managements discussion analysis results operations financial condition liquidity capital resourcesrisk management disclosure market risk item 8item 7a quantitative qualitative disclosures market risk see “item 7 management’s discussion analysis financial condition results operations market risk” disclosure market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosure market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosure market risk item 8item 7a quantitative qualitative disclosures market risk see item 7 managements discussion analysis financial condition results operations market risk disclosures market risk item 8 item 8 financial statements supplementary data report independent accountants board directors stockholders legg mason inc audited accompanying consolidated statements financial condition legg mason inc subsidiaries march 31 1994 1993 related consolidated statements earnings changes stockholders equity cash flows three years period ended march 31 1994 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position legg mason inc subsidiaries march 31 1994 1993 consolidated results operations cash flows three years period ended march 31 1994 conformity generally accepted accounting principles coopers lybrand baltimore maryland may 5 1994 consolidated statements earnings dollars thousands except per share amounts consolidated statements financial condition dollars thousands consolidated statements changes stockholders equity dollars thousands except share amounts consolidated statements cash flows dollars thousands notes consolidated financial statements dollars thousands except per share amounts 1 summary accounting policies principles consolidation consolidated financial statements include accounts legg mason inc whollyowned subsidiaries material intercompany balances transactions eliminated appropriate prior years financial statements reclassified conform 1994 presentation cash equivalents cash equivalents highly liquid investments original maturities less 90 days held sale ordinary course business resale repurchase agreements resale repurchase agreements carried amounts securities reacquired resold specified respective agreements plus accrued interest company invests shortterm resale agreements collateralized us government agency securities market value underlying collateral determined daily plus accrued interest thereon must exceed face amount transaction companys policy underlying collateral deposited companys accounts custodian banks securities transactions recorded settlement date basis differ materially trade date basis commission revenues related expenses unsettled transactions recorded trade date basis securities owned companys brokerdealer subsidiaries valued market resulting unrealized gains losses reflected earnings securities held investment consist primarily us government agency securities high grade corporate debt marketable equity securities debt securities recorded unamortized cost marketable equity securities carried lower cost market march 31 1994 1993 aggregate cost 29754 4454 aggregate market values 30368 6653 respectively depreciation amortization office equipment leasehold improvements reported cost net accumulated depreciation amortization 28025 24434 march 31 1994 1993 respectively depreciation amortization determined use straight line method estimated useful life asset remaining life lease maintenance repair costs expensed incurred intangible assets intangible assets consist principally goodwill mortgage servicing asset management contracts attributable business combinations intangibles amortized using straight line accelerated methods periods ranging four forty years accumulated amortization march 31 1994 1993 36714 32136 respectively investment advisory related fees company earns investment advisory fees assets accounts managed subsidiaries distribution fees assets companysponsored equity bond mutual funds asset based fees various types singlefee brokerage accounts income taxes company adopted statement financial accounting standards 109 accounting income taxes april 1 1993 impact adoption material companys financial position results operations prior years financial statements restated earnings per share primary earnings per share computed dividing net earnings weighted average number shares outstanding dilutive common stock equivalents companys common stock equivalents shares common stock issuable various stock option plans fully diluted earnings per share assumes exercise dilutive common stock equivalents conversion subordinated debentures weighted average number shares follows 2 business combinations may 31 1991 company completed acquisition net assets dorman wilson inc dw mortgage banking firm primarily engaged commercial loan origination servicing company issued 517060 shares common stock conjunction acquisition accounted pooling interests accordingly consolidated financial statements restated include accounts dw periods presented order conform companys fiscal year dws operating loss 355 quarter ended march 31 1991 reflected adjustment retained earnings addition dws preacquisition operating results include pro forma income tax provision 63 two months ended may 31 1991 provision applicable dw status subchapter corporation included provide comparability companys historical operating results april 1993 company acquired fairfield group inc provider mutual fund advisory services banks bank trust departments issuance common stock acquisition accounted pooling interests material companys results operations financial position accordingly results operations fairfield group inc included date acquisition 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 261803 march 31 1994 232427 march 31 1993 company pays interest certain customer free credit balances held reinvestment purposes 4 securities market securities positions consist following march 31 5 shortterm borrowings shortterm borrowings march 31 follows shortterm borrowings include loans banks clearing organization totalling 14591 bear interest rates ranging 45 55 collateralized securities market value 15000 company revolving credit agreement permits borrow 23000 repayable three years fixed floating rates specified agreement terms agreement company required among things maintain consolidated net worth less 125446 plus 50 consolidated annual net earnings subsequent march 31 1994 borrowings outstanding agreement march 31 1994 together certain subsidiaries company jointly entered revolving credit agreements permit borrow 40000 repayable within 30 days borrowings outstanding agreements march 31 1994 addition subsidiaries company bank lines credit 116250 generally subject termination either partys discretion interest payments 12704 1994 10941 1993 13489 1992 6 subordinated liabilities companys subordinated liabilities march 31 1994 1993 follows 7 525 debentures mature june 15 2011 may 1 2003 respectively convertible time prior maturity common stock company per share conversion price 2176 7 debentures 2580 525 debentures conversion price subject adjustment certain events company may redeem debentures prior maturity whole part subject certain conditions 7 debentures redeemable 1021 principal june 15 1994 thereafter prices declining annually 100 june 15 1996 525 debentures redeemable 10328 principal may 1 1996 thereafter prices declining annually 100 may 1 2001 7 debentures require annual sinking fund payments 1500 beginning june 15 1997 calculated retire 61 debentures prior maturity 7 commitments contingencies company leases office facilities equipment noncancellable operating leases expire varying dates 2005 certain leases provide renewal options contain escalation clauses providing increased rentals march 31 1994 minimum annual aggregate rentals follows company leases office space partnership company officers stockholders directors combined controlling interest march 31 1994 minimum annual rentals lease agreements included amounts aggregate 2146 1998 addition fiscal 1994 company acquired 5000 mortgage collateralized partnerships property total rental expense including cancellable equipment leases 27761 24768 23478 1994 1993 1992 respectively includes payment 811 1994 690 1993 688 1992 aforementioned partnership company enters whenissued underwriting commitments open transactions relating commitments march 31 1994 closed effect consolidated financial statements company would material company subsidiaries named defendants various legal actions arising primarily securities investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial ultimate resolution actions cannot currently determined opinion management consultation legal counsel actions resolved material adverse effect consolidated financial statements company 8 employee benefits company subsidiaries maintains various defined contribution plans covering substantially employees discretionary contributions charged operations amounted 7241 6181 4796 1994 1993 1992 respectively addition employees make voluntary contributions certain plans 9 income taxes company subsidiaries file consolidated federal income tax return provision income taxes consists 1994 1993 1992 income tax provisions consist taxes currently payable 23390 19861 15519 offset deferred tax benefits 224 1081 1621 respectively march 31 1994 company deferred tax assets liabilities totalling 8804 828 respectively sources amounts deferred tax assets primarily accrued compensation 3419 net operating loss carryforwards 1250 pooled entity tax benefits 852 income deferred financial reporting purposes 780 deferred rent 653 primary source amount deferred tax liability income deferred tax purposes 639 march 31 1994 company deferred tax valuation allowance 1288 primarily benefits related net operating losses operating loss benefits 96 expire fiscal 1999 remaining benefits 1154 expire fiscal 2009 march 31 1993 1992 deferred taxes related primarily accrued compensation income reportable tax financial reporting purposes august 1993 omnibus budget reconciliation act 1993 revenue act enacted revenue act increased companys corporate statutory income tax rate 35 34 reconciliation difference effective income tax rate statutory federal income tax rate follows income tax payments 26114 1994 19529 1993 15369 1992 10 capital stock march 31 1994 authorized numbers common preferred shares 20000000 4000000 respectively 4220540 common shares reserved issuance upon conversion companys convertible subordinated debentures addition march 31 1994 1993 2239870 2242816 shares common stock reserved issuance companys stock option plans september 24 1993 company paid 5for4 stock split shareholders record september 8 1993 references consolidated financial statements number common shares per share amounts adjusted retroactively reflect 5for4 stock split except number issued common shares presented consolidated financial statements 11 stock plans options companys employee stock option plans granted prices less 100 fair market value shares date grant options granted generally exercisable cumulative 20 increments five years term ten years date grant transactions plans three years ending march 31 1994 summarized company also adopted legg mason 1988 nonemployee director option plan options granted plan immediately exercisable price equal fair market value shares date grant options issuable plan limited 175000 shares aggregate term ten years date grant march 31 1994 options 55000 shares granted 50000 currently outstanding company makes charge income respect stock option plans company employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject 625000 total share limit plan purchases made payroll deductions company matching 5 employees contributions charges earnings significant respect plan 12 offbalance sheet risk concentration credit normal course business company executes settles finances customer proprietary securities transactions activities expose company offbalance sheet risk event customers parties fail satisfy obligations accordance industry practice securities transactions recorded settlement date generally five business days trade date customer broker fail deliver cash securities agreed company may required purchase sell securities unfavorable market prices company extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include sales securities yet purchased option contracts commodity futures contracts company continually monitors margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose company risk event margin requirements insufficient fully cover customer losses company borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral company deposits receives cash equal 102 market value securities exchanged monitors adequacy collateral levels daily basis company periodically borrows banks clearing organization collateralized basis utilizing firm customer margin securities compliance securities exchange commission rules counterparty fail return customer securities pledged company subject risk acquiring securities prevailing market prices order satisfy customer obligations company sells securities currently obligated subsequently purchase securities prevailing market prices company exposed risk loss prices securities increase prior closing transactions 13 regulatory requirements companys brokerdealer subsidiaries must maintain separate accounts exclusive benefit customers accordance securities exchange commission rule 15c33 comply segregation requirements section 4d2 commodity exchange act determined periodic computations rules allow brokerdealers maintain required amounts cash qualified securities companys brokerdealer subsidiaries subject securities exchange commissions uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 1994 brokerdealer subsidiaries aggregate net capital defined 105335 exceeded required net capital 99219 14 business segment information company subsidiaries operates predominately single business segmentthe securities industry within segment company primarily engaged securities brokerage investment advisory investment banking activities quarterly financial data dollars thousands except per share amounts unaudited item 9item 8 financial statements supplementary data report independent accountants board directors stockholders legg mason inc audited accompanying consolidated statements financial condition legg mason inc subsidiaries march 31 1996 1995 related consolidated statements earnings changes stockholders equity cash flows three years period ended march 31 1996 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amount disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position legg mason inc subsidiaries march 31 1996 1995 consolidated results operations cash flows three years period ended march 31 1996 conformity generally accepted accounting principles coopers lybrand llp baltimore maryland may 1 1996 notes consolidated financial statements dollars thousands except per share amounts 1 summary significant accounting policies basis presentation legg mason inc parent whollyowned subsidiaries collectively company principally engaged providing securities brokerage investment advisory investment banking commercial mortgage banking services individuals institutions corporations municipalities companys profitability sensitive variety factors including volume trading securities volatility general level market prices demand investment banking mortgage banking services consolidated financial statements include accounts parent whollyowned subsidiaries material intercompany balances transactions eliminated consolidated financial statements restated reflect business combination discussed note 2 accounted pooling interests appropriate prior years financial statements reclassified conform 1996 presentation consolidated financial statements prepared accordance generally accepted accounting principles require management make assumptions estimates affect amounts disclosures presented actual amounts could differ estimates cash equivalents cash equivalents highly liquid investments original maturities less 90 days held sale ordinary course business resale agreements company invests shortterm resale agreements collateralized us government agency securities market value underlying collateral determined daily plus accrued interest thereon must exceed face amount transaction companys policy underlying collateral deposited companys accounts custodian banks resale agreements carried amounts securities subsequently resold specified agreements plus accrued interest securities transactions recorded settlement date basis differ materially trade date basis commission revenues related expenses unsettled transactions recorded trade date basis securities owned companys brokerdealer subsidiaries trading investing valued market resulting unrealized gains losses reflected earnings investment securities parent nonbrokerdealer subsidiaries held availableforsale valued market resulting unrealized gains losses reflected stockholders equity depreciation amortization property equipment reported cost net accumulated depreciation amortization 38180 34372 march 31 1996 1995 respectively depreciation amortization determined use straight line method estimated useful life asset remaining life lease maintenance repair costs expensed incurred intangible assets intangible assets consist principally goodwill asset management mortgage servicing contracts attributable business combinations intangibles amortized using straight line accelerated methods periods ranging three forty years accumulated amortization march 31 1996 1995 49196 41794 respectively company periodically reviews accounting goodwill intangible assets considering factors historical profitability projected operating cash flows determine assets realizable amortization periods appropriate fair value financial instruments march 31 1996 1995 financial instruments carried fair value amounts approximate fair value investment advisory related fees company earns investment advisory fees assets accounts managed subsidiaries distribution fees assets companysponsored equity bond mutual funds assetbased fees various types single fee brokerage accounts earnings per share primary earnings per share computed dividing net earnings weighted average number shares outstanding dilutive common stock equivalents companys common stock equivalents shares common stock issuable various stock option plans fully diluted earnings per share assumes exercise dilutive common stock equivalents conversion subordinated debentures weighted average number shares follows 2 business combinations january 2 1996 company issued 1324091 shares common stock acquire bartlett co bartlett investment management firm manages equity fixed income balanced accounts high net worth individuals institutions acquisition accounted pooling interests accordingly consolidated financial statements restated include accounts bartlett periods presented bartletts preacquisition operating results include pro forma income tax provisions 626 nine months ended december 31 1995 6 159 years ended march 31 1995 1994 respectively provisions applicable bartlett status subchapter corporation included provide comparability companys historical operating results financial information periods prior business combination summarized february 13 1996 company acquired lehman brothers global asset management limited investment management firm specializes international fixedincome currency management acquisition material companys results operations financial position accounted purchase method accountingaccordingly results operations included date acquisition january 5 1995 company acquired assets batterymarch financial management batterymarch investment advisory firm manages equity portfolios institutional clients company paid 54141 cash closing additional payment due early 1998 based batterymarchs achievement specified revenue levels calendar 1997 could increase total consideration maximum 120000 amount 1998 payment exceeds 40000 company may pay portion excess form shares companys common stock acquisition accounted purchase method accounting accordingly total purchase price allocated net assets acquired principally goodwill asset management contracts based estimated fair market values results operations included consolidated financial statements date acquisition 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 463477 march 31 1996 271289 march 31 1995 company pays interest certain customer free credit balances held reinvestment purposes 4 securities market securities positions consist following march 31 5 investment securities companys investment securities including type maturity range availableforsale securities follows proceeds debt securities held availableforsale matured fiscal 1996 1995 22546 33382 respectively proceeds debt securities held availableforsale sold fiscal 1995 2500 gross realized loss 124 6 shortterm borrowings shortterm borrowings consist loans banks totalling 6800 805 march 31 1996 1995 respectively companys subsidiaries secured unsecured bank lines credit totalling 272300 generally subject termination either partys discretion march 31 1996 subsidiaries 3800 outstanding unsecured agreement bears interest 56 march 31 1995 805 outstanding rate 775 collateralized securities market value 4456 together certain subsidiaries parent jointly entered revolving credit agreements permit borrow 60000 repayable within 30 days march 31 1996 company 3000 outstanding agreements bear interest 607 collateralized security market value 5600 addition parent revolving credit agreement permits borrow 50000 none currently outstanding repayable generally four years floating rates terms agreement company required among things maintain consolidated net worth plus subordinated liabilities less 271329 plus 50 consolidated annual net earnings subsequent march 31 1996 interest payments 25543 1996 17307 1995 13057 1994 7 senior notes february 1996 company issued 100 million principal amount senior notes due february 15 2006 bear interest 65 notes sold discount yield 657 company available offering additional 50 million debt convertible debt securities pursuant shelf registration filed january 1996 8 subordinated liabilities companys subordinated liabilities march 31 1996 1995 follows 525 debentures convertible time prior maturity common stock company per share conversion price 2580 subject adjustment certain events company may redeem 525 debentures prior maturity whole part subject certain conditions 10328 principal may 1 1996 thereafter prices declining annually 100 may 1 2001 fiscal 1996 company called redemption 34487 aggregate principal amount outstanding 7 convertible subordinated debentures substantially holders converted 7 debentures 4596 shares common stock one thousand dollars principal amount debentures based conversion price 2176 per share common stock cash paid lieu fractional shares 9 commitments contingencies company leases office facilities equipment noncancellable operating leases expire varying dates 2011 certain leases provide renewal options contain escalation clauses providing increased rentals march 31 1996 minimum annual aggregate rentals follows total rental expense including cancellable equipment leases 26503 24285 28418 1996 1995 1994 respectively company leased office space partnership company officers stockholders directors combined controlling interest july 1994 time company acquired property 5000 rent expense includes payments 240 1995 811 1994 aforementioned partnership company enters whenissued underwriting commitments open transactions relating commitments march 31 1996 closed effect consolidated financial statements company would material company subsidiaries named defendants various legal actions arising primarily securities investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial ultimate resolution actions cannot currently determined opinion management consultation legal counsel actions resolved material adverse effect consolidated financial statements company fiscal 1995 earnings include charge 2000 950 tax relating settlement class action litigation arising taxable municipal bond offerings underwritten 1986 one companys subsidiaries 10 employee benefits company subsidiaries maintains various defined contribution plans covering substantially employees discretionary contributions charged operations amounted 7742 3679 7490 1996 1995 1994 respectively addition employees make voluntary contributions certain plans 11 income taxes company subsidiaries file consolidated federal income tax return provision income taxes consists reconciliation difference effective income tax rate statutory federal income tax rate follows components companys deferred tax assets liabilities follows march 31 1996 1995 deferred tax valuation allowance primarily benefits related net operating losses expire 2002 2011 income tax payments 24792 1996 12047 1995 26114 1994 12 capital stock march 31 1996 authorized numbers common preferred shares 20000000 4000000 respectively 2635658 common shares reserved issuance upon conversion companys convertible subordinated debentures addition march 31 1996 1995 1931189 2157456 shares common stock reserved issuance companys stock option plans september 24 1993 company paid 5for4 stock split shareholders record september 8 1993 references consolidated financial statements number common shares per share amounts adjusted retroactively reflect 5for4 stock split except number issued common shares presented consolidated financial statements 13 stock plans options companys employee stock option plans granted prices less 100 fair market value shares date grant except fiscal 1996 option grants options generally exercisable cumulative 20 increments five years expire within ten years date grant options granted fiscal 1996 exercisable 25 increments four years expire five years date grant transactions plans three years ending march 31 1996 summarized company also adopted legg mason 1988 nonemployee director option plan options granted plan immediately exercisable price equal fair market value shares date grant options issuable plan limited 175000 shares aggregate term ten years date grant march 31 1996 options 87000 shares granted 80000 currently outstanding company makes charge income respect stock option plans company employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject 1625000 total share limit plan purchases made payroll deductions company matching 5 employees contributions charges earnings significant respect plan 14 offbalance sheet risk concentration credit normal course business company executes settles finances customer proprietary securities transactions activities expose company offbalance sheet risk event customers parties fail satisfy obligations accordance industry practice securities transactions recorded settlement date generally three business days trade date customer broker fail deliver cash securities agreed company may required purchase sell securities unfavorable market prices company extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include sales securities yet purchased option contracts commodity futures contracts company continually monitors margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose company risk event margin requirements insufficient fully cover customer losses company borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral addition company engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis company periodically borrows banks collateralized basis utilizing firm customer margin securities compliance securities exchange commission rules counterparty fail return customer securities pledged company subject risk acquiring securities prevailing market prices order satisfy customer obligations company sells securities currently obligated subsequently purchase securities prevailing market prices company exposed risk loss securities prices increase prior closing transactions 15 regulatory requirements companys brokerdealer subsidiaries subject securities exchange commissions uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 1996 brokerdealer subsidiaries aggregate net capital defined 102394 exceeded required net capital 92870 companys principal brokerdealer subsidiary must maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows brokerdealer maintain required amounts cash qualified securities 16 business segment information company subsidiaries operates predominantly single business segment securities industry within segment company primarily engaged securities brokerage investment advisory investment banking activities item 9item 8 financial statements supplementary data report independent accountants board directors stockholders legg mason inc audited accompanying consolidated statements financial condition legg mason inc subsidiaries march 31 1997 1996 related consolidated statements earnings changes stockholders equity cash flows three years period ended march 31 1997 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position legg mason inc subsidiaries march 31 1997 1996 consolidated results operations cash flows three years period ended march 31 1997 conformity generally accepted accounting principles coopers lybrand llp baltimore maryland may 2 1997 consolidated statements earnings dollars thousands except per share amounts notes consolidated financial statements dollars thousands except per share amounts 1 summary significant accounting policies basis presentation legg mason inc parent whollyowned subsidiaries collectively company principally engaged providing securities brokerage investment advisory investment banking commercial mortgage banking services individuals institutions corporations municipalities companys profitability sensitive variety factors including volume trading securities volatility general level market prices demand investment banking mortgage banking services consolidated financial statements include accounts parent whollyowned subsidiaries material intercompany balances transactions eliminated appropriate prior years financial statements reclassified conform 1997 presentation consolidated financial statements prepared accordance generally accepted accounting principles require management make assumptions estimates affect amounts disclosures presented actual amounts could differ estimates cash equivalents cash equivalents highly liquid investments original maturities less 90 days held sale ordinary course business resale agreements company invests shortterm resale agreements collateralized us government agency securities market value underlying collateral determined daily plus accrued interest thereon must exceed face amount transaction companys policy underlying collateral deposited companys accounts custodian banks resale agreements carried amounts securities subsequently resold specified agreements plus accrued interest securities transactions recorded settlement date basis differ materially trade date basis commission revenues related expenses unsettled transactions recorded trade date basis securities owned companys brokerdealer subsidiaries trading investing valued market resulting unrealized gains losses reflected earnings investment securities parent nonbrokerdealer subsidiaries held availableforsale valued market resulting unrealized gains losses reflected stockholders equity depreciation amortization equipment leasehold improvements property reported cost net accumulated depreciation amortization 43013 38180 march 31 1997 1996 respectively depreciation amortization determined use straight line method estimated useful life asset remaining life lease maintenance repair costs expensed incurred intangible assets intangible assets consist principally goodwill asset management mortgage servicing contracts attributable business combinations intangibles amortized using straight line accelerated methods periods exceeding forty years accumulated amortization march 31 1997 1996 54726 49196 respectively company periodically reviews accounting goodwill intangible assets considering factors historical profitability projected operating cash flows determine assets realizable amortization periods appropriate fair value financial instruments march 31 1997 1996 substantially financial instruments carried fair value amounts approximate fair value fair values senior notes disclosed note 7 investment advisory related fees company earns investment advisory fees assets accounts managed subsidiaries distribution fees assets company sponsored mutual funds assetbased fees various types singlefee brokerage accounts earnings per share primary earnings per share computed dividing net earnings weighted average number shares outstanding dilutive common stock equivalents companys common stock equivalents shares common stock issuable various stock option plans fully diluted earnings per share assumes exercise dilutive common stock equivalents conversion subordinated debentures weighted average number shares follows 2 business combinations january 2 1996 company issued 1324091 shares common stock acquire bartlett co bartlett investment management firm manages equity fixed income balanced accounts high net worth individuals institutions acquisition accounted pooling interests accordingly consolidated financial statements restated include accounts bartlett periods presented bartletts preacquisition operating results include pro forma income tax provisions 626 nine months ended december 31 1995 6 year ended march 31 1995 provisions applicable bartlett status subchapter corporation included provide comparability companys historical operating results february 13 1996 company acquired lehman brothers global asset management limited since renamed western asset global management limited investment management firm specializes international fixedincome currency management acquisition material companys results operations financial position accounted purchase method accounting accordingly results operations included date acquisition january 5 1995 company acquired assets batterymarch financial management batterymarch investment advisory firm manages equity portfolios institutional clients company paid 54141 cash closing additional payment due early 1998 based batterymarchs achievement specified revenue levels calendar 1997 could increase total consideration maximum 120000 based current revenues anticipated additional payment required acquisition accounted purchase method accounting accordingly total purchase price allocated net assets acquired principally goodwill asset management contracts based estimated fair market values results operations included consolidated financial statements date acquisition 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 867413 march 31 1997 463477 march 31 1996 company pays interest certain customer free credit balances held investment purposes 4 securities market securities positions consist following march 31 5 investment securities companys investment securities including type maturity range availableforsale securities follows proceeds debt securities held availableforsale matured fiscal 1997 1996 192166 22546 respectively proceeds equity securities held availableforsale sold fiscal 1997 3030 gross realized gain 1 6 shortterm borrowings shortterm borrowings consist loans banks totaling 13400 6800 march 31 1997 1996 respectively companys subsidiaries secured unsecured bank lines credit totaling 292500 generally subject termination either partys discretion borrowings outstanding agreements march 31 1997 march 31 1996 3800 outstanding unsecured agreement interest rate 56 together certain subsidiaries parent jointly entered revolving credit agreements permit borrow 55000 generally repayable within 30 days march 31 1997 1996 company 13400 3000 respectively outstanding agreements bear interest 625 607 respectively borrowings collateralized securities market values 14500 march 31 1997 5600 march 31 1996 addition parent revolving credit agreement permits borrow 50000 repayable generally three years floating rates terms agreement company required among things maintain consolidated net worth plus subordinated liabilities less 299626 plus 50 consolidated annual net earnings subsequent march 31 1997 interest payments 45066 1997 25543 1996 17307 1995 7 senior notes february 1996 company issued 100 million principal amount senior notes due february 15 2006 bear interest 65 notes sold discount yield 657 fair value senior notes estimated using current market prices 92375 95238 march 31 1997 1996 respectively company available offering additional 50 million debt convertible debt securities pursuant shelf registration filed january 1996 8 subordinated liabilities march 1996 68000 525 convertible subordinated debentures due may 1 2003 outstanding fiscal 1997 company called redemption full principal amount outstanding 525 convertible subordinated debentures substantially holders converted debentures 3876 shares common stock one thousand dollars principal amount debentures based conversion price 2580 per share common stock cash paid lieu fractional shares fiscal 1996 company called redemption 34487 aggregate principal amount outstanding 7 convertible subordinated debentures substantially holders converted debentures 4596 shares common stock one thousand dollars principal amount debentures based conversion price 2176 per share common stock cash paid lieu fractional shares 9 commitments contingencies company leases office facilities equipment noncancellable operating leases expire varying dates 2011 certain leases provide renewal options contain escalation clauses providing increased rentals march 31 1997 minimum annual aggregate rentals follows total rental expense including cancellable equipment leases 29570 26503 24285 1997 1996 1995 respectively company entered agreement service provider completed require company make payments approximately 27000 five year period company enters whenissued underwriting commitments open transactions relating commitments march 31 1997 closed effect consolidated financial statements company would material company subsidiaries named defendants various legal actions arising primarily securities investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial ultimate resolution actions cannot currently determined opinion management consultation legal counsel actions resolved material adverse effect consolidated financial statements company fiscal 1995 earnings include charge 2000 950 tax relating settlement class action litigation arising taxable municipal bond offerings underwritten 1986 one companys subsidiaries 10 employee benefits company subsidiaries maintains various defined contribution plans covering substantially employees discretionary contributions charged operations amounted 11574 7742 3679 1997 1996 1995 respectively addition employees make voluntary contributions certain plans 11 income taxes company subsidiaries file consolidated federal income tax return provision income taxes consists reconciliation difference effective income tax rate statutory federal income tax rate follows components companys deferred tax assets liabilities follows march 31 1997 1996 deferred tax valuation allowance primarily benefits related net operating losses expire 2004 2012 income tax payments 45054 1997 24792 1996 12047 1995 12 capital stock march 31 1997 authorized numbers common preferred shares 100000000 4000000 respectively addition march 31 1997 1996 4735091 1931189 shares common stock reserved issuance companys stock option plans 13 stock plans options companys employee stock option plans granted prices less 100 fair market value shares date grant options granted prior fiscal 1996 generally become exercisable cumulative 20 increments five years expire within ten years date grant options granted fiscal 1997 1996 generally become exercisable 25 increments four years expire five years date grant march 31 1997 4250000 shares authorized issued companys employee stock option plans transactions plans three years ending march 31 1997 summarized march 31 1997 1996 1995 options exercisable 810889 743678 763163 shares respectively weighted average exercise prices 1725 1510 1371 respectively following information summarizes companys stock options outstanding march 31 1997 following information summarizes companys stock options exercisable march 31 1997 company accounts stockbased compensation provisions accounting principles board opinion 25 accounting stock issued employees rather fair value method financial accounting standards board statement 123 accounting stockbased compensation accordingly compensation costs charged earnings options granted companys plans pro forma results based fair value method prescribed statement 123 follows weightedaverage fair value stock options granted fiscal 1997 1996 using blackscholes optionpricing model 730 786 per option share respectively following weightedaverage assumptions used model grants fiscal 1997 1996 respectively expected dividend yield 185 172 riskfree interest rate 658 621 expected volatility 2162 2598 expected lives 433 years 483 years pro forma compensation expense associated option grants recognized vesting period initial impact applying statement 123 representative potential impact pro forma net earnings future years include compensation expense related vesting fiscal 1997 fiscal 1996 subsequent grants company also adopted legg mason 1988 nonemployee director option plan options granted plan immediately exercisable price equal fair market value shares date grant options issuable plan limited 175000 shares aggregate term ten years date grant march 31 1997 options 105000 shares granted 98000 currently outstanding company employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject 1625000 total share limit plan purchases made payroll deductions company matching 5 employees contributions charges earnings significant respect plan 14 offbalance sheet risk concentration credit normal course business company executes settles finances customer proprietary securities transactions activities expose company offbalance sheet risk event customers parties fail satisfy obligations accordance industry practice securities transactions recorded settlement date generally three business days trade date customer broker fail deliver cash securities agreed company may required purchase sell securities unfavorable market prices company extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include sales securities yet purchased option contracts commodity futures contracts company continually monitors margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose company risk event margin requirements insufficient fully cover customer losses company borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral addition company engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis company periodically borrows banks collateralized basis utilizing firm customer margin securities compliance securities exchange commission rules counterparty fail return customer securities pledged company subject risk acquiring securities prevailing market prices order satisfy customer obligations company sells securities currently obligated subsequently purchase securities prevailing market prices company exposed risk loss securities prices increase prior closing transactions 15 regulatory requirements companys brokerdealer subsidiaries subject securities exchange commissions uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 1997 brokerdealer subsidiaries aggregate net capital defined 132736 exceeded required net capital 120762 companys principal brokerdealer subsidiary must maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows brokerdealer maintain required amounts cash qualified securities 16 business segment information company subsidiaries operates predominantly single business segment securities industry within segment company primarily engaged securities brokerage investment advisory investment banking activities quarterly financial data dollars thousands except per share amounts unaudited quarter ended item 9item 8 financial statements supplementary data report independent accountants board directors stockholders legg mason inc audited accompanying consolidated statements financial condition legg mason inc subsidiaries march 31 1998 1997 related consolidated statements earnings changes stockholders equity cash flows three years period ended march 31 1998 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position legg mason inc subsidiaries march 31 1998 1997 consolidated results operations cash flows three years period ended march 31 1998 conformity generally accepted accounting principles coopers lybrand llp baltimore maryland may 4 1998 consolidated statements earnings dollars thousands except per share amounts notes consolidated financial statements dollars thousands except per share amounts 1 summary significant accounting policies basis presentation legg mason inc parent whollyowned subsidiaries collectively company principally engaged providing securities brokerage investment advisory investment banking commercial mortgage banking services individuals institutions corporations municipalities companys profitability sensitive variety factors including volume trading securities volatility general level market prices demand investment banking mortgage banking services consolidated financial statements include accounts parent whollyowned subsidiaries material intercompany balances transactions eliminated consolidated financial statements restated reflect business combinations described note 2 accounted pooling interests appropriate prior years financial statements reclassified conform 1998 presentation consolidated financial statements prepared accordance generally accepted accounting principles require management make assumptions estimates affect amounts disclosures presented actual amounts could differ estimates cash equivalents cash equivalents highly liquid investments original maturities less 90 days held sale ordinary course business resale agreements company invests shortterm resale agreements collateralized us government agency securities resale agreements accounted collateralized financings policy company obtain possession collateral market value excess principal amount loaned collateral valued daily company may require counterparties deposit additional collateral appropriate resale agreements carried amounts securities subsequently resold specified respective agreements plus accrued interest securities transactions recorded settlement date basis differ materially trade date basis commission revenues related expenses unsettled transactions recorded trade date basis securities owned securities sold yet purchased companys brokerdealer subsidiaries trading investing valued market resulting unrealized gains losses reflected earnings market values determined based quoted market dealer prices pricing models investment securities parent nonbrokerdealer subsidiaries held availableforsale valued market resulting unrealized gains losses reflected stockholders equity securities lending securities borrowed loaned accounted collateralized financings recorded amount collateral advanced received securities borrowed transactions require company deposit cash collateral lender company generally receives collateral form cash securities loaned fee received paid company recorded interest revenue expense company monitors market value securities borrowed loaned daily basis additional collateral obtained refunded necessary depreciation amortization equipment leasehold improvements reported cost net accumulated depreciation amortization 49874 43951 march 31 1998 1997 respectively depreciation amortization determined use straight line method estimated useful life asset remaining life lease maintenance repair costs expensed incurred intangible assets intangible assets consist principally goodwill asset management mortgage servicing contracts attributable business combinations reported cost net accumulated amortization intangibles amortized using straight line accelerated methods periods exceeding forty years accumulated amortization march 31 1998 1997 54209 54726 respectively company periodically reviews accounting goodwill intangible assets considering factors historical profitability projected operating cash flows determine assets realizable amortization periods appropriate fair value financial instruments march 31 1998 1997 substantially financial instruments carried fair value amounts approximate fair value fair values senior notes disclosed note 7 investment advisory related fees company earns investment advisory fees assets accounts managed subsidiaries distribution fees assets companys proprietary mutual funds assetbased fees various types singlefee brokerage accounts revenues investment advisory related activities accrued period services performed earnings per share effective fiscal 1998 earnings per common share eps computed accordance financial accounting standards board statement no128 statement 128 basic diluted eps replace primary fully diluted eps accordingly periods presented restated conform provisions statement 128 basic eps calculated dividing net earnings weightedaverage number common shares outstanding diluted eps similar basic eps adjusts effect potential common shares following table presents computations basic diluted eps march 31 1997 1996 options purchase 15731 4666 shares respectively included computation diluted earnings per share options exercise prices greater average price common shares period 2 business combinations company acquired brandywine asset management inc brandywine bartlett co bartlett january 1998 1996 respectively brandywine provides investment management services predominantly equity accounts institutions high net worth individuals bartlett investment management firm manages equity fixed income balanced accounts high net worth individuals institutions company issued 2574156 shares 1765455 shares common stock acquire brandywine bartlett respectively transactions accounted pooling interests additionally terms acquisition agreement brandywine 225836 stock options granted certain employees brandywine replace outstanding brandywine stock options consolidated financial statements restated include accounts brandywine bartlett periods presented order conform companys fiscal year brandywines operating profit 920 quarter ended march 31 1997 reflected adjustment retained earnings acquisitions material companys financial statements february 13 1996 company acquired lehman brothers global asset management limited since renamed western asset global management limited investment management firm specializes international fixedincome currency management acquisition material companys financial statements accounted purchase method accounting accordingly results operations included date acquisition 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 1447286 march 31 1998 867413 march 31 1997 company pays interest certain customer free credit balances held investment purposes 4 securities market securities positions consist following march 31 5 investment securities companys investment securities including type maturity range availableforsale securities follows proceeds gross realized gains losses sale availableforsale securities follows 6 shortterm borrowings shortterm borrowings consist loans banks totaling 13880 13900 march 31 1998 1997 respectively companys subsidiaries secured unsecured bank lines credit totaling 297500 generally subject termination either partys discretion march 31 1998 1997 subsidiaries 13880 500 respectively outstanding agreements bear interest weighted average rates 771 825 respectively borrowings collateralized assets market values 19048 march 31 1998 7768 march 31 1997 together certain subsidiaries parent jointly entered revolving credit agreements permit borrow 55000 generally repayable within 30 days march 31 1998 borrowings outstanding agreements march 311997 company 13400 outstanding agreements bear interest 625 borrowings collateralized securities market value 14500 march 31 1997 addition parent revolving credit agreement permits borrow 50000 repayable generally two years floating rates terms agreement company required among things maintain consolidated net worth plus subordinated liabilities less 339047 plus 50 consolidated annual net earnings subsequent march 31 1998 interest payments 73406 1998 45072 1997 25553 1996 7 senior notes february 1996 company issued 100 million principal amount senior notes due february 15 2006 bear interest 65 notes sold discount yield 657 fair value senior notes estimated using current market prices 98958 92375 march 31 1998 1997 respectively company available offering additional 50 million debt convertible debt securities pursuant shelf registration filed january 1996 8 subordinated liabilities fiscal 1997 company called redemption full principal amount outstanding 525 convertible subordinated debentures substantially holders converted debentures 5168 shares common stock one thousand dollars principal amount debentures based conversion price 1935 per share common stock cash paid lieu fractional shares 9 commitments contingencies company leases office facilities equipment noncancelable operating leases also multiyear agreements data processing services leases service agreements expire varying dates 2011 certain leases provide renewal options contain escalation clauses providing increased rentals march 31 1998 minimum annual aggregate rentals follows total rental expense including cancelable equipment leases 37908 30050 26908 1998 1997 1996 respectively company enters whenissued underwriting commitments open transactions relating commitments march 31 1998 closed effect consolidated financial statements company would material company subsidiaries named defendants various legal actions arising primarily securities investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial ultimate resolution actions cannot currently determined opinion management consultation legal counsel actions resolved material adverse effect consolidated financial statements company 10 income taxes company subsidiaries file consolidated federal income tax return provision income taxes consists reconciliation difference effective income tax rate statutory federal income tax rate follows components companys deferred tax assets liabilities included assets liabilities follows march 31 1998 1997 deferred tax valuation allowance primarily benefits related net operating losses expire 2004 2013 income tax payments 56019 1998 45054 1997 24792 1996 11 employee benefits company subsidiaries maintains various defined contribution plans covering substantially employees discretionary contributions charged operations amounted 17155 12144 8112 1998 1997 1996 respectively addition employees make voluntary contributions certain plans 12 capital stock march 31 1998 authorized numbers common preferred shares 100000000 4000000 respectively addition march 31 1998 1997 5732216 6313455 shares common stock respectively reserved issuance companys stock option plans september 24 1997 company paid 4for3 stock split shareholders record september 8 1997 references consolidated financial statements number common shares per share amounts adjusted retroactively reflect 4for3 stock split except number issued common shares presented consolidated financial statements 13 stock plans options companys employee stock option plans granted prices less 100 fair market value options generally exercisable 20 25 increments 4 5 years expire within 5 10 years date grant march 31 1998 4000000 shares authorized issued companys employee stock option plans transactions plans three years ending march 31 1998 summarized following information summarizes companys stock options outstanding march 31 1998 march 31 1998 1997 1996 options exercisable 1232373 1080361 944168 shares respectively weighted average exercise prices 1377 1293 1133 respectively following information summarizes companys stock options exercisable march 31 1998 company accounts stockbased compensation provisions accounting principles board opinion 25 accounting stock issued employees rather fair value method financial accounting standards board statement 123 accounting stockbased compensation accordingly compensation costs charged earnings options granted companys plans pro forma results based fair value method prescribed statement 123 follows weightedaverage fair value stock options granted fiscal 1998 1997 1996 using blackscholes option pricing model 1100 730 786 per option share respectively following weightedaverage assumptions used model grants fiscal 1998 1997 1996 respectively expected dividend yield 155 185 172 riskfree interest rate 606 658 621 expected volatility 2199 2162 2598 expected lives 490 years 437 years 485 years pro forma compensation expense associated option grants recognized vesting period initial impact applying statement 123 representative potential impact pro forma net earnings future years include compensation expense related vesting fiscal 1996 1997 1998 subsequent grants company also adopted legg mason 1988 non employee director option plan options granted plan immediately exercisable price equal fair market value shares date grant options issuable plan limited 233333 shares aggregate term ten years date grant march 31 1998 options 163960 shares granted 131635 currently outstanding company employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject 2166667 total share limit plan purchases made payroll deductions company matching 5 employees contributions charges earnings significant respect plan 14 offbalance sheet risk concentration credit normal course business company executes settles finances customer proprietary securities transactions activities expose company balance sheet risk event customers parties fail satisfy obligations accordance industry practice securities transactions recorded settlement date generally three business days trade date customer broker fail deliver cash securities agreed company may required purchase sell securities unfavorable market prices company extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include sales securities yet purchased option contracts commodity futures contracts company continually monitors margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose company risk event margin requirements insufficient fully cover customer losses company borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral addition company engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis company periodically borrows banks collateralized basis utilizing firm customer margin securities compliance securities exchange commission rules counterparty fail return customer securities pledged company subject risk acquiring securities prevailing market prices order satisfy customer obligations company sells securities currently obligated subsequently purchase securities prevailing market prices company exposed risk loss securities prices increase prior closing transactions 15 regulatory requirements companys brokerdealer subsidiaries subject securities exchange commissions uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 1998 brokerdealer subsidiaries aggregate net capital defined 192467 exceeded required net capital 177995 companys principal brokerdealer subsidiary must maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows brokerdealer maintain required amounts cash qualified securities 16 business segment information company subsidiaries operates predominantly single business segment securities industry within segment company primarily engaged securities brokerage investment advisory investment banking activities quarterly financial data dollars thousands except per share amounts unaudited item 9item 8 financial statements supplementary data report independent accountants board directors stockholders legg mason inc opinion accompanying consolidated statements financial condition legg mason inc subsidiaries company related consolidated statements earnings changes stockholders equity cash flows present fairly material respects consolidated financial position legg mason inc subsidiaries march 31 1999 1998 consolidated results operations cash flows three years period ended march 31 1999 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits financial statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp baltimore maryland june 2 1999 consolidated statements earnings dollars thousands except per share amounts see notes consolidated financial statements consolidated statements financial condition dollars thousands see notes consolidated financial statements consolidated statements changes stockholders equity dollars thousands except share amounts adjusted reflect stock splits see notes consolidated financial statements consolidated statements cash flows dollars thousands see notes consolidated financial statements notes consolidated financial statements dollars thousands except per share amounts 1 summary significant accounting policies basis presentation legg mason inc parent whollyowned subsidiaries collectively company principally engaged providing investment advisory securities brokerage investment banking commercial mortgage banking services individuals institutions corporations municipalities consolidated financial statements include accounts parent whollyowned subsidiaries material intercompany balances transactions eliminated appropriate prior years financial statements reclassified conform 1999 presentation consolidated financial statements prepared accordance generally accepted accounting principles require management make assumptions estimates affect amounts disclosures presented actual amounts could differ estimates cash equivalents cash equivalents highly liquid investments original maturities less 90 days held sale ordinary course business resale agreements company invests shortterm resale agreements collateralized us government agency securities resale agreements accounted collateralized financings policy company obtain possession collateral market value excess principal amount loaned collateral valued daily company may require counterparties deposit additional collateral appropriate resale agreements carried amounts securities subsequently resold specified respective agreements plus accrued interest securities transactions recorded settlement date basis differ materially trade date basis commission revenues related expenses unsettled transactions recorded trade date basis securities inventory securities sold yet purchased companys brokerdealer subsidiaries trading investing valued market resulting unrealized gains losses reflected earnings market values determined based quoted market dealer prices pricing models investment securities parent nonbrokerdealer subsidiaries held availableforsale valued market resulting unrealized gains losses reflected stockholders equity comprehensive income securities lending securities borrowed loaned accounted collateralized financings recorded amount collateral advanced received securities borrowed transactions require company deposit cash collateral lender company generally receives collateral form cash securities loaned fee received paid company recorded interest revenue expense company monitors market value securities borrowed loaned daily basis additional collateral obtained refunded necessary depreciation amortization equipment leasehold improvements reported cost net accumulated depreciation amortization 58910 49874 march 31 1999 1998 respectively depreciation amortization determined use straight line method estimated useful life asset remaining life lease maintenance repair costs expensed incurred intangible assets intangible assets consist principally goodwill asset management mortgage servicing contracts attributable business combinations reported cost net accumulated amortization intangibles amortized using straight line accelerated methods periods exceeding forty years accumulated amortization march 31 1999 1998 43914 54209 respectively company periodically reviews accounting goodwill intangible assets considering factors historical profitability projected operating cash flows determine assets realizable amortization periods appropriate fair value financial instruments march 31 1999 1998 substantially financial instruments carried fair value amounts approximate fair value fair value senior notes estimated using current market prices 100837 98958 march 31 1999 1998 respectively investment advisory related fees company earns investment advisory fees assets accounts managed subsidiaries distribution fees assets companysponsored mutual funds assetbased fees various types singlefee brokerage accounts revenues investment advisory related activities accrued period services performed earnings per share basic earnings per common share eps calculated dividing net earnings weightedaverage number common shares outstanding diluted eps similar basic eps adjusts effect potential common shares following table presents computations basic diluted eps years ended march 31 shares thousands 1999 1998 1997 weightedaverage common shares outstanding 54337 54431 51138 potential common shares employee stock options 3272 3528 2490 shares issuable upon conversion debentures 48 2357 total weightedaverage diluted common shares 57657 58007 55985 net earnings 89334 76121 57192 interest expense convertible debentures net 18 153 net earnings applicable diluted common shares 89352 76139 57345 basic eps 164 140 112 diluted eps 155 131 102 march 31 1999 1997 options purchase 2718200 31462 shares respectively included computation diluted earnings per share options exercise prices greater average price common shares period addition march 31 1999 1423619 shares held employee stock trust antidilutive therefore excluded computation diluted earnings per share 2 business combinations company acquired brandywine asset management inc brandywine january 1998 brandywine provides investment management services institutions high net worth individuals company issued 5148312 shares common stock acquire brandywine transaction accounted pooling interests accordingly years presented include results brandywine order conform companys fiscal year brandywines operating profit 920 quarter ended march 31 1997 reflected adjustment retained earnings acquisition material companys financial statements 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 2069350 march 31 1999 1447286 march 31 1998 company pays interest certain customer free credit balances held investment purposes 4 securities market securities positions consist following march 31 securities inventory 1999 1998 us government federal agencies 70991 18757 state municipal bonds 39982 36342 corporate debt equity 33025 26358 143998 81457 securities sold yet purchased 1999 1998 us government federal agencies 8688 4073 state municipal bonds 728 1570 corporate debt equity 2406 8489 11822 14132 5 investment securities companys investment securities including type maturity range availableforsale securities follows proceeds gross realized gains losses sales maturities availableforsale securities follows years ended march 31 1999 1998 1997 proceeds 51395 187256 195196 gross realized gains 260 1 gross realized losses 25 6 shortterm borrowings shortterm borrowings consist loans banks totaling 49262 13880 march 31 1999 1998 respectively companys subsidiaries secured unsecured bank lines credit totaling 261500 generally subject termination either partys discretion march 31 1999 1998 subsidiaries 14962 13880 respectively outstanding agreements bear interest weighted average rate 77 borrowings collateralized assets market values 17271 march 31 1999 19048 march 31 1998 together certain subsidiaries parent jointly entered revolving credit agreements permit borrow 110000 generally repayable within 30 days march 311999 company 34300 outstanding agreements bear interest 56 march 31 1998 borrowings outstanding agreements addition parent revolving credit agreement permits borrow 50000 repayable january 2000 floating rates march 31 1999 1998 borrowings outstanding agreement terms agreement company required among things maintain consolidated net worth plus subordinated liabilities less 383714 plus 50 consolidated annual net earnings subsequent march 31 1999 interest payments 94610 1999 73406 1998 45072 1997 7 senior notes february 1996 company issued 100 million principal amount senior notes due february 15 2006 bear interest 65 notes sold discount yield 657 company available offering additional 50 million debt convertible debt securities pursuant shelf registration filed january 1996 8 subordinated liabilities fiscal 1997 company called redemption full principal amount outstanding 525 convertible subordinated debentures substantially holders converted debentures 10336 shares common stock one thousand dollars principal amount debentures based conversion price 968 per share common stock cash paid lieu fractional shares 9 commitments contingencies company leases office facilities equipment noncancellable operating leases also multiyear agreements data processing services leases service agreements expire varying dates 2011 certain leases provide renewal options contain escalation clauses providing increased rentals march 31 1999 minimum annual aggregate rentals follows 2000 44219 2001 37672 2002 34107 2003 27313 2004 20122 thereafter 63385 226818 total rental expense including cancellable equipment leases 42818 37908 30050 1999 1998 1997 respectively company enters whenissued underwriting commitments open transactions relating commitments march 31 1999 closed effect consolidated financial statements company would material company subsidiaries named defendants various legal actions arising primarily securities investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial ultimate resolution actions cannot currently determined opinion management consultation legal counsel actions resolved material adverse effect consolidated financial statements company however period potential adverse contingency become probable results operations period could materially affected 10 income taxes company subsidiaries file consolidated federal income tax return provision income taxes consists 1999 1998 1997 federal 49515 43162 31823 state local 9926 9096 7195 59441 52258 39018 current 65737 59970 42435 deferred 6296 7712 3417 59441 52258 39018 reconciliation difference effective income tax rate statutory federal income tax rate follows 1999 1998 1997 taxes statutory rates 350 state income taxes net federal income tax benefit 44 46 49 taxexempt interest income net 05 06 life insurance proceeds 07 net 18 16 13 effective income tax rates 400 407 406 components companys deferred tax assets liabilities included assets liabilities follows 1999 1998 deferred tax assets accrued compensation benefits 32905 18556 accrued expenses 5751 4247 operating loss carryforwards 548 731 amortization leasehold improvements 1691 1479 2052 2208 valuation allowance 477 1039 42470 26182 deferred tax liabilities depreciation 4785 1971 deferred expenses 600 1126 deferred income 1225 1229 195 148 6805 4474 march 31 1999 1998 deferred tax valuation allowance primarily benefits related net operating losses subsidiaries expire 2004 2019 income tax payments 70452 1999 56019 1998 45054 1997 11 employee benefits company subsidiaries maintains various defined contribution plans covering substantially employees discretionary contributions charged operations amounted 18693 17155 12144 1999 1998 1997 respectively addition employees make voluntary contributions certain plans 12 capital stock march 31 1999 authorized numbers common preferred shares 100000000 4000000 respectively addition march 31 1999 1998 11507227 11916102 shares common stock respectively reserved issuance companys stock plans dividends declared paid march 31 1999 1998 1997 3660 3025 2375 respectively company paid 2for1 stock split 4for3 stock split fiscal 1999 1998 respectively references consolidated financial statements number common shares per share amounts adjusted retroactively reflect stock splits except number issued common shares presented consolidated financial statements 13 stock plans march 31 1999 8000000 shares authorized issued companys employee stock plans options companys employee stock plans granted prices less 100 fair market value options generally exercisable 20 25 increments 4 5 years expire within 5 10 years date grant stock option transactions plans three years ending march 31 1999 summarized weighted average number exercise shares price options outstanding march 31 1996 4997902 711 granted 1103090 1097 exercised 526172 606 canceled 88204 967 options outstanding march 31 1997 5486616 795 granted 1368042 2054 exercised 976826 665 canceled 116472 1122 options outstanding march 31 1998 5761360 1109 granted 2734332 2995 exercised 982668 714 canceled 139889 1755 options outstanding march 31 1999 7373135 1849 following information summarizes companys stock options outstanding march 31 1999 weighted option average exercise shares exercise remaining life price range outstanding price years 123 999 1817582 661 39 10001999 1970333 1230 24 20002999 2129820 2599 75 30003074 1455400 3072 73 march 31 1999 1998 1997 options exercisable 2679080 2464746 2160722 shares respectively weightedaverage exercise prices 1038 689 647 respectively following information summarizes companys stock options exercisable march 31 1999 weighted option average exercise shares exercise price range exercisable price 123 999 1545159 640 10001999 769682 1109 20002999 364239 2579 30003074 fiscal 1999 company granted 80000 restricted shares common stock fair market value 2816 per share restricted shares granted companys employee stock plans vest 25 increments four years compensation expense recognized four year vesting period restricted stock award noncash transaction additionally fiscal 1999 company entered stock purchase related loan transaction officer purchased 120000 shares common stock valued 3379 company accounts stockbased compensation provisions accounting principles board opinion 25 accounting stock issued employees rather fair value method financial accounting standards board statement 123 accounting stockbased compensation fiscal 1999 company recognized 269 compensation expense grants made companys stock plans pro forma results based fair value method prescribed statement 123 follows 1999 1998 1997 net earnings reported 89334 76121 57192 pro forma 84833 73225 56398 earnings per share reported basic 164 140 112 diluted 155 131 102 pro forma basic 156 135 110 diluted 147 126 101 weightedaverage fair value stock options granted fiscal 1999 1998 1997 using optionpricing model 927 550 365 per option share respectively following weightedaverage assumptions used model grants fiscal 1999 1998 1997 respectively expected dividend yield 134 155 185 riskfree interest rate 540 606 658 expected volatility 2346 2199 2162 expected lives 637 years 490 years 437 years pro forma compensation expense associated option grants recognized vesting period initial impact applying statement 123 representative potential impact pro forma net earnings future years include compensation expense related vesting fiscal 1996 subsequent grants company also adopted legg mason inc stock option plan nonemployee directors options granted plan immediately exercisable price equal fair market value shares date grant options issuable plan limited 1100000 shares aggregate term ten years date grant march 31 1999 options 381920 shares granted 305274 currently outstanding company employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject 4333334 total share limit plan purchases made payroll deductions company matching 5 employees contributions charges earnings significant respect plan 14 deferred compensation employee stock trust july 1998 emerging issues task force eitf reached consensus eitf issue 9714 accounting deferred compensation arrangements amounts earned held rabbi trust invested eitf 9714 eitf 9714 assets trust must consolidated employer value employers stock held rabbi trust must classified stockholders equity generally accounted manner similar treasury stock certain situations corresponding deferred compensation liability must recorded fair market value shares held rabbi trust changes fair market value deferred compensation liability september 30 1998 must recognized earnings company adopted eitf 9714 september 30 1998 shares companys stock 1423619 march 31 1999 shown stockholders equity similar treasury stock cost deferred compensation obligation recorded liabilities fair market value stock held trust difference cost fair market value september 30 1998 presented separate component stockholders equity accordance eitf 9714 fiscal year ended march 31 1999 company recorded noncash charge earnings 10352 company amended plan subsequent first quarter fiscal 2000 changes value stock held plan longer affect companys earnings stockholders equity substantially restored 15 offbalance sheet risk concentration credit normal course business company executes settles finances customer proprietary securities transactions activities expose company offbalance sheet risk event customers parties fail satisfy obligations accordance industry practice securities transactions recorded settlement date generally three business days trade date customer broker fail deliver cash securities agreed company may required purchase sell securities unfavorable market prices company extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include sales securities yet purchased option contracts commodity futures contracts company continually monitors margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose company risk event margin requirements insufficient fully cover customer losses company invests shortterm resale agreements collateralized us government agency securities company generally takes possession securities purchased agreements transactions expose company risk event counterparty repurchase securities value collateral held less underlying receivable company monitors value collateral daily requests additional collateral necessary company borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral addition company engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis company periodically borrows banks collateralized basis utilizing firm customer margin securities compliance securities exchange commission rules counterparty fail return customer securities pledged company subject risk acquiring securities prevailing market prices order satisfy customer obligations company sells securities currently obligated subsequently purchase securities prevailing market prices company exposed risk loss securities prices increase prior closing transactions 16 regulatory requirements companys brokerdealer subsidiaries subject securities exchange commissions uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 1999 brokerdealer subsidiaries aggregate net capital defined 206016 exceeded required net capital 186484 companys principal brokerdealer subsidiary must maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows brokerdealer maintain required amounts cash qualified securities 17 business segment information company provides financial services four business segments investment advisory private client capital markets segment results include direct revenues expenses operating units segment allocations indirect expenses based specific methodologies investment advisory provides investment advisory services companysponsored mutual funds asset management institutional individual clients subadvisory revenues expenses eliminated consolidated segment reporting private client distributes wide range financial products branch distribution network including equity fixedincome securities proprietary nonaffiliated mutual funds annuities net interest profit customers margin loan credit account balances included segment capital markets consists companys equity fixedincome institutional sales trading syndicate corporate public finance activities sales credits associated underwritten offerings reported private client sold retail distribution channels capital markets sold institutional distribution channels businesses principally companys real estate business unallocated corporate revenues expenses 1999 pretax earnings include noncash increase deferred compensation expense 10352 see note 14 notes consolidated financial statements business segment financial results follows 1999 1998 1997 revenues investment advisory 266740 215167 162386 private client 610529 513641 380920 capital markets 130949 128048 92303 37788 32204 28992 1046006 889060 664601 earnings income taxes investment advisory 79020 53691 40440 private client 67039 53314 44543 capital markets 11955 20345 10160 9239 1029 1067 148775 128379 96210 companys revenues earnings presented substantially derived domestic operations results international operations significant company report asset information business segment quarterly financial data dollars thousands except per share amounts unaudited adjusted reflect stock splits item 9item 8 financial statements supplementary data board directors stockholders legg mason inc opinion accompanying consolidated statements financial condition legg mason inc subsidiaries company related consolidated statements earnings changes stockholders equity comprehensive income cash flows present fairly material respects consolidated financial position legg mason inc subsidiaries march 31 2001 2000 consolidated results operations cash flows three years period ended march 31 2001 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits financial statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp baltimore maryland may 3 2001 except note 17 date may 31 2001 consolidated statements earnings dollars thousands except per share amounts see notes consolidated financial statements consolidated statements financial condition dollars thousands see notes consolidated financial statements consolidated statements changes stockholders equity dollars thousands 1net deferred income taxes 235 2001 152 2000 671 1999 see notes consolidated financial statements consolidated statements comprehensive income dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands see notes consolidated financial statements notes consolidated financial statements dollars thousands except per share amounts 1 summary significant accounting policies basis presentation legg mason inc parent subsidiaries collectively company principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries material intercompany balances transactions eliminated consolidated financial statements restated reflect business combination described note 2 perigee investment counsel inc perigee accounted pooling interests unless otherwise noted per share amounts include common shares company shares issued connection perigee acquisition exchangeable common shares company oneforone basis time appropriate prior years financial statements reclassified conform current year presentation consolidated financial statements prepared accordance accounting principles generally accepted united states require management make assumptions estimates affect amounts reported financial statements accompanying notes actual amounts could differ estimates cash equivalents cash equivalents highly liquid investments original maturities 90 days less held sale ordinary course business securities purchased agreements resell company invests shortterm securities purchased agreements resell collateralized us government agency securities purchased agreements resell accounted collateralized financings policy company obtain possession collateral market value excess principal amount loaned collateral valued daily company may require counterparties deposit additional collateral appropriate securities purchased agreements resell carried amounts securities subsequently resold specified respective agreements plus accrued interest securities transactions customer securities transactions recorded settlement date basis related commission revenues expenses recorded trade date basis financial instruments owned financial instruments used companys trading activities recorded trade date basis carried fair value unrealized gains losses reflected earnings fair values generally based listed market prices dealer price quotations similar instruments company carries private equity investments fair value based upon companys assessment underlying investments securities lending securities borrowed loaned accounted collateralized financings recorded amount collateral advanced received securities borrowed transactions require company deposit cash collateral lender company generally receives collateral form cash securities loaned fee received paid company recorded interest revenue expense company monitors fair value securities borrowed loaned daily basis additional collateral obtained refunded necessary investments company holds debt equity investments generally classified availableforsale heldtomaturity debt equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders equity comprehensive income debt securities held companys finance subsidiaries positive intent ability hold maturity classified heldto maturity investments recorded amortized cost amortization discount premium included current period earnings depreciation amortization equipment leasehold improvements reported cost net accumulated depreciation amortization 71895 67151 march 31 2001 2000 respectively depreciation amortization determined use straightline method estimated useful life asset remaining life lease maintenance repair costs expensed incurred intangible assets intangible assets consist principally goodwill asset management mortgage servicing contracts reported cost net accumulated amortization company capitalizes costs incurred acquiring mortgage servicing rights loan origination activities accordance statement financial accounting standards sfas 125 accounting transfers servicing financial assets extinguishments liabilities intangibles amortized using straightline methods principally periods exceeding twenty years accumulated amortization march 31 2001 2000 43708 52005 respectively company periodically reviews accounting goodwill intangible assets considering factors historical profitability projected operating cash flows determine assets realizable amortization periods appropriate fair value financial instruments march 31 2001 2000 substantially financial instruments carried fair value amounts approximate fair value fair values senior notes estimated using current market prices 97480 93150 march 31 2001 2000 respectively translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates statement financial condition date revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income gains losses resulting foreign currency transactions included earnings investment advisory related fees company earns investment advisory fees assets accounts managed subsidiaries distribution fees assets companysponsored mutual funds assetbased fees various types singlefee brokerage accounts addition company earns fees performing certain administrative services funds revenues investment advisory related activities recognized period services performed performance fees recognized end performance period stockbased compensation company accounts stockbased compensation accordance accounting principles board opinion apb 25 accounting stock issued employees permitted sfas 123 accounting stockbased compensation companys stockbased compensation plans include stock options restricted awards stock purchase plans deferred compensation payable stock accordance apb 25 compensation expense recognized stock options intrinsic value date grant pro forma effects sfas 123 net income earnings per share presented note 12 earnings per share earnings per share eps calculated dividing net earnings weighted average number common shares outstanding diluted eps similar basic eps adjusts effect potential common shares following table presents computations basic diluted eps march 31 2001 2000 options purchase 1897850 57000 shares respectively included computation diluted earnings per share options exercise prices greater average price common shares period addition march 31 2001 2000 1999 633967 69405 1423619 shares respectively held employee stock trust antidilutive therefore excluded computation diluted earnings per share 2 business combinations february 5 2001 company acquired approximate 70 ownership interest barrett associates inc barrett high net worth asset manager individuals families endowments foundations company acquired controlling interest approximately 18500 terms acquisition agreement remaining 30 interest acquired next five years additional amount 22500 based barretts revenues second fifth years acquisition accounted purchase accordingly net assets results operations included companys consolidated financial statements date acquisition excess purchase price interest net assets acquired approximately 17000 amortized straightline basis periods 15 years ownership interest owned company recorded minority interest material may 26 2000 company completed acquisition perigee one canadas leading institutional investment managers april 2001 perigee inc merged operating subsidiary perigee investment counsel inc terms acquisition agreement outstanding share perigee exchanged 0387 exchangeable share legg mason canada holdings subsidiary company holders exchangeable shares dividend voting rights equivalent common stockholders exchangeable shares economic equivalent common shares company may exchanged shares oneforone basis time company issued approximately 52 million exchangeable shares transaction acquisition accounted pooling interests accordingly prior period consolidated financial statements restated include combined results operations financial position cash flows perigee net revenues net income company perigee years ended march 31 2000 1999 follows december 1999 company completed acquisition leggmason investors holdings plc leggmason investors formerly johnson fry holdings plc londonbased retail fund management company acquisition accounted purchase accordingly net assets results operations included companys consolidated financial statements date acquisition total purchase price approximately 72000 including 67000 cash 5000 liabilities excess purchase price tangible net assets acquired approximately 64000 amortized straightline basis 20 years leggmason investors two finance subsidiaries purpose finance companies raise funds issuing secured fixedrate loan securities minimum maturity five years use proceeds invest portfolio bonds issued various financial institutions generally available public tranches small enough retail investor see notes 5 7 september 30 1999 company entered joint venture bingham dana llp bostonbased law firm acquire 50 interest trust administration business 10000 investment joint venture accounted equity method september 2 1999 company acquired assets berkshire asset management inc berkshire 18000 berkshire provides investment management services high net worth individuals institutions acquisition accounted purchase accordingly net assets results operations included companys consolidated financial statements date acquisition excess purchase price tangible net assets acquired 17745 amortized straight line basis periods 12 years following unaudited pro forma consolidated results presented though acquisitions leggmason investors berkshire occurred beginning fiscal 2000 adjusted amortization excess cost net tangible assets acquired 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 2746055 2438020 march 31 2001 2000 respectively company pays interest certain customer free credit balances held investment purposes 4 financial instruments owned fair value securities positions consist following march 31 march 31 2001 company pledged securities owned 352 collateral counterparties securities loaned transactions commodities clearing requirements sold repledged 5 investments company two categories investments investment securities investments finance subsidiaries investments generally classified availableforsale heldtomaturity described note 1 investment securities consist highly liquid debt equity securities investments finance subsidiaries consist bonds issued various financial institutions investments march 31 2001 2000 follows 1 nonqualifying sfas 115 accounting certain investments debt equity securities purposes information regarding companys investments categorized maturity date follows proceeds gross realized gains losses sales maturities availableforsale investments follows 6 shortterm borrowings company obtains shortterm financing primarily secured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized agency corporate equity securities company outstanding loan balances 4900 23290 march 31 2001 2000 respectively companys weighted average interest rates 558 632 respectively company committed unsecured revolving credit facility 100000 matures june 30 2003 facility restrictive covenants require company among things maintain specified levels net worth debttoequity ratios company intends use facility general corporate purposes including expansion diversification business borrowings outstanding facility march 31 2001 2000 company maintained compliance applicable covenants facility times 7 longterm debt company outstanding 100000 senior notes due february 15 2006 bear interest 65 notes issued discount yield 657 march 31 2001 company 500000 available issuance additional debt convertible debt securities pursuant shelf registration described note 2 companys finance subsidiaries issued series secured fixedrate notes minimum maturity five years obligations become due beginning may 2001 march 2003 interest rates ranging 6354 70 aggregate maturities longterm debt five years subsequent march 31 2001 follows 2002 26497 2003 100402 2004 2005 2006 100000 total226899 8 commitments contingencies company leases office facilities equipment noncancelable operating leases also multiyear agreements data processing services leases service agreements expire varying dates 2013 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2001 minimum annual aggregate rentals follows 2002 62007 2003 51385 2004 38062 2005 28258 2006 21403 thereafter 57099 258214 table include aggregate rental commitments 637 furniture equipment capital leases due 2002 rental expense operating leases service contracts 66945 51935 43370 2001 2000 1999 respectively rental expense net sublease income received material three years march 31 2001 2000 company commitments invest 9778 15670 respectively limited partnerships make private equity investments commitments funded required end respective investment periods ranging 2005 2010 company enters whenissued underwriting commitments open transactions relating commitments march 31 2001 closed effect consolidated financial statements company would material company named defendant various legal actions arising primarily securities investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial involved certain governmental self regulatory agency investigations proceedings ultimate resolution actions cannot currently determined opinion management consultation legal counsel actions resolved material adverse effect consolidated financial statements company however period potential adverse contingency become probable results operations period could materially affected 9 income taxes components income tax expense follows reconciliation difference effective income tax rate statutory federal income tax rate follows components companys deferred tax assets liabilities included assets liabilities follows march 31 2001 2000 deferred tax valuation allowance primarily benefits related net operating losses operating losses two components domestic state foreign state net operating losses expire 2004 2020 foreign net operating losses continue utilized otherwise expiration date 10 employee benefits company subsidiaries maintains various defined contribution plans covering substantially employees addition discretionary contributions company matches 50 employee 401k contributions 6 employee compensation maximum two thousand five hundred dollars per year contributions charged operations amounted 27782 29478 18693 2001 2000 1999 respectively addition employees make voluntary contributions certain plans 11 capital stock march 31 2001 authorized numbers common preferred exchangeable shares 250 million 4 million unlimited number respectively addition march 31 2001 2000 139 million 151 million shares common stock respectively reserved issuance companys stock option plans 28 million 52 million common shares respectively reserved exchangeable shares connection perigee transaction see note 2 dividends declared paid march 31 2001 2000 1999 5878 4676 3660 respectively company effected 2for1 stock split fiscal 1999 references consolidated financial statements number common shares per share amounts adjusted retroactively reflect stock split except number issued common shares presented consolidated financial statements 12 stock plans march 31 2001 139 million shares authorized issued companys omnibus employee stock plans addition certain employees ability defer compensation payable shares company stock vested limit number shares authorized issued deferred arrangements options companys employee stock plans granted prices less 100 fair market value options generally exercisable 20 25 increments 4 5 years expire within 5 10 years date grant stock option transactions plans three years ended march 31 2001 summarized following information summarizes companys stock options outstanding march 31 2001 march 31 2001 2000 1999 options exercisable 2972113 2790652 2679080 shares respectively weighted average exercise prices 2028 1454 1038 respectively following information summarizes companys stock options exercisable march 31 2001 fiscal 1999 company granted 80000 restricted shares common stock fair value 2816 per share restricted shares granted companys employee stock plans vest 25 increments four years compensation expense recognized fouryear vesting period restricted stock award noncash transaction additionally fiscal 1999 company entered stock purchase related loan transaction officer purchased 120000 shares common stock valued 3379 fiscal 2001 2000 1999 company recognized 787 674 269 respectively compensation expense grants made companys stock plans pro forma results based fair value method prescribed sfas 123 follows weighted average fair value stock options granted fiscal 2001 2000 1999 using optionpricing model 2015 1300 927 per option share respectively following weighted average assumptions used model grants fiscal 2001 2000 1999 respectively expected dividend yield 85 110 134 riskfree interest rate 618 602 540 expected volatility 3215 2768 2346 expected lives 570 years 603 years 637 years pro forma compensation expense associated option grants recognized vesting period company also stock option plan nonemployee directors options granted plan immediately exercisable price equal fair value shares date grant options issuable plan limited 11 million shares aggregate term ten years date grant march 31 2001 options 489920 shares granted 389948 currently outstanding company employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject 4333334 total share limit plan purchases made payroll deductions company matching 5 employees contributions charges earnings significant respect plan 13 deferred compensation employee stock trust july 1998 emerging issues task force eitf reached consensus eitf issue 9714 accounting deferred compensation arrangements amounts earned held rabbi trust invested eitf 9714 assets trust must consolidated employer value employers stock held rabbi trust must classified stockholders equity generally accounted manner similar treasury stock certain situations corresponding deferred compensation liability must recorded fair value shares held rabbi trust changes fair value deferred compensation liability september 30 1998 must recognized earnings company adopted eitf 9714 account deferred compensation employee stock trust plan effective september 30 1998 fiscal 2000 company recorded noncash credit 1063 credit represents change fair value stock held trust april 1 1999 june 2 1999 fiscal 1999 company recorded noncash charge earnings 10352 charge represents change fair value stock held trust september 30 1998 march 31 1999 june 2 1999 company amended plan limit distributions plan assets shares companys common stock accordance provisions eitf 9714 changes value stock held plan subsequent june 2 1999 longer affect companys earnings addition result plan amendment obligation previously recorded deferred compensation liability reclassified stockholders equity accordingly trust shares 2855192 march 31 2001 2345667 march 31 2000 corresponding liability presented components stockholders equity 14 offbalance sheet risk concentration credit normal course business company executes settles finances customer proprietary securities transactions activities expose company offbalance sheet risk event customers parties fail satisfy obligations securities transactions generally settle three business days trade date customer broker fail deliver cash securities agreed company may required purchase sell securities unfavorable market prices company extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include purchases securities sales securities yet purchased option contracts company continually monitors margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose company risk event margin requirements insufficient fully cover customer losses company invests shortterm resale agreements collateralized us government agency securities company generally takes possession securities purchased agreements transactions expose company risk event counterparty repurchase securities value collateral held less underlying receivable company monitors value collateral daily requests additional collateral necessary company borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral addition company engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis company sells securities currently obligated subsequently purchase securities prevailing market prices company exposed risk loss securities prices increase prior closing transactions company periodically borrows banks collateralized basis utilizing firm customer margin securities compliance securities exchange commission rules counterparty fail return customer securities pledged company subject risk acquiring securities prevailing market prices order satisfy customer obligations companys customer financing securities lending activities require company pledge customer securities collateral various financing sources bank loans securities lending march 31 2001 company approximately 14 billion customer securities customer margin loans available pledged company repledged approximately 29094 securities loan agreements addition company received collateral approximately 234307 securities lending agreements company repledged approximately 231848 company also received collateral approximately 20 billion reverse repurchase agreements customer reserve requirement none repledged 15 regulatory requirements companys brokerdealer subsidiaries subject securities exchange commissions uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 2001 brokerdealer subsidiaries aggregate net capital defined 291437 exceeded required net capital 269192 companys principal brokerdealer subsidiary must maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows brokerdealer maintain required amounts cash qualified securities 16 business segment information company provides financial services four business segments asset management private client capital markets business segment results include direct revenues expenses operating units business segment allocations indirect expenses based specific methodologies asset management provides investment advisory services companysponsored mutual funds asset management institutional individual clients private client distributes wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities net interest profit customers margin loan credit balances included business segment capital markets consists companys equity fixed income institutional sales trading syndicate corporate public finance activities sales credits associated underwritten offerings reported private client sold retail distribution channels capital markets sold institutional distribution channels business segment also includes realized unrealized gains losses merchant banking private equity activities warrants acquired connection investment banking activities consists principally companys real estate service business unallocated corporate revenues expenses fiscal 2000 pretax earnings include noncash deferred compensation credit 1063 fiscal 1999 pre tax earnings include noncash deferred compensation charge 10352 see note 13 business segment financial results follows company analyze asset information business segment company principally operates united states united kingdom canada results geographic region follows 17 subsequent events may 29 2001 company entered agreement acquire private capital management lp pcm privately owned high net worth investment management firm march 31 2001 pcm managed assets approximately 71 billion terms agreement company pay 682 million cash closing expected occur second quarter fiscal 2002 transaction also includes two contingent payments based pcms revenue growth third fifth anniversaries closing aggregate purchase price 1382 billion acquisition accounted purchase 682 million cash required closing 150 million available companys excess cash 250 million raised private offering zero coupon convertible notes described company currently assessing financing options respect remainder purchase price may 31 2001 company entered purchase agreement sale 567 million principal amount maturity zero coupon convertible notes due 2031 resulting gross proceeds approximately 250 million including amount covered exercised overallotment option convertible notes offered qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity issue price represents yield maturity 275 per annum initial conversion premium 25 market value companys common stock purchase date upon certain events note convertible 77062 shares companys common stock company may redeem convertible securities cash june 6 2006 accreted value addition company may required repurchase convertible securities accreted value option holders various dates beginning june 6 2003 repurchases paid cash shares companys common stock combination quarterly financial data dollars thousands except per share amounts unaudited 1 excluding 16 per share declared perigee prior acquisition quarter ended june 30 2000 2 excluding 60 per share declared perigee fiscal 2000 item 9item 8 financial statements supplementary data management’s discussion responsibility financial reporting management legg mason inc subsidiaries collectively “legg mason” responsible preparation fair presentation accompanying consolidated financial statements related notes management also responsible fair presentation management’s discussion analysis included annual report form 10k believes information accurate consistent consolidated financial statements notes applicable management understands recognizes importance safeguarding legg mason’s assets connection management believes legg mason maintains system internal controls management believes adequate ensure transactions properly authorized assets safeguarded financial records reliable system internal controls includes limited maintaining risk operational management committees maintaining internal audit legal compliance departments establishing formal written policies procedures segregating key duties functions appropriate due fact operational environment legg mason operates constantly changing management periodically evaluates implements changes improve system internal controls year legg mason established disclosure committee assist chief executive officer principal financial officer fulfilling formal certification responsibilities establishing maintaining disclosure controls procedures disclosure committee made senior representatives financial risk management areas firm advised legal department disclosure committee meets regularly review events disclosures impact legg mason’s 10q 10k reports proxy statement audit committee board directors participates reviewing adequacy system internal controls financial reporting audit committee consists directors independent legg mason meet regularly management internal auditors also meet regularly independent accountants review scope work findings finally independent accounting firm pricewaterhousecoopers llp performed audit legg mason’s financial statements part audit management believes made available pricewaterhousecoopers llp financial records related data minutes stockholders’ directors’ meetings pricewaterhousecoopers llp believed necessary order render independent audit report part audit pricewaterhousecoopers llp obtains specific representations management legg mason management believes representations made pricewaterhousecoopers llp audit valid accurate copy independent accountants’ audit report follows raymond mason chairman president chief executive officer timothy c scheve senior executive vice president chief administrative officer charles j daley jr senior vice president treasurer principal financial officer report independent accountants board directors stockholders legg mason inc opinion accompanying consolidated statements financial condition legg mason inc subsidiaries “legg mason” related consolidated statements earnings changes stockholders’ equity comprehensive income cash flows present fairly material respects consolidated financial position legg mason march 31 2003 2002 consolidated results operations cash flows three years period ended march 31 2003 conformity accounting principles generally accepted united states america financial statements responsibility legg mason’s management responsibility express opinion financial statements based audits conducted audits financial statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 6 notes consolidated financial statements effective april 1 2001 legg mason adopted provisions statements financial accounting standards 141 “business combinations” 142 “goodwill intangible assets” baltimore maryland may 1 2003 consolidated statements earnings dollars thousands except per share amounts see notes consolidated financial statements consolidated statements financial condition dollars thousands see notes consolidated financial statements consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements consolidated statements comprehensive income dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc “parent” subsidiaries collectively “legg mason” principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries material intercompany balances transactions eliminated unless otherwise noted per share amounts include common shares legg mason shares issued connection acquisition perigee investment counsel inc “perigee” exchangeable common shares legg mason oneforone basis time appropriate prior years’ financial statements reclassified conform current year presentation use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america require management make assumptions estimates affect amounts reported financial statements accompanying notes actual amounts could differ estimates differences could material impact consolidated financial statements cash equivalents cash equivalents highly liquid investments original maturities 90 days less used trading purposes repurchase agreements legg mason invests shortterm securities purchased agreements resell collateralized us government agency securities also included cash securities segregated regulatory purposes deposited clearing organizations securities purchased agreements resell securities sold agreements repurchase accounted collateralized financings policy legg mason obtain possession collateral market value excess principal amount loaned collateral valued daily legg mason may require counterparties deposit additional collateral appropriate securities purchased agreements resell securities sold agreements repurchase carried contractual amounts plus accrued interest securities sold agreements repurchase included shortterm borrowings see note 7 discussion shortterm borrowings securities transactions customer securities transactions recorded settlement date basis related commission revenues expenses recorded trade date basis receivables payables customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances reflected consolidated financial statements see note 15 discussion offbalance sheet risk securities lending securities borrowed loaned accounted collateralized financings recorded amount collateral advanced received securities borrowed transactions require legg mason deposit cash collateral lender legg mason generally receives collateral form cash securities loaned fee received paid legg mason recorded interest income expense legg mason monitors fair value securities borrowed loaned daily basis additional collateral obtained refunded necessary financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value cash securities segregated regulatory purposes deposited clearing organizations securities purchased agreements resell trading assets investment securities investments finance subsidiaries trading liabilities consolidated statements financial condition include forms financial instruments parent nonbrokerdealer subsidiaries hold debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders’ equity comprehensive income net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium included earnings financial instruments used trading activities parent’s brokerdealer subsidiaries recorded trade date basis carried fair value unrealized gains losses reflected current period earnings addition investment securities held one legg mason’s asset management subsidiaries classified trading securities investments recorded fair value unrealized gains losses included earnings realized gains losses investments included current period earnings fair values generally based upon prices independent sources listed market prices broker dealer price quotations investments illiquid privatelyheld securities readily determinable fair values determination fair value requires management estimate value security based upon available information instances security subject transfer restrictions value security based primarily quoted price security without restriction may reduced amount reflect restrictions addition even value security derived independent market price broker dealer quote certain assumptions may required determine fair value legg mason generally assumes size positions securities holds would large enough affect quoted price securities sold sale would happen orderly manner however assumptions may incorrect actual value realized upon disposition could different current carrying value legg mason evaluates nontrading securities “other temporary” impairment may exist fair value investment security adjusted cost extended period time “other temporary” impairment determined exist difference value investment security recorded financial statements fair value recognized charge earnings period impairment determined march 31 2003 legg mason approximately 53 million financial instruments valued solely based upon management’s assumptions estimates addition financial instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents receivables customers securities borrowed securities loaned shortterm borrowings payables customers fair value longterm debt march 31 2003 2002 869043 798942 respectively fair values estimated using current market prices equipment leasehold improvements equipment leasehold improvements consists primarily furniture communications technology hardware software leasehold improvements equipment leasehold improvements reported cost net accumulated depreciation amortization 95916 78015 march 31 2003 2002 respectively depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years leasehold improvements generally amortized term lease maintenance repair costs expensed incurred depreciation amortization expense 27383 25801 23348 2003 2002 2001 respectively intangible assets goodwill intangible assets consist principally asset management contracts trade names legg mason also capitalizes costs incurred acquiring mortgage servicing rights loan origination activities accordance statement financial accounting standards “sfas” 140 “accounting transfers servicing financial assets extinguishments liabilities” intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life march 31 2003 intangible assets amortized weightedaverage life 14 years value contracts manage assets mutual funds value trade names classified indefinitelife intangible assets assignment indefinite lives mutual fund contracts based upon assumption foreseeable limit contract period manage mutual funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents excess cost business acquisition fair value net assets acquired accordance sfas 142 “goodwill intangible assets” indefinitelife intangible assets goodwill amortized legg mason reviews intangible assets goodwill quarterly basis considering factors projected cash flows revenue multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs intangible assets subject amortization reviewed impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level one level operating segment deemed impaired carrying amount reporting unit exceeds implied fair value reporting unit estimating fair value reporting unit legg mason uses valuation techniques based multiples revenues discounted cash flows similar models employed analyzing purchase price acquisition target substantially legg mason’s goodwill assigned asset management operating segment legg mason defined asset management reporting units wealth management institutional mutual funds see note 6 additional information regarding intangible assets goodwill translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates statement financial condition date revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders’ equity comprehensive income gains losses resulting foreign currency transactions included earnings investment advisory related fees legg mason earns investment advisory fees assets investment funds accounts managed subsidiaries distribution fees assets companysponsored investment funds assetbased fees various types singlefee brokerage accounts addition legg mason earns fees performing certain administrative services funds revenues investment advisory related activities recognized period services performed performance fees may earned certain investment advisory contracts exceeding performance benchmarks generally recognized end performance measurement period investment banking underwriting revenues fees advisory assignments recorded underlying transaction completed terms engagement expenses related securities offerings legg mason acts principal agent deferred related revenue recognized expense reimbursements related advisory activities recorded reduction related expenses stockbased compensation legg mason’s stockbased compensation plans include stock options stock purchase plans restricted stock awards deferred compensation payable stock legg mason accounts stockbased compensation accordance accounting principles board opinion “apb” 25 “accounting stock issued employees” permitted sfas 123 “accounting stockbased compensation” amended accordance apb 25 compensation expense recognized stock options intrinsic value exercise price less market price date grant legg mason qualified employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject 3 million total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged stockholders’ equity fiscal year ended march 31 2003 approximately 200 shares purchased open market behalf participating employees following table reflects pro forma results compensation expense associated option grants stock purchase plan recognized vesting period weighted average fair value stock options granted fiscal 2003 2002 2001 using blackscholes optionpricing model 1588 1859 2015 per option share respectively following weighted average assumptions used model grants fiscal 2003 2002 2001 fiscal 2003 legg mason granted 27 shares restricted common stock fair value 5117 per share restricted shares granted legg mason’s employee stock plans vest equal increments three years compensation expense recognized threeyear vesting period restricted stock awards noncash transactions fiscal 2003 2002 2001 legg mason recognized 1515 952 787 respectively compensation expense grants made legg mason’s stock plans primarily restricted stock awards addition deferred compensation payable shares legg mason common stock granted certain employees mandatory elective plans vesting plans ranges immediate periods six years plans provide discounts 10 contributions dividends limit number shares authorized issued deferred arrangements fiscal 2003 2002 2001 legg mason recognized 9843 8394 4935 respectively compensation expense deferred compensation arrangements payable shares common stock fiscal year ended march 31 2003 legg mason issued 509 shares deferred compensation arrangements weightedaverage fair value per share grant date 4705 accumulated comprehensive loss accumulated comprehensive loss represents cumulative foreign currency translation adjustments net gains losses investment securities cash flow hedge reflected earnings march 31 2003 2002 legg mason’s accumulated comprehensive loss consists 2733 10879 respectively foreign currency translation loss adjustments 254 1155 respectively unrealized gains investment securities 1497 172 respectively unrealized losses cash flow hedge earnings per share basic earnings per share “eps” calculated dividing net earnings weighted average number common shares outstanding diluted eps similar basic eps adjusts effect potential common shares following table presents computations basic diluted eps march 31 2003 2002 2001 options purchase 3524 3681 1898 shares respectively included computation diluted earnings per share options’ exercise prices greater average price common shares period addition march 31 2003 2002 2001 674 592 634 shares respectively held employee stock trust antidilutive therefore excluded computation diluted earnings per share diluted eps include 44 million shares may issued upon conversion zerocoupon contingent convertible senior notes due contingent nature conversion features provide conversion limited circumstances including sale price common stock reaching certain thresholds notes rated specified credit ratings notes called redemption derivative instruments effective april 1 2001 legg mason adopted provisions sfas 133 amended “accounting derivative instruments hedging activities” sfas 133 requires legg mason report derivative instruments assets liabilities balance sheet measure instruments fair value legg mason generally engage derivative hedging activities except limited tradingrelated activities parent’s primary brokerdealer subsidiary transaction collateralized debt obligation “cdo” primary brokerdealer subsidiary uses futures contracts limited basis means hedging interest rate risk trading activities gains losses transactions included principal transactions consolidated statements earnings addition one parent’s asset management subsidiaries collateral manager cdo entered forward purchase agreement cash flow hedge purchase 4200 interest cdo three years fiscal 2003 legg mason recorded unrealized loss approximately 1326 net tax related cash flow hedge reflected comprehensive income march 31 2003 accumulated unrealized loss approximately 1497 net tax march 31 2003 legg mason expect unrealized loss recognized earnings next fiscal year special purpose entities special purpose entities “spes” trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse legg mason utilize spes form financing provide liquidity legg mason recognized gains sale assets spes legg mason’s primary relationship spes involves one legg mason’s asset management subsidiaries collateral manager four cdos first cdo established fiscal 2002 vehicle investors issued approximately 383000 debt acquired portfolio consisting primarily high quality assetbacked securities legg mason sell assets cdo legg mason’s services collateral manager legg mason receives senior management fees may eligible certain circumstances receive subordinated management fees approximately 1500 annually legg mason may removed collateral manager certain conditions currently legg mason equity interest entity however legg mason entered cash flow hedge whereby legg mason may purchase 4200 preference shares three years since fiscal 2002 legg mason became collateral manager three additional cdos investment vehicles investors issued total approximately 1149000 debt proceeds used acquire portfolios consisting primarily high quality assetbacked securities legg mason sell assets cdos legg mason’s services collateral manager legg mason entitled receive senior management fees may eligible certain circumstances receive subordinated management fees 2153 legg mason may removed collateral manager certain conditions currently legg mason equity interest cdos cash flow hedge described legg mason financial commitments guarantees cdos underlying debt nonrecourse legg mason collateral manager march 31 2003 cdos consolidated january 2003 financial accounting standards board “fasb” issued fasb interpretation number “fin” 46 “consolidation variable interest entitiesan interpretation arb 51 ” fin 46 provides guidance respect consolidation spes deemed variable interest entities “vies” vie entity equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support investors legg mason believes cdos described vies accordingly primary beneficiary would required consolidate vies primary beneficiary entity absorb majority vie’s expected losses receive majority vie’s residual returns legg mason currently process assessing impact fin 46 cdos however legg mason believes reasonably possible legg mason consolidate assets liabilities results cdos described quarter ended september 30 2003 legg mason required consolidate cdos legg mason estimates effect would result recording additional assets liabilities consolidated statement financial condition approximately 18 billion liabilities required recorded legg mason would disclose liabilities without recourse legg mason legg mason’s role collateral manager cdo pools expose legg mason risk loss addition normal course business activities become general partner cases limited partner investment partnerships investment manager andor managing member limited liability companies process assessing impact fin 46 entities however believe unlikely consolidate entities new accounting pronouncements following pronouncements issued fasb fiscal year sfas 143 “accounting asset retirement obligations” requires fair value liability recorded costs associated retirement tangible longlived assets period liability incurred reasonably estimated sfas 144 “accounting impairment disposal longlived assets” supersedes sfas 121 “accounting impairment longlived assets longlived assets disposed of” statement principally addresses implementation issues sfas 121 including developing single accounting model longlived assets disposed sale sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections april 2002” primarily provides guidance reporting gains losses extinguishments debt saleleaseback transactions sfas 146 “accounting costs associated exit disposal activities” standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan sfas 146 replaces existing guidance provided eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” sfas 146 applied prospectively exit disposal activities initiated december 31 2002 sfas 147 “acquisitions certain financial institutionsan amendment fasb statements 72 144 fasb interpretation 9” statement provides guidance accounting acquisition financial institution previously addressed sfas 72 “accounting certain acquisitions banking thrift institutions” requires transactions accounted accordance sfas 141 “business combinations” sfas 142 “goodwill intangible assets” addition statement amends sfas 144 include longterm customerrelationship intangible assets indefinite lives would require assets subject undiscounted cash flow recoverability impairment test sfas 144 requires longlived assets held used sfas 148 “accounting stockbased compensationtransition disclosurean amendment fasb statement 123” amends sfas 123 sfas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation sfas 148 also amends sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results disclosure requirements sfas 148 effective legg mason’s march 31 2003 financial statements interim periods thereafter legg mason currently process determining whether make voluntary change fair value based method accounting stockbased employee compensation fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness othersan interpretation fasb statements 5 57 107 rescission fasb interpretation 34” expands disclosure requirements made guarantor interim annual financial statements regarding obligations certain guarantees issued guarantees issued modified december 31 2002 fin 45 also requires certain circumstances recognition inception guarantee liability fair value obligation result issuing guarantee guarantees entity’s future performance within scope fin 45 fin 46 requires consolidation assets liabilities results operations vies primary beneficiary vie one control deemed exist means voting rights fin 46 also requires disclosure information concerning vies entities hold significant variable interests may primary beneficiary fin 46 applies immediately vies created january 31 2003 effective interim periods beginning june 15 2003 interests vies acquired february 1 2003 fin 46 also requires disclosure nature purpose size activities vies well maximum exposure loss connection vies financial statements issued january 31 2003 reasonably possible entity consolidate disclose information vie sfas nos 143 148 fin 45 46 became effective fiscal 2003 materially impact consolidated financial statements march 31 2003 legg mason process evaluating certain provisions fin 46 effective subsequent periods november 2002 emerging issues task force “eitf” reached consensus issue 023 “issues involved accounting derivative contracts held trading purposes contracts involved energy trading risk management activities” eitf 023 precludes marktomarket accounting energytrading contracts derivatives pursuant sfas 133 provisions statement effective contracts entered subsequent november 22 2002 materially impact consolidated financial statements november 2002 eitf reached consensus issue 0021 “accounting revenue arrangements multiple deliverables” eitf issue 0021 addresses accounting arrangements vendor perform multiple revenuegenerating activities provisions statement effective revenue arrangements entered fiscal periods beginning june 15 2003 legg mason expect statement materially impact consolidated financial statements 2 business combinations dispositions july 2001 fasb issued sfas 141 “business combinations” provides business combinations initiated june 30 2001 shall accounted using purchase method purchase method net assets results operations acquired companies included consolidated financial statements date acquisition addition sfas 141 provides cost acquired entity must allocated assets acquired including identifiable intangible assets liabilities assumed based estimated fair values date acquisition excess cost fair value net assets acquired must recognized goodwill october 1 2001 legg mason completed acquisition royce associates inc “royce” manages small microcap mutual funds date acquisition royce managed assets approximately 47 billion legg mason acquired royce initial cash payment 115000 plus acquisition costs 1059 acquisition royce fits legg mason’s strategic objective grow asset management business determination purchase price made basis among things revenues profitability growth rates royce summary fair values net assets acquired follows fair value asset management contracts 5700 amortized average life seven years value trade name mutual fund contracts goodwill subject amortization goodwill deductible tax purposes attributable asset management segment transaction also includes three contingent payments based royce’s revenue growth years ending third fourth fifth anniversaries closing aggregate purchase price 215000 legg mason option pay much 50 remaining purchase price common stock additional payments required result contingency allocated goodwill august 1 2001 legg mason completed acquisition private capital management lp affiliated entities “pcm” cash approximately 682000 plus acquisition costs 1000 pcm high net worth investment manager managed assets approximately 86 billion date acquisition pcm fits legg mason’s strategic objective grow asset management business determination purchase price made basis among things revenues profitability growth rates pcm summary fair values net assets acquired follows fair value asset management contracts 298000 amortized average life eighteen years value trade name goodwill subject amortization goodwill deductible tax purposes attributable asset management segment transaction also includes two contingent payments based pcm’s revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion additional payments required result contingency allocated goodwill following unaudited pro forma consolidated results presented though acquisitions pcm royce occurred beginning period presented february 5 2001 legg mason acquired approximate 70 ownership interest barrett associates inc “barrett” high net worth asset manager individuals families endowments foundations legg mason acquired controlling interest approximately 15900 contingent purchase price adjustment acquisition accounted purchase fair value asset management contracts acquired 5747 amortized 15 years excess purchase price fair value assets acquired 8787 recognized goodwill april 2002 minority shareholders representing approximately 12 outstanding shares barrett exercised rights put shares legg mason june 30 2002 purchase price 3116 april 2003 minority shareholders representing 9 outstanding shares barrett notified legg mason intention exercise rights put shares legg mason june 2003 quarter purchase price 2081 terms acquisition agreement remaining 9 interest acquired prior 2006 additional amount 6759 based barrett’s revenues fifth year ownership interest owned legg mason recorded minority interest material legg mason’s consolidated financial statements may 26 2000 legg mason completed acquisition perigee canadian institutional investment manager terms acquisition agreement outstanding share perigee exchanged 0387 exchangeable share legg mason canada holdings subsidiary legg mason holders exchangeable shares dividend voting rights equivalent common stockholders exchangeable shares economic equivalent common shares legg mason may exchanged shares oneforone basis time legg mason issued approximately 52 million exchangeable shares transaction acquisition accounted pooling interests accordingly prior period consolidated financial statements restated include results operations financial position cash flows perigee fiscal year ended march 31 2003 legg mason sold certain contracts bank brokerage network proceeds 1600 resulted pretax gain 1331 additionally sale provides future contingent proceeds next two years based certain performance provisions total sales price expected exceed 3200 effect sale contracts legg mason’s continuing net revenues earnings income taxes material legg mason’s consolidated financial statements 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 3123083 3067134 march 31 2003 2002 respectively legg mason pays interest certain customer free credit balances held investment purposes 4 trading assets liabilities securities positions used legg mason’s trading activities consist following march 31 march 31 2003 2002 legg mason pledged securities owned 149 300 respectively collateral counterparties securities loaned transactions sold repledged 5 investments legg mason two categories investments investment securities investments finance subsidiaries investments generally classified availableforsale heldtomaturity trading described note 1 investment securities consist debt equity securities investments finance subsidiaries consisted bonds issued various financial institutions proceeds gross realized gains losses sales maturities availableforsale heldtomaturity investments follows investments march 31 2003 2002 follows 1 investments held one parent’s nonbrokerdealer subsidiaries 2 nonqualifying sfas 115 “accounting certain investments debt equity securities” contains investments private equity securities readily determinable fair values nontrading securities held parent’s brokerdealer subsidiaries information regarding legg mason’s availableforsale heldtomaturity investments categorized maturity date follows 6 intangible assets goodwill april 2001 legg mason adopted sfas 142 “goodwill intangible assets” sfas 142 provides goodwill longer amortized value identifiable intangible asset must amortized useful life unless asset determined indefinite useful life goodwill indefinitelife intangible assets tested impairment quarterly legg mason completed testing goodwill indefinitelife intangible assets determined impairment march 31 2003 2002 adoption sfas 142 occurred beginning fiscal year ended march 31 2001 net earnings would 162060 diluted eps would 239 following tables reflect components intangible assets march 31 fiscal year ended march 31 2003 legg mason recorded expenses impairment charge 2787 2000 represented fair value asset management contracts acquired prior business combination deemed impaired due declining profit margins remainder impairment charge represented fair value asset management contracts acquired prior business combination terminated period fiscal year ended march 31 2002 legg mason recorded expenses impairment charge 1164 representing fair value asset management contracts acquired prior business combination terminated period estimated amortization expense next five fiscal years follows legg mason’s carrying value goodwill 454512 march 31 2003 primarily attributable asset management segment increase carrying value goodwill since march 31 2002 primarily reflects approximately 5900 impact changes foreign currency exchange rates approximately 3000 related increase ownership interest barrett approximately 1800 acquisition assets investment advisor material legg mason’s financial statements 7 shortterm borrowings legg mason obtains shortterm financing secured unsecured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized agency corporate equity securities legg mason committed unsecured revolving credit facility 100000 matures june 30 2003 facility restrictive covenants require legg mason among factors maintain specified levels net worth debttoequity ratios legg mason intends use facility general corporate purposes including expansion diversification business interest facility based upon federal funds rates prime rates libor borrowings outstanding facility march 31 2003 2002 legg mason’s real estate service mortgage banking subsidiary committed secured compensating balance line credit allows borrowings 125000 based amount underlying customer escrow funds matures september 15 2003 legg mason intends use facility shortterm investing interest accruing 080 per year facility collateralized securities purchased funds borrowings outstanding facility march 31 2003 2002 addition subsidiary committed secured warehouse line credit 50000 matures september 15 2003 legg mason uses facility provide interim financing commercial mortgage loans outstanding loan balances 24770 3560 march 31 2003 2002 weighted average interest rates 203 380 respectively certain subsidiaries maintain lines credit general corporate purposes interest generally based upon prevailing rates total lines credit material legg mason borrowings outstanding facilities march 31 2003 2002 legg mason maintained compliance applicable covenants facilities legg mason security sold agreement repurchase 4708 march 31 2003 interest rate 134 matured april 1 2003 8 longterm debt legg mason’s longterm debt march 31 2003 consisted 424143 675 senior notes 262746 zerocoupon contingent convertible senior notes 99864 650 senior notes 2002 legg mason issued longterm fixed rate debt primarily fund asset management acquisitions july 2 2001 legg mason issued 425000 principal amount senior notes due july 2 2008 bear interest 675 notes sold discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs june 6 2001 legg mason issued 567000 principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 resulting gross proceeds approximately 250000 convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year upon certain events including sale price legg mason’s common stock reaching certain thresholds convertible notes rated specified credit ratings convertible notes called redemption note convertible 77062 shares legg mason’s common stock subject adjustment legg mason may redeem convertible notes cash june 6 2006 accreted value addition legg mason may required repurchase convertible notes accreted value option holders june 6 2005 2007 2011 every five years thereafter 2026 upon change control legg mason occurs june 6 2006 repurchases paid cash shares legg mason’s common stock combination net proceeds offering 244375 payment debt issuance costs debt issuance costs included assets amortized twoyear period date first repurchase option holders approximately 44 million shares common stock reserved issuance upon conversion legg mason also outstanding 100000 principal amount senior notes due february 15 2006 bear interest 650 notes issued discount yield 657 legg mason’s finance subsidiaries issued series secured fixed rate notes minimum maturity five years obligations repaid full fiscal year ended march 31 2003 march 31 2003 legg mason 575000 available issuance additional debt equity securities pursuant shelf registration statement march 31 2003 aggregate maturities longterm debt based contractual terms follows 9 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements data processing services leases service agreements expire varying dates 2014 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2003 minimum annual aggregate rentals follows minimum rental commitments shown reduced 16435 minimum sublease rentals received future noncancelable subleases table also include aggregate rental commitments 221 furniture equipment capital leases due 2004 rental expense operating leases service contracts 67407 70024 66945 2003 2002 2001 respectively rental expense net sublease income received material three years march 31 2003 2002 legg mason commitments invest 27450 10252 respectively limited partnerships make private equity investments commitments funded required end respective investment periods ranging 2005 2010 include 1250 commitments lend employees funds invest one partnerships discussed note 2 legg mason contingent payments related acquisitions payments payable fiscal 2007 exceed 807797 normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason enters whenissued underwriting commitments open transactions relating commitments march 31 2003 closed effect consolidated financial statements legg mason would material legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency investigations proceedings accordance sfas 5 “accounting contingencies” legg mason established reserves potential losses pending complaints legal actions investigations proceedings ultimate resolution actions cannot currently determined opinion management consultation legal counsel actions expected resolved material adverse effect legg mason’s financial condition however period potential adverse contingency become probable resolved results operations period could materially affected addition ultimate costs litigationrelated charges vary significantly period depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement 2003 2002 2001 legg mason recorded litigationrelated charges approximately 9400 15100 2400 respectively net recoveries 50 11100 1319 respectively 10 income taxes components income tax expense follows reconciliation difference effective income tax rate statutory federal income tax rate follows components legg mason’s deferred tax assets liabilities included assets liabilities respectively follows march 31 2003 2002 deferred tax valuation allowance primarily benefits related net operating losses operating losses two components domestic state foreign state net operating losses expire 2009 2023 foreign net operating losses continue utilized otherwise expiration date 11 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees primary plan legg mason makes discretionary contributions matches 50 employee 401k contributions 6 employee compensation maximum two thousand five hundred dollars per year contributions charged operations amounted 27207 27858 27782 2003 2002 2001 respectively addition employees make voluntary contributions certain plans 12 capital stock march 31 2003 authorized numbers common preferred exchangeable shares 250 million 4 million unlimited number respectively addition march 31 2003 2002 126 million 131 million shares common stock respectively reserved issuance legg mason’s stock option plans 23 million 25 million common shares respectively reserved exchangeable shares connection perigee transaction see note 2 additionally march 31 2003 legg mason approximately 44 million shares common stock reserved issuance upon conversion zerocoupon contingent convertible senior notes changes common stock shares exchangeable common stock three years ended march 31 2003 follows dividends declared paid march 31 2003 2002 2001 7374 6695 5878 respectively fiscal year ended march 31 2002 board directors approved stock repurchase plan legg mason authorized repurchase 3 million shares open market discretion fiscal years ended march 31 2003 2002 legg mason repurchased retired 885 shares 41963 137 shares 7130 respectively 13 employee stock option plans march 31 2003 133 million shares authorized issued legg mason’s equity incentive stock plans options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments 3 5 years expire within 5 10 years date grant see note 1 discussion stockbased compensation stock option transactions plans three years ended march 31 2003 summarized following information summarizes legg mason’s stock options outstanding march 31 2003 legg mason also stock option plan nonemployee directors options granted plan immediately exercisable price equal fair value shares date grant options issuable plan limited 11 million shares aggregate term ten years date grant march 31 2003 options 598 shares granted 396 currently outstanding 14 deferred compensation stock trust accordance eitf issue 9714 “accounting deferred compensation arrangements amounts held rabbi trust invested” assets rabbi trusts consolidated employer value employer’s stock held rabbi trusts classified stockholders’ equity generally accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders’ equity employee stock trust deferred compensation employee stock trust respectively shares held plan march 31 2003 2002 3370 3044 respectively 15 offbalance sheet risk concentration credit normal course business legg mason executes settles finances customer proprietary securities transactions activities expose legg mason offbalance sheet risk event customers parties fail satisfy obligations securities transactions generally settle three business days trade date customer broker fail deliver cash securities agreed legg mason may required purchase sell securities unfavorable market prices legg mason extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include purchases securities sales securities yet purchased option contracts legg mason continually monitors margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose legg mason risk event margin requirements insufficient fully cover customer losses legg mason invests shortterm resale agreements collateralized us government agency securities legg mason generally takes possession securities purchased agreements transactions expose legg mason risk event counterparty repurchase securities value collateral held less underlying receivable legg mason monitors value collateral daily requests additional collateral necessary legg mason borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral addition legg mason engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions legg mason deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis legg mason sells securities currently obligated subsequently purchase securities prevailing market prices legg mason exposed risk loss securities prices increase prior closing transactions legg mason periodically borrows financial institutions collateralized basis utilizing firm securities counterparty fail return customer securities pledged legg mason subject risk acquiring securities prevailing market prices order satisfy customer obligations legg mason’s customer financing securities lending activities require legg mason pledge customer securities collateral various financing sources bank loans securities lending march 31 2003 legg mason approximately 12 billion customer securities customer margin loans available pledged legg mason repledged approximately 25649 securities loan agreements addition legg mason received collateral approximately 244465 securities lending agreements legg mason repledged approximately 182973 legg mason also received collateral approximately 24 billion reverse repurchase agreements customer reserve requirement none repledged legg mason’s real estate service mortgage banking subsidiary agreements allow invest certain escrow funds manages name customer funds invested liquid shortterm highly rated money market funds subsidiary responsible investment losses incurred interest earned investments considered part servicing fees entitled receive march 31 2003 51258 invested one money market fund 16 regulatory requirements parent’s brokerdealer subsidiaries subject securities exchange commission’s uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 2003 brokerdealer subsidiaries aggregate net capital defined 363353 exceeded required net capital 342832 parent’s principal brokerdealer subsidiary must maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows brokerdealer maintain required amounts cash qualified securities parent’s trust subsidiary subject requirements office thrift supervision requires compliance regulatory capital standards march 31 2003 trust subsidiary met capital adequacy requirements subject 17 business segment information legg mason currently operates four business segments asset management private client capital markets business segments based upon factors services provided distribution channels served certain services legg mason offers provided clients one business segments legg mason allocates certain common income expense items among business segments based upon various methodologies factors asset management segment provides investment advisory services companysponsored investment funds asset management services institutional individual clients investment advisory related fees earned asset management vary based upon factors type underlying investment product amount assets management type services provided addition performance fees may earned certain investment advisory contracts meeting exceeding performance benchmarks private client segment distributes wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities private client consists net interest customers’ margin loan credit account balances commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds fee earned feebased brokerage managed accounts sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets segment consists legg mason’s equity fixed income institutional sales trading corporate public finance advisory underwriting activities well corporate structured financing activities sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also include realized unrealized gains losses investments acquired connection merchant investment banking activities segment consists principally legg mason’s real estate service mortgage banking business unallocated corporate revenues expenses business segment financial results follows legg mason analyze asset information business segments legg mason principally operates united states united kingdom canada revenues expenses geographic purposes generally allocated based location office providing service results geographic region follows quarterly financial data dollars thousands except per share amounts unaudited may 27 2003 closing price legg mason’s common stock 6050 item 9item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders legg mason inc opinion accompanying consolidated statements financial condition related consolidated statements earnings changes stockholders’ equity comprehensive income cash flows present fairly material respects financial position legg mason inc subsidiaries “legg mason” march 31 2004 2003 results operations cash flows three years period ended march 31 2004 conformity accounting principles generally accepted united states america financial statements responsibility legg mason’s management responsibility express opinion financial statements based audits conducted audits financial statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion baltimore maryland may 27 2004 consolidated statements earnings dollars thousands except per share amounts see notes consolidated financial statements consolidated statements financial condition dollars thousands see notes consolidated financial statements consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements consolidated statements comprehensive income dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc “parent” subsidiaries collectively “legg mason” principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity “vie” considered primary beneficiary see discussion special purpose entities follows well note 16 discussion variable interest entities material intercompany balances transactions eliminated unless otherwise noted per share amounts include common shares legg mason shares issued connection acquisition legg mason canada inc formerly perigee inc exchangeable common shares legg mason oneforone basis time appropriate prior years’ financial statements reclassified conform current year presentation use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america require management make assumptions estimates affect amounts reported financial statements accompanying notes including fair value financial instruments intangible assets goodwill reserves losses contingencies variable interest entities stockbased compensation income taxes actual amounts could differ estimates differences could material impact consolidated financial statements cash equivalents cash equivalents used trading purposes highly liquid investments original maturities 90 days less repurchase agreements legg mason invests shortterm securities purchased agreements resell collateralized us government agency securities also included cash securities segregated regulatory purposes deposited clearing organizations securities purchased agreements resell securities sold agreements repurchase accounted collateralized financings policy legg mason obtain possession collateral market value excess principal amount loaned collateral valued daily legg mason may require counterparties deposit additional collateral appropriate securities purchased agreements resell securities sold agreements repurchase carried contractual amounts plus accrued interest securities sold agreements repurchase included shortterm borrowings securities transactions customer securities transactions recorded settlement date basis materially different trade date amount related commission revenues expenses recorded trade date basis receivables payables customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances reflected consolidated financial statements see note 15 discussion offbalance sheet risk securities lending securities borrowed loaned accounted collateralized financings recorded amount cash collateral advanced received securities borrowed transactions require legg mason deposit cash lender legg mason generally receives cash collateral securities loaned fee received paid legg mason recorded interest income expense legg mason monitors fair value securities borrowed loaned daily basis additional collateral obtained refunded necessary financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value cash securities segregated regulatory purposes deposited clearing organizations securities purchased agreements resell trading assets investment securities trading liabilities consolidated statements financial condition include forms financial instruments parent nonbrokerdealer subsidiaries hold debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders’ equity comprehensive income net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium included earnings financial instruments used trading activities parent’s brokerdealer subsidiaries recorded trade date basis carried fair value unrealized gains losses reflected current period earnings addition certain investment securities held non brokerdealer subsidiaries classified trading securities investments recorded fair value unrealized gains losses also included earnings realized gains losses investments included current period earnings fair values generally obtained quoted market prices active markets broker dealer price quotations external pricing sources investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires management estimate value security based upon available information instances security subject transfer restrictions value security based primarily quoted price security without restriction may reduced amount reflect restrictions addition even value security derived independent market price broker dealer quote certain assumptions may required determine fair value legg mason generally assumes size positions holds securities would large enough affect quoted price securities sold sale would happen orderly manner however assumptions may incorrect actual value received upon disposition could different current carrying value legg mason evaluates nontrading securities “other temporary” impairment may exist fair value investment security adjusted cost extended period time “other temporary” impairment determined exist difference value investment security recorded financial statements fair value recognized charge earnings period impairment determined march 31 2004 2003 amount unrealized losses investment securities recognized earnings material march 31 2004 2003 legg mason approximately 3166 5323 respectively nontrading financial instruments valued based upon management’s assumptions estimates addition financial instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents receivables customers securities borrowed securities loaned shortterm borrowings payables customers fair value longterm debt march 31 2004 2003 1007931 869043 respectively fair values estimated using current market prices equipment leasehold improvements equipment leasehold improvements consists primarily furniture communications technology hardware software leasehold improvements equipment leasehold improvements reported cost net accumulated depreciation amortization 97184 95916 march 31 2004 2003 respectively depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years leasehold improvements generally amortized term lease maintenance repair costs expensed incurred depreciation amortization expense 26307 26472 24990 2004 2003 2002 respectively intangible assets goodwill intangible assets consist principally asset management contracts trade names intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life march 31 2004 intangible assets amortized weightedaverage life 15 years value contracts manage assets proprietary mutual funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary mutual fund contracts based upon assumption foreseeable limit contract period manage proprietary mutual funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely prior sale commercial mortgage banking mortgage servicing operations legg mason real estate services inc “lmres” legg mason capitalized costs incurred acquiring mortgage servicing rights loan origination activities accordance statement financial accounting standards “sfas” 140 “accounting transfers servicing financial assets extinguishments liabilities” goodwill represents excess cost business acquisition fair value net assets acquired accordance sfas 142 “goodwill intangible assets” indefinitelife intangible assets goodwill amortized legg mason reviews intangible assets goodwill quarterly basis considering factors projected cash flows revenue multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs intangible assets subject amortization reviewed impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level one level operating segment could deemed impaired carrying amount reporting unit exceeds implied fair value reporting unit estimating fair value reporting unit legg mason uses valuation techniques based multiples revenues discounted cash flows similar models employed analyzing purchase price acquisition target substantially legg mason’s goodwill assigned asset management operating segment legg mason defined asset management reporting units wealth management institutional mutual funds see note 6 additional information regarding intangible assets goodwill translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates statement financial condition date revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders’ equity comprehensive income gains losses resulting foreign currency transactions included earnings investment advisory related fees legg mason earns investment advisory fees assets investment funds accounts managed subsidiaries distribution fees assets companysponsored investment funds assetbased fees various types singlefee brokerage accounts addition legg mason earns fees performing certain administrative services funds revenues investment advisory related activities recognized period services performed performance fees may earned certain investment advisory contracts exceeding performance benchmarks generally recognized end performance measurement period investment banking underwriting revenues fees advisory assignments recorded underlying transaction substantially completed terms engagement expenses related securities offerings legg mason acts principal agent deferred related revenue recognized offering deemed unlikely expense reimbursements related advisory activities recorded reduction related expenses reimbursable expenses reviewed impairment reporting date stockbased compensation legg mason’s stockbased compensation plans include stock options employee stock purchase plans restricted stock awards deferred compensation retention bonuses payable stock compensation plans legg mason issues stock options officers key employees nonemployee members board directors prior april 1 2003 legg mason accounted stockbased employee compensation plans accordance accounting principles board opinion “apb” 25 “accounting stock issued employees” permitted sfas 123 “accounting stockbased compensation” amended accordance apb 25 compensation expense recognized stock options intrinsic value exercise price less market price date grant fiscal 2004 legg mason adopted fair value method sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure” prospectively stock options granted stock purchase plan transactions april 1 2003 using blackscholes option pricing model prospective method allowed sfas 148 compensation expense recognized based fair value stock options granted april 1 2003 applicable vesting period compensation expense recognized stock options granted prior april 1 2003 therefore expense related stockbased employee compensation included determination net income march 31 2004 less would included fair value method applied awards impact adopting sfas 123 amended reduced net earnings 3310 005 per diluted share legg mason qualified employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject three million total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged earnings fiscal year ended march 31 2004 2003 2002 approximately 139 200 175 shares respectively purchased open market behalf participating employees restricted stock awards deferred compensation payable stock recognized expense vesting periods following table reflects pro forma results compensation expense associated option grants regardless grant date stock purchase plan recognized vesting period weighted average fair value stock options granted fiscal 2004 2003 2002 using blackscholes optionpricing model 2977 1588 1859 per option share respectively following weighted average assumptions used model grants fiscal 2004 2003 2002 fiscal 2004 2003 2002 legg mason granted 26 27 22 shares restricted common stock respectively fair value 5424 5117 4664 respectively per share restricted shares vest equal increments three years compensation expense recognized threeyear vesting period restricted stock awards noncash transactions fiscal 2004 2003 2002 legg mason recognized 1283 1515 952 respectively compensation expense grants made restricted stock awards addition deferred compensation payable shares legg mason common stock granted certain employees mandatory elective plans vesting plans ranges immediate periods six years plans provide discounts 10 contributions dividends limit number shares authorized issued deferred arrangements however subsequent march 31 2004 legg mason adopted programs equity incentive plan replace deferred arrangements approved legg mason’s stockholders fiscal 2004 2003 2002 legg mason recognized 10814 9843 8394 respectively compensation expense deferred compensation arrangements payable shares common stock fiscal 2004 2003 2002 legg mason issued 266 510 344 shares respectively deferred compensation arrangements weightedaverage fair value per share grant date 7625 4924 4664 respectively march 31 2004 balance officer note receivable related stock purchase transaction 895 accumulated comprehensive incomeloss accumulated comprehensive incomeloss represents cumulative foreign currency translation adjustments net gains losses investment securities cash flow hedge reflected earnings summary legg mason’s accumulated comprehensive incomeloss march 31 2004 2003 follows supplemental cash flow information noncash activities excluded consolidated statements cash flows connection sale mortgage banking servicing business lmres fiscal 2004 legg mason received 6900 noninterest bearing note due september 30 2007 net present value 5100 additionally value common stock issued connection business acquisition 3262 fiscal 2003 amount 1783 attributable goodwill 1416 attributable intangible assets 63 attributable tangible net assets earnings per share basic earnings per share “eps” calculated dividing net earnings weighted average number common shares outstanding diluted eps similar basic eps adjusts effect potential common shares following table presents computations basic diluted eps march 31 2004 2003 2002 options purchase 2 3524 3681 shares respectively included computation diluted earnings per share options’ exercise prices greater average price common shares period addition march 31 2004 2003 2002 391 674 592 shares respectively held employee stock trust antidilutive therefore excluded computation diluted earnings per share diluted earnings per share fiscal year ended march 31 2004 includes weighted average amount shares issuable upon conversion zerocoupon contingent convertible senior notes senior notes contain conversion features triggered certain events including sale price legg mason’s common stock reaching specified thresholds threshold 7315 met quarter ended december 31 2003 therefore 44 million total potential convertible shares approximately 22 million shares included weighted average shares outstanding year ended march 31 2004 result diluted earnings per share fiscal 2004 reduced 009 per share derivative instruments derivative instruments recorded assets liabilities balance sheet measured fair value legg mason generally engage derivative hedging activities except limited tradingrelated activities parent’s primary brokerdealer subsidiary previous transaction related collateralized debt obligation “cdo” primary brokerdealer subsidiary uses futures contracts options futures contracts limited basis means hedging interest rate risk trading activities gains losses transactions included principal transactions consolidated statements earnings addition one parent’s asset management subsidiaries collateral manager cdo entered forward purchase agreement cash flow hedge purchase 4200 interest cdo three years fiscal 2004 cash flow hedge sold legg mason recorded realized loss approximately 1036 net tax special purpose entities special purpose entities “spes” trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse march 31 2004 legg mason utilize spes form financing provide liquidity legg mason recognized gains losses sale assets spes january 2003 financial accounting standards board “fasb” issued interpretation number “fin” 46 “consolidation variable interest entitiesan interpretation arb 51” fin 46 requires spes designated either voting interest entity vie vies subject consolidation party deemed primary beneficiary vie entity sufficient equity risk finance activities without additional subordinate financial support equity investors characteristics controlling financial interest primary beneficiary entity absorb majority vie’s expected losses entity receive majority vie’s expected residual returns initial implementation fin 46 required periods beginning june 15 2003 however october 2003 fasb deferred effective date interests vies created february 1 2003 end first interim period ending december 15 2003 december 2003 fasb revised fin 46 “fin 46r” incorporate certain modifications among things removed requirement include gross fees paid decision maker determination expected residual returns result unlikely legg mason primary beneficiary vies created manage assets clients unless ownership interest vies substantial company adopted provisions fin 46r december 31 2003 see note 16 notes consolidated financial additional information spes new accounting pronouncements fasb issued following pronouncements fiscal year april 2003 fasb issued sfas 149 “amendment statement 133 derivative instruments hedging activities” sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities addition statement clarifies contract derivative contains financing component warrants special reporting statement cash flows sfas 149 generally effective prospectively contracts entered modified hedging relationships designated june 30 2003 adoption sfas 149 materially impact legg mason’s consolidated financial statements may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” sfas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity imposes certain additional disclosure requirements provisions sfas 150 generally effective financial instruments entered modified may 31 2003 adoption sfas 150 materially impact legg mason’s consolidated financial statements november 2003 emerging issues task force “eitf” reached consensus issue 0301 “the meaning otherthantemporary impairment application certain investments” relates disclosures sfas 115 securities addition disclosures already required sfas 115 eitf issue 0301 requires quantitative qualitative disclosures marketable equity debt securities new disclosure requirements required applied financial statements fiscal years ending december 15 2003 adoption eitf 0301 materially impact legg mason’s consolidated financial statements december 2003 fasb issued fin 46r previously discussed 2 business combinations dispositions october 1 2001 legg mason completed acquisition royce associates inc “royce” manages small microcap mutual funds date acquisition royce managed assets approximately 47 billion legg mason acquired royce initial cash payment 115000 plus acquisition costs 1059 acquisition royce fits legg mason’s strategic objective grow asset management business determination purchase price made basis among things revenues profitability growth rates royce summary fair values net assets acquired follows fair value asset management contracts 5700 amortized average life seven years values trade name mutual fund contracts goodwill subject amortization goodwill deductible tax purposes attributable asset management segment transaction also includes three contingent payments based royce’s revenue growth years ending third fourth fifth anniversaries closing aggregate purchase price 215000 legg mason option pay much 50 remaining purchase price common stock additional payments required result contingency allocated goodwill based current revenue levels royce legg mason required make additional payment remaining 100000 fiscal 2005 august 1 2001 legg mason completed acquisition private capital management lp affiliated entities “pcm” cash approximately 682000 plus acquisition costs 1000 pcm high net worth investment manager managed assets approximately 86 billion date acquisition pcm fits legg mason’s strategic objective grow asset management business determination purchase price made basis among things revenues profitability growth rates pcm summary fair values net assets acquired follows fair value asset management contracts 298000 amortized average life eighteen years values trade name goodwill subject amortization goodwill deductible tax purposes attributable asset management segment transaction also includes two contingent payments based pcm’s revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion additional payments required result contingency allocated goodwill based current revenue levels pcm legg mason required make third anniversary payment 400000 additionally pcm’s revenues remain current levels increase likely legg mason required make fifth anniversary payment 300000 september 30 2003 legg mason sold certain assets liabilities comprising commercial mortgage banking mortgage servicing operations wholly owned subsidiary lmres continue operate real estate investment group included capital markets segment sales price net assets approximately 68630 including 63530 cash closing including 40900 used repay outstanding balance secured warehouse line credit 6900 noninterest bearing note due four years closing discounted 8 legg mason recognized gain net transaction costs 10861 6481 net taxes 4380 gain reflected gain sale discontinued operations consolidated statement earnings sale certain assets lmres result legg mason’s long term strategic objective focus legg mason’s core businesses results prior periods restated reflect results sold business discontinued operations net assets net revenues pretax earnings net earnings cash flows operations lmres sold material legg mason’s consolidated operations connection transaction investments securing committed secured compensating balance line credit liquidated line repaid secured warehouse line credit committed secured compensating balance line credit terminated 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 3386477 3123083 march 31 2004 2003 respectively legg mason pays interest certain customer free credit balances held investment purposes 4 trading assets liabilities securities positions used legg mason’s trading activities consist following march 31 march 31 2004 2003 legg mason pledged securities owned 1219 149 respectively collateral counterparties securities loaned transactions sold repledged counterparties 5 investments legg mason investments debt equity securities generally classified availableforsale trading described note 1 investments march 31 2004 2003 follows proceeds gross realized gains losses sales maturities availableforsale heldtomaturity investments follows net unrealized gains investment securities classified trading included 2004 2003 consolidated statements financial condition 3583 260 respectively information regarding legg mason’s availableforsale investments categorized maturity date follows 6 intangible assets goodwill sfas 142 “goodwill intangible assets” provides goodwill longer amortized value identifiable intangible asset must amortized useful life unless asset determined indefinite useful life goodwill indefinitelife intangible assets analyzed impairment quarterly based upon analysis performed march 31 2004 2003 impairment charges required following tables reflect components intangible assets march 31 fiscal year ended march 31 2003 legg mason recorded expenses impairment charge 2787 2000 represented fair value asset management contracts acquired prior business combination deemed impaired due declining profit margins remainder impairment charge represented fair value asset management contracts acquired prior business combination terminated period estimated amortization expense follows carrying value goodwill 466207 march 31 2004 primarily attributable asset management segment increase carrying value goodwill since march 31 2003 primarily reflects approximately 9892 impact changes foreign currency exchange rates 1915 related increase ownership interest barrett associates inc 620 related acquisition business rothschild asset management singapore limited material legg mason’s results 543 related contingent payment prior acquisition partially offset 1275 related sale mortgage banking servicing business lmres 7 shortterm borrowings legg mason obtains shortterm financing secured unsecured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized agency corporate equity securities legg mason committed unsecured revolving credit facility 100000 matures june 30 2006 general corporate purposes may include shortterm funding needs facility restrictive covenants require legg mason among things maintain specific levels net worth debttoequity ratios borrowings outstanding facility march 31 2004 2003 certain subsidiaries maintain lines credit general corporate purposes interest generally based upon prevailing rates total lines credit material legg mason borrowings outstanding facilities march 31 2004 2003 connection sale mortgage banking servicing business lmres committed secured compensating balance line credit secured warehouse line credit utilized lmres terminated legg mason maintained compliance applicable covenants facilities 8 longterm debt legg mason’s longterm debt march 31 2004 consisted 424306 675 senior notes 270021 zerocoupon contingent convertible senior notes 99911 650 senior notes fiscal 2002 legg mason issued longterm fixed rate debt primarily fund asset management acquisitions july 2 2001 legg mason issued 425000 principal amount senior notes due july 2 2008 bear interest 675 notes sold discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs june 6 2001 legg mason issued 567000 principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 resulting gross proceeds approximately 250000 convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year quarter ended december 31 2003 price legg mason’s common stock exceeded conversion trigger price 7315 least 20 trading days last 30 trading days quarter result note became convertible 77062 shares legg mason’s common stock subject adjustment commencing january 2 2004 may result issuance additional 44 million shares legg mason may redeem convertible notes cash june 6 2006 accreted value addition legg mason may required repurchase convertible notes accreted value option holders june 6 2005 2007 2011 every five years thereafter 2026 upon change control legg mason occurs june 6 2006 repurchases paid cash shares legg mason’s common stock combination net proceeds offering 244375 payment debt issuance costs debt issuance costs included assets amortized twoyear period ended june 6 2003 legg mason also outstanding 100000 principal amount senior notes due february 15 2006 bear interest 650 notes issued discount yield 657 march 31 2004 legg mason 575000 available issuance additional debt equity securities pursuant shelf registration statement march 31 2004 aggregate maturities longterm debt based contractual terms follows 9 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements data processing services leases service agreements expire varying dates fiscal 2019 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2004 minimum annual aggregate rentals follows minimum rental commitments shown reduced 16684 minimum sublease rentals received future noncancelable subleases table also include aggregate rental commitments 171 furniture equipment capital leases due 2005 rental expense operating leases service agreements 64662 65281 68065 fiscal 2004 2003 2002 respectively rental expense net sublease income received 1158 1185 488 fiscal 2004 2003 2002 respectively march 31 2004 2003 legg mason commitments invest 18055 27450 respectively limited partnerships make private investments commitments funded required end respective investment periods ranging fiscal 2005 2011 include 536 commitments lend employees funds invest one partnerships march 31 2004 outstanding balance loans 289 discussed note 2 legg mason contingent payment obligations related acquisitions payments payable fiscal 2007 exceed 806400 normal course business connection sale certain assets lmres legg mason enters contracts contain variety representations warranties provide general indemnifications legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency inquiries investigations proceedings accordance sfas 5 “accounting contingencies” legg mason established provisions estimated losses pending complaints legal actions investigations proceedings ultimate resolution actions cannot currently determined opinion management consultation legal counsel legg mason reason believe resolution actions material adverse effect legg mason’s financial condition however results operations could materially affected period liabilities period differ legg mason’s prior estimates october 3 2003 federal district court jury rendered approximately 20000 verdict legg mason civil copyright lawsuit confirmed subsequent judgment case result verdict recorded 17500 pretax charge quarter ended september 30 2003 legg mason filed appeal judgment appeal pending addition ultimate costs litigationrelated charges vary significantly period depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement fiscal 2004 2003 2002 legg mason recorded litigationrelated charges approximately 27900 includes 17500 related civil copyright lawsuit 9400 15100 respectively net recoveries 50 11100 fiscal 2003 2002 respectively 10 income taxes components income tax expense continuing operations follows reconciliation difference effective income tax rate statutory federal income tax rate follows deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated statements financial condition temporary differences result taxable deductible amounts future years details legg mason’s deferred tax assets liabilities follow march 31 2004 legg mason us state net operating loss carryforwards totaling 3276 expiring various years 2010 addition legg mason nonus net operating loss capital loss carryforwards 10731 12106 respectively carried forward indefinitely march 31 2004 2003 legg mason recorded valuation allowance deferred tax assets primarily related us state net operating losses nonus net operating capital loss carryforwards established accordance sfas 109 “accounting income taxes” management’s opinion likely benefits may realized legg mason intends reinvest cumulative undistributed earnings nonus subsidiaries deferred us federal income taxes provided undistributed earnings extent permanently reinvested legg mason’s nonus operations practical determine us federal income tax liability would payable earnings reinvested indefinitely 11 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees primary plan legg mason makes discretionary contributions matches 50 employee 401k contributions 6 employee compensation maximum two thousand five hundred dollars per year december 31 2003 beginning january 1 2004 maximum 401k matching contribution increased three thousand dollars per year contributions charged operations amounted 33095 27207 27858 fiscal 2004 2003 2002 respectively addition employees make voluntary contributions certain plans 12 capital stock march 31 2004 authorized numbers common preferred exchangeable shares 250 million 4 million unlimited number respectively addition march 31 2004 2003 108 million 126 million shares common stock respectively reserved issuance legg mason’s stock option plans 20 million 23 million common shares respectively reserved exchangeable shares connection acquisition legg mason canada inc additionally march 31 2004 legg mason approximately 44 million shares common stock reserved issuance upon conversion zerocoupon contingent convertible senior notes changes common stock shares exchangeable common stock three years ended march 31 2004 follows dividends declared paid march 31 2004 2003 2002 10289 7374 6695 respectively fiscal year ended march 31 2002 board directors approved stock repurchase plan legg mason authorized repurchase 3 million shares open market discretion fiscal years ended march 31 2004 2003 2002 legg mason repurchased retired 789 shares 65399 885 shares 41963 137 shares 7130 respectively 13 employee stock option plans march 31 2004 133 million shares authorized issued legg mason’s equity incentive stock plans options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments 3 5 years expire within 5 10 years date grant see note 1 discussion stockbased compensation stock option transactions plans three years ended march 31 2004 summarized following information summarizes legg mason’s stock options outstanding march 31 2004 march 31 2004 2003 2002 options exercisable 4163 4522 3248 shares respectively weighted average exercise prices 3686 3303 2803 respectively following information summarizes legg mason’s stock options exercisable march 31 2004 legg mason also stock option plan nonemployee directors options granted plan immediately exercisable price equal fair value shares date grant options issuable plan limited 11 million shares aggregate term ten years date grant march 31 2004 options 664 shares granted 412 currently outstanding 14 deferred compensation stock trust accordance eitf issue 9714 “accounting deferred compensation arrangements amounts held rabbi trust invested” assets rabbi trusts consolidated employer value employer’s stock held rabbi trusts classified stockholders’ equity generally accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders’ equity employee stock trust deferred compensation employee stock trust respectively shares held plan march 31 2004 2003 3394 3370 respectively 15 offbalance sheet risk concentration credit normal course business legg mason executes settles finances customer proprietary securities transactions activities expose legg mason offbalance sheet risk event customers parties fail satisfy obligations securities transactions generally settle within three business days trade date customer broker fail deliver cash securities agreed legg mason may required purchase sell securities unfavorable market prices legg mason extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include purchases securities sales securities yet purchased purchases sales option contracts legg mason continually monitors compliance margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose legg mason risk event margin deposits insufficient fully cover customer losses legg mason invests shortterm resale agreements collateralized us government agency securities collateral securities generally delivered either legg mason case triparty resale agreements custodian bank transactions expose legg mason risk event counterparty repurchase securities value collateral held less underlying receivable legg mason monitors value collateral daily requests additional collateral necessary legg mason borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral addition legg mason engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions legg mason deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis legg mason sells securities currently obligated subsequently purchase securities prevailing market prices legg mason exposed risk loss securities prices increase prior closing transactions legg mason periodically borrows funds financial institutions collateralized basis utilizing customer margin securities counterparty fail return customer securities pledged legg mason subject risk acquiring securities prevailing market prices order satisfy customer obligations legg mason’s customer financing securities lending activities require legg mason pledge customer securities collateral various financing sources bank loans securities lending march 31 2004 legg mason approximately 14 billion customer securities customer margin loans available repledged legg mason repledged approximately 70384 securities loan agreements addition legg mason received collateral approximately 550325 securities borrowings agreements legg mason repledged approximately 464246 legg mason also received collateral approximately 26 billion reverse repurchase agreements customer reserve requirement none repledged 16 special purpose entities normal course business activities legg mason collateral manager collateralized debt obligation entities general partner cases limited partner investment partnerships investment manager andor managing member limited liability companies trusts shore investment vehicles accordingly legg mason may obtain variable interests vies manages entities investment vehicles include many types investment strategies including real estate equity fixed income portfolios services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees legg mason sell transfer assets vies legg mason’s exposure risk entities generally limited equity investment made required make earned uncollected management fees legg mason issue performance guarantees vies investors uncollected management fees vies material march 31 2004 determining whether primary beneficiary vies legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees determining primary beneficiary legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit risks assumptions estimates significant bearing determination primary beneficiary legg mason’s assumptions estimates materially incorrect legg mason might required consolidate additional vies consolidation vies would result increase assets corresponding increase liabilities consolidated statements financial condition increase net revenues corresponding increase expenses consolidated statements earnings result adoption fin 46r march 31 2004 legg mason required consolidate one investment partnership two investment trusts total assets 13137 solely due underlying ownership entities comprised employees’ interests see note 4 trading assets liabilities consolidated vies legg mason ownership interest entities net equity entities reflected minority interest liabilities consolidated statements financial condition legg mason’s assets exclusive assets consolidated vies subject claims creditors consolidated vies likewise assets consolidated vies available legg mason’s creditors addition results operations consolidated vies immaterial march 31 2004 following table summary vies legg mason significant variable interest primary beneficiary dollars millions 1 includes one money market fund assets 11 billion legg mason believes less 1 variable interest 2 excludes 4 limited liability companies one legg mason’s asset management subsidiaries approximately 179 million invested longterm incentive plan legg mason direct variable interest since earn fees assets 17 regulatory requirements parent’s brokerdealer subsidiaries subject securities exchange commission’s uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 2004 brokerdealer subsidiaries aggregate net capital defined 408611 exceeded required net capital 383306 parent’s principal brokerdealer subsidiary must maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows brokerdealer maintain required amounts cash qualified securities march 31 2004 amount segregated rule 15c33 2769053 parent’s trust subsidiary subject requirements office thrift supervision requires compliance regulatory capital standards march 31 2004 trust subsidiary met capital adequacy requirements subject 18 business segment information legg mason currently operates three business segments asset management private client capital markets business segment classifications based upon factors services provided distribution channels utilized certain services legg mason offers provided clients one business segments therefore revenue categories allocated multiple segments legg mason allocates certain common income expense items among business segments based upon various methodologies factors methodologies nature subjective reviewed periodically management business segment results future may reflect reallocations revenues expenses result changes methodologies reallocations effect legg mason’s consolidated results operations asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue asset management investment advisory distribution administrative fees typically calculated percentage assets account vary based upon factors type underlying investment product amount assets management type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution fees earned companysponsored investment funds reported asset management fund sold direct marketing channels private client segment fund sold branch distribution network revenues asset management tend stable private client capital markets less affected changes securities market conditions private client distributes wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds feebased brokerage managed account fees net interest customers’ margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets consists legg mason’s equity fixed income institutional sales trading corporate public finance investment banking primary sources revenue equity fixed income institutional sales trading include commissions principal credits transactions corporate municipal products legg mason maintains proprietary fixed income equity securities inventory primarily facilitate customer transactions realizes trading profits losses proprietary trading activities investment banking revenues include underwriting fees advisory fees private placements mergers acquisitions sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also include realized unrealized gains losses investments acquired connection merchant investment banking activities september 2003 legg mason sold mortgage banking servicing operation lmres previously reported fourth segment also included certain unallocated corporate revenues expenses consolidated results restated reflect historical results sold business discontinued operations remaining operations lmres capital markets corporate revenues expenses allocated business segments reported separately corporate business segment financial results follows legg mason analyze asset information business segments legg mason principally operates united states united kingdom canada revenues expenses geographic purposes generally allocated based location office providing service results geographic region follows quarterly financial data dollars thousands except per share amounts unaudited may 24 2004 closing price legg mason’s common stock 8583 item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg mason’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg mason’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg mason’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg mason’s internal control financial reporting march 31 2005 based framework set forth committee sponsoring organizations treadway commission “coso” internal control integrated framework based assessment management concluded march 31 2005 legg mason’s internal control financial reporting effective based criteria established coso framework management’s assessment effectiveness legg mason’s internal control financial reporting march 31 2005 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinions management’s assessment effectiveness legg mason’s internal control financial reporting march 31 2005 raymond mason chairman president chief executive officer charles j daley jr senior vice president treasurer principal financial officer report independent registered public accounting firm board directors stockholders legg mason inc completed integrated audit legg mason inc’s 2005 consolidated financial statements internal control financial reporting march 31 2005 audits 2004 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements opinion accompanying consolidated statements financial condition related consolidated statements earnings changes stockholders’ equity comprehensive income cash flows present fairly material respects financial position legg mason inc subsidiaries march 31 2005 2004 results operations cash flows three years period ended march 31 2005 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included report management internal control financial reporting company maintained effective internal control financial reporting march 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting march 31 2005 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland june 2 2005 consolidated statements earnings dollars thousands except per share amounts see notes consolidated financial statements consolidated statements financial condition dollars thousands see notes consolidated financial statements consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements consolidated statements comprehensive income dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc “parent” subsidiaries collectively “legg mason” principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity “vie” considered primary beneficiary see discussion special purpose entities follows well note 16 discussion variable interest entities material intercompany balances transactions eliminated unless otherwise noted per share amounts include common shares legg mason shares issued connection acquisition legg mason canada inc formerly perigee inc exchangeable common shares legg mason oneforone basis time appropriate prior years’ financial statements reflect reclassifications conform current year presentation use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america require management make assumptions estimates affect amounts reported financial statements accompanying notes including fair value financial instruments intangible assets goodwill liabilities losses contingencies stockbased compensation income taxes management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements cash equivalents cash equivalents used trading purposes highly liquid investments original maturities 90 days less restricted cash restricted cash march 31 2005 20658 represents cash escrow account connection appeal judgment civil copyright lawsuit cash available legg mason general corporate use see note 9 discussion civil copyright lawsuit repurchase agreements legg mason invests shortterm securities purchased agreements resell collateralized us government agency securities also included cash securities segregated regulatory purposes deposited clearing organizations securities purchased agreements resell securities sold agreements repurchase accounted collateralized financings policy legg mason obtain possession collateral market value excess principal amount loaned collateral valued daily legg mason may require counterparties deposit additional collateral appropriate securities purchased agreements resell securities sold agreements repurchase carried contractual amounts plus accrued interest securities sold agreements repurchase included shortterm borrowings securities transactions customer securities transactions recorded settlement date basis related commission revenues expenses recorded trade date basis receivables payables customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances reflected consolidated financial statements see note 15 discussion offbalance sheet risk securities lending securities borrowed loaned accounted collateralized financings recorded amount cash collateral advanced received securities borrowed transactions require legg mason deposit cash lender legg mason generally receives cash collateral securities loaned fee received paid legg mason recorded interest income expense legg mason monitors fair value securities borrowed loaned daily basis additional collateral obtained refunded necessary financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value cash securities segregated regulatory purposes deposited clearing organizations securities purchased agreements resell trading assets investment securities trading liabilities consolidated statements financial condition include forms financial instruments parent nonbrokerdealer subsidiaries hold debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders’ equity comprehensive income net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium included interest income financial instruments used trading activities parent’s brokerdealer subsidiaries generally recorded trade date basis carried fair value unrealized gains losses reflected current period earnings however securities transactions scheduled settle beyond normal settlement date considered forward contracts therefore reflected trading assets liabilities however unrealized gains losses securities reflected trading assets trading liabilities current period earnings addition certain investment securities held non brokerdealer subsidiaries classified trading securities investments recorded fair value unrealized gains losses also included earnings realized gains losses investments included current period earnings trading assets trading liabilities fair values equity securities generally determined using prices independent sources external pricing services broker dealer price quotations closing market prices listed instruments available fixed income securities valued using external pricing services thirdparty broker dealer price quotations traders’ estimates based spreads actively traded benchmark debt instruments readily available market prices traders’ estimates compared external pricing services verify material variations either individually aggregate verified comparison actual values realized instances security subject transfer restrictions value security based primarily quoted price security without restriction may reduced amount reflect restrictions addition even value security derived independent market price broker dealer quote certain assumptions may required determine fair value legg mason generally assumes size positions holds securities would large enough affect quoted price securities sold sale would happen orderly manner however assumptions may incorrect actual value received upon disposition could different current carrying value legg mason evaluates nontrading investment securities “other temporary” impairment may exist fair value investment security adjusted cost extended period time “other temporary” impairment determined exist difference value investment security recorded financial statements fair value recognized charge earnings period impairment determined march 31 2005 2004 amount unrealized losses investment securities recognized earnings material investments illiquid privatelyheld securities market prices quotations readily available determination fair value requires management estimate value security based upon available information march 31 2005 2004 legg mason approximately 5253 3166 respectively nontrading financial instruments valued based upon management’s assumptions estimates march 31 2005 2004 legg mason approximately 33169 26179 respectively investments investment partnerships included assets consolidated statements financial condition investments generally accounted cost equity method addition financial instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents restricted cash receivables customers securities borrowed securities loaned shortterm borrowings payables customers fair value longterm debt march 31 2005 2004 1065532 1007931 respectively fair values estimated using current market prices equipment leasehold improvements equipment consists primarily communications technology hardware software furniture fixtures equipment leasehold improvements reported cost net accumulated depreciation amortization march 31 2005 2004 equipment leasehold improvements follows depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years leasehold improvements amortized term lease maintenance repair costs expensed incurred depreciation amortization expense 32750 26307 26472 2005 2004 2003 respectively intangible assets goodwill intangible assets consist principally asset management contracts manage proprietary mutual funds trade names intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life management contracts amortizable intangible assets capitalized acquisition amortized expected life contract march 31 2005 intangible assets amortized weightedaverage life 14 years value contracts manage assets proprietary mutual funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary mutual fund contracts based upon assumption foreseeable limit contract period manage proprietary mutual funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents excess cost business acquisition fair value net assets acquired accordance sfas 142 “goodwill intangible assets” indefinitelife intangible assets goodwill amortized legg mason values intangible assets goodwill quarterly basis considering factors projected cash flows revenue multiples determine whether values asset impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment determined fair values intangible assets subject amortization reviewed reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level one level operating segment deemed impaired carrying amount reporting unit exceeds implied fair value reporting unit estimating fair value reporting unit legg mason uses valuation techniques based multiples revenues discounted cash flows similar models employed analyzing purchase price acquisition target substantially legg mason’s goodwill assigned asset management operating segment legg mason defined asset management reporting units institutional mutual funds wealth management divisions see note 6 additional information regarding intangible assets goodwill translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated statements financial condition dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders’ equity comprehensive income gains losses resulting foreign currency transactions included earnings investment advisory related fees legg mason earns investment advisory fees assets investment funds accounts managed subsidiaries distribution fees assets companysponsored investment funds assetbased fees various types singlefee brokerage accounts addition legg mason earns fees performing certain administrative services funds revenues investment advisory related activities recognized period services performed performance fees may earned certain investment advisory contracts exceeding performance benchmarks generally recognized end performance measurement period determined realizable investment banking underwriting revenues fees advisory assignments recorded underlying transaction substantially completed terms engagement amounts determined realizable expenses related securities offerings legg mason acts principal agent deferred related revenue recognized offering deemed unlikely expense reimbursements related advisory activities recorded reduction related expenses reimbursable expenses reviewed collectibility reporting date distribution service fees distribution service fees represent costs incurred related distribution servicing proprietary funds largely assetbased expenses determined percentage client assets reported amounts also include finders’ fees referral fees paid unaffiliated brokerdealers introducing parties expenses related providing client shareholder servicing including recordkeeping administrative services related proprietary funds similar products borne adviser subadvisory fees paid unaffiliated asset managers stockbased compensation legg mason’s stockbased compensation plans include stock options employee stock purchase plans restricted stock awards deferred compensation retention bonuses payable stock compensation plans legg mason issues stock options officers key employees nonemployee members board directors prior april 1 2003 legg mason accounted stockbased employee compensation plans accordance accounting principles board opinion “apb” 25 “accounting stock issued employees” permitted sfas 123 “accounting stockbased compensation” amended accordance apb 25 prior fiscal 2004 compensation expense recognized stock options intrinsic value exercise price less market price date grant fiscal 2004 legg mason adopted fair value method sfas 123 amended sfas 148 “accounting stockbased compensation transition disclosure” prospectively stock options granted stock purchase plan transactions april 1 2003 using blackscholes option pricing model prospective method allowed sfas 148 compensation expense recognized based fair value stock options granted april 1 2003 applicable vesting period compensation expense recognized stock options granted prior april 1 2003 therefore expense related stockbased employee compensation included determination net income fiscal 2005 2004 less would included fair value method applied awards impact adopting sfas 123 amended reduced net earnings fiscal 2005 2004 4289 004 per diluted share 3310 003 per diluted share respectively legg mason qualified employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject 45 million total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged earnings fiscal year ended march 31 2005 2004 2003 approximately 147 209 300 shares respectively purchased open market behalf participating employees restricted stock awards deferred compensation payable stock recognized expense vesting periods following table reflects pro forma results compensation expense associated option grants regardless grant date stock purchase plan recognized vesting period weighted average fair value stock options granted fiscal 2005 2004 2003 using blackscholes option pricing model 2253 1985 1059 per share respectively following weighted average assumptions used model grants fiscal 2005 2004 2003 fiscal 2005 2004 2003 legg mason granted 138 40 shares restricted common stock respectively fair value 6036 3616 3411 respectively per share restricted shares vest equal increments three years expense recognized threeyear vesting period restricted stock awards noncash transactions fiscal 2005 2004 2003 legg mason recognized 3225 1283 1515 respectively compensation expense restricted stock awards addition deferred compensation payable shares legg mason common stock granted certain employees mandatory elective plans programs legg mason’s equity incentive plan vesting plans programs ranges immediate periods six years plans programs provide discounts 10 contributions dividends limit number shares authorized issued one remaining active deferred plan plans replaced similar programs legg mason’s equity incentive plan fiscal 2005 fiscal 2005 2004 2003 legg mason recognized 11135 10814 9843 respectively compensation expense deferred compensation arrangements payable shares common stock fiscal 2005 2004 2003 legg mason issued 308 399 765 shares respectively deferred compensation arrangements weightedaverage fair value per share grant date 6803 5083 3283 respectively fiscal 2005 officer note receivable 895 related stock purchase transaction repaid accumulated comprehensive income accumulated comprehensive income represents cumulative foreign currency translation adjustments net gains losses investment securities significant change accumulated translation adjustment fiscal 2005 2004 primarily resulted impact changes british pound canadian dollar relation us dollar net assets united kingdom canadian subsidiaries pound canadian dollar functional currencies summary legg mason’s accumulated comprehensive income march 31 2005 2004 follows deferred tax provision benefit unrealized holding gains losses arising investment securities fiscal years ended 2005 2004 2003 53 24 84 respectively deferred tax provision benefit reclassification adjustments gains losses included net income investment securities fiscal years ended 2005 2004 2003 5 40 4 respectively deferred tax provision benefit unrealized holding gains losses arising cash flow hedges fiscal years ended 2004 2003 282 812 respectively deferred tax provision benefit reclassification adjustments gains included net income cash flow hedges fiscal year ended 2004 635 supplemental cash flow information noncash activities excluded consolidated statements cash flows described note 8 legg mason outstanding 545285 principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity fiscal 2005 holders 22000 principal amount maturity notes converted notes 254 shares common stock connection sale mortgage banking servicing business legg mason real estate services inc “lmres” fiscal 2004 legg mason received 6900 noninterest bearing note due september 30 2007 net present value 5100 additionally value common stock issued connection business acquisition 3262 fiscal 2003 earnings per share basic earnings per share “eps” calculated dividing net earnings weighted average number common shares outstanding diluted eps similar basic eps adjusts effect potential common shares result adoption emerging issues task force “eitf” 048 “the effect contingently convertible instruments diluted earnings per share” diluted earnings per share fiscal years ended march 31 2004 2003 restated include april 1 2002 66 million shares issuable upon conversion zerocoupon contingent convertible senior notes result diluted earnings per share fiscal 2004 fiscal 2003 reduced 006 007 respectively previously senior notes included calculation diluted earnings per share beginning quarter ended december 31 2003 senior notes became convertible quarter following table presents computations basic diluted eps march 31 2005 2004 2003 options purchase 1 4 5285 shares respectively included computation diluted earnings per share options’ exercise prices greater average price common shares period basic diluted earnings per share fiscal years ended march 31 2005 2004 2003 include vested shares phantom stock related deferred compensation plans diluted earnings per share periods also include unvested shares phantom stock related plans unless shares deemed antidilutive march 31 2005 2004 2003 464 587 1010 unvested shares phantom stock respectively antidilutive therefore excluded computation diluted earnings per share derivative instruments fair values derivative instruments recorded assets liabilities consolidated statements financial condition legg mason generally engage derivative hedging activities except limited tradingrelated activities parent’s primary brokerdealer subsidiary primary brokerdealer subsidiary uses forwards futures purchased options limited basis means hedging interest rate risk trading activities realized unrealized gains losses transactions included principal transactions consolidated statements earnings legg mason apply hedge accounting defined fasb statement 133 “accounting derivative instruments hedging activities” amended financial instruments marked market changes fair values reflected earnings therefore disclosures required fasb statement 133 generally applicable respect financial instruments addition one parent’s asset management subsidiaries collateral manager collateralized debt obligation “cdo” entered forward purchase agreement fiscal 2002 cash flow hedge purchase 4200 interest cdo fiscal 2005 fiscal 2004 cash flow hedge sold legg mason recorded realized loss approximately 1036 net tax special purpose entities special purpose entities “spes” trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse legg mason utilize spes form financing provide liquidity legg mason recognized gains losses sale assets spes january 2003 financial accounting standards board “fasb” issued interpretation number “fin” 46 “consolidation variable interest entities interpretation arb 51” fin 46 requires spes designated either voting interest entity vie vies subject consolidation party deemed primary beneficiary vie entity sufficient equity risk finance activities without additional subordinate financial support equity investors characteristics controlling financial interest primary beneficiary entity absorb majority vie’s expected losses entity receive majority vie’s expected residual returns december 2003 fasb revised fin 46 “fin 46r” incorporate certain modifications among things removed requirement include gross fees paid decision maker determination expected residual returns result unlikely legg mason primary beneficiary vies created manage assets clients unless ownership interest including interests related parties defined fin 46r vie substantial legg mason adopted provisions fin 46r fiscal 2004 see note 16 additional information spes recent accounting developments fasb issued following pronouncements fiscal year december 2004 fasb issued sfas 123r “sharebased payment” requires sharebased payment transactions valued using fair value method sfas 123r eliminates ability account sharebased compensation using intrinsic value method accounting principles board opinion “apb” 25 originally sfas 123r effective interim periods beginning june 15 2005 april 2005 sec amended date compliance allowing effective date first annual reporting period beginning june 15 2005 sfas 123r effective fiscal 2007 retroactive application provisions sfas 123r beginning fiscal year includes effective date permitted required see table stock based compensation impact legg mason’s consolidated financial statements december 2004 fasb issued fasb staff position fas 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” american jobs creation act signed law october 22 2004 provides onetime dividends received deduction repatriation certain foreign earnings us taxpayers historically legg mason reinvested cumulative undistributed earnings nonus subsidiaries accordingly deferred us federal income taxes undistributed earnings recorded legg mason currently evaluating income tax effects foreign earnings repatriation provision within act cannot reasonably estimate income tax effects time eitf reached consensus regarding issue 048 guidance eitf requires contingently convertible instruments dilutive included retroactively diluted earnings per share computations date issuance instruments effective date eitf reporting periods ending december 15 2004 see earnings per share discussion impact adopting eitf reached consensus topic d108 “use residual method value acquired assets goodwill” companies applied residual method valuation intangible assets purposes impairment testing perform impairment test applying guidance later beginning first fiscal year beginning december 15 2004 impairments intangible assets recognized upon application direct value method entities previously applying residual method reported cumulative effect change accounting principle requirements applied business combinations completed september 29 2004 adoption eitf d108 impact legg mason’s consolidated financial statements eitf reached consensus issue 0410 “determining whether aggregate operating segments meet quantitative thresholds” eitf requires individual operating segments meet quantitative thresholds set forth sfas 131 “disclosure segments enterprise related information” separate reporting may aggregated segments meet certain requirements applicable fiscal years ending october 13 2004 adoption eitf 0410 impact legg mason’s identified segments eitf reached consensus issue 0316 “accounting investments limited liability companies” eitf requires investment limited liability company “llc” maintains “specific ownership account” investor similar partnership capital account structure viewed similar investment limited partnership purposes determining whether noncontrolling investment llc accounted using cost method equity method requirements applicable reporting periods beginning june 15 2004 adoption eitf 0316 materially impact legg mason’s consolidated financial statements 2 business combinations dispositions november 12 2004 legg mason investment counsel llc wholly owned subsidiary legg mason agreed acquire deutsche investment management americas new york city philadelphia cincinnati chicago offices scudder private investment counsel “acquired offices” acquisition offices fits legg mason’s strategic objective grow asset management business transaction closed december 31 2004 terms agreement legg mason purchased acquired offices cash 55000 transaction includes contingent payment based revenues acquired offices first anniversary closing aggregate purchase price 81 300 acquired offices 54 billion assets management december 31 2004 allocation purchase price resulted 20008 goodwill 34000 amortizable asset management contracts fair value asset management contracts 34000 amortized estimated life 12 years september 30 2003 legg mason sold certain assets liabilities comprising commercial mortgage banking mortgage servicing operations wholly owned subsidiary lmres continues operate real estate investment group included capital markets segment sales price net assets approximately 68630 including 63530 cash closing including 40900 used repay outstanding balance secured warehouse line credit 6900 noninterest bearing note due four years closing discounted 8 legg mason recognized gain net transaction costs 10861 6481 net taxes 4380 gain reflected gain sale discontinued operations consolidated statements earnings sale certain assets lmres result legg mason’s long term strategic objective focus legg mason’s core businesses results fiscal 2003 restated reflect results sold business discontinued operations net assets net revenues pretax earnings net earnings cash flows operations lmres sold material legg mason’s consolidated operations 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 3191469 3386477 march 31 2005 2004 respectively legg mason pays interest certain customer free credit balances held investment purposes 4 trading assets liabilities securities positions used legg mason’s trading activities consist following march 31 march 31 2005 2004 legg mason pledged securities owned 2031 1219 respectively collateral counterparties securities loaned transactions sold repledged counterparties 5 investments legg mason investments debt equity securities generally classified availableforsale trading described note 1 investments march 31 2005 2004 follows 1 includes investments private equity debt securities nontrading securities primarily warrants held parent’s brokerdealer subsidiaries readily determinable fair values legg mason uses specific identification method determine cost security sold amount reclassified accumulated comprehensive income earnings proceeds gross realized gains losses sales maturities availableforsale heldtomaturity investments follows net unrealized gains investment securities classified trading included 2005 2004 consolidated statements financial condition 4467 3583 respectively information regarding legg mason’s availableforsale investments categorized maturity date follows 6 intangible assets goodwill sfas 142 provides goodwill amortized value identifiable intangible asset must amortized useful life unless asset determined indefinite useful life goodwill indefinitelife intangible assets analyzed impairment quarterly based upon analysis performed fiscal 2005 2004 impairment charges recognized following tables reflect components intangible assets march 31 estimated amortization expense next five fiscal years follows quarter ended december 31 2004 legg mason purchased acquired offices described note 2 increase cost amortizable asset management contracts primarily reflects value contracts acquired 34000 fiscal 2005 result private capital management lp “pcm” royce associates llc “royce” meeting certain revenue levels specified acquisition agreements maximum third anniversary payment 400000 made former owners pcm contingent payment 100000 made former owners royce represented maximum contingent amount due carrying value goodwill 993366 march 31 2005 primarily attributable asset management reporting segment increase carrying value goodwill since march 31 2004 primarily reflects 500000 additional purchase consideration described 20008 related acquisition four offices scudder private investment counsel goodwill related additional purchase consideration acquisition four offices deductible tax purposes 7 shortterm borrowings legg mason obtains shortterm financing secured unsecured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized agency corporate equity securities legg mason committed unsecured revolving credit facility 100000 matures june 30 2006 general corporate purposes may include shortterm funding needs facility restrictive covenants require legg mason among things maintain specific levels net worth debttoequity ratios borrowings outstanding facility march 31 2005 2004 certain subsidiaries maintain lines credit general corporate purposes interest generally based upon prevailing rates total lines credit material legg mason borrowings outstanding facilities march 31 2005 2004 legg mason maintained compliance applicable covenants facilities 8 longterm debt longterm debt march 31 2005 consists following july 2 2001 legg mason issued 425000 principal amount senior notes due july 2 2008 bear interest 675 notes sold discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs june 6 2001 legg mason issued 567285 principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year legg mason amortizing issue discount interest expense using effective interest method term convertible notes net proceeds offering 244375 payment debt issuance costs quarter ended december 31 2003 price legg mason’s common stock exceeded conversion trigger price 4877 least 20 trading days last 30 trading days quarter result note became convertible 115593 shares legg mason’s common stock subject adjustment commencing january 2 2004 february 2005 notes aggregating 22000 principal amount maturity converted 254 shares reduced principal amount maturity 545285 march 31 2005 outstanding notes may result issuance additional 63 million shares legg mason may redeem convertible notes cash june 6 2006 accreted value however notes may converted prior redemption addition legg mason may required repurchase convertible notes accreted value option holders june 6 2005 2007 2011 every five years thereafter 2026 upon change control legg mason occurs june 6 2006 repurchases paid cash shares legg mason’s common stock combination based upon current stock price legg mason expect convertible notes tendered repurchase june 6 2005 however notes tendered legg mason elected pay cash legg mason also outstanding 100000 principal amount senior notes due february 15 2006 bear interest 650 notes issued discount yield 657 april 2004 western asset management subsidiary legg mason entered 20000 term loan agreement commercial bank finance tenant improvements real property new headquarters loan bears interest 419 collateralized property equipment western maturity date october 2010 western required maintain compensating balance life loan beginning 5000 funding date decreasing zero predetermined rate compensating balance legally restricted however failure maintain appropriate balance result additional bank charges possible acceleration maturity charges paid loan also provides restrictive covenants subsidiary relating maintenance specified financial performance ratios tangible net worth debt service coverage legg mason maintained compliance applicable covenants facilities except term loan legg mason issued longterm debt primarily fund asset management acquisitions march 31 2005 legg mason 125 billion available issuance additional debt equity securities pursuant shelf registration statement march 31 2005 aggregate maturities longterm debt current accreted value 811164 based contractual terms follows 9 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements data processing services leases service agreements expire varying dates fiscal 2021 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2005 minimum annual aggregate rentals follows minimum rental commitments shown reduced 14449 minimum sublease rentals received future noncancelable subleases table also include aggregate rental commitments 63 furniture equipment capital leases rental expense operating leases service agreements 71444 64662 65281 fiscal 2005 2004 2003 respectively rental expense net sublease income received 966 1158 1185 fiscal 2005 2004 2003 respectively march 31 2005 2004 legg mason commitments invest 9182 18055 respectively limited partnerships make private investments commitments funded required end respective investment periods ranging fiscal 2006 2011 legg mason contingent payment obligations related acquisitions payments payable fiscal 2007 exceed 326300 normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency inquiries investigations proceedings accordance sfas 5 “accounting contingencies” legg mason established provisions estimated losses pending complaints legal actions investigations proceedings ultimate resolution matters cannot currently determined opinion management consultation legal counsel legg mason believe resolution actions material adverse effect legg mason’s financial condition however results operations could materially affected period liabilities period differ legg mason’s prior estimates legg mason’s cash flows could materially affected period matters resolved starting september 2003 responded inquiries office new york attorney general securities exchange commission relating industrywide mutual fund probes legg mason wood walker cooperating two separate investigations undertaken securities exchange commission staff “staff” arose inquiries one investigation ongoing currently able predict outcome investigation predict effect investigation business results operations respect staff’s investigation legg mason wood walker negotiations staff resolve aspects investigation recorded 12 million charge september 2004 quarter settlement securities exchange commission reached assurance given matter settled consistent amount reserved expect settlement investigation material legg mason’s business results operations october 3 2003 federal district court jury rendered approximately 19700 verdict legg mason civil copyright lawsuit verdict confirmed subsequent judgment case result verdict subsequent judgment fiscal year 2004 legg mason increased provision litigation approximately 19000 also reclassified 1500 statement earnings fiscal year 2004 150 statement earnings fiscal year 2003 expense litigation award charge entire amount charges recorded fiscal year 2004 fiscal year 2003 connection litigation reflected litigation award charge legg mason appealed judgment appeal pending us court appeals fourth circuit ultimate costs litigationrelated charges vary significantly period depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement march 31 2005 2004 legg mason’s liability losses contingencies 27000 31800 respectively significant portion outstanding liability due civil copyright infringement lawsuit discussed fiscal 2005 2004 2003 legg mason recorded litigationrelated charges approximately 8000 27900 includes 19000 related civil copyright lawsuit 9400 respectively net recoveries 5900 600 400 fiscal 2005 2004 2003 respectively periods liability reduced settlement payments approximately 18700 5900 15700 respectively 10 income taxes components income tax expense follows reconciliation difference effective income tax rate statutory federal income tax rate follows deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated statements financial condition temporary differences result taxable deductible amounts future years details legg mason’s deferred tax assets liabilities follows march 31 2005 legg mason us state net operating loss carryforwards totaling 1491 expiring various years 2010 addition legg mason nonus net operating loss capital loss carryforwards 7232 13201 respectively carried forward indefinitely march 31 2005 2004 legg mason recorded valuation allowance certain deferred tax assets related us state net operating loss nonus net operating capital loss carryforwards established accordance sfas 109 “accounting income taxes” management’s opinion likely benefits may realized legg mason intends reinvest cumulative undistributed earnings nonus subsidiaries nonus operations deferred us federal income taxes provided undistributed earnings extent permanently reinvested legg mason’s nonus operations practical determine us federal income tax liability would payable earnings reinvested indefinitely 11 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees primary plan legg mason makes discretionary contributions matches 50 employee 401k contributions 6 employee compensation maximum three thousand dollars per year contributions charged operations amounted 41167 33095 26779 fiscal 2005 2004 2003 respectively addition employees make voluntary contributions certain plans 12 capital stock march 31 2005 authorized numbers common preferred exchangeable shares 250 million 4 million unlimited number respectively addition march 31 2005 2004 175 million 154 million shares common stock respectively reserved issuance legg mason’s equity plans 27 million 29 million common shares respectively reserved exchangeable shares connection acquisition legg mason canada inc outstanding exchangeable shares exchangeable time holder oneforone basis shares common stock included basic shares outstanding additionally march 31 2005 legg mason approximately 63 million shares common stock reserved issuance upon conversion zerocoupon contingent convertible senior notes changes common stock shares exchangeable common stock three years ended march 31 2005 follows dividends declared paid march 31 2005 2004 2003 16398 10289 7374 respectively fiscal year ended march 31 2002 board directors approved stock repurchase plan legg mason authorized repurchase 45 million shares open market discretion fiscal years ended march 31 2005 2004 2003 legg mason repurchased retired 735 shares 40729 1184 shares 65399 1327 shares 41963 respectively july 20 2004 legg mason declared threefortwo stock split paid dividend september 24 2004 stockholders record september 8 2004 accordingly share per share information retroactively restated reflect stock split except common stock additional paidin capital presented consolidated statements financial condition consolidated statements changes stockholders’ equity table december 15 2004 legg mason sold 46 million shares common stock 7030 per share less underwriting fees net proceeds approximately 311000 13 employee stock option plans march 31 2005 24 million shares authorized issued legg mason’s equity incentive stock plans options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments 3 5 years expire within 5 10 years date grant see note 1 discussion stockbased compensation stock option transactions plans three years ended march 31 2005 summarized following information summarizes legg mason’s stock options outstanding march 31 2005 march 31 2005 2004 2003 options exercisable 6293 6245 6783 shares respectively weighted average exercise prices 2733 2457 2202 respectively following information summarizes legg mason’s stock options exercisable march 31 2005 legg mason also stock option plan nonemployee directors options granted plan immediately exercisable price equal fair value shares date grant options issuable plan limited 165 million shares aggregate term ten years date grant march 31 2005 options 1045 shares granted 592 currently outstanding 14 deferred compensation stock trust accordance eitf issue 9714 “accounting deferred compensation arrangements amounts held rabbi trust invested” assets rabbi trusts consolidated employer value employer’s stock held rabbi trusts classified stockholders’ equity generally accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders’ equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2005 2004 4945 5091 respectively 15 offbalance sheet risk concentration credit normal course business legg mason executes settles finances customer proprietary securities transactions activities expose legg mason offbalance sheet risk event customers parties fail satisfy obligations securities transactions generally settle within three business days trade date customer broker fail deliver cash securities agreed legg mason may required purchase sell securities unfavorable market prices legg mason extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include purchases securities sales securities yet purchased purchases sales option contracts legg mason continually monitors compliance margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose legg mason risk event margin deposits insufficient fully cover customer losses legg mason invests shortterm resale agreements collateralized us government agency securities collateral securities generally delivered either legg mason case triparty resale agreements custodian bank transactions expose legg mason risk event counterparty repurchase securities value collateral held less underlying receivable legg mason monitors value collateral daily requests additional collateral necessary legg mason borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral addition legg mason engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions legg mason deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis legg mason sells securities currently obligated subsequently purchase securities prevailing market prices legg mason exposed risk loss securities prices increase prior closing transactions legg mason periodically borrows funds financial institutions collateralized basis utilizing customer margin securities counterparty fail return customer securities pledged legg mason subject risk acquiring securities prevailing market prices order satisfy customer obligations legg mason’s customer financing securities lending activities require legg mason pledge customer securities collateral various financing sources bank loans securities lending march 31 2005 legg mason approximately 14 billion customer securities customer margin loans available repledged legg mason repledged approximately 61184 securities loan agreements addition legg mason received collateral approximately 762947 securities borrowings agreements legg mason repledged approximately 560546 legg mason also received collateral approximately 25 billion reverse repurchase agreements customer reserve requirement none repledged 16 special purpose entities described note 1 fin46r requires consolidation vies legg mason primary beneficiary normal course business activities legg mason collateral manager collateralized debt obligation entities general partner cases limited partner investment partnerships investment manager andor managing member limited liability companies trusts offshore investment vehicles accordingly legg mason may obtain variable interests vies manages entities investment vehicles include many types investment strategies including real estate equity fixed income portfolios services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees legg mason sell transfer assets vies legg mason’s exposure risk entities generally limited equity investment made required make earned uncollected management fees legg mason issue performance guarantees vies investors uncollected management fees vies material march 31 2005 determining whether primary beneficiary vies legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees determining primary beneficiary legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit risks assumptions estimates significant bearing determination primary beneficiary legg mason’s assumptions estimates materially incorrect legg mason might required consolidate additional vies consolidation vies would result increase assets corresponding increase liabilities consolidated statements financial condition increase net revenues corresponding increase expenses consolidated statements earnings april 2004 provided 1200 subordinated loan unaffiliated entity became sole equity investor vie simultaneously issued 31583 debt instruments thirdparty investors result loan sole equity investor vie considered primary beneficiary vie required consolidate entity six months ended september 30 2004 october 2004 subordinated loan repaid result longer required consolidate vie legg mason required consolidate two investment trusts solely due underlying ownership entities comprised employees’ interests legg mason ownership interest entities net equity entities reflected minority interest liabilities consolidated statements financial condition legg mason’s statement financial condition march 31 2005 includes 3814 assets attributable consolidated vies primarily includes 3807 trading assets 3814 liabilities attributable consolidated vies primarily includes 3779 minority interest see note 4 trading assets liabilities consolidated vies legg mason’s assets exclusive assets consolidated vies subject claims creditors consolidated vies likewise assets consolidated vies available legg mason’s creditors results operations consolidated vies material legg mason fin 46r also requires disclosure vies legg mason considered significant variable interest determining whether variable interest significant legg mason considers factors described determination primary beneficiary march 31 2005 legg mason significant variable interest primary beneficiary two limited partnerships one real estate investment trust total assets 431355 legg mason equity investments entities 19818 future capital commitments 5687 date earliest involvement entities april 1996 results operations entities material legg mason 17 regulatory requirements parent’s brokerdealer subsidiaries subject securities exchange commission’s uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 2005 brokerdealer subsidiaries aggregate net capital defined 3889 million exceeded required net capital 3646 million net capital brokerdealer subsidiary exceeded required net capital parent’s principal brokerdealer subsidiary must maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows brokerdealer maintain required amounts cash qualified securities march 31 2005 amount segregated rule 15c33 25 billion parent’s trust subsidiary subject requirements office thrift supervision requires compliance regulatory capital standards march 31 2005 trust subsidiary met capital adequacy requirements subject certain foreign subsidiaries also subject requirements local regulatory agencies subsidiaries met respective capital adequacy requirements 18 business segment information legg mason currently operates following business segments asset management private client capital markets corporate revenues expenses allocated business segments reported separately corporate business segment classifications based upon factors services provided distribution channels utilized certain services legg mason offers provided clients one business segments legg mason allocates certain common income expense items among business segments based upon various methodologies factors methodologies nature subjective reviewed periodically management business segment results may reflect reallocations revenues expenses result changes methodologies reallocations effect consolidated results operations material changes methodologies fiscal 2005 asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue asset management investment advisory distribution administrative fees typically calculated percentage assets account vary based upon factors type underlying investment product amount assets management type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution fees earned companysponsored investment funds reported asset management fund sold marketing channels private client segment fund sold branch distribution network revenues asset management tend stable private client capital markets less affected changes securities market conditions private client distributes wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds feebased account fees net interest customers’ margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets consists equity fixed income institutional sales trading corporate public finance investment banking primary sources revenue equity fixed income institutional sales trading include commissions principal credits transactions corporate municipal products legg mason maintains proprietary fixed income equity securities inventory primarily facilitate customer transactions recognizes trading profits losses proprietary trading activities investment banking revenues include underwriting fees advisory fees private placements mergers acquisitions sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also include realized unrealized gains losses investments acquired connection merchant investment banking activities september 2003 legg mason sold mortgage banking servicing operation lmres previously reported also included certain unallocated corporate revenues expenses consolidated results fiscal 2003 restated reflect historical results sold business discontinued operations remaining operations lmres capital markets corporate revenues expenses allocated business segments reported separately corporate loss continuing operations fiscal 2004 includes 17500 19000 single litigation award charge business segment financial results follows legg mason analyzes assets consolidated basis therefore provide asset information segment legg mason principally operates united states united kingdom canada revenues expenses geographic purposes generally allocated based location office providing service results geographic region follows quarterly financial data1 dollars thousands except per share amounts unaudited may 25 2005 closing price legg mason’s common stock 8167 1 adjusted reflect september 2004 stock split diluted earnings per share restated required eitf 048 “the effect contingently convertible instruments diluted earnings per share” applicable item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg mason’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg mason’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg mason’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg mason’s internal control financial reporting march 31 2007 based framework set forth committee sponsoring organizations treadway commission “coso” internal controlintegrated framework based assessment management concluded march 31 2007 legg mason’s internal control financial reporting effective based criteria established coso framework management’s assessment effectiveness legg mason’s internal control financial reporting march 31 2007 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinions management’s assessment effectiveness legg mason’s internal control financial reporting march 31 2007 raymond mason chairman chief executive officer charles j daley jr senior vice president chief financial officer treasurer report independent registered public accounting firm board directors stockholders legg mason inc completed integrated audits legg mason inc’s consolidated financial statements internal control financial reporting march 31 2007 accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements opinion consolidated financial statements listed accompanying index present fairly material respects financial position legg mason inc subsidiaries march 31 2007 march 31 2006 results operations cash flows three years period ended march 31 2007 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included accompanying report management internal control financial reporting company maintained effective internal control financial reporting march 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting march 31 2007 based criteria established internal controlintegrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 30 2007 consolidated statements income dollars thousands except per share amounts see notes consolidated financial statements consolidated balance sheets dollars thousands see notes consolidated financial statements consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements consolidated statements comprehensive income dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc “parent” subsidiaries collectively “legg mason” principally engaged providing asset management related financial services individuals institutions corporations municipalities december 1 2005 legg mason acquired substantially citigroup inc’s “citigroup” worldwide asset management business “cam” exchange legg mason’s private client capital markets “pccm” businesses common preferred stock cash also effective november 1 2005 legg mason acquired permal group ltd “permal” see notes 2 3 additional information consolidated financial statements include accounts parent subsidiaries controlling financial interest including cam permal dates acquisition generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity “vie” considered primary beneficiary see discussion special purpose variable interest entities follows discussion vies material intercompany balances transactions eliminated appropriate prior years’ financial statements reflect reclassifications conform current year presentation including current period breakout performance fees separate component investment advisory fees deferred income tax assets liabilities current assets noncurrent liabilities respectively unless otherwise noted per share amounts include common shares legg mason shares issued connection acquisition legg mason canada inc exchangeable common shares legg mason oneforone basis time nonvoting convertible preferred stock convertible upon sale shares legg mason common stock nonvoting convertible preferred shares considered “participating securities” therefore included calculation basic earnings per common share july 2006 number authorized common shares increased 250 million 500 million connection sale legg mason’s pccm businesses legg mason reflected related results operations pccm businesses income discontinued operations consolidated statements income operating investing cash flows discontinued operations shown separately consolidated statements cash flows financing cash flows discontinued operations references fiscal 2007 2006 2005 refer legg mason’s fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america require management make assumptions estimates affect amounts reported financial statements accompanying notes including intangible assets goodwill liabilities losses contingencies stockbased compensation income taxes management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements cash equivalents cash equivalents highly liquid investments original maturities 90 days less financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value legg mason holds debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders’ equity comprehensive income net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium recorded interest method included interest income certain investment securities classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings legg mason evaluates nontrading investment securities “other temporary” impairment may exist fair value investment security adjusted cost extended period time “other temporary” impairment determined exist difference value investment security recorded financial statements fair value recognized charge income period impairment determined temporary march 31 2007 2006 amount unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations readily available management must estimate value security based upon available information order determine fair value march 31 2007 2006 legg mason approximately 1298 1503 respectively nontrading financial instruments valued based upon management’s assumptions estimates taking consideration available financial information company industry march 31 2007 2006 legg mason approximately 58265 64026 respectively investments partnerships limited liability corporations investments reflected noncurrent assets consolidated balance sheets accounted cost equity method addition financial instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair value longterm debt march 31 2007 2006 1120253 1277508 respectively fair values estimated using current market prices fixed assets fixed assets consist equipment software leasehold improvements equipment consists primarily communications technology hardware furniture fixtures software includes purchased software internally developed software fixed assets reported cost net accumulated depreciation amortization depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements amortized initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill intangible assets consist principally asset management contracts manage proprietary funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife intangible assets goodwill amortized legg mason evaluates intangible assets goodwill quarterly basis considering factors projected cash flows revenue multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment determined fair values intangible assets subject amortization reviewed reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level deemed impaired carrying amount reporting unit exceeds implied fair value estimating fair value reporting unit legg mason uses valuation techniques based discounted cash flows similar models employed analyzing purchase price acquisition target legg mason defines reporting units managed investments institutional wealth management divisions operating segments allocations goodwill legg mason’s divisions acquisitions dispositions based relative fair values businesses added sold divisions see note 6 additional information regarding intangible assets goodwill note 18 additional information regarding business segments translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders’ equity comprehensive income gains losses resulting foreign currency transactions included earnings investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg mason’s clients fees primarily based predetermined percentages market value assets management “aum” recognized period services performed may billed advance period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks generally recognized end performance measurement period determined realizable distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution service fee expense accrued amounts owed third parties including finders’ fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges “cdsc” received shareholders funds upon redemption shares cdsc receipts recorded distribution servicing revenue received corresponding expense reduction unamortized balance deferred sales commissions management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2007 2006 2005 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 449 million 789 million march 31 2007 2006 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance management’s opinion likely benefits may realized legg mason’s deferred income taxes principally relate business combinations amortization accrued compensation loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated stockbased compensation legg mason’s stockbased compensation includes stock options employee stock purchase plans restricted stock awards deferred compensation payable stock compensation plans legg mason issues stock options officers key employees nonemployee members board directors fiscal year 2007 legg mason adopted sfas 123 r “sharebased payment” related pronouncements using modifiedprospective method related transition election method compensation expense year ended march 31 2007 includes compensation cost nonvested sharebased awards grantdate fair value amortized respective vesting periods straightline method legg mason determines fair value stockbased compensation using blackscholes option pricing model exception marketbased performance grants valued monte carlo optionpricing model prior fiscal 2007 awards also accounted grantdate fair value except awards granted prior april 1 2003 recorded intrinsic value result prior adoption sfas 123 r related compensation expense recognized awards granted prior april 1 2003 expense related stockbased employee compensation included determination net income fiscal years 2006 2005 less would included fair value method applied awards modifiedprospective method results years ended march 31 2006 2005 restated additionally unamortized deferred compensation previously classified separate component stockholders’ equity reclassified reduction additional paidin capital also sfas 123 r cash flows related income tax deductions excess stockbased compensation expense 14466 classified financing cash flows year ended march 31 2007 years ended march 31 2006 2005 cash flows 92376 18972 respectively continue classified operating cash inflows see note 13 additional discussion stockbased compensation earnings per share basic earnings per share “eps” calculated dividing net income weighted average number shares outstanding calculation weighted average shares includes common shares exchangeable common stock convertible preferred shares considered participating securities diluted eps similar basic eps adjusts effect potential common shares share per share information retroactively restated reflect september 2004 threefortwo split see note 15 additional discussion eps special purpose variable interest entities special purpose entities “spes” trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse legg mason utilize spes form financing provide liquidity legg mason recognized gains losses sale assets spes accordance financial accounting standards board “fasb” interpretation “fin” 46 r “consolidation variable interest entitiesan interpretation arb 51” spes designated either voting interest entity vie vies subject consolidation party deemed primary beneficiary vie entity sufficient equity risk finance activities without additional subordinated financial support equity investors characteristics controlling financial interest primary beneficiary entity absorb majority vie’s expected losses entity receive majority vie’s expected residual returns accordance fin 46 r legg mason’s determination expected residual returns excludes gross fees paid decision maker unlikely legg mason primary beneficiary vies created manage assets clients unless ownership interest including interests related parties vie substantial unless legg mason may earn significant performance fees vie fin 46 r also requires disclosure vies legg mason considered significant variable interest determining whether variable interest significant legg mason considers factors used determination primary beneficiary determining whether primary beneficiary vies legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees determining primary beneficiary legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit risks assumptions estimates significant bearing determination primary beneficiary legg mason’s assumptions estimates materially incorrect legg mason might required consolidate additional vies consolidation vies would result increase assets corresponding increase minority interests consolidated balance sheets increase revenues corresponding increase minority interests consolidated statements income supplemental cash flow information following noncash activities excluded consolidated statements cash flows described note 8 fiscal 2007 2006 holders 76 million 480 million zerocoupon contingent convertible senior notes converted notes 756 thousand 55 million shares common stock respectively zerocoupon contingent convertible senior notes outstanding conversion fiscal 2007 described note 2 fiscal 2006 legg mason issued 54 million shares common stock 13346632 shares nonvoting convertible preferred stock citigroup acquisition cam march 2006 citigroup sold thus converted approximately 496 shares nonvoting convertible preferred stock 496 million shares common stock addition 832 million promissory note described note 7 executed result final purchase price closing also described note 2 fiscal 2006 legg mason issued 19 million shares common stock valued 200 million acquire permal described note 3 fiscal 2006 legg mason recognized gain sale pccm businesses citigroup based value 165 billion businesses portion consideration acquire cam assets liabilities pccm businesses transferred citigroup part transaction approximately 42 billion 37 billion respectively amounts reflected supplementary disclosure consolidated statements cash flows cash paid income taxes interest represent amounts continuing discontinued operations applicable derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason generally engage derivative hedging activities except hedge interest rate risk debt described note 8 addition legg mason uses currency hedges hedge risk movement exchange rates interest rates financial assets legg mason applies hedge accounting defined sfas 133 “accounting derivative instruments hedging activities” aforementioned debt interest rate risk hedge adjustment cash flow hedge recorded comprehensive income gain loss derivative instruments designated hedge accounting included income expense consolidated statements income material recent accounting developments following relevant accounting pronouncements recently issued fasb issued fasb interpretation 48 “accounting uncertainty income taxes” “fin 48” july 2006 fin 48 clarifies previously issued fasb statement 109 “accounting income taxes” prescribing recognition threshold measurement attribute financial statements tax positions taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties interim accounting disclosure transition effective fiscal year 2008 legg mason substantially completed analysis adopting provisions fin 48 based analysis currently expect adjustment opening retained earnings existing income tax reserves april 1 2007 material consolidated financial statements september 2006 fasb issued statement 157 “fair value measurements” “sfas 157” provide consistent definition fair value establish framework measuring fair value generally accepted accounting principles sfas 157 additional disclosure requirements effective fiscal year 2009 legg mason evaluating adoption sfas 157 cannot estimate impact consolidated financial statements time september 2006 fasb issued statement 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132 r” “sfas 158” sfas 158 requires employer business entity sponsors one singleemployer defined benefit plans recognize funded status plans balance sheet balance sheet date sfas 158 also requires gains losses prior service costs credits components net periodic benefit costs cycled comprehensive income recognized net periodic benefit cost sfas 158 additional disclosure requirements effective march 31 2007 adoption sfas 158 material impact legg mason’s consolidated financial statements september 2006 sec staff issued staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” “sab 108” eliminate diversity registrants quantify financial statement misstatements prior sab 108 registrants used one two widely recognized methods quantify financial statement misstatements “rollover” method “iron curtain” method iron curtain method quantifies uncorrected misstatements based effects correcting misstatements existing balance sheet current year irrespective year origination misstatement rollover method quantifies uncorrected misstatements based amount misstatements originating current year income statement ignores effects correcting portion relating balance sheet misstatements prior years sab 108 requires registrant consider iron curtain rollover methods evaluating uncorrected misstatements uncorrected misstatements previously deemed immaterial one method may material new “dual approach” require correction current year financial statements sab 108 additional disclosure requirements sab 108 adopted march 31 2007 impact legg mason’s consolidated financial statements february 2007 fasb issued statement 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” “sfas 159” sfas 159 permits companies measure many financial instruments certain items fair value provisions sfas 159 mandatory legg mason option adopt sfas 159 fiscal 2008 fiscal 2009 legg mason process evaluating potential future effect sfas 159 consolidated financial statements 2 acquisitions december 1 2005 legg mason completed acquisition cam exchange outstanding stock legg mason subsidiaries constituted pccm businesses see note 3 discussion discontinued operations ii approximately 539 million shares common stock 13346632 shares 10 par value per share nonvoting legg mason convertible preferred stock convertible upon transfer approximately 1335 million shares common stock iii 512 million cash borrowed 700 million fiveyear syndicated term loan facility cam acquisition price initially aggregated 396 billion including 173 billion legg mason stock 539 million shares common stock 1335 million shares common stock issuable upon conversion convertible preferred stock 9205 per share 165 billion pccm business 512 million cash related costs 68 million accordance eitf 9912 “determination measurement date market price acquirer securities issued purchase business combination” common stock convertible stock issued transaction valued based average closing price legg mason common stock immediately following june 24 2005 date terms transaction agreed parties announced convertible preferred stock valued basis common stock classes economic rights value assigned pccm business based negotiations buyer citigroup seller legg mason using market metrics revenue book value earnings multiples developed conjunction independent thirdparty advisors time acquisition cam managed assets approximately 4086 billion excluded certain assets expected retained cam determination purchase price made basis among things revenues profitability growth rates cam acquisition cam fits one legg mason’s strategic objectives become pure global asset management company summary fair values net assets acquired follows amortizable asset management contracts amortized periods ranging six twelve years excluding certain contracts approximately 11 million amortized 16 months value indefinitelife mutual fund contracts subject amortization evaluated quarterly impairment approximately 739 million goodwill deductible 15 years tax purposes accordance terms acquisition agreement cam postclosing purchase price adjustment 847 million paid citigroup september 2006 quarter based retention certain acquired aum payment recorded additional goodwill therefore impact future earnings extent recorded goodwill becomes impaired prior consummation cam transaction senior management began assess formulate plans restructuring business combined entities included reductions acquired workforce rationalization realignment acquired mutual funds evaluation office lease obligations assumed transaction several geographic regions costs associated reductions acquired workforce accrued acquisition date time specific plans communication plans finalized costs associated mutual fund realignment office space rationalization accrued fiscal 2007 management finalized plans amounts could reasonably estimated part fund realignment certain domestic funds merged funds similar strategy certain funds redomiciled liquidated approved boards directors funds fund shareholders fund realignment costs associated incurred generate revenues combined entity consummation date incremental costs incurred conduct activities prior transaction date incurred direct result plan exit certain cam activities evaluation excess office space several geographic regions resulted staff reductions business integrations excess office space costs include amounts incurred existing contractual obligations cam continue economic benefit penalties incurred cancel contractual obligations acquired business costs workforce reductions mutual fund realignment excess office space aggregating 854 million associated integration acquired cam business reasons described costs reflected additional goodwill impact future earnings extent recorded goodwill becomes impaired summary accrued restructuring costs follows purchase price allocation completed fiscal 2007 legg mason expects remaining accrued costs paid incurred contractual terms future years connection acquisition cam effective october 3 2005 legg mason entered threeyear global distribution agreement citigroup pursuant legg mason intends distribute asset management products services cam subsidiaries including legg mason funds family mutual funds citigroup’s various distribution businesses include citigroup’s retail securities brokerage retail institutional banks life variable annuity representatives citigroup’s retail securities brokerage exclusive retail distributor legg mason funds managed legg mason capital management subject exceptions term exclusivity three years subject certain conditions prior acquisition cam conjunction citigroup entity smith barney fund management llc “sbfm” one entities acquired citigroup completed settlement us securities exchange commission “sec” resolving investigation sec matters relating arrangements certain smith barney mutual funds citigroup affiliated transfer agent unaffiliated subtransfer agent terms settlement sbfm paid 184 million us treasury distributed pursuant distribution plan subject approval sec although transfer agency business included acquisition cam liabilities sbfm assumed acquisition include approximately 184 million amounts paid pursuant plan distribution approved addition assets acquired include receivable approximately 184 million amount returned legg mason us treasury distribution pursuant plan settlement still disbursed receivable balance included receivables related liability included current liabilities march 31 2007 2006 effective november 1 2005 legg mason acquired 80 outstanding equity permal leading global fundsofhedge funds manager concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares resulting legg mason owning 100 outstanding voting common stock permal legg mason right purchase preference shares next four years right exercised holders shares right require legg mason purchase interests general time frame approximately consideration aggregate consideration paid legg mason closing 800 million excluding 85 million acquisitionrelated costs 200 million form approximately 1889 newly issued shares legg mason common stock remainder cash anticipated legg mason acquire remaining 20 ownership interest permal represented preference shares legg mason purchases made two four years initial closing prices based permal’s revenues additional payments treated contingent consideration maximum aggregate price including earnout payments related purchase based upon future revenue levels equity interests permal 1386 billion 9695 million minimum price including acquisition costs legg mason may elect deliver 25 future payments form shares common stock payments preference shares including dividends contingent earnouts exceeding 9695 million minimum purchase price recognized additional goodwill fiscal 2007 legg mason paid approximately 12 million dividends preference shares based upon current performance levels march 31 2007 130 million 161 million difference minimum price consideration paid closing including acquisition costs classified contractual acquisition payable current liability march 31 2006 161 million difference included noncurrent liabilities time acquisition permal managed assets approximately 175 billion excluding approximately 20 billion assets crossinvested among managed funds 27 billion assets permal expect retain acquisition permal fits one legg mason’s strategic objectives expand global asset management business summary fair values net assets acquired follows 1 subsequent acquisition adjustments certain contractual agreements occurred vies longer required consolidated fair value amortizable asset management contracts approximately 100 million amortized periods ranging two nine years values indefinitelife trade name fundsofhedge funds contracts subject amortization evaluated quarterly impairment following unaudited pro forma consolidated results presented though acquisitions cam permal occurred beginning period presented excludes results discontinued operations including gain sale pccm businesses pro forma results include adjustments exclude certain nontransferred cam businesses accordance terms transaction agreement conform accounting policies acquired entities adjust effect acquisition related expenses former owners private capital management “pcm” earned maximum fifth anniversary payment 3000 million accrued march 31 2006 paid fiscal 2007 payment recorded additional goodwill subject certain limited clawback provisions december 31 2004 legg mason investment counsel llc wholly owned subsidiary legg mason acquired deutsche investment management americas new york city philadelphia cincinnati chicago offices scudder private investment counsel “acquired offices” cash 550 million acquisition offices fits legg mason’s strategic objective grow asset management business transaction included contingent payment based revenues acquired offices first anniversary closing resulted payment approximately 163 million march 2006 recorded additional goodwill acquired offices 62 billion aum december 31 2004 allocation purchase price resulted approximately 200 million goodwill 340 million amortizable asset management contracts fair value asset management contracts 340 million amortized estimated life 12 years 3 discontinued operations december 1 2005 legg mason sold entities comprised pccm businesses citigroup portion consideration purchase citigroup’s global asset management businesses accordance sfas 144 “accounting impairment disposal longlife assets” aftertax results operations pccm reflected income discontinued operations consolidated income statements fiscal years ended march 31 2006 2005 result sale legg mason recognized gain 109 billion net 972 million costs related sale including 787 million accelerated vesting employee stock option deferred compensation awards required sfas 123 modification terms option award makes valuable shall treated exchange original award new award incremental value shall measured difference fair value modified option determined accordance provisions sfas 123 b value old option immediately terms modified determined based shorter 1 remaining expected life 2 expected life modified option 864 thousand unvested options transaction date exercisable original contractual provisions therefore value terms options modified vesting periods shortened december 1 2005 transaction date ninety days thereafter exercise modified options expected exercised immediately therefore fair value options time value component equal aggregate transaction date market price less respective strike prices modified option sale resulted aftertax gain 6413 million fiscal 2007 company completed filing income tax return related sale also adjusted liabilities related sale actions resulted adjustment aftertax gain sale 572 results operations discontinued operations summarized follows 1 see note 18 additional information net revenues march 31 2006 legg mason sold operations subsidiary legg mason real estate services “lmres” sales price net assets approximately 8093 received cash subsequent closing legg mason recognized pretax gain net transaction costs 4698 2739 net taxes 1959 gain sale reflected gain sale discontinued operations consolidated statements income sale lmres result legg mason’s longterm strategic objective focus core asset management business 4 investments legg mason investments debt equity securities generally classified availableforsale heldtomaturity trading described note 1 investments march 31 2007 2006 follows 1 includes assets deferred compensation plans 191684 106170 respectively remainder seed capital investments vies 2 includes investments private equity debt securities readily determinable fair values legg mason uses specific identification method determine cost security sold amount reclassified accumulated comprehensive income earnings proceeds gross realized gains losses sales maturities available forsale investments follows net unrealized gain investment securities classified trading 7141 2007 net unrealized losses investment securities classified trading 8360 2564 2006 2005 respectively legg mason’s availableforsale investments consist mortgagebacked securities us government agency securities equity securities fair value investments classified availableforsale 8297 7514 march 31 2007 2006 respectively gross unrealized gains losses investments classified availableforsale 407 303 respectively march 31 2007 342 383 respectively march 31 2006 legg mason investments classified heldtomaturity march 31 2007 march 31 2006 amortized cost investments classified heldtomaturity 17255 gross unrealized gains losses investment securities classified heldtomaturity 72 292 respectively march 31 2006 5 fixed assets following table reflects components fixed assets dates shown depreciation amortization expense 69442 35308 19318 fiscal 2007 2006 2005 respectively net 4243 3728 fiscal 2006 2005 respectively allocated discontinued operations reflect use certain fixed assets discontinued operations prior sale 6 intangible assets goodwill indefinite life intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair market value assets exceed book value fair value less book value legg mason record impairment charge fiscal 2007 legg mason recognized operating expense impairment charges approximately 20 million certain amortizable asset management contracts impairment charges fiscal 2006 2005 following tables reflect components intangible assets continuing operations march 31 march 31 2007 management contracts amortized weightedaverage life 11 years estimated amortization expense next five fiscal years follows decrease amortizable cost primarily due previously described impairment charge increase indefinitelife intangible assets primarily attributable impact foreign currency translation increase carrying value goodwill since april 1 2006 summarized increase goodwill due business acquisition costs contractual acquisition earnouts fiscal 2007 2006 primarily attributable cam permal discussed note 2 accrual 3000 million final contingent payment pcm fiscal 2006 fiscal 2007 legg mason began recognizing tax benefit amortization excess tax basis related cam acquisition accordance sfas 109 “accounting income taxes” tax benefit recorded reduction goodwill deferred tax liabilities addition contingent payment approximately 16300 made fiscal 2006 connection acquisition acquired offices recorded additional goodwill 7 shortterm borrowings october 14 2005 legg mason entered unsecured 5year 500 million revolving credit agreement legg mason expects use revolving credit facility fund working capital needs general corporate purposes facility replaced legg mason’s previous 100 million revolving credit facility payable full maturity five years borrowings outstanding facility march 31 2007 2006 legg mason maintains two additional borrowing facilities 50 million 3year revolving credit agreement 40 million credit line facilities general operating purposes borrowings outstanding facilities march 31 2007 2006 legg mason maintained compliance applicable covenants facilities connection acquisition cam legg mason entered two 364day borrowing arrangements one 130 million revolving credit facility interest rate including commitment fees libor plus 27 basis points 832 million promissory note interest rate including commitment fees libor plus 35 basis points average effective interest rate 832 million credit facility 56 48 periods ended march 31 2007 2006 respectively fiscal year ended march 31 2007 paid available cash 832 million balance outstanding shortterm promissory note citigroup legg mason borrow 130 million credit facility expired november 2006 8 longterm debt longterm debt march 31 2007 2006 consists following july 2 2001 legg mason issued 425000 principal amount senior notes due july 2 2008 bear interest 675 notes sold discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs june 6 2001 legg mason issued 567285 principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 year ended march 31 2006 zerocoupon contingent convertible senior notes aggregating 479918 principal amount maturity converted 55 million shares common stock fiscal 2007 remaining outstanding zerocoupon contingent convertible senior notes converted 756 thousand shares common stock legg mason repaid 100000 principal amount 65 senior notes matured february 15 2006 fiscal year ended march 31 2006 legg mason entered following longterm debt agreements 5year term loan october 14 2005 legg mason entered unsecured term loan agreement amount exceed 700 million legg mason used term loan pay portion purchase price including acquisition related costs acquisition cam term loan facility payable full maturity calendar year 2010 bears interest libor plus 35 basis points fiscal 2007 repaid 50 million resulting outstanding balance march 31 2007 650 million currently bears interest rate 57 3year term loan connection cam acquisition december 1 2005 legg mason entered 16 million 3year term loan payable maturity interest including commitment fees paid semiannually floating rate linked bank chile offering rate plus 35 basis points march 31 2007 outstanding balance loan facility 85 million interest rate 64 credit facilities entered connection citigroup transaction contain standard covenants including leverage interest coverage ratios legg mason maintained compliance applicable covenants borrowing facilities third party distribution financing july 31 2006 legg mason entered fouryear agreement financial institution finance nonrecourse basis 907 million commissions paid financial intermediaries connection sales certain share classes proprietary funds outstanding balance march 31 2007 3617 distribution fee revenues used repay distribution financing based average aum respective funds interest imputed average rate 54 term loans legg mason entered loan fiscal 2005 finance leasehold improvements outstanding balance march 31 2007 136 million bears interest 42 due october 31 2010 fiscal 2006 legg mason entered 128 million term loan agreement finance acquisition aircraft loan bears interest 59 secured aircraft maturity date january 1 2016 outstanding balance march 31 2007 121 million 5year credit agreement november 23 2005 legg mason entered unsecured 5year floatingrate credit agreement amount exceed 300 million legg mason borrowed 100 million agreement fund portion purchase price cam transaction payable outside us borrowing payable full maturity five business days transaction closing date made november 25 2005 repaid december 2 2005 entire amount credit facility including repaid amounts initial loan became available december 2 2005 fund additional purchase price payable cam transaction result final postclosing payment made available cash see note 2 agreement drawn upon terminated accordance terms fiscal 2007 march 31 2007 aggregate maturities longterm debt current accreted value 1112624 based contractual terms follows march 31 2007 legg mason 125 billion available issuance additional debt equity securities pursuant shelf registration statement interest rate swap effective december 1 2005 legg mason executed 3year amortizing interest rate swap “swap” large financial institution hedge interest rate risk portion 700 million 5year floatingrate term loan terms swap legg mason pay fixed interest rate 49 notional amount 400 million quarterly payments receipts swap matched exactly offset changes floating rate interest payments 400 million principal term loan since terms conditions hedge expected changed long least unamortized balance swap outstanding 5year floatingrate term loan swap continue effective cash flow hedge result changes market value swap recorded component comprehensive income march 2007 quarter swap began unwind repaid 50 million debt march 31 2007 unrealized gain 584 net tax 414 market value 350 million swap reflected comprehensive income estimated unrealized gain included comprehensive income march 31 2007 expected reclassified income within next twelve months actual amount vary result changes market conditions quarterly basis legg mason assesses effectiveness cash flow hedge confirming payments balance liability hedged match swap 9 income taxes components income tax expense continuing operations follows reconciliation difference effective income tax rate statutory federal income tax rate continuing operations follows deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years details legg mason’s deferred tax assets liabilities follows certain tax benefits associated legg mason’s employee stock plans recorded directly stockholders’ equity stockholders’ equity increased 14466 92376 18972 2007 2006 2005 respectively result tax benefits acquisitions permal certain nonus cam entities stock acquisitions afforded tax basis writeup intangibles exclusive goodwill thereby creating deferred tax liability equal tax effect differences book basis financial reporting purposes related tax cost basis change deferred tax liability related book tax basis differences intangibles acquisitions year ended march 31 2006 primarily relates increase 275700 12522 permal cam respectively march 31 2007 2006 legg mason recorded deferred tax asset 2047 5495 respectively us state net operating loss carryforwards expiring various years march 31 2009 also march 31 2007 2006 legg mason recorded deferred tax asset 24151 21575 respectively nonus net operating loss carryforwards 11621 years nonus capital loss carryforwards portions expire various years beginning march 31 2008 us subsidiaries permal file separate federal income tax returns apart legg mason inc’s consolidated federal income tax return due permal acquisition structure separate state income tax returns march 31 2006 us subsidiaries permal recorded deferred tax asset 15964 us federal net operating capital loss carryforwards 5206 us state operating capital loss carryforwards expired utilized march 31 2007 march 31 2007 2006 legg mason recorded valuation allowance deferred tax assets 916 1751 respectively us state net operating loss carryforwards also march 31 2007 2006 legg mason recorded valuation allowance deferred tax assets 22818 21453 respectively relating nonus net operating loss carryforwards 11621 years relating nonus capital loss carryforwards 2354 2022 respectively relating deferred tax assets valuation allowances established accordance sfas 109 “accounting income taxes” management’s opinion likely benefits may realized march 31 2007 2006 valuation allowances deferred tax assets 37709 36847 respectively valuation allowance relating nonus net operating loss carryforwards acquired cam acquisition totaling 14244 reduce goodwill legg mason subsequently recognizes deferred tax asset legg mason intends permanently reinvest cumulative undistributed earnings nonus subsidiaries nonus operations accordingly us federal income taxes provided undistributed earnings extent permanently reinvested legg mason’s nonus operations practical time determine income tax liability would result upon repatriation earnings 10 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2025 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases year ended march 31 2007 legg mason entered lease agreement office space located new york used primarily clearbridge advisors western asset lease annual base rent approximately 181 million per year agreement provides initial term 16 years right renew either additional 10year term two 5year terms february 12 2007 legg mason entered agreement lease new office space baltimore replacement current headquarters lease expires fiscal 2010 lease annual base rent approximately 111 million building currently construction legg mason anticipates taking possession space summer 2009 initial lease term expire april 2024 two renewal options 10 five years march 31 2007 minimum annual aggregate rentals operating leases servicing agreements follows minimum rental commitments shown reduced 95420 minimum sublease rentals received future noncancelable subleases table also include aggregate rental commitments 155 furniture equipment capital leases following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes period provided landlord “free rent” period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2007 2006 legg mason commitments invest approximately 39300 42100 respectively limited partnerships make private investments commitments funded required end respective investment periods ranging fiscal 2008 2011 march 31 2007 legg mason contingent payment obligations related acquisitions payments payable fiscal 2012 exceed 613046 normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency inquiries investigations proceedings citigroup transaction legg mason transferred citigroup subsidiaries constituted pccm businesses thus transferring entities would primary liability customer complaint litigation regulatory liabilities proceedings arising businesses however part transaction legg mason agreed indemnify citigroup customer complaint litigation regulatory liabilities legg mason’s former pccm businesses result preclosing events similarly although citigroup transferred legg mason entities would primarily liable customer complaint litigation regulatory liabilities proceedings cam business citigroup agreed indemnify legg mason customer complaint litigation regulatory liabilities cam business result preclosing events accordance sfas 5 “accounting contingencies” legg mason established provisions estimated losses pending complaints legal actions investigations proceedings ultimate resolution matters cannot currently determined opinion management consultation legal counsel legg mason believe resolution actions material adverse effect legg mason’s financial condition however results operations could materially affected period liabilities period differ legg mason’s prior estimates legg mason’s cash flows could materially affected period matters resolved addition ultimate costs litigationrelated charges vary significantly period depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement legg mason two officers named defendants consolidated legal action alleges defendants violated securities exchange act 1934 securities act 1933 making misleading statements public omitting certain material facts respect acquisition cam business public statements prospectus used secondary stock offering order artificially inflate price legg mason common stock action seeks certification class shareholders purchased legg mason common stock either february 1 2006 october 10 2006 secondary public offering march 9 2006 seeks unspecified damages legg mason intends defend action vigorously legg mason cannot accurately predict eventual outcome action point whether material adverse effect legg mason march 31 2007 2006 legg mason’s liability losses contingencies 2600 4300 respectively fiscal 2007 2006 2005 legg mason recorded litigationrelated charges continuing operations approximately 100 2500 respectively net recoveries 5300 fiscal 2005 fiscal 2006 2005 legg mason recorded litigationrelated charges discontinued operations approximately 5900 5500 respectively net recoveries 800 600 fiscal 2006 2005 respectively fiscal 2007 2006 2005 liability reduced settlement payments approximately 1800 21500 18700 respectively reversal accruals fiscal 2006 primarily related civil copyright lawsuit 8300 11 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees primary plan legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation 50 match employee 401k contributions 6 employee compensation maximum five thousand dollars per year contributions charged continuing operations amounted 40686 22670 11538 fiscal 2007 2006 2005 respectively contributions charged discontinued operations 20295 29629 fiscal 2006 2005 respectively addition employees make voluntary contributions certain plans 12 capital stock march 31 2007 authorized numbers common preferred exchangeable shares 500 million 4 million unlimited number respectively addition march 31 2007 2006 103 million 121 million shares common stock respectively reserved issuance legg mason’s equity plans 21 million 23 million common shares respectively reserved exchangeable shares issued connection acquisition legg mason canada inc exchangeable shares exchangeable time holder oneforone basis shares legg mason’s common stock included basic shares outstanding connection acquisition cam legg mason issued 1335 shares 10 par value per share nonvoting legg mason convertible preferred stock convertible upon transfer 1335 million shares common stock fiscal 2006 legg mason issued approximately 496 million common shares upon conversion approximately 496 shares convertible preferred march 31 2007 approximately 839 shares convertible preferred stock outstanding changes common stock shares exchangeable common stock three years ended march 31 2007 follows dividends declared per share 081 069 055 fiscal 2007 2006 2005 respectively dividends declared paid march 31 2007 2006 2005 29430 24912 16398 respectively included current liabilities fiscal year ended march 31 2002 board directors approved stock repurchase plan legg mason authorized repurchase 3 million shares open market discretion fiscal years ended march 31 2007 2006 shares repurchased fiscal year ended march 31 2005 legg mason repurchased retired 735 shares 40729 july 20 2004 legg mason declared threefortwo stock split paid dividend september 24 2004 stockholders record september 8 2004 accordingly share per share information prior date retroactively restated reflect stock split except common stock additional paidin capital presented consolidated statements changes stockholders’ equity table fiscal 2005 december 15 2004 legg mason sold 46 million shares common stock 7030 per share less underwriting fees net proceeds approximately 311000 november 1 2005 connection acquisition permal described note 2 legg mason issued 1889 shares common stock portion consideration paid december 1 2005 connection acquisition cam described note 2 legg mason issued 5394 shares common stock portion purchase price 13 stockbased compensation legg mason’s stockbased compensation includes stock options employee stock purchase plans restricted stock awards deferred compensation payable stock march 31 2007 24 million shares authorized issued legg mason’s equity incentive stock plans 32 million remaining shares available issuance options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments 3 5 years expire within 5 10 years date grant see note 1 discussion stockbased compensation expense continuing operations relating stock options stock purchase plan deferred compensation years ended march 31 2007 2006 2005 23817 11877 3810 respectively related income tax benefit years ended march 31 2007 2006 2005 8452 4255 976 respectively effect adopting sfas 123 r net income year ended march 31 2007 reduction 1872 net tax following tables reflect pro forma results compensation expense associated option grants regardless grant date stock purchase plan recognized vesting period discussed note 3 connection sale pccm businesses legg mason accelerated vesting stock option equitybased deferred compensation awards previously granted employees pccm businesses accelerated vesting stock options reduced gain sale 737 million 617 million tax reflecting increase fair value awards vesting date original grant date approximately 431 million charge related incentive stock options tax benefit consolidated statements income stock option transactions legg mason’s option plans three years ended march 31 2007 summarized 1 adjusted reflect stock split appropriate total intrinsic value options exercised years ended march 31 2007 2006 2005 55046 384153 84072 respectively march 31 2007 aggregate intrinsic value options outstanding 346439 following information summarizes legg mason’s stock options outstanding march 31 2007 march 31 2007 2006 2005 options exercisable 4156 4123 6292 shares respectively weighted average exercise prices 3388 2802 2733 respectively stock options exercisable march 31 2007 weightedaverage remaining contractual life 22 years march 31 2007 aggregate intrinsic value options exercisable 140804 following information summarizes legg mason’s stock options exercisable march 31 2007 following information summarizes unvested stock options legg mason’s equity incentive plans year ended march 31 2007 1 generally vesting occurs july year unamortized compensation cost related unvested options march 31 2007 59237 expected recognized weightedaverage period 22 years legg mason also equity plan nonemployee directors replaced stock option plan nonemployee directors fiscal 2006 equity plan directors may elect receive shares stock options acquire shares stock restricted stock units options granted either plan immediately exercisable price equal market value shares date grant term ten years shares options restricted stock units issuable equity plan limited 625 shares aggregate 69 shares issued plan fiscal 2007 march 31 2007 447 stock options 7 restricted stock units outstanding plans cash received exercises stock options legg mason’s equity incentive plans 20690 128728 64088 years ended march 31 2007 2006 2005 respectively tax benefit expected realized tax deductions option exercises totaled 13965 104807 18342 years ended march 31 2007 2006 2005 respectively 2006 2005 amounts include amounts attributable discontinued operations weighted average fair value stock options granted fiscal 2007 2006 2005 using blackscholes option pricing model 3317 4090 2253 per share respectively following weighted average assumptions used model grants fiscal 2007 2006 2005 fiscal 2006 legg mason determined using combination implied historical volatility accurate measure expected volatility calculating blackscholes option values effective stock option grants made quarter ended december 31 2005 legg mason began estimating expected volatility equal weighting implied historical measures change accounting estimate material impact net income legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 45 million total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged earnings fiscal year ended march 31 2007 2006 2005 approximately 43 91 147 shares respectively purchased open market behalf participating employees october 17 2005 compensation committee legg mason approved grants senior officers options acquire 300 shares legg mason common stock exercise price 10400 per share subject certain conditions grants vest ratably july 17 four years following grant date options exercisable july 17 2009 legg mason common stock closed 12750 per share 30 consecutive trading days condition met fiscal 2006 options expire july 17 2013 weighted average fair value 3719 per share options included pro forma net income shown estimated grant date using monte carlo optionpricing model following assumptions july 19 2005 independent directors legg mason approved grant legg mason’s chairman chief executive officer options acquire 500 shares legg mason common stock exercise price 11153 per share subject certain conditions grant vest ratably four years starting effective grant date july 19 2005 subject continuing legg mason’s chairman chief executive officer least two years continuing provide agreedupon ongoing services legg mason two years thereafter options exercisable within four years grant date legg mason common stock closed 12750 per share 30 consecutive trading days condition met fiscal 2006 options expire eighth anniversary grant date fair value 4233 per share options granted included pro forma net income shown estimated date grant using monte carlo optionpricing model following assumptions monte carlo optionpricing model used value option grants order properly factor impact performance market conditions specified grant fiscal 2007 2006 2005 legg mason granted 289 547 138 shares restricted common stock respectively weighted average market value 10708 11762 6036 respectively per share restricted stock awards noncash transactions fiscal 2007 2006 2005 legg mason recognized 17039 6049 708 respectively compensation expense restricted stock awards related continuing operations fiscal 2006 2005 legg mason recognized 3408 2517 respectively compensation expense restricted stock awards related discontinued operations tax benefit expected realized tax deductions vesting restricted stock totaled 5320 1722 865 years ended march 31 2007 2006 2005 respectively unamortized compensation cost related unvested restricted stock awards 563 shares yet recognized march 31 2007 52031 expected recognized weightedaverage period 20 years deferred compensation payable shares legg mason common stock granted certain employees mandatory elective plans programs legg mason’s equity incentive plan vesting plans programs ranges immediate periods six years plans programs provide discounts 10 contributions dividends limit number shares authorized issued one remaining active deferred plan plans replaced similar programs legg mason’s equity incentive plan fiscal 2005 fiscal 2007 2006 2005 legg mason recognized 247 6635 12032 respectively compensation expense principally related discontinued operations deferred compensation arrangements payable shares common stock fiscal 2007 2006 2005 legg mason issued 46 112 308 shares respectively deferred compensation arrangements weightedaverage fair value per share grant date 8726 8369 6803 respectively 14 deferred compensation stock trust legg mason issued shares connection certain deferred compensation plans held rabbi trusts assets rabbi trusts consolidated employer value employer’s stock held rabbi trusts classified stockholders’ equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders’ equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2007 2006 1417 1933 respectively 15 earnings per share basic earnings per share “eps” calculated dividing net income weighted average number shares outstanding calculation weighted average shares includes common shares exchangeable common stock convertible preferred shares considered participating securities diluted eps similar basic eps adjusts effect potential common shares result acquisition cam quarter ended december 31 2005 legg mason issued 13346632 shares nonvoting convertible preferred stock convert upon transfer aggregate 133 million shares legg mason common stock nonvoting convertible preferred shares considered “participating securities” therefore included calculation weighted average shares outstanding following table presents computations basic diluted eps march 31 2007 2006 2005 options purchase 1086 741 1 shares respectively included computation diluted earnings per share presumed proceeds exercising options including related income tax benefits exceed average price common shares period therefore options deemed antidilutive basic diluted earnings per share fiscal years ended march 31 2007 2006 2005 include vested shares phantom stock related legg mason’s deferred compensation plans diluted earnings per share periods also include unvested shares phantom stock related plans unless shares deemed antidilutive march 31 2007 2006 2005 526 429 464 unvested shares phantom stock respectively deemed antidilutive therefore excluded computation diluted earnings per share per share information retroactively restated appropriate reflect september 2004 threefortwo stock split 16 accumulated comprehensive income accumulated comprehensive income includes cumulative foreign currency translation adjustments net tax gain interest rate swap net tax gains losses investment securities change accumulated translation adjustments fiscal 2007 2006 primarily resulted impact changes british pound brazilian real relation us dollar net assets legg mason’s united kingdom brazilian subsidiaries pound real functional currencies respectively summary legg mason’s accumulated comprehensive income march 31 2007 2006 follows 17 special purpose variable interest entities normal course business legg mason manager various types investment vehicles considered vies services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees legg mason sell transfer assets vies legg mason’s exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees vies material march 31 2007 2006 legg mason issued investment performance guarantees vies investors march 31 2007 2006 legg mason required consolidate vies material consolidated financial statements addition march 31 2007 2006 vies legg mason significant variable interest 18 business segment information legg mason global asset management company provides investment management related services wide array clients legg mason operates three divisions operating segments managed investments institutional wealth management economic characteristics products services offered production process distribution methods regulatory aspects division similar accordingly legg mason aggregates three divisions one reportable business segment asset management continuing operations asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution fees companysponsored investment funds included asset management along corresponding expense representing fees paid unaffiliated distributors funds including parties related parties prior sale legg mason principally operates united states united kingdom revenues expenses geographical purposes generally allocated based location office providing services results geographic region follows intangible assets net goodwill geographic region follows discontinued operations financial results discontinued operations’ business segments follows 1 represents distribution fees proprietary mutual funds historically reported private client reclassified asset management distribution fee revenue corresponding distribution expense reflect legg mason’s continuing role funds’ distributor fiscal year ended march 31 2006 net revenues net income legg mason’s private client capital markets businesses reflect activity eight months legg mason owned businesses results discontinued operations geographic region follows private client distributed wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds feebased account fees net interest customers’ margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets consisted legg mason’s equity fixed income institutional sales trading corporate public finance primary sources revenue equity fixed income institutional sales trading included commissions principal credits transactions corporate municipal products legg mason maintained proprietary fixed income equity securities inventory primarily facilitate customer transactions result recognized trading profits losses legg mason’s trading activities corporate finance revenues included underwriting fees advisory fees private placements mergers acquisitions sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also included realized unrealized gains losses investments acquired connection merchant investment banking activities quarterly financial data1 dollars thousands except per share amounts unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results may 21 2007 closing price legg mason’s common stock 10005 quarterly financial data1 continued dollars thousands except per share amounts unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2011 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework based assessment management concluded march 31 2011 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2011 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2011 mark r fetting chairman president chief executive officer peter h nachtwey chief financial officer senior executive vice president report independent registered public accounting firm board directors stockholders legg mason inc opinion accompanying consolidated balance sheets related consolidated statements income loss comprehensive income loss changes stockholders equity cash flows present fairly material respects financial position legg mason inc subsidiaries march 31 2011 march 31 2010 results operations cash flows three years period ended march 31 2011 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements 2011 company adopted new accounting guidance related consolidation variable interest entities companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 27 2011 consolidated balance sheets dollars thousands see notes consolidated financial statements consolidated statements income loss dollars thousands except per share amounts see notes consolidated financial statements consolidated statements changes stockholders equity dollars thousands see notes consolidated financial statements consolidated statements comprehensive income loss dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands consolidated statements cash flows continued dollars thousands see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see note 18 discussion vies material intercompany balances transactions eliminated certain amounts prior period financial statements reclassified conform current period presentation including amounts associated certain consolidated investment vehicles civs see consolidation note 18 additional information related civs unless otherwise noted per share amounts include common shares legg mason shares issued connection acquisition legg mason canada inc exchangeable common shares legg mason oneforone basis time may 2010 outstanding exchangeable shares exchanged shares legg mason common stock references fiscal 2011 2010 2009 refer legg masons fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america require management make assumptions estimates affect amounts reported financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes consolidation management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements consolidation effective april 1 2010 legg mason adopted new accounting guidance accounting standards codification asc topic 810 consolidation statement financial accounting standards 167 amendments financial accounting standards board interpretation 46r sfas 167 relating consolidation vies includes new approach determining consolidate vie changes necessary reassess consolidate vie changes assessment entities vies application new accounting guidance deferred certain investment funds including money market funds investment funds qualify deferral continue assessed consolidation prior guidance asc topic 810 consolidation financial accounting standards board interpretation 46r consolidation variable interest entities interpretation arb 51 fin 46r normal course business legg mason sponsors manager various types investment vehicles certain investment vehicles considered vies others considered voting rights entities vres subject traditional consolidation concepts based ownership rights services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees legg mason sell transfer assets vies vres legg masons exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees vies material march 31 2011 2010 legg mason issued investment performance guarantees vies vres investors investment vehicles considered vres consolidated legg mason controlling financial interest investment vehicle fin 46r sponsored investment funds including money market funds qualify deferral new accounting guidance legg mason determines primary beneficiary vie absorbs majority vies expected losses receives majority vies expected residual returns legg masons determination expected residual returns excludes gross fees paid decision maker unlikely legg mason primary beneficiary vies created manage assets clients qualify deferral unless legg masons ownership interest vie including interests related parties substantial unless legg mason may earn significant performance fees vie unless legg mason considered material implied variable interest determining whether primary beneficiary vie qualifies deferral legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees implied relationships determining primary beneficiary legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks determining whether vie significant disclosure purposes legg mason considers factors used determination primary beneficiary sfas 167 legg mason sponsors manager collateralized debt obligation entities cdos collateralized loan obligations clos qualify deferral assessed new accounting guidance follows legg mason determines whether variable interest vie considering among things obligation absorb losses right receive benefits expected significant vie legg mason also considers management fee structure including seniority level fees current expected economic performance entity well provisions included governing documents might restrict guarantee expected loss residual return legg mason significant variable interest determines primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits potentially could significant vie evaluating whether obligation absorb losses right receive benefits potentially could significant vie legg mason considers factors regarding design terms characteristics investment vehicles including limited following qualitative factors legg mason involvement investment vehicle beyond providing management services legg mason holds equity debt interests investment vehicle legg mason transferred assets investment vehicle potential aggregate fees future periods insignificant relative potential cash flows investment vehicle variability expected fees relation potential cash flows investment vehicle insignificant new accounting guidance prior guidance legg mason must consolidate vies deemed primary beneficiary new accounting guidance legg mason consolidated clo previously consolidated march 31 2011 legg masons consolidated balance sheet reflects 314617 assets 278320 debt issued clo despite fact assets cannot used legg mason legg mason obligated debt adoption impact net income attributable legg mason incs common shareholders addition legg masons consolidated cash flow statement year ended march 31 2011 reflects cash flows clo accordance new accounting guidance prior periods restated see note 18 additional information related application amended vie consolidation model required disclosures cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash restricted cash primarily represents cash collateral required market hedge arrangements cash available legg mason general corporate use financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except legg masons longterm debt equity investments legg mason control investee primary beneficiary variable interest entity exert significant influence financial operating policies investee legg mason follows equity method accounting evaluation whether legg mason exert control significant influence financial operational policies investees requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence may governing board investee legal rights investors entity pursuant funds operating documents relationship legg mason investors entity substantially legg masons equity method investees investment companies record underlying investments fair value therefore equity method accounting legg masons share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee legg masons share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense significant portion earnings losses attributable legg masons equity method investments offsetting compensation expense adjustments revenue sharing agreements therefore fluctuations market value investments material impact net income attributable legg mason inc legg mason also holds debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders equity noncontrolling interests comprehensive income net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium recorded interest method included interest income certain investment securities including held civs classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings equity fixed income securities classified trading availableforsale valued using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices legg mason evaluates nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist amount impairment relates credit losses recognized charge income march 31 2011 2010 2009 amount temporary unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations may readily available including certain investments held civs management estimates value securities using variety methods resources including current available financial information investment industry addition financial instruments described derivative instruments clo loans bonds debt described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair value longterm debt march 31 2011 2010 1322960 1265418 respectively fair values estimated using current market prices derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason used foreign exchange forwards interest rate swaps hedge risk movement exchange rates interest rates financial assets limited basis also legg mason used futures contracts index funds hedge market risk certain seed capital investments addition certain civs use derivative instruments however risk legg mason relation derivative assets liabilities civs excess investment funds legg mason applied hedge accounting defined accounting literature debt interest rate risk hedge matured fiscal 2009 adjustment cash flow hedge recorded comprehensive income loss matured time realized nonoperating income expense gains losses derivative instruments designated hedge accounting included income expense nonoperating income expense consolidated statements income except described gains losses derivative instruments civs recorded nonoperating income expense consolidated investment vehicles net consolidated statements income fiscal 2009 legg mason various credit support arrangements certain liquidity funds managed subsidiary arrangements included letters credit locs capital support agreements csas total return swap trs qualified derivative transactions fair values derivative instruments based expected outcomes derived pricing data underlying securities andor detailed collateral analyses based recent available information related derivative assets liabilities march 31 2011 2010 none derivative transactions designated hedge accounting defined accounting guidance related gains losses included fund support consolidated statement operations fair value measurements accounting guidance fair value measurements defines fair value establishes framework measuring fair value fair value defined exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date accounting guidance fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance fair value accounting guidance reaffirms objective fair value measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically reaffirms need use judgment ascertain formerly active market become inactive determining fair values markets become inactive accounting guidance also relates otherthan temporary impairments intended bring greater consistency timing impairment recognition also intended provide greater clarity investors credit noncredit components impaired debt securities expected sold guidance also requires increased timely disclosures regarding expected cash flows credit losses aging securities unrealized losses fair value accounting guidance also establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category may include repurchase agreements fixed income securities certain proprietary fund products category also includes clo loans liabilities civ level 3 financial instruments values based unobservable inputs including little market activity category includes derivative liabilities related fund support arrangements investments partnerships limited liability companies private equity funds previously included derivative assets related fund support arrangements certain owned securities issued structured investment vehicles sivs category may also include certain proprietary fund products redemption restrictions clo debt civ valuation asset liability may involve inputs one level hierarchy level fair value hierarchy fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products certain investments held civs valued net asset value nav determined applicable fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 fair values clo loans bonds determined based prices wellrecognized thirdparty pricing services utilize available market data therefore classified level 2 legg mason established controls designed assess reasonableness prices provided fair value clo debt valued using discounted cash flow methodology inputs used determine expected cash flows include assumptions forecasted default recovery rates market participant would use determining fair value clos underlying collateral assets given significance unobservable inputs fair value measurement clo debt valuation classified level 3 exchange traded options valued using last sale price absence sale last offering price options traded counter valued using dealer supplied valuations options classified level 1 futures contracts valued last settlement price end day exchange upon traded classified level 1 index single name credit default swaps interest rate swaps valued based valuations furnished pricing services classified level 2 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments reporting date transfers categories measured beginning period see note 3 additional information regarding fair value measurements fair value option legg mason elected fair value option certain eligible assets liabilities including corporate loans debt clo consolidating see note 18 management believes use fair value option eliminates certain timing differences better matches changes fair value assets liabilities related clo unrealized gains losses assets liabilities fair value option elected reported earnings decision elect fair value option determined instrument basis must applied entire instrument irrevocable elected assets liabilities measured fair value pursuant fair value option included assets liabilities consolidated investment vehicles consolidated balance sheets time company elected apply fair value option financial instruments appropriated retained earnings upon adoption new consolidation guidance related election fair value option eligible assets liabilities clo described legg mason recorded cumulative effect adjustment appropriated retained earnings consolidated investment vehicles consolidated balance sheets equal difference fair values clos assets liabilities difference recorded appropriated retained earnings investors clo legg mason shareholders ultimately realize benefits losses associated clo beginning april 1 2010 changes fair values clo assets liabilities recorded net income loss attributable noncontrolling interests consolidated statements income appropriated retained earnings consolidated investment vehicles consolidated balance sheets fixed assets fixed assets consist equipment software leasehold improvements capital lease assets equipment consists primarily communications technology hardware furniture fixtures software includes purchased software internally developed software fixed assets reported cost net accumulated depreciation amortization capital lease assets initially reported lesser present value related future minimum lease payments assets current fair value subsequently reduced accumulated depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements capital lease assets amortized depreciated initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill intangible assets consist principally asset management contracts manage proprietary funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife intangible assets goodwill amortized book purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events triggering event occurred company perform tests include critical reviews significant assumptions determine intangible assets goodwill impaired minimum company performs tests annually december 31 indefinitelife intangible assets goodwill considering factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment determined fair values intangible assets subject amortization reviewed reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level deemed impaired carrying amount reporting unit exceeds implied fair value estimating fair value reporting unit legg mason uses valuation techniques principally based discounted cash flows similar models employed analyzing purchase price acquisition target goodwill deemed recoverable reporting unit level also operating segment level legg mason defines americas international divisions results fact operating segment management reports chief executive officer manages business division level regularly receive discrete financial information operating results lower level asset management affiliate level allocations goodwill legg masons divisions management restructures acquisitions dispositions based relative fair values respective businesses restructured added sold divisions december 2010 legg mason announced realignment executive management team among things eliminate previous separation americas international divisions one global asset management business fiscal 2012 although company announced realignment executive management year march 31 2011 changes made internal reporting practices legg mason continued operate one reportable asset management segment two divisions americas international see note 5 additional information regarding intangible assets goodwill note 17 additional business segment information translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income gains losses resulting foreign currency transactions included net income investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients fees primarily based predetermined percentages market value assets management aum recognized period services performed may billed advance period earned based aum beginning billing period accordance related advisory contracts revenue associated advance billings deferred included current liabilities consolidated balance sheets recognized period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks recognized end performance measurement period accordingly neither advanced billings performance fees subject reversal legg mason responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution service fee expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc receipts recorded distribution servicing revenue received reduction unamortized balance deferred sales commissions corresponding expense management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2011 2010 2009 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 11339 15271 march 31 2011 2010 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforwards business combinations amortization accrued compensation applicable accounting guidance tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information companys accounting policy classify interest related tax matters interest expense related penalties operating expense see note 8 additional information regarding income taxes loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plans restricted stock awards marketbased performance shares payable common stock deferred compensation payable stock compensation plans legg mason issues equity awards directors officers key employees accordance applicable accounting guidance compensation expense includes costs nonvested sharebased awards grant date fair value amortized respective vesting periods straightline method legg mason determines fair value stock options using blackscholes optionpricing model exception marketbased performance grants valued monte carlo optionpricing model see note 12 additional information regarding stockbased compensation earnings per share basic earnings per share attributable legg mason inc common shareholders eps calculated dividing net income attributable legg mason inc weightedaverage number shares outstanding calculation weightedaverage shares includes common shares exchangeable common stock unvested sharebased payment awards considered participating securities contain nonforfeitable rights dividends diluted eps similar basic eps adjusts effect potential common shares unless antidilutive periods net loss potential common shares considered antidilutive see note 13 additional discussion eps restructuring costs may 2010 legg masons management committed plan streamline business model described note 16 costs anticipated connection plan primarily relate employee termination benefits incentives retain employees transition period contract termination costs termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statements income compensation items require employees provide future service therefore expensed ratably required service period contract termination costs expensed incurred noncontrolling interests noncontrolling interests related civs classified redeemable noncontrolling interests investors funds may request withdrawals time redeemable noncontrolling interests years ended march 31 2011 2010 follows recent accounting developments following relevant accounting pronouncements recently issued may 12 2011 fasb issued update clarifies modifies existing fair value measurement disclosure requirements update includes required qualitative disclosures sensitivity fair value measurements changes unobservable inputs level 3 categorization level fair value hierarchy items measured fair value balance sheet fair value required disclosed debt update effective legg mason fiscal 2013 currently expected material impact legg masons consolidated financial statements december 2010 fasb issued update clarifies goodwill impairment testing requirements update effective legg masons fiscal 2012 legg mason currently expect guidance material effect recorded goodwill january 2010 fasb issued update requires new disclosures recurring nonrecurring fair value measurements new disclosures include significant transfers level 1 2 measurements change current disclosure requirement level 3 measurement activity net basis gross basis amendment also clarifies existing disclosure guidance level disaggregation inputs valuation techniques new revised disclosures effective legg mason fiscal 2011 except revised disclosures level 3 measurement activity effective legg mason fiscal 2012 disclosures expected material impact legg masons consolidated financial statements 2 acquisitions dispositions effective november 1 2005 legg mason acquired 80 outstanding equity permal leading global fundsofhedge funds manager concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares legg mason owning 100 outstanding voting common stock permal fiscal 2010 legg mason paid aggregate 170804 cash acquire remaining 625 outstanding preference shares company also elected purchase 9000 rights sellers preference shares receive earnout payment 149200 two years result transaction payments permal acquisition addition fiscal 2010 2009 legg mason paid aggregate amount 15048 dividends preference shares payments preference shares including dividends recognized additional goodwill april 2008 legg mason completed sale citigroup global markets inc affiliate citigroup acquired majority overlay implementation business legg mason private portfolio group including managed account trading technology platform sale produced cash proceeds approximately 181147 transaction costs gain sale business approximately 5540 3435 tax recognized nonoperating income expense fiscal 2009 connection purchase private capital management fiscal 2007 legg mason paid available cash maximum fifth anniversary payment 300000 150000 remained escrow subject certain limited clawback provisions fiscal 2010 fiscal 2009 remaining contingency settled releasing approximately 30000 sellers returning approximately 120000 legg mason recorded reduction goodwill 3 investments fair values assets liabilities disclosures include details legg masons assets liabilities measured fair value excluding assets liabilities civs see note 18 variable interest entities consolidation investment vehicles information related assets liabilities civs measured fair value legg mason investments debt equity securities generally classified availableforsale trading described note 1 investments march 31 2011 2010 follows 1includes trading investments deferred compensation plans 120107 118096 respectively equity method investments deferred compensation plans 48528 49031 respectively remainder represents seed investments proprietary fund products 2includes investments private equity securities readily determinable fair values net unrealized realized gain loss investment securities classified trading 28355 125395 2003043 fiscal 2011 2010 2009 respectively realized unrealized losses fiscal 2009 primarily relate losses sivissued securities purchased certain liquidity funds legg masons availableforsale investments consist mortgage backed securities us government agency securities equity securities gross unrealized gains losses investments classified availableforsale 157 186 respectively march 31 2011 172 33 respectively march 31 2010 legg mason uses specific identification method determine cost security sold amount reclassified accumulated comprehensive income earnings proceeds gross realized gains losses sales maturities available forsale investments follows legg mason investments classified heldtomaturity march 31 2011 2010 fair values financial assets liabilities company determined using following categories inputs march 31 2011 2010 1cash equivalents include highly liquid investments original maturities 90 days less cash investments actively traded money market funds measured nav classified level 1 cash investments time deposits measured amortized cost approximates fair value short time purchase instrument expected realization classified level 2 2primarily mutual funds minimal market risk company change value offset adjustment compensation expense related liability 3total proprietary fund products investments represent primarily mutual funds invested approximately 60 40 equity debt securities march 31 2011 respectively invested approximately 63 37 equity debt securities march 31 2010 respectively 4includes investments equity method approximates fair value relating longterm incentive compensation plans 48528 49031 march 31 2011 2010 respectively proprietary fund products investments 27812 25249 march 31 2011 2010 respectively classified investment securities consolidated balance sheets table presents summary changes financial assets liabilities measured fair value using significant unobservable inputs level 3 periods march 31 2010 march 31 2011 march 31 2009 march 31 2010 realized unrealized gains losses recorded level 3 investments included fund support income expense consolidated statements income change unrealized gains losses relating level 3 assets liabilities still held reporting date 11472 35026 years ended march 31 2011 2010 respectively significant transfers levels 1 2 year ended march 31 2011 practical expedient legg mason relies net asset value certain investments fair value net asset values provided investees derived fair values underlying investments reporting date following table summarizes march 31 2011 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 173 monthly redemption 27 quarterly redemption 34 subject twoyear lockup 2liquidations expected remaining term 382 twoyear remaining term 18 20year remaining term current plans sell investments 4 fixed assets following table reflects components fixed assets march 31 connection restructuring plans discussed note 16 legg mason concluded year ended march 31 2011 longer intends exercise putpurchase option land building serves operations technology facility accounted capital lease fiscal 2010 result decision 4134 escrow deposit charged occupancy expense transitionrelated cost effective december 31 2010 lease accounted operating lease depreciation amortization expense related fixed assets 79835 91309 101957 fiscal 2011 2010 2009 respectively 5 intangible assets goodwill indefinitelife intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair value assets exceeds book value intangible assets subject amortization considered impairment reporting period fair value less book value legg mason record impairment charge following tables reflect components intangible assets march 31 march 31 2011 management contracts amortized weightedaverage life 36 years estimated amortization expense next five fiscal years follows change indefinitelife intangible assets attributable impact foreign currency translation legg mason completed recent annual impairment tests indefinitelife intangible assets december 31 2010 determined impairment value assets fiscal 2011 also determined triggering events occurred march 31 2011 would require impairment testing change carrying value goodwill summarized legg mason completed recent annual impairment test goodwill december 31 2010 determined impairment value assets fiscal 2011 legg mason also determined triggering events occurred march 31 2011 would require impairment testing based earnings permal november 2009 legg mason paid 170804 81000 accrued fiscal 2008 fourth anniversary payment purchase contract acquisition remaining preference shares issued permal recognized corresponding increase goodwill addition december 2009 legg mason elected purchase 9000 rights sellers preference shares receive earnout payment sixth anniversary november 2011 149200 9000 purchase amount represents fair value obligation also resulted increase goodwill legg mason also recognizes tax benefit amortization excess tax basis related cam acquisition accordance accounting guidance income taxes tax benefit recorded reduction goodwill deferred tax liabilities benefit realized 6 shortterm borrowings march 2009 legg mason repaid 250000 500000 outstanding borrowings 1000000 revolving credit facility also amended decrease maximum amount facility 500000 february 11 2010 revolving credit agreement amended extend expiration commitments maturity date loans outstanding february 2013 march 31 2011 2010 revolving credit facility rate libor plus 2625 basis points effective interest rate 29 facility rate may change future based changes legg masons credit ratings libor rates march 31 2011 2010 250000 outstanding facility companys revolving credit facility substantially lenders 550000 fiveyear term loan repaid full fiscal 2010 described note 7 facility standard financial covenants revised fiscal 2010 including maximum net debt ebitda ratio 25 previously 30 gross debt minimum ebitda interest ratio 40 march 31 2011 legg masons net debt ebitda ratio 11 ebitda interest expense ratio 129 legg mason maintained compliance applicable covenants determined compliance covenants may pressure number actions may taken including reducing expenses increase ebitda using available cash repay portion 250000 outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt subsidiary legg mason maintains credit line general operating purposes may 2010 maximum amount may borrowed credit line increased 12000 15000 borrowings outstanding facility march 31 2011 2010 another subsidiary legg mason 100000 oneyear revolving credit agreement general operating purposes expired september 2009 borrowings outstanding 7 longterm debt disclosures include details legg masons debt excluding debt civs see note 18 variable interest entities consolidation investment vehicles information related debt civs accreted value longterm debt consists following 25 convertible senior notes related hedge transactions january 14 2008 legg mason sold 1250000 25 convertible senior notes bear interest 25 payable semiannually cash legg mason accreting carrying value principal amount maturity using imputed interest rate 65 effective borrowing rate nonconvertible debt time issuance expected life seven years resulting additional interest expense fiscal 2011 2010 2009 36688 34445 32340 respectively notes convertible certain conditions met initial conversion rate 113636 shares legg mason common stock per one thousand dollar principal amount notes equivalent conversion price approximately 8800 per share maximum 14205 shares subject adjustment unconverted notes mature par january 2015 upon conversion one thousand dollar principal amount note holder receive cash amount equal one thousand dollars less conversion value note conversion value exceeds principal amount note conversion legg mason also deliver election cash common stock combination cash common stock conversion value excess one thousand dollars amount accreted value notes exceeds ifconverted value march 31 2011 representing potential loss approximately 121690 using current interest rate 350 agreement governing issuance notes contains certain covenants benefit initial purchaser notes including leverage interest coverage ratio requirements may result notes becoming immediately due payable covenants met leverage covenant waived accommodate equity units issuance may 2008 waiver expire june 2011 otherwise legg mason maintained compliance applicable covenants connection sale notes january 14 2008 legg mason entered convertible note hedge transactions respect common stock purchased call options financial institution counterparties hedge providers purchased call options exercisable solely connection conversions notes event market value per share legg mason common stock time exercise greater exercise price purchased call options equal 88 conversion price notes subject adjustment simultaneously separate transactions legg mason also sold hedge providers warrants purchase aggregate subject adjustment 14205 shares common stock net share settled basis exercise price 10746 per share common stock purchased call options warrants part terms notes affect holders rights notes hedging transactions net cost approximately 83000 paid proceeds notes recorded reduction additional paidin capital notes converted market price per share legg mason common stock exceeds 88 exercise price purchased call options purchased call options entitle legg mason receive hedge providers shares legg mason common stock cash combination shares common stock cash match shares cash legg mason must deliver terms notes additionally time market price per share legg mason common stock exceeds 10746 exercise price warrants legg mason required deliver hedge providers net shares common stock amount based excess market price per share common stock exercise price warrants transactions effectively increase conversion price notes 10746 per share common stock legg mason contractual rights execution related agreements ability settle obligations conversion feature notes purchased call options warrants legg mason common stock accordingly transactions accounted equity subsequent adjustment changes value obligations 56 senior notes equity units may 2008 legg mason issued 23000 equity units 1150000 approximately 50000 used pay issuance costs unit consists 5 interest one thousand dollar principal amount 56 senior notes due june 30 2021 detachable contract purchase varying number shares legg masons common stock 50 june 30 2011 notes purchase contracts separate distinct instruments terms structured simulate conversion debt equity potentially remarketed debt approximately three years issuance holders obligations purchase shares legg masons common stock collateralized pledge notes prescribed collateral connection issuance equity units legg mason incurred issuance costs 36200 27600 allocated equity component equity units recorded reduction additional paidin capital notes considered mandatorily convertible commitment purchase shares legg masons common stock holders also receive quarterly payments referred contract adjustment payments cap fixed annual rate 14 commitment amount threeyear contract term upon issuance equity units legg mason recognized approximately 45800 liability fair value obligation based upon discounted cash flows pay unitholders quarterly contract adjustment payment amount also represented fair value legg masons commitment contract issue shares common stock future designated prices recorded reduction additional paidin capital cap obligation liability accreted approximate threeyear contract term charges interest expense based constant rate calculation subsequent contract adjustment payments reduce cap obligation liability march 31 2011 2010 168 1610 respectively included liabilities consolidated balance sheets decrease cap obligation liability primarily due equity unit extinguishment discussed purchase contract obligates legg mason sell number newly issued shares common stock based settlement rate determined legg masons stock price purchase date settlement rate adjusts price legg mason stock way intended maintain original investment value legg masons common stock priced 5630 6756 per share settlement rate 07401 shares legg mason common stock subject adjustment equity unit market value legg mason common stock 6756 settlement rate 08881 shares legg mason common stock subject adjustment equity unit market value legg mason common stock 5630 market value legg mason common stock 5630 6756 settlement rate number shares legg mason common stock equal 50 divided market value september 2009 quarter legg mason completed tender offer retired 91 outstanding equity units 20939 units including extinguishment 1050000 outstanding 56 senior notes termination related purchase contracts exchange issuance approximately 18596 shares legg mason common stock payment approximately 130870 cash payment allocated liability equity components equity units based relative fair values resulting loss debt extinguishment approximately 22040 including noncash charge approximately 6355 accelerated expense deferred issue costs decrease additional paidin capital approximately 115186 maximum number shares may issued remaining equity units subject adjustment approximately 1830 purchase contracts deemed equity upon issuance legg mason incur gain loss outstanding equity units settled accordance original terms shares legg masons common stock issuable equity unit purchase contracts currently antidilutive treasury stock method market price legg mason common stock less 6756 per share event probability successful remarketing equity unit notes becomes remote amount shares issuable purchase contracts must included diluted earnings per share would determined ifconverted method legg mason required attempt remarket notes june 30 2011 upon successful remarketing interest rate maturity date senior notes reset notes may remain outstanding time exercise purchase contracts related issuance legg mason common shares remarketing successful period note holders put notes par legg mason upon settlement purchase contracts notes redeemed remarketed june 30 2013 called par legg mason legg mason process evaluating options remarketing senior notes june 30 2011 thirdparty distribution financing july 31 2006 subsidiary legg mason entered fouryear agreement financial institution finance nonrecourse basis 90700 commissions paid financial intermediaries connection sales certain share classes proprietary funds april 2009 legg mason terminated agreement balance outstanding march 31 2011 fiveyear term loan october 14 2005 legg mason entered unsecured term loan agreement amount exceed 700000 legg mason used term loan pay portion purchase price including acquisition related costs acquisition cam fiscal 2008 2007 legg mason repaid aggregate 150000 outstanding borrowings term loan make payments fiscal 2009 january 2010 legg mason repaid full 550000 remaining outstanding borrowings term loan term loans subsidiary legg mason entered loan fiscal 2005 finance leasehold improvements outstanding balance march 31 2010 2349 paid full october 31 2010 fiscal 2006 subsidiary legg mason entered 12803 term loan agreement finance aircraft loan bears interest 59 secured aircraft maturity date january 1 2016 outstanding balance march 31 2011 9363 march 31 2011 aggregate maturities longterm debt based contractual terms follows 8 income taxes components income loss income tax provision benefit follows components income tax expense benefit follows legg mason received approximately 580000 tax refunds june 2009 quarter primarily attributable utilization 1600000 realized losses incurred fiscal 2009 sale securities issued sivs federal legislation enacted november 2009 temporarily extend net operating loss carryback period two five years enabled legg mason utilize additional 1300000 net operating loss deductions result additional 459000 tax refunds received january 2010 reconciliation difference effective income tax rate statutory federal income tax rate follows 1certain prior year amounts reclassified conform current year presentation 2state income taxes include changes valuation allowances net impact deferred tax assets changes state apportionment factors planning strategies effect foreign tax rates also includes changes valuation allowances quarter ended september 30 2010 united kingdom uk enacted finance act 2010 reduced corporate tax rate 28 27 tax periods commencing april 1 2011 impact prior deferred tax assets liabilities time change fiscal 2011 onetime tax benefit approximating 8900 although yet enacted additional proposed reductions uk corporate tax rate 26 fiscal 2012 25 fiscal 2013 expected one percentage point reduction uk corporate tax rate result tax benefit approximately 8900 time enactment based amount deferred tax assets liabilities march 31 2011 revalued new rate deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows certain tax benefits associated legg masons employee stock plans recorded directly stockholders equity tax benefit recorded equity 2009 2010 2011 due net operating loss position company march 31 2011 additional 4700 net operating loss recognized increase stockholders equity ultimately realized connection completion filing fiscal 2010 federal tax return december 2010 legg mason recorded net additional tax benefit approximately 36000 respect equity unit extinguishment occurred fiscal 2010 tax benefit increases additional paidin capital manner consistent fiscal 2010 allocation extinguishment payment legg mason various loss carryforwards may provide future tax benefits related valuation allowances established accordance accounting guidance income taxes managements opinion likely benefits realized substantially legg masons deferred tax assets relate us united kingdom uk taxing jurisdictions march 31 2011 us federal deferred tax assets aggregated 683200 realization expected require approximately 4600000 future us earnings approximately 129000 must form foreign source income based estimates future taxable income using assumptions consistent used legg masons goodwill impairment testing likely current federal tax benefits relating net operating losses realizable valuation allowance necessary time respect resulting foreign tax credits likely tax benefits relating 4800 foreign tax credits realized valuation allowance 3131 established fiscal 2011 march 31 2011 us state deferred tax assets aggregated 221700 due limitations net operating loss capital loss carryforwards taking consideration certain state tax planning strategies valuation allowance established state capital loss net operating loss benefits certain jurisdictions additional valuation allowance 700 recorded fiscal 2011 due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary march 31 2011 uk deferred tax assets net valuation allowances material additional valuation allowance 3024 recorded foreign deferred tax assets relating various jurisdictions principally relating foreign currency translation adjustments recognized equity extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets tax planning may enhance legg masons tax positions realization current tax benefits dependent significant tax strategies following deferred tax assets valuation allowances relating carryforwards recorded march 31 2011 2010 respectively 1due permal acquisition structure periods prior december 1 2009 us subsidiaries permal filed separate federal income tax returns apart legg mason incs consolidated federal income tax return separate state income tax returns 2substantially us state net operating losses carryforward fiscal 2029 3due potential change factors relating apportionment income various states companys effective state tax rates subject fluctuation impact value companys deferred tax assets including net operating losses could material impact future effective tax rate company legg mason total gross unrecognized tax benefits approximately 77653 51027 43662 march 31 2011 2010 2009 respectively totals approximately 53500 40600 33900 respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 2011 2010 2009 follows although management cannot predict degree certainty timing ultimate resolution matters review various taxing jurisdictions reasonably possible companys gross unrecognized tax benefits balance may change within next twelve months 33500 result expiration statutes limitation completion tax authorities exams company accrues interest related unrecognized tax benefits interest expense recognizes penalties operating expense years ended march 31 2011 2010 2009 company recognized approximately 3000 2200 5400 respectively substantially interest march 31 2011 2010 2009 legg mason approximately 9000 6000 5000 respectively accrued interest penalties tax contingencies consolidated balance sheets legg mason examination internal revenue service tax authorities various states following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal 2005 us federal fiscal 2005 united kingdom fiscal 2003 state california fiscal 2005 state new york fiscal 2007 states connecticut maryland massachusetts company anticipate making significant cash payments settlement audits prior year legg mason initiated plans repatriate earnings certain foreign subsidiaries 225000 189000 yet repatriated legg mason still intends repatriate earnings create foreign source income order utilize foreign tax credits may otherwise expire unutilized repatriation beyond original 225000 foreign earnings contemplated except noted legg mason intends permanently reinvest cumulative undistributed earnings nonus subsidiaries nonus operations accordingly us federal income taxes provided undistributed earnings extent permanently reinvested legg masons nonus operations practical time determine income tax liability would result upon repatriation earnings 9 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2025 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2011 minimum annual aggregate rentals operating leases servicing agreements follows minimum rental commitments table reduced 148556 minimum sublease rentals received future noncancelable subleases approximately 55 due one counterparty subtenant defaults sublease legg mason may incur operating charges reflect expected future sublease rentals reduced amounts result current commercial real estate market minimum rental commitments includes 967688 real estate leases equipment leases 93878 service maintenance agreements discussed note 4 connection restructuring plans legg mason longer intends exercise putpurchase option land building treated capital lease march 31 2011 remaining rental commitment facility included table included table 13337 commitments related office space vacated subleases pursued lease liability adjusted fiscal 2011 2010 reflect present value excess existing lease obligations estimated sublease income related costs lease liability takes consideration various assumptions including amount time take secure sublease agreement prevailing rental rates applicable real estate markets related costs incurred fiscal 2011 2010 aggregated 2587 19331 respectively following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes period provided landlord free rent period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2011 2010 legg mason commitments invest approximately 23381 45697 respectively limited partnerships make private investments commitments funded required end respective investment periods ranging fiscal 2018 normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications legg masons maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also received subpoenas currently involved governmental selfregulatory agency inquiries investigations proceedings involving asset management activities accordance guidance accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings probable loss incurred reasonable estimate loss made citigroup transaction legg mason transferred citigroup subsidiaries constituted private clientcapital markets pccm businesses thus transferring entities would primary liability customer complaint litigation regulatory liabilities proceedings arising businesses however part transaction legg mason agreed indemnify citigroup customer complaint litigation regulatory liabilities legg masons former pccm businesses result preclosing events ultimate resolution matters cannot currently determined based current information consultation legal counsel management believes accrual range reasonably possible losses march 31 2011 2010 material similarly although citigroup transferred legg mason entities would primarily liable customer complaint litigation regulatory liabilities proceedings cam business citigroup agreed indemnify legg mason customer complaint litigation regulatory liabilities cam business result preclosing events ultimate resolution matters cannot currently determined opinion management consultation legal counsel legg mason believes resolution actions material adverse effect legg masons financial condition due part preliminary nature certain matters legg mason currently unable estimate amount range potential losses matters results operations cash flows could materially affected period matter ultimately resolved addition ultimate costs litigationrelated charges vary significantly period depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement march 31 2011 2010 legg masons liability losses contingencies 500 21500 respectively fiscal 2011 2010 2009 legg mason recorded litigation related charges approximately 2500 21200 600 respectively charge fiscal 2010 primarily represents 19000 accrual affiliate investor settlement settled fiscal 2011 fiscal 2011 2010 2009 liability reduced settlement payments approximately 23500 1500 500 respectively 10 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees primary plan legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation 50 match employee 401k contributions 6 employee compensation maximum five thousand dollars per year profit sharing matching contributions amounted 22739 18199 fiscal 2011 2010 respectively matching contributions amounted 14366 fiscal 2009 legg mason elected make profit sharing contribution fiscal 2009 addition employees make voluntary contributions certain plans 11 capital stock march 31 2011 authorized numbers common preferred exchangeable shares 500000 4000 unlimited number respectively march 31 2011 2010 14557 16377 shares common stock respectively reserved issuance legg masons equity plans march 31 2010 1099 common shares reserved exchangeable shares issued connection acquisition legg mason canada inc exchangeable shares exchangeable time holder oneforone basis shares legg masons common stock included basic shares outstanding may 2010 outstanding exchangeable shares converted shares legg mason common stock may 10 2010 legg mason announced board directors replaced existing stock buyback authority purchase 1 billion worth legg mason common stock expiration date attached new authorization fiscal 2011 legg mason entered separate accelerated share repurchase agreements asr agreements two financial institutions repurchase aggregate 300000 legg mason common stock asr agreements legg mason received 10147 shares common stock shares purchased asr agreements retired upon receipt fiscal 2011 legg mason also purchased retired 4405 shares common stock open market 145067 remaining balance authorized stock buyback 554933 discussed note 7 may 2008 legg mason issued 1150000 equity units unit consisting 5 interest one thousand dollar principal amount senior notes due june 30 2021 purchase contract committing holder purchase shares legg masons common stock june 30 2011 fiscal 2010 legg mason issued approximately 18596 shares equity unit tender offer exchange 91 outstanding equity units march 31 2011 maximum amount shares could issued reserved issuance approximately 1830 subject adjustment also discussed note 7 january 2008 legg mason issued 1250000 25 contingent convertible senior notes certain conditions met could result issuance maximum approximately 14205 shares legg mason common stock subject adjustment changes common stock shares exchangeable common stock three years ended march 31 2011 2010 2009 follows dividends declared per share 020 012 096 fiscal 2011 2010 2009 respectively dividends declared paid march 31 2011 2010 2009 8990 4844 34043 respectively included current liabilities 12 stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plans restricted stock awards units performance shares payable common stock deferred compensation payable stock effective july 28 2009 number shares authorized issued legg masons active equity incentive stock plan increased 6000 35000 shares available issuance march 31 2011 8304 options legg masons employee stock plans granted prices less 100 fair market value options generally exercisable equal increments three five years expire within five ten years date grant compensation expense relating stock options years ended march 31 2011 2010 2009 19926 17281 22224 respectively related income tax benefit years ended march 31 2011 2010 2009 7718 6221 8710 respectively stock option transactions legg masons equity incentive plans years ended march 31 2011 2010 2009 respectively summarized total intrinsic value options exercised years ended march 31 2011 2010 2009 6977 229 11102 respectively march 31 2011 aggregate intrinsic value options outstanding 17010 following information summarizes legg masons stock options outstanding march 31 2011 march 31 2011 2010 2009 options exercisable 2860 2810 2811 shares respectively weightedaverage exercise prices 7720 7357 6464 respectively stock options exercisable march 31 2011 weightedaverage remaining contractual life 33 years march 31 2011 aggregate intrinsic value options exercisable 4207 following information summarizes legg masons stock options exercisable march 31 2011 following information summarizes unvested stock options legg masons equity incentive plans year ended march 31 2011 1stock options granted prior fiscal 2011 vest july year beginning fiscal 2011 stock options granted vest may year unamortized compensation cost related unvested options march 31 2011 28207 expected recognized weightedaverage period 19 years cash received exercises stock options legg masons equity incentive plans 12094 1829 25463 years ended march 31 2011 2010 2009 respectively tax benefit expected realized tax deductions option exercises totaled 2645 73 3889 years ended march 31 2011 2010 2009 respectively weightedaverage fair value stock options granted fiscal 2011 2010 2009 using blackscholes optionpricing model 1432 1209 1336 per share respectively following weightedaverage assumptions used model grants fiscal 2011 2010 2009 legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 4500 total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged earnings fiscal years ended march 31 2011 2010 2009 approximately 102 147 188 shares respectively purchased open market behalf participating employees fiscal 2011 2010 2009 legg mason recognized 286 313 418 respectively compensation expense related stock purchase plan january 28 2008 compensation committee legg mason approved grants senior officers 120 marketbased performance shares upon vesting subject certain conditions distributed shares common stock grants vest ratably january 28 five years following grant date upon attaining service criteria stock price hurdles beginning 7797 year one ending 11415 year five weightedaverage fair value per share awards 1181 estimated grant date using grant price 7088 monte carlo optionpricing model following assumptions connection termination senior officer fiscal 2009 20 performance shares voluntarily forfeited resulting charge 550 representing acceleration expense associated unvested portion award restricted stock restricted stock unit transactions years ended march 31 2011 2010 2009 respectively summarized restricted stock restricted stock unit awards noncash transactions fiscal 2011 2010 2009 legg mason recognized 35770 27233 32629 respectively compensation expense related tax benefits 13854 9804 12787 respectively restricted stock restricted stock unit awards unamortized compensation cost related unvested restricted stock restricted stock unit awards 2637 shares yet recognized march 31 2011 53393 expected recognized weightedaverage period 18 years legg mason also equity plan nonemployee directors equity plan directors may elect receive shares stock restricted stock units prior july 19 2007 amendment plan directors could also elect receive stock options granted old plan immediately exercisable price equal market value shares date grant term ten years fiscal 2011 2010 2009 legg mason recognized expense 1425 1575 1400 respectively awards plan shares options restricted stock units issuable equity plan limited 625 shares aggregate 232 shares issued plan march 31 2011 march 31 2011 nonemployee directors held 220 stock options included outstanding options presented table march 31 2011 nonemployee directors held 62 restricted stock units vest grant date therefore included unvested shares restricted stock restricted stock units table 9 stock options exercised 7 restricted stock units distributed fiscal 2011 17 restricted stock units 31 shares common stock granted fiscal 2011 59 stock options restricted stock units cancelled forfeited fiscal 2011 deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends limit number shares authorized issued plan fiscal 2011 2010 2009 legg mason recognized 263 176 322 respectively compensation expense related plan fiscal 2011 2010 2009 legg mason issued 77 128 125 shares respectively plan weightedaverage fair value per share grant date 2838 2253 3962 respectively legg mason issued shares connection certain deferred compensation plans held rabbi trusts assets rabbi trusts consolidated employer value employers stock held rabbi trusts classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trusts corresponding liability related deferred compensation plans presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trusts march 31 2011 2010 3196 2205 respectively part companys restructuring initiative discussed note 16 employment certain recipients stock option restricted stock awards terminated termination benefits extended employees include accelerated vesting portion equity incentive awards would vested january 1 2012 original terms awards fiscal 2011 portion awards subject accelerated vesting revalued expensed new vesting period impact included also connection restructuring initiative departure executive officer december 2010 resulted accelerated vesting portion certain equity incentive awards impact also included 13 earnings per share basic earnings per share calculated dividing net income loss attributable legg mason inc weightedaverage number shares outstanding calculation weightedaverage shares includes common shares exchangeable common stock unvested restricted shares deemed participating securities diluted eps similar basic eps adjusts effect potential common shares except inclusion antidilutive situations net loss reported inclusion potentially issuable common shares decrease net loss per share since would antidilutive shares excluded calculation fiscal 2011 legg mason purchased retired 14552 shares common stock asr agreements open market purchases 9088 shares excluded weightedaverage shares outstanding year ended march 31 2011 august 2009 legg mason issued 18596 shares common stock equity units tender offer 11565 shares included weightedaverage shares outstanding year ended march 31 2010 following table presents computations basic diluted eps diluted eps calculations years ended march 31 2011 2010 exclude potential common shares issuable convertible 25 senior notes convertible equity units market price legg mason common stock exceeded price conversion either instrument would dilutive using treasury stock method also diluted eps calculation fiscal year ended march 31 2009 excludes 6629 potential common shares antidilutive due net loss fiscal year options purchase 5204 shares 5130 shares fiscal years ended march 31 2011 2010 respectively included computation diluted earnings per share presumed proceeds exercising options including related income tax benefits exceed average price common shares fiscal year therefore options deemed antidilutive also march 31 2011 2010 2009 warrants issued connection convertible note hedge transactions described note 7 excluded calculation diluted earnings per share effect would antidilutive march 31 2011 2061 23000 equity units issued may 2008 include purchase warrants providing issuance 1525 1830 shares legg mason common stock june 2011 remain outstanding fully described note 7 14 accumulated comprehensive income accumulated comprehensive income includes cumulative foreign currency translation adjustments net tax gains losses investment securities change accumulated translation adjustments fiscal 2011 2010 primarily resulted impact changes brazilian real japanese yen british pound singapore dollar australian dollar relation us dollar net assets legg masons subsidiaries brazil japan united kingdom singapore australia real yen pound singapore dollar australian dollar functional currencies respectively summary legg masons accumulated comprehensive income march 31 2011 2010 follows 15 derivatives hedging disclosures detail legg masons derivatives hedging excluding derivatives hedging civs see note 18 variable interest entities consolidation investment vehicles information related derivatives hedging civs legg mason continues use currency forwards economically hedge risk movements exchange rates primarily us dollar euro great britain pound canadian dollar japanese yen singapore dollar brazilian real consolidated balance sheets legg mason nets fair value certain foreign currency forwards executed counterparty legg mason legal right intent settle contracts net basis legg mason also uses market hedges certain seed capital investments entering futures contracts sell index funds benchmark hedged seed capital investments open futures contracts required cash collateral 7099 2185 march 31 2011 2010 respectively following table presents fair value march 31 2011 2010 derivative instruments designated hedging instruments classified assets liabilities following table presents gains losses recognized derivative instruments years ended march 31 2011 2010 16 restructuring may 2010 legg mason announced plan streamline business model drive increased profitability growth includes 1 transitioning certain shared services investment affiliates closer actual client relationships 2 sharing affiliate revenue americas distribution group plan involves headcount reductions operations technology administrative areas may partially offset headcount increases affiliates ultimately enable legg mason eliminate portion corporate office space dedicated operations technology employees legg mason expects initiative substantially complete fiscal 2012 initiative involves transitionrelated costs primarily comprised charges employee termination benefits retention incentives transition period recorded transitionrelated compensation transitionrelated costs also involve costs including charges consolidating leased office space early contract terminations asset disposals professional fees recorded appropriate operating expense classifications total transitionrelated costs expected range 115000 135000 charges transitionrelated costs 54434 year ended march 31 2011 primarily represent costs severance retention incentives substantially remaining costs accrued fiscal 2012 table presents summary changes transitionrelated liability march 31 2010 march 31 2011 cumulative charges incurred march 31 2011 including noncash charges asset writeoffs 1includes stockbased compensation expense writeoffs capitalized costs primarily internallydeveloped software longer utilized result initiative estimates remaining transitionrelated costs follows management expects total estimated costs within range disclosed nature costs may differ presented 17 business segment information legg mason global asset management company provides investment management related services wide array clients company operates one reportable business segment asset management asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks legg mason operates two operating segments divisions americas international primarily based geographic location advisor domicile fund families manage americas division consists usdomiciled fund families separate account businesses usbased investment affiliates domestic distribution organization similarly international division consists fund complexes distribution teams investment affiliates located outside us primarily united kingdom december 2010 legg mason announced realignment executive management team among things eliminate previous separation americas international divisions one global asset management business fiscal 2012 although executive management realignment announced fiscal 2011 march 31 2011 changes made internal reporting practices legg mason continued operate one reportable business segment asset management two divisions americas international table reflects revenues longlived assets geographic region thousands march 31 18 variable interest entities consolidation investment vehicles legg mason investment manager cdosclos considered vies new accounting guidance since investors structures lack unilateral decision making authority investment vehicles created sole purpose issuing collateralized instruments offer investors opportunity returns vary risk level investment legg masons management fee structure investment vehicles typically includes senior management fee may also include subordinated incentive management fees legg mason holds equity interest investment vehicles sell transfer assets investment vehicles accordance methodology described note 1 legg mason concluded collateral management agreements represent variable interest two investment vehicles clos primarily due level subordinated fees considering factors described note 1 legg mason concluded primary beneficiary one two clos resulted consolidation legg masons financial statements april 1 2010 collateral assets vie primarily comprised investments corporate loans lesser extent bonds assets clo cannot used legg mason gains losses related assets impact net income attributable legg mason inc liabilities vie primarily comprised debt clos debt holders recourse assets clo recourse general credit assets legg mason addition legg mason primary beneficiary one sponsored investment fund vie held controlling financial interest two sponsored investment fund vres consolidated march 31 2011 march 31 2010 legg mason consolidated sponsored investment fund vie one sponsored investment fund vres legg masons investment civs march 31 2011 march 31 2010 53708 61864 respectively represents maximum risk loss excluding uncollected advisory fees assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds following tables reflect impact civs consolidated balance sheets march 31 2011 march 31 2010 consolidated statements income fiscal year ended march 31 2011 2010 respectively consolidating balance sheets consolidating statements income nonoperating income expense includes interest income interest expense net gains losses investments longterm debt determined accrual basis consolidation civs impact net income attributable legg mason inc fair value financial assets liabilities civs determined using following categories inputs defined note 1 march 31 2011 march 31 2010 table presents summary changes assets liabilities civs measured fair value using significant unobservable inputs level 3 periods march 31 2010 march 31 2011 march 31 2009 march 31 2010 1transfers level 3 fiscal years ended march 31 2011 2010 primarily represent assets liabilities recorded upon initial consolidation investment vehicles realized unrealized gains losses recorded level 3 assets liabilities civs included nonoperating income expense civs consolidated statements income total unrealized gains losses level 3 investments liabilities civs relating assets liabilities still held reporting date 21668 1377 fiscal year ended march 31 2011 2010 respectively significant transfers levels 1 2 year ended march 31 2011 nav values used practical expedient civs provided investees derived fair values underlying investments reporting date following table summarizes march 31 2011 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 130 quarterly redemption 1 annual redemption 69 subject three five year lockup side pocket provisions 2monthly redemption 3liquidations expected remaining term current plans sell investments following table presents fair value unpaid principal balance clo loans bonds debt carried fair value fair value option march 31 2011 year ended march 31 2011 total net losses 14686 recognized nonoperating income expense civs consolidated statements income related assets liabilities fair value option elected clo loans clo debt measured fair value substantially estimated gains losses included earnings year ended march 31 2011 attributable instrument specific credit risk relevant interest rates fairly static credit spreads instruments widened current period particularly credit spreads clo debt lower seniority capital structure clo debt bears interest variable rates based libor plus predefined spread ranges 25 basis points 400 basis points outstanding debt matures july 15 2018 march 31 2011 total derivative assets liabilities civs 170 14297 respectively primarily recorded liabilities civs gains losses 15364 18022 respectively fiscal year ended march 31 2011 related derivative assets liabilities civs included nonoperating income expense civs risk legg mason relation derivative assets liabilities civs excess investment funds march 31 2011 march 31 2010 vies legg mason holds significant variable interest sponsor holds variable interest primary beneficiary legg masons carrying value related vie assets liabilities maximum risk loss follows 1legg mason manages certain cdosclos longer considered variable interest new accounting guidance effective april 1 2010 aggregate cumulative assets liabilities cdosclos 2817357 2577457 respectively march 31 2010 2includes equity investments company made required make earned uncollected management fees 3the company continues manage funds publicprivate investment program result restructuring investment three months ended june 30 2010 company remains sponsor longer variable interest certain publicprivate investment program funds assets vies primarily comprised cash equivalents investment securities liabilities primarily comprised debt various expense accruals 19 liquidity fund support due stress liquidity markets prior years certain asset backed securities previously held liquidity funds legg mason subsidiary manages default restructured default although company required provide support funds legg mason elected maintain confidence clients maintain reputation marketplace certain cases support aaaaaa credit ratings funds clients lose confidence company could potentially withdraw funds favor investments offered competitors resulting reduction legg masons assets management investment advisory fees march 31 2010 previously existing support arrangements expired terminated accordance terms year ended march 31 2010 legg mason recognized pretax gains 23171 16565 net income taxes represents reversal unrealized noncash losses recorded fiscal 2009 related four csas support investments nonasset backed securities amount also includes pretax gains foreign exchange forward contracts 1484 interest payment 1056 received related siv securities sold fiscal 2009 fiscal 2009 legg mason purchased 2923666 cash including 24256 accrued interest 2972772 principal amount nonbank sponsored siv securities six liquidity funds previously supported csas locs company subsequently sold purchased securities along 354934 securities previously supported trs 76237 canadian conduit securities held balance sheet third parties 654726 excluding transaction costs legg mason also paid 181183 reimburse two funds portion losses incurred selling unsupported siv securities result sale reimbursement funds completely eliminated companys exposure securities issued sivs company incurred realized loss 2261365 1362146 net taxes operating expense adjustments fiscal 2009 also fiscal 2009 legg mason recognized unrealized losses 21871 14433 net taxes operating expense adjustments related nonbank sponsored siv securities purchased liquidity fund fiscal 2008 unrealized losses related four csas support investments nonasset backed securities expired terminated accordance terms fiscal 2010 gains losses including interest payments related foreign exchange forward contracts included fund support nonoperating income expense consolidated statements income quarterly financial data dollars thousands except per share amounts unaudited 1due rounding quarterly results total amounts fiscal year may differ immaterially annual results may 20 2011 closing price legg masons common stock 3355 quarterly financial data continued dollars thousands except per share amounts unaudited 1due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2012 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework based assessment management concluded march 31 2012 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2012 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2012 mark r fetting chairman board president chief executive officer peter h nachtwey senior executive vice president chief financial officer report independent registered public accounting firm board directors stockholders legg mason inc opinion accompanying consolidated balance sheets related consolidated statements income loss comprehensive income loss changes stockholders equity cash flows present fairly material respects financial position legg mason inc subsidiaries company march 31 2012 march 31 2011 results operations cash flows three years period ended march 31 2012 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 25 2012 consolidated balance sheets dollars thousands see notes consolidated financial statements consolidated statements income dollars thousands except per share amounts see notes consolidated financial statements consolidated statements comprehensive income dollars thousands see notes consolidated financial statements consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands consolidated statements cash flows continued dollars thousands see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see note 18 discussion vies material intercompany balances transactions eliminated appropriate prior years financial statements reflect reclassifications conform current year presentation unless otherwise noted per share amounts include common shares legg mason shares issued connection acquisition legg mason canada inc exchangeable common shares legg mason oneforone basis time may 2010 outstanding exchangeable shares exchanged shares legg mason common stock references fiscal 2012 2011 2010 refer legg masons fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america require management make assumptions estimates affect amounts reported financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes consolidation management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements consolidation effective april 1 2010 legg mason adopted accounting standards codification asc topic 810 consolidation statement financial accounting standards 167 amendments financial accounting standards board interpretation 46r sfas 167 relating consolidation vies includes new approach determining consolidate vie changes necessary reassess consolidate vie changes assessment entities vies application revised accounting guidance deferred certain investment funds including money market funds investment funds qualify deferral continue assessed consolidation prior guidance asc topic 810 consolidation financial accounting standards board interpretation 46r consolidation variable interest entities interpretation arb 51 fin 46r normal course business legg mason sponsors manager various types investment vehicles certain investment vehicles considered vies others considered voting rights entities vres subject traditional consolidation concepts based ownership rights services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees legg mason sell transfer assets vies vres legg masons exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees vies material march 31 2012 2011 legg mason issued investment performance guarantees vies vres investors investment vehicles considered vres consolidated legg mason controlling financial interest investment vehicle financial accounting standards board interpretation 46r accounting standards update 201010 amendments statement 167 certain investment funds sponsored investment funds including money market funds qualify deferral revised accounting guidance legg mason determines primary beneficiary vie absorbs majority vies expected losses receives majority vies expected residual returns legg masons determination expected residual returns excludes gross fees paid decision maker unlikely legg mason primary beneficiary vies created manage assets clients qualify deferral unless legg masons ownership interest vie including interests related parties substantial unless legg mason may earn significant performance fees vie unless legg mason considered material implied variable interest determining whether primary beneficiary vie qualifies deferral legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees implied relationships determining primary beneficiary legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks determining whether vie significant disclosure purposes legg mason considers factors used determination primary beneficiary statement financial accounting standards 167 accounting standards codification topic 810 consolidation legg mason sponsors manager collateralized debt obligation entities cdos collateralized loan obligations clos qualify deferral assessed revised accounting guidance follows legg mason determines whether variable interest vie considering among things obligation absorb losses right receive benefits expected significant vie legg mason also considers management fee structure including seniority level fees current expected economic performance entity well provisions included governing documents might restrict guarantee expected loss residual return legg mason significant variable interest determines primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits potentially could significant vie evaluating whether obligation absorb losses right receive benefits potentially could significant vie legg mason considers factors regarding design terms characteristics investment vehicles including limited following qualitative factors legg mason involvement investment vehicle beyond providing management services legg mason holds equity debt interests investment vehicle legg mason transferred assets investment vehicle potential aggregate fees future periods insignificant relative potential cash flows investment vehicle variability expected fees relation potential cash flows investment vehicle insignificant revised accounting guidance prior guidance legg mason must consolidate vies deemed primary beneficiary revised accounting guidance effective april 1 2010 legg mason consolidated clo previously consolidated march 31 2012 2011 legg masons consolidated balance sheet reflects 291853 314617 respectively assets 271707 278320 respectively debt issued clo despite fact assets cannot used legg mason legg mason obligated debt adoption impact net income attributable legg mason incs common shareholders addition legg masons consolidated statements cash flows years ended march 31 2012 2011 reflect cash flows clo accordance revised accounting guidance periods prior fiscal 2011 restated see note 18 additional information related application amended vie consolidation model required disclosures cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash restricted cash primarily represents longterm escrow deposits cash collateral required market hedge arrangements cash available legg mason general corporate use financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except legg masons longterm debt equity investments legg mason control investee primary beneficiary vie exert significant influence financial operating policies investee legg mason follows equity method accounting evaluation whether legg mason exert control significant influence financial operational policies investees requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence legg mason may governing board investee legal rights investors entity pursuant funds operating documents relationship legg mason investors entity substantially legg masons equity method investees investment companies record underlying investments fair value therefore equity method accounting legg masons share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee legg masons share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense significant portion earnings losses attributable legg masons equity method investments offsetting compensation expense adjustments revenue sharing agreements deferred compensation arrangements therefore fluctuations market value investments material impact net income attributable legg mason inc legg mason also holds debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders equity noncontrolling interests comprehensive income net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium recorded interest method included interest income certain investment securities including held consolidated investment vehicles civs classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings equity fixed income securities classified trading availableforsale valued using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices legg mason evaluates nontrading investment securities otherthantemporary impairment may exist fair value investment security adjusted cost extended period time otherthantemporary impairment determined exist amount impairment relates credit losses recognized charge income march 31 2012 2011 2010 amount temporary unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations may readily available including certain investments held civs management estimates value securities using variety methods resources including current available financial information investment industry addition financial instruments described derivative instruments clo loans bonds debt described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair value longterm debt march 31 2012 2011 1214245 1322960 respectively fair values estimated using cash flow analysis discounted current market rates classified level 2 fair value hierarchy described derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason used foreign exchange forwards interest rate swaps hedge risk movement exchange rates interest rates financial assets limited basis also legg mason used futures contracts index funds hedge market risk certain seed capital investments addition certain civs use derivative instruments however risk legg mason relation derivative assets liabilities civs excess investment funds legg mason designated financial instruments hedge accounting defined accounting literature periods presented gains losses derivative instruments designated hedge accounting included income expense nonoperating income expense consolidated statements income exception gains losses derivative instruments civs recorded nonoperating income expense consolidated investment vehicles net consolidated statements income fair value measurements accounting guidance fair value measurements defines fair value establishes framework measuring fair value fair value defined exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date accounting guidance fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance objective fair value accounting measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically requires use judgment ascertain formerly active market become inactive determining fair values markets become inactive accounting guidance also relates otherthantemporary impairments intended bring greater consistency timing impairment recognition also intended provide greater clarity investors credit noncredit components impaired debt securities expected sold guidance also requires timely disclosures regarding expected cash flows credit losses aging securities unrealized losses fair value accounting guidance also establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category may include repurchase agreements fixed income securities certain proprietary fund products category also includes clo loans liabilities civ previously included certain derivative assets liabilities civs level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds category may also include certain proprietary fund products redemption restrictions clo debt civ valuation asset liability may involve inputs one level hierarchy level fair value hierarchy fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products certain investments held civs valued net asset value nav determined applicable fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 fair values clo loans bonds determined based prices wellrecognized thirdparty pricing services utilize available market data therefore classified level 2 legg mason established controls designed assess reasonableness prices provided fair value clo debt valued using discounted cash flow methodology inputs used determine expected cash flows include assumptions forecasted default recovery rates market participant would use determining fair value clos underlying collateral assets given significance unobservable inputs fair value measurement clo debt valuation classified level 3 exchange traded options valued using last sale price absence sale last offering price options traded counter valued using dealer supplied valuations options classified level 1 futures contracts valued last settlement price end day exchange upon traded classified level 1 index single name credit default swaps interest rate swaps previously held valued based valuations furnished pricing services classified level 2 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments reporting date transfers categories measured beginning period see note 3 additional information regarding fair value measurements fair value option legg mason elected fair value option certain eligible assets liabilities including corporate loans debt clo consolidating see note 18 management believes use fair value option eliminates certain timing differences better matches changes fair value assets liabilities related clo unrealized gains losses assets liabilities fair value option elected reported earnings decision elect fair value option determined instrument basis must applied entire instrument irrevocable elected assets liabilities measured fair value pursuant fair value option included assets liabilities consolidated investment vehicles consolidated balance sheets time company elected apply fair value option financial instruments appropriated retained earnings upon adoption revised consolidation guidance april 1 2010 related election fair value option eligible assets liabilities clo described legg mason recorded cumulative effect adjustment appropriated retained earnings consolidated investment vehicles consolidated balance sheets equal difference fair values clos assets liabilities difference recorded appropriated retained earnings investors clo legg mason shareholders ultimately realize benefits losses associated clo beginning april 1 2010 changes fair values clo assets liabilities recorded net income loss attributable noncontrolling interests consolidated statements income appropriated retained earnings consolidated investment vehicle consolidated balance sheets fixed assets fixed assets consist equipment software leasehold improvements capital lease assets equipment consists primarily communications technology hardware furniture fixtures software includes purchased software internally developed software fixed assets reported cost net accumulated depreciation amortization capital lease assets initially reported lesser present value related future minimum lease payments assets current fair value subsequently reduced accumulated depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements capital lease assets amortized depreciated initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill legg masons intangible assets consist principally asset management contracts manage proprietary funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife intangible assets goodwill amortized book purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events triggering event occurred company perform tests include critical reviews significant assumptions determine intangible assets goodwill impaired minimum company performs tests annually december 31 indefinitelife intangible assets goodwill considering factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment determined fair values intangible assets subject amortization reviewed reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level potentially impaired carrying amount reporting unit exceeds implied fair value estimating fair value reporting unit legg mason uses valuation techniques principally based discounted cash flows similar models employed analyzing purchase price acquisition target goodwill deemed recoverable reporting unit level also operating segment level legg mason defines global asset management segment results fact chief operating decision maker legg masons chief executive officer regularly receives discrete financial information consolidated global asset management business level regularly receive discrete financial information operating results lower level asset management affiliate level prior fiscal 2012 legg masons reporting units americas international divisions allocations goodwill management restructures acquisitions dispositions based relative fair values respective businesses restructured added sold divisions see note 5 additional information regarding intangible assets goodwill note 17 additional business segment information translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income gains losses resulting foreign currency transactions included net income investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients fees primarily based predetermined percentages market value assets management aum recognized period services performed may billed advance period earned based aum beginning billing period accordance related advisory contracts revenue associated advance billings deferred included current liabilities consolidated balance sheets recognized period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks relative absolute basis depending product recognized end performance measurement period accordingly neither advanced billings performance fees subject reversal legg mason responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution servicing expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc receipts recorded distribution service fee revenue received reduction unamortized balance deferred sales commissions corresponding expense management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2012 2011 2010 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 9510 11339 march 31 2012 2011 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforward benefits business combinations amortization accrued compensation applicable accounting guidance tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information companys accounting policy classify interest related tax matters interest expense related penalties operating expense see note 8 additional information regarding income taxes loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plans restricted stock awards marketbased performance shares payable common stock deferred compensation payable stock compensation plans legg mason issues equity awards directors officers key employees accordance applicable accounting guidance compensation expense includes costs nonvested sharebased awards grant date fair value amortized respective vesting periods straightline method legg mason determines fair value stock options using blackscholes optionpricing model exception marketbased performance grants would valued monte carlo optionpricing model see note 12 additional information regarding stockbased compensation earnings per share basic earnings per share attributable legg mason inc common shareholders eps calculated dividing net income attributable legg mason inc weightedaverage number shares outstanding calculation weightedaverage shares includes common shares exchangeable common stock certain unvested sharebased payment awards considered participating securities contain nonforfeitable rights dividends diluted eps similar basic eps adjusts effect potential common shares unless antidilutive see note 13 additional discussion eps restructuring costs may 2010 legg masons management committed plan streamline business model described note 16 streamlining initiative complete march 31 2012 costs associated initiative primarily related employee termination benefits incentives retain employees transition period charges consolidating leased office space contract termination costs termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statements income compensation items required employees provide future service therefore expensed ratably required service period contract termination costs expensed incurred noncontrolling interests noncontrolling interests related civs classified redeemable noncontrolling interests investors funds may request withdrawals time redeemable noncontrolling interests years ended march 31 2012 2011 2010 follows recent accounting developments following relevant accounting pronouncements recently issued december 2011 financial accounting standards board fasb updated guidance disclosures offsetting assets liabilities require gross net information instruments transactions including derivatives repurchase reverse repurchase arrangements eligible offset balance sheet disclosures effective legg mason fiscal 2014 expected material impact legg masons consolidated financial statements september 2011 fasb updated guidance annual goodwill test impairment update permits companies assess qualitative factors determine likely fair value reporting unit less carrying amount basis determining whether necessary perform currently required quantitative fair value assessment update effective legg mason fiscal 2013 expected material effect recorded goodwill 2 acquisitions effective november 1 2005 legg mason acquired 80 outstanding equity permal group ltd permal leading global fundsofhedge funds manager concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares legg mason owning 100 outstanding voting common stock permal fiscal 2010 legg mason paid aggregate 170804 cash acquire remaining 625 outstanding preference shares company also elected purchase 9000 rights sellers preference shares receive earnout payment 149200 two years result transaction payments permal acquisition addition fiscal 2010 legg mason paid 7524 dividends preference shares payments preference shares including dividends recognized additional goodwill 3 investments fair values assets liabilities disclosures include details legg masons assets liabilities measured fair value excluding assets liabilities civs see note 18 variable interest entities consolidation investment vehicles information related assets liabilities civs measured fair value legg mason investments debt equity securities generally classified availableforsale trading described note 1 investments march 31 2012 2011 follows 1 includes investments private equity securities readily determinable fair values net unrealized realized loss gain investment securities classified trading 6063 28355 125395 fiscal 2012 2011 2010 respectively legg masons availableforsale investments consist mortgage backed securities us government agency securities equity securities gross unrealized gains losses investments classified availableforsale 551 184 respectively march 31 2012 157 186 respectively march 31 2011 legg mason uses specific identification method determine cost security sold amount reclassified accumulated comprehensive income earnings proceeds gross realized gains losses sales maturities availableforsale investments follows legg mason investments classified heldtomaturity march 31 2012 2011 fair values financial assets liabilities company determined using following categories inputs substantially financial instruments valuation methods rely observable market inputs significant input utilize either equity method cost method nav practical expedient measurement uncertainty little relevance 1 cash equivalents include highly liquid investments original maturities 90 days less cash investments actively traded money market funds measured nav classified level 1 cash investments time deposits measured amortized cost approximates fair value short time purchase instrument expected realization classified level 2 primarily mutual funds minimal market risk company change value primarily offset adjustment compensation expense related deferred compensation liability 3 trading proprietary fund products investments primarily represent mutual funds invested approximately 52 48 equity debt securities march 31 2012 respectively invested approximately 60 40 equity debt securities march 31 2011 respectively 4 substantially legg masons equity method investments investment companies record underlying investments fair value fair value measured using legg masons share investees underlying net income loss predominately representative fair value adjustments investments held equity method investee 5 includes investments equity method approximates fair value relating longterm incentive compensation plans 54934 48528 march 31 2012 march 31 2011 respectively proprietary fund products investments 23343 27812 march 31 2012 march 31 2011 respectively classified investment securities consolidated balance sheets accordance new accounting guidance adopted fiscal 2012 changes financial assets measured fair value using significant unobservable inputs level 3 period march 31 2011 march 31 2012 presented gross basis table realized unrealized gains losses recorded level 3 investments included income expense consolidated statements income change unrealized gains relating level 3 assets liabilities still held reporting date 5495 11472 years ended march 31 2012 2011 respectively significant transfers levels 1 2 years ended march 31 2012 2011 practical expedient legg mason relies net asset value certain investments fair value net asset values provided investees derived fair values underlying investments reporting date following table summarizes march 31 2012 nature investments related liquidation restrictions factors may impact ultimate value realized nanot applicable 1 63 monthly redemption 37 quarterly redemption 36 subject twoyear lockup 2 liquidations expected remaining term 3 redemptions prohibited november 2012 4 remaining term less one year 96 20year remaining term current plans sell investments 4 fixed assets following table reflects components fixed assets march 31 depreciation amortization expense related fixed assets 74221 79835 91309 fiscal 2012 2011 2010 respectively decrease total cost fixed assets substantially due disposals conjunction business streamlining initiative see additional information regarding legg masons business streamlining initiative note 16 5 intangible assets goodwill indefinitelife intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair value assets exceeds book value intangible assets subject amortization considered impairment reporting period fair value less book value legg mason record impairment charge following table reflects components intangible assets march 31 march 31 2012 management contracts amortized weightedaverage life 29 years estimated amortization expense next five fiscal years follows change indefinitelife intangible assets attributable impact foreign currency translation legg mason completed recent annual impairment tests indefinitelife intangible assets december 31 2011 determined impairment value assets fiscal 2012 legg mason also determined triggering events occurred march 31 2012 would require impairment testing specific 2502000 indefinitelife domestic mutual fund contracts acquired citigroup asset management cam acquisition principally managed clearbridge advisors llc western asset management company legg masons recent annual impairment test assessed fair value exceeded carrying value 5 given current uncertainty regarding future market conditions market performance flows related aum levels decrease near term cash flow projections deviate current projections reasonably possible asset could deemed impaired material amount change carrying value goodwill summarized legg mason completed recent annual impairment test goodwill december 31 2011 determined impairment value assets fiscal 2012 legg mason also determined triggering events occurred march 31 2012 would require impairment testing legg mason also recognizes tax benefit amortization excess tax basis related cam acquisition accordance accounting guidance income taxes tax benefit recorded reduction goodwill deferred tax liabilities benefit realized 6 shortterm borrowings legg mason maintains revolving credit facility expires february 2013 maximum amount available 500000 subject covenant discussed note 7 march 31 2012 2011 revolving credit facility rate libor plus 2625 basis points effective interest rate 29 facility rate may change future based changes legg masons credit ratings libor rates march 31 2012 2011 250000 outstanding facility standard financial covenants including maximum net debt ebitda ratio 25 1 minimum ebitda interest ratio 40 1 march 31 2012 legg masons net debt ebitda ratio 11 1 ebitda interest expense ratio 138 1 legg mason maintained compliance applicable covenants determined compliance covenants becomes pressure number actions may taken including reducing expenses increase ebitda using available cash repay portion 250000 outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt see note 20 subsequent borrowing remaining 250000 available revolving credit facility may 2012 subsidiary legg mason maintains credit line general operating purposes maximum amount may borrowed credit line 15000 subject covenant discussed note 7 borrowings outstanding facility march 31 2012 2011 7 longterm debt disclosures include details legg mason’s debt excluding debt civs see note 18 variable interest entities consolidation investment vehicles information related debt civs accreted value longterm debt consists following 25 convertible senior notes related hedge transactions january 14 2008 legg mason sold 1250000 25 convertible senior notes “notes” notes bear interest 25 payable semiannually cash legg mason accreting carrying value principal amount maturity using imputed interest rate 65 effective borrowing rate nonconvertible debt time issuance expected life seven years resulting additional interest expense fiscal 2012 2011 2010 39077 36688 34445 respectively notes convertible certain conditions met initial conversion rate 113636 shares legg mason common stock per one thousand dollar principal amount notes equivalent conversion price approximately 88 per share maximum 14205 shares subject adjustment unconverted notes mature par january 2015 upon conversion one thousand dollar principal amount note holder receive cash amount equal one thousand dollars less conversion value note conversion value exceeds principal amount note conversion legg mason also deliver election cash common stock combination cash common stock conversion value excess one thousand dollars amount notes’ ifconverted value exceeds accreted value march 31 2012 representing potential loss approximately 77353 using current interest rate 400 agreement governing issuance notes contains certain covenants benefit initial purchaser notes including additional debt may incurred legg masons gross debt ebitda ratio defined documents exceeds 25 1 covenants may result notes becoming immediately due payable covenants met leverage covenant waived accommodate equity units issuance may 2008 waiver expired june 2011 legg mason maintained compliance applicable covenants march 31 2012 leverage ratio 27 1 thus covenant prohibits legg mason borrowing additional amounts date connection sale notes january 14 2008 legg mason entered convertible note hedge transactions respect common stock “purchased call options” financial institution counterparties “hedge providers” purchased call options exercisable solely connection conversions notes event market value per share legg mason common stock time exercise greater exercise price purchased call options equal 88 conversion price notes subject adjustment simultaneously separate transactions legg mason also sold hedge providers warrants purchase aggregate subject adjustment 14205 shares common stock net sharesettled basis exercise price 10746 per share common stock purchased call options warrants part terms notes affect holders rights notes hedging transactions net cost approximately 83000 paid proceeds notes recorded reduction additional paidin capital notes converted market price per share legg mason common stock exceeds 88 exercise price purchased call options purchased call options entitle legg mason receive hedge providers shares legg mason common stock cash combination shares common stock cash match shares cash legg mason must deliver terms notes additionally time market price per share legg mason common stock exceeds 10746 exercise price warrants legg mason required deliver hedge providers net shares common stock amount based excess market price per share common stock exercise price warrants transactions effectively increase conversion price notes 10746 per share common stock legg mason contractual rights execution related agreements ability settle obligations conversion feature notes purchased call options warrants legg mason common stock accordingly transactions accounted equity subsequent adjustment changes value obligations 56 senior notes equity units may 2008 legg mason issued 23000 equity units 1150000 approximately 50000 used pay issuance costs unit consisted 5 interest one thousand dollar principal amount 56 senior notes due june 30 2021 detachable contract purchase varying number shares legg masons common stock 50 june 30 2011 notes purchase contracts separate distinct instruments terms structured simulate conversion debt equity potentially remarketed debt approximately three years issuance holders obligations purchase shares legg masons common stock collateralized pledge notes prescribed collateral connection issuance equity units legg mason incurred issuance costs 36200 27600 allocated equity component equity units recorded reduction additional paidin capital notes considered mandatorily convertible commitment purchase shares legg masons common stock holders also received quarterly payments referred contract adjustment payments “cap” fixed annual rate 14 commitment amount threeyear contract term upon issuance equity units legg mason recognized liability approximately 45800 fair value obligation based upon discounted cash flows pay unitholders quarterly contract adjustment payment amount also represented fair value legg masons commitment contract issue shares common stock future designated prices recorded reduction additional paidin capital cap obligation liability accreted approximate threeyear contract term charges interest expense based constant rate calculation subsequent contract adjustment payments reduced cap obligation liability march 31 2011 168 included liabilities consolidated balance sheets due retirement remaining equity units discussed cap obligation liability march 31 2012 purchase contract obligated legg mason sell number newly issued shares common stock based settlement rate determined legg masons stock price purchase date settlement rate adjusted price legg mason stock way intended maintain original investment value legg masons common stock priced 5630 6756 per share settlement rate 07401 shares legg mason common stock subject adjustment equity unit market value legg mason common stock 6756 settlement rate 08881 shares legg mason common stock subject adjustment equity unit market value legg mason common stock 5630 market value legg mason common stock 5630 6756 settlement rate number shares legg mason common stock equal 50 divided market value september 2009 quarter legg mason completed tender offer retired 91 outstanding equity units 20939 units including extinguishment 1050000 outstanding 56 senior notes termination related purchase contracts exchange issuance approximately 18596 shares legg mason common stock payment approximately 130870 cash payment allocated liability equity components equity units based relative fair values resulting loss debt extinguishment approximately 22040 including noncash charge approximately 6355 accelerated expense deferred issue costs decrease additional paidin capital approximately 115186 103039 outstanding debt remaining 56 senior notes retired june 30 2011 part remarketing concurrently legg mason issued 1830 shares legg mason common stock upon exercise purchase contracts equity units term loans fiscal 2006 subsidiary legg mason entered 12803 term loan agreement finance aircraft loan bears interest 59 secured aircraft maturity date january 1 2016 outstanding balance march 31 2012 2011 8568 9363 respectively march 31 2012 aggregate maturities longterm debt based contractual terms follows see note 20 subsequent issuance 650000 55 senior notes repurchase 1250000 notes may 2012 8 income taxes components income tax provision follows components income tax expense follows legg mason received approximately 580000 tax refunds june 2009 quarter primarily attributable utilization 1600000 realized losses incurred fiscal 2009 sale securities issued structured investment vehicles federal legislation enacted november 2009 temporarily extend net operating loss carryback period two five years enabled legg mason utilize additional 1300000 net operating loss deductions result additional 459000 tax refunds received january 2010 reconciliation difference effective income tax rate statutory federal income tax rate follows 1 state income taxes include changes valuation allowances net impact deferred tax assets changes state apportionment factors planning strategies effect foreign tax rates also includes changes valuation allowances quarter ended september 30 2010 uk finance 2 act 2010 enacted reduced main uk corporate tax rate 28 27 july 2011 uk finance act 2011 act enacted act reduced main uk corporate tax rate 27 26 effective april 1 2011 26 25 effective april 1 2012 reductions uk corporate tax rate resulted tax benefits 18268 8878 recognized fiscal 2012 2011 respectively result revaluation deferred tax assets liabilities new rates addition year ended march 31 2012 legg mason recorded 18254 tax benefits related restructuring australian business deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows certain tax benefits associated legg masons employee stock plans recorded directly stockholders equity tax benefit recorded equity fiscal 2012 2011 2010 due net operating loss position company march 31 2012 additional 6700 net operating loss recognized increase stockholders equity ultimately realized connection completion filing fiscal 2010 federal tax return december 2010 legg mason recorded net additional tax benefit approximately 36000 fiscal 2011 respect equity unit extinguishment occurred fiscal 2010 tax benefit increased additional paidin capital manner consistent fiscal 2010 allocation extinguishment payment legg mason various loss carryforwards may provide future tax benefits related valuation allowances established accordance accounting guidance income taxes managements opinion likely benefits realized substantially legg masons deferred tax assets relate us uk taxing jurisdictions march 31 2012 us federal deferred tax assets aggregated 717552 realization expected require approximately 4120000 future us earnings approximately 169000 must form foreign source income based estimates future taxable income using assumptions consistent used legg masons goodwill impairment testing likely current federal tax benefits relating net operating losses realizable valuation allowance necessary time respect resulting foreign tax credits likely tax benefits relating 10370 foreign tax credits realized valuation allowance 3411 established fiscal 2012 tax planning may enhance legg masons tax positions realization current tax benefits dependent significant tax strategies march 31 2012 us state deferred tax assets aggregated 236675 due limitations net operating loss capital loss carryforwards taking consideration certain state tax planning strategies valuation allowance established state capital loss net operating loss benefits certain jurisdictions additional valuation allowance 12076 recorded fiscal 2012 due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary net release 7306 fiscal 2012 full valuation allowance foreign deferred tax assets related various jurisdictions primarily uk japan extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets following deferred tax assets valuation allowances relating carryforwards recorded march 31 2012 2011 respectively 1 substantially us state net operating losses carryforward fiscal 2029 2 due potential change factors relating apportionment income various states companys effective state tax rates subject fluctuation impact value companys deferred tax assets including net operating losses could material impact future effective tax rate company legg mason total gross unrecognized tax benefits approximately 90831 77653 51027 march 31 2012 2011 2010 respectively totals approximately 62400 53500 40600 respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 2012 2011 2010 follows although management cannot predict degree certainty timing ultimate resolution matters review various taxing jurisdictions reasonably possible companys gross unrecognized tax benefits balance may change within next twelve months 20500 result expiration statutes limitation completion tax authorities exams company accrues interest related unrecognized tax benefits interest expense recognizes penalties operating expense years ended march 31 2012 2011 2010 company recognized approximately 1300 3000 2200 respectively substantially interest march 31 2012 2011 2010 legg mason approximately 10000 9000 6000 respectively accrued interest penalties tax contingencies consolidated balance sheets legg mason examination internal revenue service tax authorities various states following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal 2005 us federal fiscal 2005 united kingdom fiscal 2003 state california fiscal 2005 state new york fiscal 2008 states connecticut maryland massachusetts company anticipate making significant cash payments settlement audits excess amounts reserved prior year legg mason initiated plans repatriate accumulated earnings approximately 225000 approximately 100000 repatriated march 31 2012 legg mason currently intends repatriate 100000 150000 foreign earnings create foreign source income order utilize foreign tax credits may otherwise expire unutilized repatriation accumulated prior period foreign earnings beyond range currently planned however legg mason may repatriate future earnings except noted legg mason intends permanently reinvest cumulative undistributed earnings nonus subsidiaries nonus operations accordingly us federal income taxes provided undistributed earnings extent permanently reinvested legg masons nonus operations practical time determine income tax liability would result upon repatriation earnings 9 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2026 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2012 minimum annual aggregate rentals operating leases service agreements follows minimum rental commitments shown reduced 148775 minimum sublease rentals received future noncancelable subleases approximately 51 due one counterparty subtenant defaults sublease legg mason may incur operating charges reflect expected future sublease rentals reduced amounts result current commercial real estate market minimum rental commitments include 931703 real estate equipment leases 115882 service maintenance agreements included table 37858 commitments related space vacated subleases pursued lease liability adjusted fiscal 2012 2011 reflect present value excess existing lease obligations estimated sublease income related costs lease liability takes consideration various assumptions including amount time take secure sublease agreement prevailing rental rates applicable real estate markets related costs incurred fiscal 2012 2011 primarily related legg masons business streamlining initiative aggregated 13375 2587 respectively following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes period provided landlord free rent period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2012 2011 legg mason commitments invest approximately 36653 23381 respectively limited partnerships make private investments commitments expected funded required end respective investment periods ranging fiscal 2018 normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial normal course business legg mason also received subpoenas currently involved governmental selfregulatory agency inquiries investigations time proceedings involving asset management activities accordance guidance accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings probable loss incurred reasonable estimate loss made transaction citigroup december 2005 legg mason transferred citigroup subsidiaries constituted private clientcapital markets pccm businesses thus transferring entities would primary liability customer complaint litigation regulatory liabilities proceedings arising businesses however part transaction legg mason agreed indemnify citigroup customer complaint litigation regulatory liabilities legg masons former pccm businesses result preclosing events ultimate resolution matters cannot currently determined based current information consultation legal counsel management believes accrual range reasonably possible losses march 31 2012 2011 material similarly although citigroup transferred legg mason entities would primarily liable customer complaint litigation regulatory liabilities proceedings cam business citigroup agreed indemnify legg mason customer complaint litigation regulatory liabilities cam business result preclosing events ultimate resolution matters cannot currently determined opinion management consultation legal counsel due preliminary nature certain matters legg mason currently unable estimate amount range potential losses matters legg masons financial condition results operations cash flows could materially affected period matter ultimately resolved addition ultimate costs litigationrelated charges vary significantly periodtoperiod depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement one legg masons asset management subsidiaries named defendant lawsuit filed former institutional client late august 2011 complaint alleges breach contract breach fiduciary duty arising investments former clients account allegedly inconsistent accounts objectives seeks damages excess 90000 legg mason believes claims without merit intends defend matter vigorously third quarter fiscal year 2012 subsidiary filed motion dismiss yet ruled upon court discovery case ongoing pretrial conference currently scheduled april 2013 preliminary status matter legg mason cannot estimate possible loss range loss matter addition although legg mason believes matter would likely covered insurance policies may substantially mitigate amount eventual loss unusual litigation point process assurance action material effect legg masons financial position results operations cash flows march 31 2012 2011 legg masons liability losses contingencies 200 500 respectively fiscal 2012 2011 2010 legg mason recorded litigation related charges approximately 1000 2500 21200 respectively charge fiscal 2010 primarily represents 19000 accrual affiliate investor settlement settled fiscal 2011 fiscal 2012 2011 2010 liability reduced settlement payments approximately 1300 23500 1500 respectively 10 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees primary plan legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation 50 match employee 401k contributions 6 employee compensation maximum five thousand dollars per year profit sharing matching contributions amounted 22336 22739 fiscal 2012 2011 respectively addition employees make voluntary contributions certain plans 11 capital stock march 31 2012 authorized numbers common preferred shares 500000 4000 respectively march 31 2012 2011 19275 14557 shares common stock respectively reserved issuance legg masons equity plans march 31 2010 1099 common shares reserved exchangeable shares issued connection acquisition legg mason canada inc exchangeable shares exchangeable time holder oneforone basis shares legg masons common stock included basic shares outstanding may 2010 outstanding exchangeable shares converted shares legg mason common stock may 10 2010 legg mason announced board directors replaced existing stock buyback authority purchase 1 billion worth legg mason common stock expiration date attached authorization fiscal 2012 legg mason purchased retired 13597 shares common stock 400266 open market purchases fiscal 2011 legg mason purchased retired 14552 shares common stock 445465 accelerated share repurchase asr agreements open market purchases remaining balance authorized stock buyback 154938 discussed note 7 may 2008 legg mason issued 1150000 equity units unit consisting 5 interest one thousand dollar principal amount senior notes due june 30 2021 purchase contract committing holder purchase shares legg masons common stock june 30 2011 fiscal 2010 legg mason issued approximately 18596 shares equity unit tender offer exchange 91 outstanding equity units fiscal 2012 legg mason issued 1830 shares legg mason common stock upon exercise purchase contracts remaining equity units senior notes equity units retired remarketing also discussed note 7 january 2008 legg mason issued 1250000 25 contingent convertible senior notes certain conditions met could result issuance maximum approximately 14205 shares legg mason common stock subject adjustment changes common stock shares exchangeable common stock three years ended march 31 2012 2011 2010 follows dividends declared per share 032 020 012 fiscal 2012 2011 2010 respectively dividends declared paid march 31 2012 2011 2010 11493 8990 4844 respectively included current liabilities 12 stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plans restricted stock awards units performance shares payable common stock deferred compensation payable stock effective july 26 2011 number shares authorized issued legg masons active equity incentive stock plan increased 6500 41500 shares available issuance march 31 2012 13134 options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments four five years expire within eight ten years date grant compensation expense relating stock options years ended march 31 2012 2011 2010 14076 19926 17281 respectively related income tax benefit years ended march 31 2012 2011 2010 5539 7718 6221 respectively stock option transactions legg masons equity incentive plans years ended march 31 2012 2011 2010 respectively summarized total intrinsic value options exercised years ended march 31 2012 2011 2010 398 6977 229 respectively march 31 2012 aggregate intrinsic value options outstanding 1715 following information summarizes legg masons stock options outstanding march 31 2012 march 31 2012 2011 2010 options exercisable 3334 2860 2810 shares respectively weightedaverage exercise prices 7360 7720 7357 respectively stock options exercisable march 31 2012 weightedaverage remaining contractual life 29 years march 31 2012 aggregate intrinsic value options exercisable 934 following information summarizes legg masons stock options exercisable march 31 2012 following information summarizes unvested stock options legg masons equity incentive plans year ended march 31 2012 1 stock options granted prior fiscal 2011 vest july year beginning fiscal 2011 stock options granted vest may year unamortized compensation cost related unvested options march 31 2012 22843 expected recognized weightedaverage period 17 years cash received exercises stock options legg masons equity incentive plans 2851 12094 1829 years ended march 31 2012 2011 2010 respectively tax benefit expected realized tax deductions option exercises totaled 47 2645 73 years ended march 31 2012 2011 2010 respectively weightedaverage fair value stock options granted fiscal 2012 2011 2010 using blackscholes option pricing model 1313 1432 1209 per share respectively following weightedaverage assumptions used model grants fiscal 2012 2011 2010 legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 4500 total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged earnings fiscal years ended march 31 2012 2011 2010 approximately 107 102 147 shares respectively purchased open market behalf participating employees fiscal 2012 2011 2010 legg mason recognized 267 286 313 respectively compensation expense related stock purchase plan january 28 2008 compensation committee legg mason approved grants senior officers 120 marketbased performance shares 100 remain outstanding upon vesting subject certain conditions distributed shares common stock grants vest ratably january 28 five years following grant date upon attaining service criteria stock price hurdles beginning 7797 year one ending 11415 year five weightedaverage fair value per share awards 1181 estimated grant date using grant price 7088 monte carlo optionpricing model following assumptions restricted stock restricted stock unit transactions years ended march 31 2012 2011 2010 respectively summarized restricted stock restricted stock unit awards noncash transactions fiscal 2012 2011 2010 legg mason recognized 32826 35770 27233 respectively compensation expense related tax benefits 12705 13854 9804 respectively restricted stock restricted stock unit awards unamortized compensation cost related unvested restricted stock restricted stock unit awards 2873 shares yet recognized march 31 2012 63196 expected recognized weightedaverage period 17 years legg mason also equity plan nonemployee directors equity plan directors may elect receive shares stock restricted stock units prior july 19 2007 amendment plan directors could also elect receive stock options granted old plan immediately exercisable price equal market value shares date grant term ten years fiscal 2012 2011 2010 legg mason recognized expense 1375 1425 1575 respectively awards plan shares options restricted stock units issuable equity plan limited 625 shares aggregate 276 shares issued plan march 31 2012 march 31 2012 nonemployee directors held 184 stock options included outstanding options presented table march 31 2012 nonemployee directors held 74 restricted stock units vest grant date therefore included unvested shares restricted stock restricted stock units table year ended march 31 2012 nonemployee directors exercise stock options restricted stock units distributed 12 restricted stock units 31 shares common stock granted fiscal 2012 36 stock options restricted stock units canceled forfeited fiscal 2012 fiscal 2012 legg mason established longterm incentive plan ltip equity incentive plan provides additional element compensation based performance ltip executive officers granted cash value performance units june 2011 quarter vest end three year period based upon legg masons cumulative adjusted earnings per share period awards granted ltip may settled cash andor shares legg mason common stock discretion legg mason estimated amount award would expensed vesting period based probability assessment expected outcome ltip provisions deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends 5792 additional shares reserved future issuance plan fiscal 2012 2011 2010 legg mason recognized 191 263 176 respectively compensation expense related plan fiscal 2012 2011 2010 legg mason issued 68 77 128 shares respectively plan weightedaverage fair value per share grant date 2705 2838 2253 respectively legg mason issued shares connection certain deferred compensation plans held rabbi trusts assets rabbi trusts consolidated employer value employers stock held rabbi trusts classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trusts corresponding liability related deferred compensation plans presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trusts march 31 2012 2011 2010 690 706 653 respectively part companys streamlining initiative discussed note 16 employment certain recipients stock option restricted stock awards terminated termination benefits extended employees included accelerated vesting portion equity incentive awards would vested january 1 2012 original terms awards fiscal 2011 portion awards subject accelerated vesting revalued expensed new vesting period impact included also connection restructuring initiative departure executive officer december 2010 resulted accelerated vesting portion certain equity incentive awards impact also included 13 earnings per share basic eps calculated dividing net income attributable legg mason inc weightedaverage number shares outstanding calculation weightedaverage shares includes common shares exchangeable common stock unvested restricted shares deemed participating securities diluted eps similar basic eps adjusts effect potentially issuable common shares except inclusion antidilutive fiscal 2012 legg mason purchased retired 13597 shares common stock 400266 open market purchases fiscal 2011 legg mason purchased retired 14552 shares common stock 445465 asr agreements open market purchases repurchases reduced weightedaverage shares outstanding 9716 9088 shares years ended march 31 2012 2011 respectively june 2011 legg mason issued 1830 shares common stock upon exercise purchase contracts remaining equity units shares 1380 shares included weightedaverage shares outstanding year ended march 31 2012 august 2009 legg mason issued 18596 shares common stock equity units tender offer shares 11565 shares included weightedaverage shares outstanding year ended march 31 2010 following table presents computations basic diluted eps diluted eps calculations years ended march 31 2012 2011 2010 exclude potential common shares issuable convertible 25 senior notes years ended march 31 2011 2010 exclude potential common shares issuable convertible equity units market price legg mason common stock exceeded price conversion either instrument would dilutive using treasury stock method options purchase 5239 5204 5130 shares fiscal years ended march 31 2012 2011 2010 respectively included computation diluted earnings per share presumed proceeds exercising options including related income tax benefits exceed average price common shares fiscal year therefore options deemed antidilutive also march 31 2012 2011 2010 warrants issued connection convertible note hedge transactions described note 7 excluded calculation diluted earnings per share effect would antidilutive 14 accumulated comprehensive income accumulated comprehensive income includes cumulative foreign currency translation adjustments net tax gains losses investment securities change accumulated translation adjustments fiscal 2012 2011 primarily resulted impact changes brazilian real polish zloty australian dollar japanese yen british pound singapore dollar relation us dollar net assets legg masons subsidiaries brazil poland australia japan united kingdom singapore real zloty australian dollar yen pound singapore dollar functional currencies respectively summary legg masons accumulated comprehensive income march 31 2012 2011 follows 15 derivatives hedging disclosures detail legg mason’s derivatives hedging excluding derivatives hedging civs see note 18 variable interest entities consolidation investment vehicles information related derivatives hedging civs legg mason uses currency forwards economically hedge risk movements exchange rates primarily us dollar euro canadian dollar japanese yen singapore dollar brazilian real british pound australian dollar consolidated balance sheets legg mason nets fair value certain foreign currency forwards executed counterparty legg mason legal right intent settle contracts net basis legg mason also uses market hedges certain seed capital investments entering futures contracts sell index funds benchmark hedged seed capital investments open futures contracts required cash collateral 1919 7099 march 31 2012 2011 respectively following table presents fair values march 31 2012 2011 derivative instruments designated accounting purposes hedging instruments classified assets liabilities following table presents gains losses recognized derivative instruments years ended march 31 2012 2011 16 restructuring may 2010 legg mason announced plan streamline business model drive increased profitability growth primarily involved transitioning certain shared services investment affiliates closer actual client relationships plan involved headcount reductions operations technology administrative areas partially offset headcount increases affiliates enabled legg mason eliminate portion corporate office space primarily dedicated operations technology employees initiative complete march 31 2012 initiative involved transitionrelated costs primarily comprised charges employee termination benefits retention incentives transition period recorded transitionrelated compensation consolidated statements income transitionrelated costs also involved costs including charges consolidating leased office space early contract terminations asset disposals professional fees recorded appropriate operating expense classifications total transitionrelated costs 127500 march 31 2012 charges transitionrelated costs 73066 54434 years ended march 31 2012 2011 respectively primarily represent costs severance retention incentives table presents summary changes transitionrelated liability initiation restructuring plan march 31 2012 including noncash charges asset writeoffs stockbased compensation expense cumulative charges incurred date 1 includes lease loss accruals 17983 space permanently abandoned 2 includes stockbased compensation expense fixed asset accelerated depreciation related space permanently abandoned accelerated depreciation internallydeveloped software longer utilized result initiative 17 business segment information legg mason global asset management company provides investment management related services wide array clients due realignment executive management team beginning fiscal 2012 previous separation americas international divisions eliminated company operates one reportable business segment global asset management global asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue global asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks revenues geographic location primarily based geographic location advisor domicile fund families managed legg mason table reflects revenues longlived assets geographic region thousands march 31 18 variable interest entities consolidation investment vehicles legg mason investment manager cdosclos considered vies revised accounting guidance since investors structures lack unilateral decision making authority investment vehicles created sole purpose issuing collateralized instruments offer investors opportunity returns vary risk level investment legg masons management fee structure investment vehicles typically includes senior management fee may also include subordinated incentive management fees legg mason holds equity interest investment vehicles transfer sell assets investment vehicles accordance methodology described note 1 legg mason concluded variable interest two investment vehicles clos primary beneficiary one two clos although legg mason holds equity interest either investment vehicles power control significant variable interest one clo expected subordinated fees march 31 2012 2011 balances related clo consolidated companys consolidated financial statements collateral assets vie primarily comprised investments corporate loans lesser extent bonds assets clo cannot used legg mason gains losses related assets impact net income attributable legg mason inc liabilities vie primarily comprised debt clos debt holders recourse general credit assets legg mason addition legg mason primary beneficiary one sponsored investment fund vie also held controlling financial interest one sponsored investment fund vre consolidated march 31 2012 2011 2010 effective december 31 2011 controlling financial interest 20814 second sponsored investment fund vre consolidated march 31 2011 legg mason redeemed accordingly fund deconsolidated legg mason funds balance sheet amounts excluded legg masons consolidated balance sheet march 31 2012 income statement cash flow amounts fund included legg masons consolidated income cash flow statements year ended march 31 2012 legg masons investment civs march 31 2012 2011 38919 53708 respectively represents maximum risk loss excluding uncollected advisory fees assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds following tables reflect impact civs consolidated balance sheets march 31 2012 2011 respectively consolidated statements income years ended march 31 2012 2011 2010 respectively consolidating balance sheets consolidating statements income nonoperating income expense includes interest income interest expense net gains losses investments longterm debt determined accrual basis consolidation civs impact net income attributable legg mason inc fair value financial assets liabilities civs determined using following categories inputs defined note 1 march 31 2012 except clo debt substantially financial instruments valuation methods rely observable market inputs significant input utilize nav practical expedient measurement uncertainty little relevance following table provides summary qualitative information relating valuation clo debt significant increases decreases inputs isolation would result significantly lower higher fair value measurement generally constant rate prepayment default rate driven market conditions related interest rates credit ratings factors inputs noted could move independently depending specific market conditions making possible varying market conditions drive changes inputs positive negative zero correlation fair value financial assets liabilities civs determined using following categories inputs defined note 1 march 31 2011 accordance new accounting guidance adopted fiscal 2012 changes assets liabilities civs measured fair value using significant unobservable inputs level 3 year ended march 31 2012 presented gross basis table 1 transfers level 3 year ended march 31 2011 primarily represent assets liabilities recorded upon initial consolidation investment vehicles realized unrealized gains losses recorded level 3 assets liabilities civs included nonoperating income expense civs consolidated statements income total unrealized gains losses level 3 investments liabilities civs relating assets liabilities still held reporting date 7297 21668 fiscal year ended march 31 2012 2011 respectively significant transfers levels 1 2 either years ended march 31 2012 2011 nav values used practical expedient civs provided investees derived fair values underlying investments reporting date following table summarizes march 31 2012 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 5 daily redemption 6 monthly redemption 5 quarterly redemption 84 subject three five year lockup side pocket provisions 2 liquidations expected remaining term current plans sell investments legg mason elected fair value option certain eligible assets liabilities including corporate loans debt consolidated clo management believes use fair value option eliminates certain timing differences better matches changes fair value assets liabilities related clo following table presents fair value unpaid principal balance clo loans bonds debt carried fair value fair value option march 31 2012 2011 years ended march 31 2012 2011 total net gains losses 2054 14686 respectively recognized nonoperating income civs consolidated statements income related assets liabilities fair value option elected clo loans clo debt measured fair value substantially estimated gains losses included earnings fiscal year ended march 31 2012 attributable instrument specific credit risk overall credit spreads widened general credit curve steepened clo debt bears interest variable rates based libor plus predefined spread ranges 25 basis points 400 basis points outstanding debt matures july 15 2018 total derivative liabilities civs 3872 march 31 2012 total derivative assets liabilities civs 170 14297 respectively march 31 2011 primarily recorded liabilities civs gains losses 54603 47697 respectively fiscal year ended march 31 2012 related derivative assets liabilities civs included nonoperating income civs gains losses 15364 18022 respectively fiscal year ended march 31 2011 related derivative assets liabilities civs included nonoperating income expense civs risk legg mason relation derivative assets liabilities civs excess investment funds march 31 2012 2011 vies legg mason holds significant variable interest sponsor holds variable interest primary beneficiary legg masons carrying value related vie assets liabilities maximum risk loss follows 1 includes equity investments company made required make earned uncollected management fees assets vies primarily comprised cash equivalents investment securities liabilities primarily comprised debt various expense accruals 19 liquidity fund support due stress liquidity markets prior years certain asset backed securities previously held liquidity funds legg mason subsidiary manages default restructured default although company required provide support funds legg mason elected maintain confidence clients maintain reputation marketplace certain cases support aaaaaa credit ratings funds clients lose confidence company could potentially withdraw funds favor investments offered competitors resulting reduction legg masons aum investment advisory fees march 31 2010 previously existing support arrangements expired terminated accordance terms year ended march 31 2010 legg mason recognized pretax gains 23171 16565 net income taxes represents reversal unrealized noncash losses recorded fiscal 2009 related four csas support investments nonasset backed securities amount also includes pretax gains foreign exchange forward contracts 1484 interest payment 1056 received related siv securities sold fiscal 2009 gains losses including interest payments related foreign exchange forward contracts included fund support nonoperating income expense consolidated statements income 20 subsequent events may 2012 legg masons board directors approved new capital plan includes refinancing notes defined note 7 25 convertible senior notes refinancing effected issuance 650000 55 senior notes due may 2019 net proceeds together cash hand 250000 borrowings existing revolving credit facility used repurchase 1250000 notes terms repurchase include repayment notes par plus accrued interest prepayment fee 6250 issuance warrants holders notes replicate extend contingent conversion feature notes warrants provide purchase 14205 shares legg masons common stock 88 per share subject customary antidilution adjustments expire july 2017 extinguishment notes results approximate 69000 pretax nonoperating charge including approximately 8000 charges deferred initial issuance notes hedge transactions purchased call options warrants executed conjunction initial issuance notes also extinguished part new capital plan legg masons board directors authorized 1000000 additional purchases legg mason common stock acceleration purchase remaining approximate 155000 legg mason common stock previously authorized first quarter fiscal 2013 new capital plan authorizes using 65 cash generated future operations beginning fiscal 2013 purchase shares legg mason common stock quarterly financial data dollars thousands except per share amounts unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results may 22 2012 closing price legg masons common stock 2439 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2013 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework based assessment management concluded march 31 2013 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2013 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2013 joseph sullivan president chief executive officer director peter h nachtwey senior executive vice president chief financial officer report independent registered public accounting firm board directors stockholders legg mason inc opinion accompanying consolidated balance sheets related consolidated statements income loss comprehensive income loss changes stockholders equity cash flows present fairly material respects financial position legg mason inc subsidiaries company march 31 2013 march 31 2012 results operations cash flows three years period ended march 31 2013 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2013 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 24 2013 consolidated balance sheets dollars thousands see notes consolidated financial statements consolidated statements income loss dollars thousands except per share amounts see notes consolidated financial statements consolidated statements comprehensive income loss dollars thousands see notes consolidated financial statements consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands consolidated statements cash flows continued dollars thousands see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see note 17 discussion vies material intercompany balances transactions eliminated appropriate prior years financial statement amounts reflect reclassifications certain less significant items conform current year presentation references fiscal 2013 2012 2011 refer legg masons fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america applicable rules regulations securities exchange commission sec require management make assumptions estimates affect amounts reported financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes consolidation management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements consolidation legg mason applies accounting standards codification asc topic 810 consolidation statement financial accounting standards 167 amendments financial accounting standards board interpretation 46r sfas 167 relating consolidation vies includes guidance determining consolidate vie necessary reassess consolidate vie assessment entities vies however certain investment funds including money market funds qualify deferral application sfas 167 continue assessed consolidation prior guidance asc topic 810 consolidation financial accounting standards board interpretation 46r consolidation variable interest entities interpretation arb 51 fin 46r normal course business legg mason sponsors manager various types investment vehicles certain investment vehicles considered vies others considered voting rights entities vres subject traditional consolidation concepts based ownership rights services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees legg mason sell transfer assets vies vres legg masons exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees vies material march 31 2013 2012 legg mason issued investment performance guarantees vies vres investors investment vehicles considered vres consolidated legg mason controlling financial interest investment vehicle absent substantive investor rights replace manager entity kickout rights financial accounting standards board interpretation 46r accounting standards update 201010 amendments statement 167 certain investment funds sponsored investment funds including money market funds qualify deferral revised accounting guidance legg mason determines primary beneficiary vie absorbs majority vies expected losses receives majority vies expected residual returns legg masons determination expected residual returns excludes gross fees paid decision maker unlikely legg mason primary beneficiary vies created manage assets clients qualify deferral unless legg masons ownership interest vie including interests related parties substantial unless legg mason may earn significant performance fees vie unless legg mason considered material implied variable interest determining whether primary beneficiary vie qualifies deferral legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees implied relationships determining primary beneficiary legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks determining whether vie significant disclosure purposes legg mason considers factors used determination primary beneficiary statement financial accounting standards 167 accounting standards codification topic 810 consolidation legg mason sponsors manager collateralized debt obligation entities cdos collateralized loan obligations clos qualify deferral assessed revised accounting guidance follows legg mason determines whether variable interest vie considering among things obligation absorb losses right receive benefits expected significant vie legg mason also considers management fee structure including seniority level fees current expected economic performance entity well provisions included governing documents might restrict guarantee expected loss residual return legg mason significant variable interest determines primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits potentially could significant vie evaluating whether obligation absorb losses right receive benefits potentially could significant vie legg mason considers factors regarding design terms characteristics investment vehicles including limited following qualitative factors legg mason involvement investment vehicle beyond providing management services legg mason holds equity debt interests investment vehicle legg mason transferred assets investment vehicle potential aggregate fees future periods insignificant relative potential cash flows investment vehicle variability expected fees relation potential cash flows investment vehicle insignificant revised accounting guidance prior guidance legg mason must consolidate vies deemed primary beneficiary march 31 2013 2012 legg masons consolidated balance sheets reflect 224193 291853 respectively assets 207835 271707 respectively debt issued clo despite fact assets cannot used legg mason legg mason obligated debt consolidation clo impact net income attributable legg mason incs common shareholders see note 17 additional information related application amended vie consolidation model required disclosures cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash restricted cash primarily represents longterm escrow deposits cash collateral required market hedge arrangements cash available legg mason general corporate use financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except legg masons longterm debt equity investments legg mason control investee primary beneficiary vie exert significant influence financial operating policies investee legg mason follows equity method accounting evaluation whether legg mason exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence legg mason may governing board investee legal rights investors entity pursuant funds operating documents relationship legg mason investors entity substantially legg masons equity method investees investment companies record underlying investments fair value therefore equity method accounting legg masons share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee legg masons share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense significant portion earnings losses attributable legg masons equity method investments offsetting compensation expense adjustments revenue sharing agreements deferred compensation arrangements therefore fluctuations market value investments material impact net income loss attributable legg mason inc legg mason also holds debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders equity noncontrolling interests comprehensive income loss net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium recorded interest method included interest income certain investment securities including held consolidated investment vehicles civs classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings equity fixed income securities classified trading availableforsale valued using closing market prices listed instruments broker price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices legg mason evaluates nontrading investment securities otherthantemporary impairment may exist fair value investment security adjusted cost extended period time otherthantemporary impairment determined exist amount impairment relates credit losses recognized charge income march 31 2013 2012 2011 amount temporary unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations may readily available including certain investments held civs management estimates value securities using variety methods resources including current available financial information investment industry addition financial instruments described derivative instruments clo loans bonds debt described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair values longterm debt march 31 2013 2012 aggregated 1206166 1214245 respectively carrying value fiveyear term loan approximates fair value debt credit facility variable interest rate based shortterm rate fair values estimated using publicly quoted market prices discounted cash flow analyses appropriate classified level 2 fair value hierarchy described derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason used foreign exchange forwards interest rate swaps hedge risk movement exchange rates interest rates financial assets limited basis also legg mason used futures contracts index funds hedge market risk certain seed capital investments addition certain civs use derivative instruments however risk legg mason relation derivative assets liabilities civs excess investment funds legg mason designated financial instruments hedge accounting defined accounting literature periods presented gains losses derivative instruments designated hedge accounting included income expense nonoperating income expense consolidated statements income loss exception gains losses derivative instruments civs recorded nonoperating income expense consolidated investment vehicles net consolidated statements income loss fair value measurements accounting guidance fair value measurements defines fair value establishes framework measuring fair value fair value defined exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date accounting guidance fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance objective fair value accounting measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically requires use judgment ascertain formerly active market become inactive determining fair values markets become inactive accounting guidance also relates otherthantemporary impairments intended bring greater consistency timing impairment recognition also intended provide greater clarity investors credit noncredit components impaired debt securities expected sold guidance also requires timely disclosures regarding expected cash flows credit losses aging securities unrealized losses fair value accounting guidance also establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category may include repurchase agreements fixed income securities certain proprietary fund products category also includes clo loans derivative liabilities civ level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds clo debt civ category may also include certain proprietary fund products redemption restrictions valuation asset liability may involve inputs one level hierarchy level fair value hierarchy fair value measurement falls entirety determined based lowest level input significant fair value measurement entirety proprietary fund products certain investments held civs valued net asset value nav determined applicable fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 fair values clo loans bonds determined based prices wellrecognized thirdparty pricing services utilize available market data therefore classified level 2 legg mason established controls designed assess reasonableness prices provided fair value clo debt valued using discounted cash flow methodology inputs used determine expected cash flows include assumptions forecasted default recovery rates market participant would use determining fair value clos underlying collateral assets given significance unobservable inputs fair value measurement clo debt valuation classified level 3 exchange traded options valued using last sale price absence sale last offering price options traded counter valued using dealer supplied valuations options classified level 1 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments reporting date transfers categories measured beginning period see note 3 additional information regarding fair value measurements fair value option legg mason elected fair value option certain eligible assets liabilities including corporate loans debt clo consolidating see note 17 management believes use fair value option eliminates certain timing differences better matches changes fair value assets liabilities related clo unrealized gains losses assets liabilities fair value option elected reported earnings decision elect fair value option determined instrument basis must applied entire instrument irrevocable elected assets liabilities measured fair value pursuant fair value option included assets liabilities consolidated investment vehicles consolidated balance sheets time company elected apply fair value option financial instruments appropriated retained earnings upon election fair value option eligible assets liabilities clo described legg mason recorded cumulative effect adjustment appropriated retained earnings consolidated investment vehicle consolidated balance sheets equal difference fair values clos assets liabilities difference recorded appropriated retained earnings investors clo legg mason shareholders ultimately realize benefits losses associated clo changes fair values clo assets liabilities recorded net income loss attributable noncontrolling interests consolidated statements income loss appropriated retained earnings consolidated investment vehicle consolidated balance sheets fixed assets fixed assets primarily consist equipment software leasehold improvements equipment consists primarily communications technology hardware furniture fixtures software includes purchased software internally developed software fixed assets reported cost net accumulated depreciation amortization depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements amortized depreciated initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill legg masons intangible assets consist principally asset management contracts manage proprietary funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife intangible assets goodwill amortized book purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred company perform tests include critical reviews significant assumptions determine intangible assets goodwill impaired minimum company performs tests annually december 31 indefinitelife intangible assets goodwill considering factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment determined fair values intangible assets subject amortization reviewed reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined market participants perspective based projected discounted cash flows take consideration estimates future fees profit margins growth rates taxes discount rates goodwill evaluated reporting unit level considered impairment carrying value reporting unit exceeds implied fair value reporting unit estimating fair value reporting unit legg mason uses valuation techniques principally based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition goodwill deemed recoverable reporting unit level also operating segment level legg mason defines global asset management segment results fact chief operating decision maker legg masons chief executive officer regularly receives discrete financial information consolidated global asset management business level regularly receive discrete financial information operating results lower level asset management affiliate level prior fiscal 2012 legg masons reporting units americas international divisions allocations goodwill management restructures acquisitions dispositions based relative fair values respective businesses restructured added sold divisions see note 5 additional information regarding intangible assets goodwill note 16 additional business segment information translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income loss gains losses resulting foreign currency transactions included net income loss investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients fees primarily based predetermined percentages market value assets management aum recognized period services performed may billed advance period earned based aum beginning billing period accordance related advisory contracts revenue associated advance billings deferred included current liabilities consolidated balance sheets recognized period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks relative absolute basis depending product recognized end performance measurement period accordingly neither advanced billings performance fees subject reversal largest portion performance fees earned based 12month performance periods end differing quarters year portion also based quarterly performance periods legg masons total aum period ended march 31 2013 2012 2011 approximately 6 accounts eligible earn performance fees legg mason responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution servicing expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc receipts recorded distribution service fee revenue received reduction unamortized balance deferred sales commissions corresponding expense management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2013 2012 2011 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 8259 9510 march 31 2013 2012 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforward benefits business combinations amortization intangible assets accrued compensation applicable accounting guidance tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information companys accounting policy classify interest related tax matters interest expense related penalties operating expense see note 7 additional information regarding income taxes loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plans restricted stock awards marketbased performance shares payable common stock deferred compensation payable stock compensation plans legg mason issues equity awards directors officers key employees accordance applicable accounting guidance compensation expense includes costs nonvested sharebased awards grant date fair value amortized respective vesting periods straightline method legg mason determines fair value stock options using blackscholes optionpricing model exception marketbased performance grants would valued monte carlo optionpricing model see note 11 additional information regarding stockbased compensation earnings per share basic earnings per share attributable legg mason inc common shareholders eps calculated dividing net income loss attributable legg mason inc weightedaverage number shares outstanding calculation weightedaverage shares includes common shares exchangeable common stock certain unvested sharebased payment awards considered participating securities contain nonforfeitable rights dividends diluted eps similar basic eps adjusts effect potential common shares unless antidilutive periods net loss potential common shares considered antidilutive see note 12 additional discussion eps restructuring costs may 2010 legg masons management committed plan streamline business model described note 15 streamlining initiative completed march 31 2012 costs associated initiative primarily related employee termination benefits incentives retain employees transition period charges consolidating leased office space contract termination costs termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statements income loss compensation items required employees provide future service therefore expensed ratably required service period contract termination costs expensed incurred capital plan may 2012 legg mason implemented capital plan refinancingrestructuring debt completion existing share repurchase authorization share repurchases result net income loss attributable legg mason inc year ended march 31 2013 includes pretax loss debt extinguishment 68975 net reduction outstanding debt obligations 350000 see notes 6 12 details developments december 12 2012 company modified employment arrangements management investment management affiliate permal group ltd permal modifications included company investing permal business part sharing certain compensation costs result lower margins business current revenue levels exchange higher margins significantly increased revenue levels addition company permal engaged implementing profits interest management equity plan key employees entitle participate 15 future growth value permal business noncontrolling interests noncontrolling interests related civs classified redeemable noncontrolling interests investors funds may request withdrawals time nonredeemable noncontrolling interests march 31 2013 2012 2011 noted net income loss attributable noncontrolling interests consolidated statements income loss also includes net income loss reclassified appropriated retained earnings consolidated investment vehicle consolidated balance sheets net income loss attributable noncontrolling interests years ended march 31 2013 2012 2011 included following amounts redeemable noncontrolling interests years ended march 31 2013 2012 2011 included following amounts recent accounting developments december 2011 financial accounting standards board fasb updated guidance disclosures offsetting assets liabilities require gross net information instruments transactions including derivatives repurchase reverse repurchase arrangements eligible offset balance sheet disclosures effective legg mason fiscal 2014 expected material impact legg masons consolidated financial statements july 2012 fasb updated guidance annual indefinitelived intangible asset tests impairment update permits companies assess qualitative factors determine likely fair value intangible asset less carrying amount basis determining whether necessary perform currently required quantitative fair value assessment update effective legg mason fiscal 2014 update expected material effect legg masons recorded indefinitelived assets legg mason still evaluating adoption january 2013 fasb updated guidance parents accounting cumulative translation adjustment upon sale transfer liquidation foreign subsidiary entity update states cumulative translation adjustment released earnings entity ceases controlling financial interest foreign subsidiary group assets within foreign subsidiary sale transfer results complete substantially complete liquidation foreign entity update effective legg mason fiscal 2014 update expected material effect legg masons cumulative translation adjustment legg mason still evaluating impact adoption 2 acquisitions march 13 2013 permal whollyowned subsidiary legg mason completed acquisition outstanding share capital fauchier partners management limited fauchier leading european based manager fundsofhedge funds bnp paribas investment partners sa accordance sale purchase agreement spa entered december 2012 transaction significantly expands permals institutional business creating global institutional capability across geographies client profiles time acquisition fauchier managed assets approximately 5400000 initial purchase price cash payment 63433 funded existing cash resources addition contingent consideration approximately 23000 approximately 30000 using exchange rates march 31 2013 may due second fourth anniversaries closing respectively dependent achieving certain financial targets subject catch adjustment contingent consideration liability established closing acquisition date fair value 21566 represents present value contingent consideration expected paid included liabilities consolidated balance sheet changes estimates fair value contingent consideration recorded nonoperating income loss consolidated statements income loss summary fair values assets acquired liabilities assumed follows 1 subject adjustment amounts ultimately realized provided spa fair value amortizable asset management contracts amortized period 6 years none acquired intangible assets goodwill deductible local tax purposes management estimated fair values indefinitelife fund management contracts based upon discounted cash flow analyses contingent consideration expected paid based upon revenue projections using unobservable market data inputs level 3 measurements typical acquisition portion business larger financial services firm related operations legg mason expects initial contraction acquired business significant assumptions used analyses included projected cash flows revenues discount rates summarized follows company presented pro forma combined results operations acquisition results operations reported accompanying consolidated statements income would materially different postacquisition financial results fauchier included legg masons consolidated financial results year ended march 31 2013 significant legg mason incurred acquisition costs 1380 included operating expenses consolidated statement income loss 3 investments fair values assets liabilities disclosures include details legg masons assets liabilities measured fair value excluding assets liabilities civs see note 17 variable interest entities consolidation investment vehicles information related assets liabilities civs measured fair value legg mason investments debt equity securities generally classified trading described note 1 investments march 31 2013 2012 follows 1 includes investments private equity securities readily determinable fair values net unrealized realized gain loss investment securities classified trading 18260 6063 28355 fiscal 2013 2012 2011 respectively legg masons availableforsale investments consist mortgage backed securities us government agency securities equity securities gross unrealized gains losses investments classified availableforsale 230 188 respectively march 31 2013 551 184 respectively march 31 2012 legg mason uses specific identification method determine cost security sold amount reclassified accumulated comprehensive income earnings proceeds gross realized gains losses sales maturities availableforsale investments follows legg mason investments classified heldtomaturity march 31 2013 2012 fair values financial assets liabilities company determined using following categories inputs 1 cash equivalents include highly liquid investments original maturities 90 days less cash investments actively traded money market funds measured nav classified level 1 cash investments time deposits measured amortized cost approximates fair value short time purchase instrument expected realization classified level 2 primarily mutual funds minimal market risk company change value primarily offset adjustment compensation expense related deferred compensation liability 3 trading proprietary fund products investments primarily represent mutual funds invested approximately 49 51 equity debt securities respectively march 31 2013 invested approximately 52 48 equity debt securities respectively march 31 2012 4 substantially legg masons equity method investments investment companies record underlying investments fair value fair value measured using legg masons share investees underlying net income loss predominately representative fair value adjustments investments held equity method investee 5 includes investments equity method approximates fair value relating longterm incentive compensation plans 43741 54934 march 31 2013 march 31 2012 respectively proprietary fund products investments 12600 23343 march 31 2013 march 31 2012 respectively classified investment securities consolidated balance sheets 6 amounts included noncurrent assets consolidated balance sheets periods presented substantially financial instruments valuation methods rely observable market inputs significant input utilize equity method cost method nav practical expedient discussed measurement uncertainty little relevance changes financial assets measured fair value using significant unobservable inputs level 3 years ended march 31 2013 2012 presented tables realized unrealized gains losses recorded level 3 investments included nonoperating income expense consolidated statements income loss change unrealized gains losses level 3 investments still held reporting date 1229 5495 years ended march 31 2013 2012 respectively significant transfers level 1 level 2 years ended march 31 2013 2012 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 2013 nature investments related liquidation restrictions factors may impact ultimate value realized nanot applicable 1 49 monthly redemption 51 quarterly redemption 38 subject twoyear lockup expires june 2013 2 63 monthly redemption 37 quarterly redemption 36 subject twoyear lockup expires june 2013 3 liquidations expected remaining term 4 legg masons investment fully redeemed quarter ended december 31 2012 upon liquidation fund 5 balance 4 remaining term less one year 96 remaining term 20 years 6 comprised approximately 32 68 level 2 level 3 assets respectively march 31 2013 13 87 level 2 level 3 assets respectively march 31 2012 current plans sell investments held march 31 2013 4 fixed assets following table reflects components fixed assets march 31 depreciation amortization expense related fixed assets 73829 74221 79835 fiscal 2013 2012 2011 respectively includes accelerated depreciation amortization 21020 fiscal 2013 related initiative reduce space requirements 10256 fiscal 2012 related business streamlining initiative 5 intangible assets goodwill indefinitelife intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair value assets exceeds book value intangible assets subject amortization considered impairment reporting period fair value less book value legg mason record impairment charge following table reflects components intangible assets part legg masons annual impairment testing process considering aspects modifications permal compensation related arrangements discussed note 1 december 12 2012 updated december 31 2012 company concluded carrying value two significant indefinitelife fund management contract intangible assets trade name asset exceeded respective fair values assets impaired aggregate amount 734000 impairment charges resulted number trends factors including decrease nearterm margin projections ii increase rate used discount projected future cash flows primarily due company specific factors including continued market regulatory influences continued stock price uncertainty search permanent chief executive officer ongoing impairment testing process iii recent outflows related reductions assets management iv reduction nearterm projected growth rates changes resulted reduction projected cash flows legg masons overall assessment fair value assets domestic mutual fund management contracts asset permal fundsofhedge fund management contracts asset permal trade name declined carrying values accordingly impaired 396000 321000 17000 respectively management estimated fair values assets based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used cash flow analyses included projected cash flows discount rates summarized follows projected cash flow growth rates assets dependent product investment performance client aum flows market conditions discount rates influenced changes market conditions well interest rates factors decreases projected cash flow growth rates andor increases discount rates could result lower fair value measurements potential additional impairments could material impairments indefinitelife intangible assets amortizable management contracts intangible assets goodwill december 31 2012 legg mason also determined triggering events occurred march 31 2013 would require impairment testing changes indefinitelife intangible assets impairments noted fauchier business acquisition discussed note 2 relate impact foreign currency translation march 31 2013 amortizable asset management contracts amortized weightedaverage remaining life 28 years estimated amortization expense next five fiscal years follows change carrying value goodwill summarized legg mason also recognizes tax benefit amortization excess tax basis related citigroup asset management cam acquisition accordance accounting guidance income taxes tax benefit recorded reduction goodwill deferred tax liabilities benefit realized 6 shortterm borrowings longterm debt disclosures include details legg mason’s debt excluding debt civs see note 17 variable interest entities consolidation investment vehicles information related debt civs accreted value longterm debt consists following january 2008 legg mason sold 1250000 25 convertible senior notes” due 2015 may 2012 legg mason announced capital plan included refinancing notes discussed refinancing effected issuance 650000 55 senior notes net proceeds together cash hand 250000 additional borrowing existing revolving credit facility used repurchase entire 1250000 face amount notes also pursuant capital plan june 2012 legg mason entered unsecured credit agreement provides undrawn 500000 revolving credit facility 500000 term loan also discussed proceeds term loan used repay 500000 outstanding borrowings previous revolving credit facility terminated march 31 2012 250000 outstanding previous revolving credit facility effective interest rate 29 500000 revolving credit facility may increased aggregate amount 250000 subject approval lenders expires june 2017 revolving credit facility interest rate libor plus 150 basis points annual commitment fee 20 basis points interest rate may change future based changes legg masons credit ratings revolving credit facility available fund working capital needs general corporate purposes borrowings outstanding facility march 31 2013 revolving credit facility term loan standard financial covenants including maximum net debt ebitda ratio defined documents 25 1 minimum ebitda interest ratio defined documents 40 1 march 31 2013 legg masons net debt ebitda ratio 14 1 ebitda interest expense ratio 116 1 therefore legg mason maintained compliance applicable covenants fiveyear amortizing term loan 500000 term loan entered conjunction unsecured credit agreement noted repaid time due four annual installments 50000 beginning june 2013 remainder repaid maturity june 2017 term loan bears interest libor plus 150 basis points may change future based changes legg masons credit ratings effective interest rate march 31 2013 17 55 senior notes 650000 55 senior notes senior notes due may 2019 sold discount 6754 amortized interest expense sevenyear term senior notes subject certain nonfinancial covenants including provisions relating dispositions certain assets could require percentage related proceeds applied accelerated repayments senior notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 050 together related accrued unpaid interest february 2013 senior notes registered trade public markets consistent terms registration rights agreement signed connection issuance addition terms 55 senior notes interest rate paid notes increase modestly legg masons credit ratings reduced investment grade 25 convertible senior notes related hedge transactions prior repurchase notes may 2012 previously discussed legg mason accreting carrying value notes principal amount maturity using interest rate 65 effective borrowing rate nonconvertible debt time issuance expected life seven years resulting interest expense 5839 39077 36688 years ended march 31 2013 2012 2011 respectively notes convertible certain conditions met initial conversion rate 113636 shares legg mason common stock per one thousand dollar principal amount notes equivalent conversion price approximately 88 per share maximum 14205 shares subject adjustment unconverted notes would mature par january 2015 upon conversion one thousand dollar principal amount note holder would receive cash amount equal one thousand dollars less conversion value note conversion value exceeded principal amount note conversion legg mason would also deliver election cash common stock combination cash common stock conversion value excess one thousand dollars connection sale notes january 2008 legg mason entered convertible note hedge transactions respect common stock “purchased call options” financial institution counterparties “hedge providers” purchased call options exercisable solely connection conversions notes event market value per share legg mason common stock time exercise greater exercise price purchased call options equal 88 conversion price notes subject adjustment simultaneously separate transactions legg mason also sold hedge providers warrants purchase aggregate subject adjustment 14205 shares common stock net sharesettled basis exercise price 10746 per share common stock purchased call options warrants part terms notes affect holders rights notes hedging transactions net cost approximately 83000 paid proceeds notes recorded reduction additional paidin capital transactions effectively increased conversion price notes 10746 per share common stock legg mason contractual rights execution related agreements ability settle obligations conversion feature notes purchased call options warrants legg mason common stock accordingly transactions accounted equity subsequent adjustment changes value obligations terms repurchase notes may 2012 noted included repayment par plus accrued interest prepayment fee 6250 noncash exchange warrants “warrants” holders notes replicated extended contingent conversion feature notes cash payment 1256250 repurchase notes allocated liability equity components based liability fair value 1193971 determined using current market interest rate 41 resulting loss debt extinguishment 68975 including 7851 accelerated deferred issue costs remaining balance cash payment allocated equity component notes 62279 reduction additional paidin capital offset related tax benefits 31446 1193971 amount cash repurchase payment allocated liability component notes upon extinguishment exceeds initial allocated value issuance 977933 requiring consolidated statements cash flows year ended march 31 2013 include allocation 216038 excess operating activities warrants issued holders notes connection repurchase notes provide purchase aggregate subject adjustment 14205 shares legg mason common stock net share settled basis exercise price 88 per share upon exercise warrants legg mason required deliver holders warrants election either shares common stock cash amount based excess market price per share common stock exercise price warrants expire july 2017 legg mason option settle obligations warrants legg mason common stock accordingly warrants accounted equity connection extinguishment notes hedge transactions purchased call options warrants executed connection initial issuance notes also terminated term loans fiscal 2006 subsidiary legg mason entered 12803 term loan agreement finance aircraft outstanding balance march 31 2012 8568 paid full fiscal 2013 march 31 2013 aggregate maturities longterm debt based contractual terms follows 7 income taxes components income loss income tax provision benefit follows components income tax expense benefit follows reconciliation difference effective income tax benefit rate statutory federal income tax benefit rate follows 1 state income taxes include changes valuation allowances net impact deferred tax assets changes state apportionment factors planning strategies effect foreign tax rates also includes changes valuation allowances includes changes federal valuation allowances see schedule change valuation allowances jurisdiction quarter ended september 30 2010 uk finance 2 act 2010 enacted reduced main uk corporate tax rate 28 27 july 2011 uk finance act 2011 act enacted act reduced main uk corporate tax rate 27 26 effective april 1 2011 26 25 effective april 1 2012 july 2012 uk finance act 2012 enacted reducing main uk corporate tax rate 24 effective april 1 2012 23 effective april 1 2013 reductions uk corporate tax rate resulted tax benefits 18075 18268 8878 recognized fiscal 2013 2012 2011 respectively result revaluation deferred tax assets liabilities new rates addition year ended march 31 2012 legg mason recorded 18254 tax benefits related restructuring australian business deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows certain tax benefits associated legg masons employee stock plans recorded directly stockholders equity tax benefit recorded equity fiscal 2013 2012 2011 due net operating loss position company march 31 2013 additional 6700 net operating loss recognized increase stockholders equity ultimately realized connection completion filing fiscal 2010 federal tax return december 2010 legg mason recorded net additional tax benefit approximately 36000 fiscal 2011 respect equity unit extinguishment occurred fiscal 2010 tax benefit increased additional paidin capital manner consistent fiscal 2010 allocation extinguishment payment legg mason various loss carryforwards may provide future tax benefits related valuation allowances established accordance accounting guidance income taxes managements opinion likely benefits realized substantially legg masons deferred tax assets relate us uk taxing jurisdictions march 31 2013 us federal deferred tax assets aggregated 770933 realization expected require approximately 4200000 future us earnings approximately 331606 must form foreign source income based estimates future taxable income using assumptions consistent used legg masons goodwill impairment testing likely current federal tax benefits relating net operating losses realizable valuation allowance necessary time respect resulting foreign tax credits likely tax benefits relating utilization 36319 foreign tax credits realized additional valuation allowance 17066 provided fiscal 2013 addition valuation allowance established prior years substantial portion deferred tax assets relating uk taxing jurisdictions tax planning may enhance legg masons tax positions realization current tax benefits dependent significant tax strategies march 31 2013 us state deferred tax assets aggregated approximately 172704 due state tax planning allow utilization nols generated certain jurisdictions company recognized net valuation allowance release 2046 due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary net valuation allowance release approximately 3500 fiscal 2013 primarily related full release valuation allowance deferred tax assets related australia singapore offset establishment valuation allowance certain uk deferred tax assets extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets following deferred tax assets valuation allowances relating carryforwards recorded march 31 2013 2012 respectively 1 substantially us state net operating losses carryforward fiscal 2029 2 due potential change factors relating apportionment income various states companys effective state tax rates subject fluctuation impact value companys deferred tax assets including net operating losses could material impact future effective tax rate company legg mason total gross unrecognized tax benefits approximately 72650 90831 77653 march 31 2013 2012 2011 respectively totals approximately 46340 62400 53500 respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates fiscal 2013 result expiration statutes limitation completion tax authority examinations unrecognized benefits 16842 realized reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 2013 2012 2011 follows although management cannot predict degree certainty timing ultimate resolution matters review various taxing jurisdictions reasonably possible companys gross unrecognized tax benefits balance may change within next twelve months 11400 result expiration statutes limitation completion tax authorities exams company accrues interest related unrecognized tax benefits interest expense recognizes penalties operating expense years ended march 31 2013 2012 2011 company recognized approximately 5500 1300 3000 respectively substantially interest march 31 2013 2012 2011 legg mason approximately 14000 10000 9000 respectively accrued interest penalties tax contingencies consolidated balance sheets legg mason examination internal revenue service inland revenue service tax authorities various states following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal 2009 us federal fiscal 2012 united kingdom fiscal 2004 state california fiscal 2005 state new york fiscal 2009 states connecticut maryland massachusetts company anticipate making significant cash payments settlement audits excess amounts reserved year ended march 31 2013 legg mason repatriated approximately 394000 foreign cash plans repatriate another 325000 next several years order make cash available us general corporate purposes legg mason anticipates incremental tax cost approximately 18000 respect repatriation adjusted tax reserve accordingly repatriation accumulated prior period foreign earnings currently planned however circumstances change legg mason provide pay applicable additional us taxes connection repatriation funds practical time determine income tax liability would result repatriation accumulated foreign earnings except noted legg mason intends permanently reinvest cumulative undistributed earnings nonus subsidiaries nonus operations accordingly us federal income taxes provided undistributed earnings extent permanently reinvested legg masons nonus operations practical time determine income tax liability would result upon repatriation earnings 8 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2026 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2013 minimum annual aggregate rentals operating leases service agreements follows minimum rental commitments shown reduced 151664 minimum sublease rentals received future noncancelable subleases approximately half due one counterparty subtenant defaults sublease legg mason may incur operating charges adjust existing liability 31321 reflect expected future sublease rentals reduced amounts result current commercial real estate market minimum rental commitments include 877807 real estate equipment leases 87135 service maintenance agreements included table 75894 commitments related space vacated subleases pursued lease liability adjusted fiscal 2013 2012 reflect present value excess existing lease obligations estimated sublease income related costs including newly vacated subleased space lease liability takes consideration various assumptions including amount time take secure sublease agreement prevailing rental rates applicable real estate markets march 31 2013 liability related vacant space sublease pursued aggregated 35592 subject adjustment based circumstances real estate markets may require change assumptions actual terms sublease ultimately secured addition accelerated depreciation amortization discussed note 4 related costs incurred fiscal 2013 driven initiative reduce space requirements fiscal 2012 related business streamlining initiative aggregated 28788 13375 respectively included occupancy expense consolidated statements income following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes period provided landlord free rent period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2013 2012 legg mason commitments invest approximately 37410 36653 respectively limited partnerships make private investments commitments expected funded required end respective investment periods ranging fiscal 2021 connection acquisition fauchier discussed note 2 contingent consideration approximately 23000 approximately 30000 using exchange rates march 31 2013 may due second fourth anniversaries closing respectively dependent upon achievement certain financial targets subject catch adjustment contingent consideration liability acquisition date fair value 21566 normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications considered financial guarantees relevant accounting guidance legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial normal course business legg mason also received subpoenas currently involved governmental selfregulatory agency inquiries investigations time proceedings involving asset management activities accordance guidance accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings probable loss incurred reasonable estimate loss made transaction citigroup december 2005 legg mason transferred citigroup subsidiaries constituted private clientcapital markets pccm businesses thus transferring entities would primary liability customer complaint litigation regulatory liabilities proceedings arising businesses however part transaction legg mason agreed indemnify citigroup customer complaint litigation regulatory liabilities legg masons former pccm businesses result preclosing events ultimate resolution matters cannot determined based current information consultation legal counsel management believes accrual range reasonably possible losses march 31 2013 2012 material similarly although citigroup transferred legg mason entities would primarily liable customer complaint litigation regulatory liabilities proceedings cam business citigroup agreed indemnify legg mason customer complaint litigation regulatory liabilities cam business result preclosing events one legg masons asset management subsidiaries named defendant lawsuit filed former institutional client late august 2011 complaint alleges breach contract breach fiduciary duty arising investments former clients account allegedly inconsistent accounts objectives seeks damages excess 90000 legg mason believes claims without merit intends defend matter vigorously discovery case ongoing pretrial conference currently scheduled october 2013 continued preliminary status matter legg mason cannot estimate possible loss range loss matter addition although legg mason believes matter would likely covered insurance policies may substantially mitigate amount eventual loss unusual litigation point process assurance action material effect legg masons financial position results operations cash flows additionally two matters subject regulatory investigations involving one legg masons asset management subsidiaries regarding compliance applicable legal requirements respect investments made certain client accounts legg mason continuing discussions resolve matters subsequent fiscal yearend result discussions legg mason agreed principle subject agreement final terms documentation settle two matters approximately 20000 accrued march 31 2013 majority covered expected insurance proceeds ultimate loss matters beyond amounts covered insurance policies substantially mitigated reductions compensation revenue share arrangements specific matters discussed legg mason cannot estimate reasonably possible loss range loss associated matters litigation including described customer complaints legal actions inquiries proceedings investigations inability provide reasonably possible amount range losses uncertainty ultimate outcome matter liability damage issues developed point legg mason conclude reasonable possibility loss meaningful amount range possible losses numerous aspects customer complaints legal actions inquiries proceedings investigations prevent legg mason estimating related amount range reasonably possible losses aspects include among things nature matters significant relevant facts known uncertain dispute damages sought specified uncertain unsupportable unexplained addition legal actions discovery may yet started may complete may conclusive meaningful settlement discussions may occurred regulatory matters investigations may run course without clear indication wrongdoing fault conclusion managements opinion adequate accrual made march 31 2013 provide probable losses may arise matters company could reasonably estimate amount legg masons financial condition results operations cash flows could materially affected period matter ultimately resolved addition ultimate costs litigationrelated charges vary significantly periodtoperiod depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement march 31 2013 2012 legg masons liability losses contingencies 20300 200 respectively fiscal 2013 2012 2011 legg mason recorded litigation related charges approximately 5200 1000 2500 respectively net recoveries 15200 fiscal 2013 fiscal 2013 2012 2011 liability reduced settlement payments approximately 300 1300 23500 respectively 9 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees plans legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation match employee 401k contributions matches range 50 100 employee 401k contributions maximum lesser 6 employee compensation specified amount 15 per year corporate profit sharing matching contributions together contributions made subsidiary plans totaled 25868 22336 22739 fiscal 2013 2012 2011 respectively addition employees make voluntary contributions certain plans 10 capital stock march 31 2013 authorized numbers common preferred shares 500000 4000 respectively march 31 2013 2012 11948 13932 shares common stock respectively reserved issuance legg masons equity plans march 31 2010 1099 common shares reserved exchangeable shares issued connection acquisition legg mason canada inc exchangeable shares exchangeable time holder oneforone basis shares legg masons common stock included basic shares outstanding may 2010 outstanding exchangeable shares converted shares legg mason common stock may 2012 part capital plan legg masons board directors authorized 1000000 additional purchases legg mason common stock well completion repurchase remaining approximate 155000 legg mason common stock previously authorized expiration date attached new authorization fiscal 2013 legg mason purchased retired 16199 shares common stock 425475 open market purchases completed repurchase common stock previous authorization began purchases new authorization fiscal 2012 legg mason purchased retired 13597 shares common stock 400266 open market purchases remaining balance authorized stock buyback approximately 730000 may 2008 legg mason issued 1150000 equity units unit consisting 5 interest one thousand dollar principal amount senior notes due june 30 2021 purchase contract committing holder purchase shares legg masons common stock june 30 2011 fiscal 2010 legg mason issued approximately 18596 shares equity unit tender offer exchange 91 outstanding equity units fiscal 2012 legg mason issued 1830 shares legg mason common stock upon exercise purchase contracts remaining equity units senior notes equity units retired remarketing discussed note 6 warrants issued connection repurchase notes could result issuance maximum 14205 shares legg mason common stock subject adjustment certain conditions met changes common stock shares exchangeable common stock three years ended march 31 2013 2012 2011 respectively follows dividends declared per share 044 032 020 fiscal 2013 2012 2011 respectively dividends declared paid march 31 2013 2012 2011 14185 11493 8990 respectively included current liabilities 11 stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plans restricted stock awards units marketbased performance shares payable common stock deferred compensation payable stock effective july 26 2011 number shares authorized issued legg masons active equity incentive stock plan increased 6500 41500 shares available issuance active equity incentive stock plan march 31 2013 11273 options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments four five years expire within eight ten years date grant compensation expense relating stock options years ended march 31 2013 2012 2011 10979 14076 19926 respectively related income tax benefit years ended march 31 2013 2012 2011 4293 5539 7718 respectively stock option transactions legg masons equity incentive plans years ended march 31 2013 2012 2011 respectively summarized total intrinsic value options exercised years ended march 31 2013 2012 2011 168 398 6977 respectively march 31 2013 aggregate intrinsic value options outstanding 12649 following information summarizes legg masons stock options outstanding march 31 2013 march 31 2013 2012 2011 options exercisable 3254 3334 2860 shares respectively weightedaverage exercise prices 6907 7360 7720 respectively stock options exercisable march 31 2013 weightedaverage remaining contractual life 26 years march 31 2013 aggregate intrinsic value options exercisable 3555 following information summarizes legg masons stock options exercisable march 31 2013 following information summarizes unvested stock options legg masons equity incentive plans year ended march 31 2013 unamortized compensation cost related unvested options march 31 2013 17167 expected recognized weightedaverage period 16 years cash received exercises stock options legg masons equity incentive plans 660 2851 12094 years ended march 31 2013 2012 2011 respectively tax benefit expected realized tax deductions option exercises totaled 45 47 2645 years ended march 31 2013 2012 2011 respectively weightedaverage fair value stock option grants years ended march 31 2013 2012 2011 using blackscholes option pricing model 947 1313 1432 per share respectively following weightedaverage assumptions used model grants fiscal 2013 2012 2011 legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 4500 total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged earnings fiscal years ended march 31 2013 2012 2011 approximately 107 102 shares respectively purchased open market behalf participating employees fiscal 2013 2012 2011 legg mason recognized 238 267 286 respectively compensation expense related stock purchase plan january 28 2008 legg mason compensation committee approved grants senior officers 120 marketbased performance shares fiscal 2013 remaining 100 shares award forfeited resulting outstanding balance march 31 2013 restricted stock restricted stock unit transactions years ended march 31 2013 2012 2011 respectively summarized restricted stock restricted stock unit awards noncash transactions fiscal 2013 2012 2011 legg mason recognized 46351 32826 35770 respectively compensation expense related tax benefits 17697 12705 13854 respectively restricted stock restricted stock unit awards unamortized compensation cost related unvested restricted stock restricted stock unit awards 3738 shares yet recognized march 31 2013 66854 expected recognized weightedaverage period 16 years connection change legg masons chief executive officer september 2012 325 shares restricted stock granted certain executives key employees aggregate value 8400 march 2013 vesting 85 shares accelerated remaining shares vest march 31 2014 compensation expense year ended march 31 2013 includes approximately 6400 accelerated stockbased net compensation costs associated departure three legg mason executive officers fiscal 2013 1400 relates accelerated vesting shares march 2013 legg mason also equity plan nonemployee directors equity plan directors may elect receive shares stock restricted stock units prior july 19 2007 amendment plan directors could also elect receive stock options granted old plan immediately exercisable price equal market value shares date grant term ten years fiscal 2013 2012 2011 legg mason recognized expense 1250 1375 1425 respectively awards plan shares options restricted stock units issuable equity plan limited 625 shares aggregate 328 shares issued plan march 31 2013 march 31 2013 2012 2011 nonemployee directors held 112 184 220 stock options respectively included outstanding options presented table march 31 2013 2012 2011 nonemployee directors held 91 74 62 restricted stock units respectively vest grant date therefore included unvested shares restricted stock restricted stock units table years ended march 31 2013 2012 nonemployee directors exercise stock options restricted stock units distributed year ended march 31 2011 nonemployee directors exercised 9 stock options fiscal year ended march 31 2011 7 restricted stock units distributed nonemployee directors years ended march 31 2013 2012 2011 nonemployee directors granted 17 12 17 restricted stock units 35 31 shares common stock respectively fiscal years ended march 31 2013 2012 2011 72 36 59 stock options canceled forfeited respectively fiscal 2012 legg mason established longterm incentive plan ltip equity incentive plan provides additional element compensation based performance ltip executive officers granted cash value performance units june 2011 quarter september 2012 quarter vest end performance periods march 31 2014 march 31 2015 respectively based upon legg masons cumulative adjusted earnings per share respective periods awards granted ltip may settled cash andor shares legg mason common stock discretion legg mason estimated payout amounts awards expensed future vesting periods based probability assessment expected outcome ltip provisions deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends 378 additional shares reserved future issuance plan fiscal 2013 2012 2011 legg mason recognized 165 191 263 respectively compensation expense related plan fiscal 2013 2012 2011 legg mason issued 71 68 77 shares respectively plan weightedaverage fair value per share grant date 2307 2705 2838 respectively legg mason issued shares connection certain deferred compensation plans held rabbi trusts assets rabbi trusts consolidated employer value employers stock held rabbi trusts classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trusts corresponding liability related deferred compensation plans presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trusts march 31 2013 2012 2011 726 690 706 respectively part companys streamlining initiative discussed note 15 employment certain recipients stock option restricted stock awards terminated termination benefits extended employees included accelerated vesting portion equity incentive awards would vested january 1 2012 original terms awards fiscal 2011 portion awards subject accelerated vesting revalued expensed new vesting period impact included also connection restructuring initiative departure executive officer december 2010 resulted accelerated vesting portion certain equity incentive awards impact also included may 2013 legg mason awarded options purchase 500 shares legg mason inc common stock exercise price 3146 president chief executive officer award grant date fair value 5525 subject vesting requirements majority contain marketbased hurdles well requirement certain shares received upon exercise retained two year period 12 earnings per share basic eps calculated dividing net income loss attributable legg mason inc weightedaverage number shares outstanding calculation weightedaverage shares includes common shares unvested restricted shares deemed participating securities diluted eps similar basic eps adjusts effect potentially issuable common shares except inclusion antidilutive periods net loss attributable legg mason inc reported inclusion potentially issuable common shares decrease net loss per share since would antidilutive shares excluded calculation may 2012 part capital plan legg masons board directors authorized 1000000 additional purchases legg mason common stock well completion repurchase remaining approximate 155000 legg mason common stock previously authorized capital plan authorizes using 65 cash generated future operations beginning fiscal 2013 purchase shares legg mason common stock years ended march 31 2013 2012 legg mason purchased retired 16199 13597 shares common stock respectively 425475 400266 open market purchases fiscal 2013 purchases completed repurchase common stock previous authorization includes approximately 270000 purchases new authorization fiscal 2011 legg mason purchased retired 14552 shares common stock 445465 accelerated share repurchase agreements open market purchases repurchases reduced weightedaverage shares outstanding 8449 9716 9088 shares years ended march 31 2013 2012 2011 respectively par value shares repurchased charged common stock excess purchase price par first charged additional paidin capital remaining balance charged retained earnings year ended march 31 2013 2012 legg mason issued 2185 1370 shares restricted stock respectively primarily related annual incentive awards retention awards shares issued fiscal 2013 2012 1807 1153 shares respectively included weightedaverage shares outstanding june 2011 legg mason issued 1830 shares common stock upon exercise purchase contracts remaining outstanding equity units shares 1380 shares included weightedaverage shares outstanding year ended march 31 2012 following table presents computations basic diluted eps 1 diluted shares basic shares periods net loss diluted eps calculation year ended march 31 2013 excludes 5730 potential common shares antidilutive due net loss fiscal year diluted eps calculation years ended march 31 2013 2012 2011 excludes potential common shares issuable 25 convertible senior notes extinguished may 2012 warrants exchanged note conversion feature market price legg mason common stock exceeded price conversionexercise would dilutive using treasury stock method also march 31 2012 2011 warrants issued connection convertible note hedge transactions associated issuance 25 convertible senior notes excluded calculation diluted earnings per share effect would antidilutive options purchase 5239 5204 shares fiscal years ended march 31 2012 2011 respectively included computation diluted earnings per share presumed proceeds exercising options including related income tax benefits exceed average price common shares period therefore options deemed antidilutive 13 accumulated comprehensive income accumulated comprehensive income includes cumulative foreign currency translation adjustments net tax gains losses investment securities change accumulated translation adjustments fiscal 2013 2012 primarily resulted impact changes brazilian real japanese yen british pound australian dollar polish zloty relation us dollar net assets legg masons subsidiaries brazil japan united kingdom australia poland real yen pound australian dollar zloty functional currencies respectively summary legg masons accumulated comprehensive income march 31 2013 2012 follows significant amounts reclassified accumulated comprehensive income consolidated statements income loss years ended march 31 2013 2012 2011 14 derivatives hedging disclosures detail legg mason’s derivatives hedging activities excluding derivatives hedging activities civs see note 17 variable interest entities consolidation investment vehicles information related derivatives hedging civs legg mason uses currency forwards economically hedge risk movements exchange rates primarily us dollar euro japanese yen singapore dollar british pound chinese yuan south korean consolidated balance sheets legg mason nets fair value certain foreign currency forwards executed counterparty legg mason legal right intent settle contracts net basis legg mason also uses market hedges certain seed capital investments entering futures contracts sell index funds benchmark hedged seed capital investments open futures contracts required cash collateral 7131 1919 march 31 2013 2012 respectively following table presents fair values march 31 2013 2012 derivative instruments designated accounting purposes hedging instruments classified assets liabilities following table presents gains losses recognized derivative instruments years ended march 31 2013 2012 2011 15 restructuring may 2010 legg mason announced plan streamline business model drive increased profitability growth primarily involved transitioning certain shared services investment affiliates closer actual client relationships plan involved headcount reductions operations technology administrative areas partially offset headcount increases affiliates enabled legg mason eliminate portion corporate office space primarily dedicated operations technology employees initiative completed march 31 2012 total transitionrelated costs 127500 including noncash charges 30841 completion plan march 2012 total transitionrelated costs incurred 79686 related charges employee termination benefits retention incentives transition period recorded transitionrelated compensation consolidated statements income loss remainder represents costs including charges consolidating leased office space early contract terminations asset disposals professional fees recorded appropriate operating expense classifications charges transitionrelated costs 73066 54434 years ended march 31 2012 2011 respectively primarily represent costs lease loss accruals fixed asset accelerated depreciation related space permanently abandoned well costs severance retention incentives table presents summary changes transitionrelated liability march 31 2011 march 31 2013 1 includes lease loss accruals 17983 space permanently abandoned 16 business segment information legg mason global asset management company provides investment management related services wide array clients due realignment executive management team beginning fiscal 2012 previous separation americas international divisions eliminated company operates one reportable business segment global asset management global asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue global asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks revenues geographic location primarily based geographic location advisor domicile fund families managed legg mason table reflects revenues longlived assets geographic region march 31 17 variable interest entities consolidation investment vehicles legg mason investment manager cdosclos considered vies revised accounting guidance since investors structures lack unilateral decision making authority investment vehicles created sole purpose issuing collateralized instruments offer investors opportunity returns vary risk level investment legg masons management fee structure investment vehicles typically includes senior management fee may also include subordinated incentive management fees legg mason holds equity interest investment vehicles transfer sell assets investment vehicles accordance methodology described note 1 legg mason concluded variable interest two investment vehicles clos primary beneficiary one two clos although legg mason holds equity interest either investment vehicles power control significant variable interest one clo expected subordinated fees march 31 2013 2012 balances related clo consolidated companys consolidated financial statements collateral assets vie primarily comprised investments corporate loans lesser extent bonds assets clo cannot used legg mason gains losses related assets impact net income loss attributable legg mason inc liabilities vie primarily comprised debt clos debt holders recourse general credit assets legg mason clo consolidated level expected subordinated fees insignificant addition legg mason primary beneficiary one sponsored investment fund vie also held controlling financial interest one sponsored investment fund vre consolidated march 31 2013 2012 2011 effective december 31 2011 controlling financial interest 20814 second sponsored investment fund vre consolidated legg mason march 31 2011 redeemed accordingly fund deconsolidated legg mason funds balance sheet amounts excluded legg masons consolidated balance sheet march 31 2012 later partial income statement cash flow amounts fund included legg masons consolidated income cash flow statements year ended march 31 2012 legg masons investment civs march 31 2013 2012 39056 38919 respectively represents maximum risk loss excluding uncollected advisory fees assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds following tables reflect impact civs consolidated balance sheets march 31 2013 2012 respectively consolidated statements income loss years ended march 31 2013 2012 2011 respectively consolidating balance sheets consolidating statements income loss nonoperating income expense includes interest income interest expense net gains losses investments longterm debt determined accrual basis consolidation civs impact net income loss attributable legg mason inc fair value financial assets liabilities civs determined using following categories inputs march 31 2013 except clo debt substantially financial instruments valuation methods rely observable market inputs significant input utilize nav practical expedient measurement uncertainty little relevance following table provides summary qualitative information relating valuation clo debt significant increases decreases inputs isolation would result significantly lower higher fair value measurement generally constant rate prepayment default rate driven market conditions related interest rates credit ratings factors inputs noted could move independently depending specific market conditions making possible varying market conditions drive changes inputs positive negative zero correlation changes assets liabilities civs measured fair value using significant unobservable inputs level 3 years ended march 31 2013 2012 presented table realized unrealized gains losses recorded level 3 assets liabilities civs included nonoperating income expense civs consolidated statements income loss total unrealized gains losses level 3 investments liabilities civs relating assets liabilities still held reporting date 11842 7297 years ended march 31 2013 2012 respectively transfers level 1 level 2 either years ended march 31 2013 2012 nav values used practical expedient civs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 2013 march 31 2012 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 11 daily redemption 8 monthly redemption 2 quarterly redemption 79 subject three five year lockup side pocket provisions 2 5 daily redemption 6 monthly redemption 5 quarterly redemption 84 subject three five year lockup side pocket provisions 3 liquidations expected remaining term current plans sell investments held march 31 2013 legg mason elected fair value option certain eligible assets liabilities including corporate loans debt consolidated clo management believes use fair value option eliminates certain timing differences better matches changes fair value assets liabilities related clo following table presents fair value unpaid principal balance clo loans bonds debt carried fair value fair value option march 31 2013 march 31 2012 years ended march 31 2013 2012 total net gains losses 8455 2054 respectively recognized nonoperating income loss civs consolidated statements income loss related assets liabilities fair value option elected clo loans clo debt measured fair value floating interest rates therefore substantially estimated gains losses included earnings years ended march 31 2013 2012 attributable instrument specific credit risk clo debt bears interest variable rates based libor plus predefined spread ranges 25 basis points 400 basis points outstanding debt matures july 15 2018 clo commenced winddown july 2012 proceeds securities cannot reinvested applied reduce debt outstanding quarter subsequent receipt required payments total derivative liabilities civs 2930 3872 march 31 2013 2012 respectively recorded liabilities civs gains losses 942 1223 respectively fiscal year ended march 31 2013 54603 47697 respectively fiscal year ended march 31 2012 related derivative liabilities civs included nonoperating income loss civs risk legg mason relation derivative assets liabilities civs excess investment funds march 31 2013 2012 vies legg mason holds variable interest sponsor holds variable interest primary beneficiary legg masons carrying value maximum risk loss follows 1 includes equity investments company made required make earned uncollected management fees 2 upon liquidation fund legg masons investment fully redeemed quarter ended december 31 2012 companys total aum unconsolidated vies 17090267 17534840 march 31 2013 2012 respectively assets vies primarily comprised cash equivalents investment securities liabilities primarily comprised debt various expense accruals vies consolidated legg mason absorb majority vies expected losses receive majority vies expected residual returns quarterly financial data dollars thousands except per share amounts unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results may 21 2013 closing price legg masons common stock 3613 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2016 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework 2013 based assessment management concluded march 31 2016 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2016 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2016 joseph sullivan chairman chief executive officer peter h nachtwey senior executive vice president chief financial officer report independent registered public accounting firm board directors stockholders legg mason inc opinion accompanying consolidated balance sheets related consolidated statements income loss comprehensive income loss changes stockholders’ equity cash flows present fairly material respects financial position legg mason inc subsidiaries “the company” march 31 2016 march 31 2015 results operations cash flows three years period ended march 31 2016 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 23 2016 legg mason inc subsidiaries consolidated balance sheets dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements income loss dollars thousands except per share amounts see notes consolidated financial statements legg mason inc subsidiaries consolidated statements comprehensive income loss dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements cash flows dollars thousands legg mason inc subsidiaries consolidated statements cash flows continued dollars thousands see notes consolidated financial statements legg mason inc subsidiaries notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason company principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see consolidation note 17 discussion vies material intercompany balances transactions eliminated certain amounts prior year financial statements reclassified conform current year presentation including classification consolidated balance sheets deferred debt issuance costs fully described references fiscal 2016 2015 2014 refer legg masons fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america applicable rules regulations securities exchange commission require management make assumptions estimates affect amounts reported consolidated financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes consolidation management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements consolidation normal course business legg mason sponsors manages various types investment vehicles services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinated management fees incentive fees legg masons exposure risk entities generally limited equity investment made required make earned uncollected management fees legg mason sell transfer assets investment vehicles accordance financial accounting standards legg mason consolidates certain sponsored investment vehicles designated reported consolidated investment vehicles “civs” consolidation sponsored investment vehicles including designated civs impact net income loss attributable legg mason inc material impact legg masons consolidated operating results change value consolidated sponsored investment vehicles recorded nonoperating income expense reflected net income loss attributable noncontrolling interests certain investment vehicles legg mason sponsors manager considered vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights sponsored investment vehicles considered vres consolidated legg mason controlling financial interest investment vehicle absent substantive investor rights replace manager entity kickout rights legg mason may also fund initial cash investment certain vre investment vehicles generate investment performance track record order attract thirdparty investors product legg masons initial investment new product typically represents 100 ownership product discussed “seed capital investments” consolidated long legg mason maintains controlling financial interest product designated civs legg mason unless investment longerterm legg mason held longerterm controlling financial interest one sponsored investment fund vre thirdparty investors consolidated included civ prior quarter ended march 31 2015 prior march 31 2015 legg mason redeemed significant portion investment fund result longer controlling financial interest fund therefore fund included civ subsequent march 31 2015 vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity investors potential controlling financial interest investment company vies sponsored investment fund vies deemed investment companies including money market funds legg mason determines primary beneficiary vie absorbs majority vies expected losses receives majority vies expected residual returns legg masons determination expected residual returns excludes gross fees paid decision maker certain criteria relating fees met determining whether primary beneficiary investment company vie legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party including employees ownership guarantees implied relationships legg mason concluded primary beneficiary one sponsored investment fund vie consolidated designated civ march 31 2016 2015 2014 despite significant thirdparty investments product march 31 2016 2015 2014 legg mason also concluded primary beneficiary 14 17 employeeowned funds sponsors respectively consolidated designated civs vies sponsored investment funds meet investment company criteria legg mason determines primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits potentially could significant vie march 31 2016 2015 legg mason variable interest four collateralized loan obligations clos legg mason concluded primary beneficiary clos consolidated holds equity interest investment vehicles level fees expected pay legg mason insignificant march 31 2014 legg mason variable interest two clos also consolidated period march 31 2014 legg mason concluded primary beneficiary another clo held variable interest although held equity interest investment vehicle power control clo significant variable interest level expected subordinated fees march 31 2014 balances related clo consolidated reported civ companys consolidated financial statements three months ended june 30 2014 clo substantially liquidated therefore consolidated legg mason subsequent june 30 2014 legg masons investment civs march 31 2016 2015 13641 15553 respectively represents maximum risk loss excluding uncollected advisory fees material assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds see notes 3 17 additional information regarding vies vres cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash restricted cash represents cash collateral required market hedge arrangements longterm escrow deposits cash available legg mason general corporate use financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except legg masons longterm debt designated hedging transaction discussed consolidation seed capital investments proprietary fund products initially consolidated individual securities within portfolio accounted trading investments legg mason consolidates products long holds controlling financial interest product upon deconsolidation typically occurs several years legg mason accounts investments proprietary fund products equity method investments described ownership 20 50 otherwise ability significantly influence financial operating policies investee partnerships llcs thirdparty investors may less ability influence operations equity method accounting considered legg masons ownership greater 3 changes fair value proprietary fund products classified trading equity method investments recognized nonoperating income expense consolidated statements income loss legg mason generally redeems investment proprietary fund products related product establishes sufficient track record thirdparty investments related product sufficient sustain strategy decision made longer pursue strategy length time legg mason holds majority interest product varies based number factors market demand market conditions investment performance see notes 3 17 additional information regarding legg masons seed capital investments determination whether investments proprietary fund products represent vies respectively equity investments legg mason control investee primary beneficiary vie exert significant influence financial operating policies investee legg mason follows equity method accounting evaluation whether legg mason exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence legg mason may governing board investee legal rights investors entity pursuant funds operating documents relationship legg mason investors entity legg masons equity method investees investment companies record underlying investments fair value therefore equity method accounting legg masons share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee legg masons share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense significant portion earnings losses attributable legg masons equity method investments offsetting compensation expense adjustments revenue sharing arrangements deferred compensation arrangements therefore fluctuations market value investments material impact net income loss attributable legg mason inc legg mason also holds debt marketable equity investments classified trading certain investment securities including held civs also classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings equity fixed income securities classified trading valued using closing market prices listed instruments broker price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices legg mason evaluates nontrading investment securities otherthantemporary impairment may exist fair value investment security adjusted cost extended period time otherthantemporary impairment determined exist amount impairment relates credit losses recognized charge income march 31 2016 2015 2014 amount temporary unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations may readily available management estimates value securities using variety methods resources including current available financial information investment industry addition financial instruments described derivative instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair value longterm debt march 31 2016 2015 aggregated 1773852 1166697 respectively except longterm debt designated hedging transaction fair values estimated using publicly quoted market prices classified level 2 fair value hierarchy described additionally 27 senior notes due 2019 designated hedging transaction valued sum amortized cost debt fair value related interest rate contract designated hedging transaction approximates debt fair value classified level 2 measurement discussed derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason used foreign exchange forwards interest rate swaps hedge risk movement exchange rates interest rates financial assets liabilities limited basis also legg mason used futures contracts index funds hedge market risk certain seed capital investments exception interest rate swap reverse treasury rate lock contract discussed note 6 legg mason designated financial instruments hedge accounting defined accounting literature periods presented gains losses derivative instruments designated hedge accounting included operating income expense nonoperating income expense consolidated statements income loss depending strategy gains losses derivative instruments civs recorded nonoperating income loss consolidated investment vehicles net consolidated statements income loss applicable see note 15 additional information regarding derivatives hedging fair value measurements accounting guidance fair value measurements defines fair value establishes framework measuring fair value fair value defined exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date accounting guidance fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance objective fair value accounting measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically requires use judgment ascertain formerly active market become inactive determining fair values markets become inactive accounting guidance also relates otherthantemporary impairments intended bring greater consistency timing impairment recognition also intended provide greater clarity investors credit noncredit components impaired debt securities expected sold guidance also requires timely disclosures regarding expected cash flows credit losses aging securities unrealized losses fair value accounting guidance also establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value except debt designated hedging transaction classified disclosed one following categories level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets certain derivative instruments level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category may include fixed income securities certain proprietary fund products certain longterm debt level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds category may also include certain proprietary fund products redemption restrictions contingent consideration liabilities valuation asset liability may involve inputs one level hierarchy level fair value hierarchy fair value measurement falls entirety determined based lowest level input significant fair value measurement entirety certain proprietary fund products investments held civs valued net asset value nav determined applicable fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient legg mason relies nav certain investments classified level 2 level 3 fair value navs provided investees derived fair values underlying investments reporting date transfers categories measured beginning period see note 3 additional information regarding fair value measurements appropriated retained earnings prior june 30 2014 legg mason elected fair value option certain eligible assets liabilities including corporate loans debt consolidated clo upon election fair value option eligible assets liabilities clo legg mason recorded cumulative effect adjustment appropriated retained earnings consolidated investment vehicle consolidated balance sheets equal difference fair values clos assets liabilities difference recorded appropriated retained earnings consolidated investment vehicle investors clo legg mason shareholders would ultimately realize benefits losses associated clo changes fair values clo assets liabilities recorded net income loss attributable noncontrolling interests consolidated statements income loss appropriated retained earnings consolidated investment vehicle consolidated balance sheet clo substantially liquidated deconsolidated june 30 2014 march 31 2014 clo final stage liquidation fair value assets liabilities substantially equal appropriated retained earnings fixed assets fixed assets primarily consist equipment software leasehold improvements equipment consists primarily communications technology hardware furniture fixtures capitalized software includes purchased software internally developed software cost software used service contract legg mason control software expensed term contract fixed assets reported cost net accumulated depreciation amortization depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements amortized depreciated initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill legg masons identifiable intangible assets consist principally asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary mutual funds fundsofhedge funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities indefinitelife intangible assets goodwill amortized financial statement purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred company perform quantitative tests include critical reviews significant factors assumptions determine intangible assets goodwill impaired legg mason considers factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected consolidated financial statements current fair value recognized expense period impairment determined triggering event occurred company performs quantitative tests annually december 31 indefinitelife intangible assets goodwill unless company qualitatively conclude likely respective fair values exceed related carrying values fair values intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined market participants perspective based projected discounted cash flows take consideration estimates future fees profit margins growth rates taxes discount rates proprietary fund contracts managed operated single unit meet criteria may aggregated impairment testing goodwill evaluated reporting unit level considered impairment carrying value reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit legg mason uses valuation techniques principally based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition goodwill deemed recoverable reporting unit level also operating segment level legg mason defines global asset management segment results fact chief operating decision maker legg masons chief executive officer regularly receives discrete financial information consolidated global asset management business level regularly receive discrete financial information operating results lower level asset management affiliate level allocations goodwill management restructures acquisitions dispositions based relative fair values respective businesses restructured acquired divested see note 5 additional information regarding intangible assets goodwill note 16 additional business segment information debt year ended march 31 2016 legg mason elected early adopt updated accounting guidance requires debt issuance costs presented balance sheet direct deduction carrying value associated longterm debt liability consistent presentation debt discount updated guidance adopted retrospective basis result legg mason reclassified unamortized debt issuance costs 8395 noncurrent assets 748 current assets longterm debt within consolidated balance sheet year ended march 31 2015 contingent consideration liabilities connection business acquisitions legg mason may required pay additional future consideration based achievement certain designated financial metrics legg mason estimates fair value potential future obligations time business combination consummated records contingent consideration liability consolidated balance sheet legg mason accretes contingent consideration liabilities expected payment amounts related earnout terms obligations ultimately paid resulting interest expense consolidated statements income loss expected payment amounts subsequently change contingent consideration liabilities reduced increased current period resulting gain loss reflected within operating expense consolidated statements income loss see notes 2 8 additional information regarding contingent consideration liabilities translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income loss gains losses resulting foreign currency transactions included net income loss investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients fees primarily based predetermined percentages market value assets management aum recognized period services performed may billed advance period earned based aum beginning billing period accordance related advisory contracts revenue associated advance billings deferred included current liabilities consolidated balance sheets recognized period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks relative absolute basis depending product recognized end performance measurement period accordingly neither advanced billings performance fees subject reversal largest portion performance fees earned based 12month performance periods end differing quarters year portion also based quarterly performance periods legg mason responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds nondiscretionary advisory services distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution servicing expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc receipts recorded distribution service fee revenue received reduction unamortized balance deferred sales commissions corresponding expense management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2016 2015 2014 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 6713 10422 march 31 2016 2015 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforward benefits business combinations amortization intangible assets accrued compensation applicable accounting guidance tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information companys accounting policy classify interest related tax matters interest expense related penalties operating expense year ended march 31 2016 legg mason elected early adopt new accounting guidance relating balance sheet classification deferred taxes updated guidance requires deferred tax assets liabilities related valuation allowances classified prospectively noncurrent classified balance sheet see note 7 additional information regarding income taxes loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated related insurance recoveries recorded separately underwriter confirmed coverage specific claim amount see note 8 additional information stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units management equity plans certain affiliates deferred compensation payable stock compensation plans legg mason issues equity awards directors officers key employees accordance applicable accounting guidance compensation expense includes costs nonvested sharebased awards classified equity grant date fair value amortized respective vesting periods straightline method grantdate fair value equityclassified sharebased awards immediate vesting also included compensation benefits expense legg mason determines fair value stock options using blackscholes optionpricing model exception marketbased performance grants valued monte carlo optionpricing model legg mason also determines fair value optionlike affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts see note 11 additional information regarding stockbased compensation earnings per share basic earnings per share attributable legg mason inc shareholders eps calculated dividing net income loss attributable legg mason inc adjusted earnings allocated participating securities weightedaverage number shares outstanding legg mason issued employees restricted stock deemed participating securities prior vesting unvested restricted shares entitle holder nonforfeitable dividend rights circumstance accounting guidance requires “twoclass method” eps calculations excludes earnings potentially distributed undistributed allocated participating securities diluted eps similar basic eps adjusts effect potential common shares unless antidilutive periods net loss potential common shares potentially unvested restricted shares considered antidilutive see note 12 additional discussion eps restructuring costs discussed note 2 legg mason restructuring permal group ltd permal combination entrust capital entrust costs associated restructuring primarily relate employee termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statement income loss charges consolidating leased office space recorded occupancy consolidated statement income loss also discussed note 2 may 2014 legg mason acquired qs investors holdings llc qs investors integrated two existing affiliates batterymarch financial management inc batterymarch legg mason global asset allocation llc lmgaa qs investors leverage best aspects subsidiary costs related integration primarily related employee termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statements income loss noncontrolling interests noncontrolling interests include affiliate minority interests thirdparty investor equity consolidated sponsored investment vehicles vested affiliate management equity plan interests civs consolidated sponsored investment vehicles thirdparty investors related noncontrolling interests classified redeemable noncontrolling interests investors funds may request withdrawals time also included redeemable noncontrolling interests vested affiliate management equity plan interests holder may point request settlement interests redeemable noncontrolling interests reported consolidated balance sheets estimated settlement values settlement expected occur future date changes expected settlement value recognized settlement period adjustment retained earnings nonredeemable noncontrolling interests include vested affiliate management equity plan interests permit holder request settlement interests nonredeemable noncontrolling interests reported consolidated balance sheets issuance value together undistributed net income allocated noncontrolling interests legg mason estimates settlement value noncontrolling interests fair value consolidated sponsored investment vehicles investor may request withdrawal time fair value based market quotes underlying securities held investment vehicles affiliate minority interests management equity plan interests fair value reflects related total business enterprise value appropriate discounts lack marketability control may also features equity interests dividend subordination contemplated valuations fair value optionlike management equity plan interests also relies blackscholes option pricing model calculations noted net income loss attributable noncontrolling interests consolidated statements income loss includes share income loss respective subsidiary allocated minority interest holders net income loss attributable noncontrolling interests consolidated statement income loss year ended march 31 2014 also includes net loss reclassified appropriated retained earnings consolidated investment vehicle see note 14 additional information regarding noncontrolling interests related parties services sponsored investment funds legg mason earns management fees incentive fees distribution service fees revenue incurs distribution servicing expenses disclosed consolidated statements income sponsored investment funds deemed affiliated entities related party definition relevant accounting guidance recent accounting developments march 2016 financial accounting standards board fasb updated guidance stockbased compensation accounting updated guidance simplifies several aspects accounting stockbased compensation including income tax consequences classification criteria awards either equity liabilities classification related amounts statements cash flows guidance effective fiscal 2018 option early adoption fiscal 2017 legg mason evaluating impact adoption february 2016 fasb updated guidance accounting leases updated guidance requires lessee shall recognize assets liabilities arise lease transactions lessee recognize rightofuse asset use underlying asset liability representing lease payments updated guidance also requires evaluation inception contract determine whether contract contains lease guidance effective fiscal 2020 legg mason evaluating impact adoption may 2015 fasb updated guidance fair value measurement updated guidance removes requirement investments fair value measured using nav practical expedient categorized within fair value hierarchy related sensitivity disclosures amount investments would instead disclosed reconciling item fair value hierarchy table investment amounts reported balance sheet guidance effective legg mason fiscal 2017 legg mason evaluating impact adoption february 2015 fasb updated guidance consolidation requirements updated guidance eliminates presumption general partner consolidate limited partnership modifies evaluation whether limited partnerships similar legal entities vies vres additionally updated guidance affects conclusion certain fees paid decision makers longer variable interests certain related party relationships sponsored investment fund may longer require consolidation update also eliminates deferral accounting guidance requires separate evaluation investment company vies update effective fiscal 2017 legg mason intends adopt modified retrospective basis legg mason expects new guidance certain sponsored investment vehicles residing foreign mutual fund trusts qualify vies subject consolidation lower ownership percentage currently employed threshold 50 may 2014 fasb updated guidance revenue recognition updated guidance improves comparability removes inconsistencies revenue recognition practices across entities industries jurisdictions capital markets march 2016 fasb updated revenue guidance determining whether report revenue gross versus net basis updated guidance clarifies entities evaluate principal versus agent aspects revenue recognition guidance issued may 2014 evaluation require entities identify goods services provided customer determine whether obtain control good service transferred customer control would suggest principal relationship would accounted gross basis updates effective legg mason fiscal 2019 legg mason evaluating impact adoption 2 acquisitions disposition acquisitions following table presents summary acquisitiondate fair values assets acquired liabilities assumed legg masons significant recent acquisitions 1 subject prospective adjustments including amounts ultimately realized adjustments provided share purchase agreement rare infrastructure limited october 21 2015 legg mason acquired majority equity interest rare infrastructure limited rare infrastructure rare infrastructure specializes global listed infrastructure security investing headquartered sydney australia approximately 6800000 aum closing transaction terms related transaction agreements legg mason acquired 75 ownership interest firm firms management team retained 15 equity interest treasury group continuing minority owner retained 10 acquisition required initial cash payment 213739 using foreign exchange rate october 21 2015 296000 australian dollar payment funded approximately 40000 net borrowings companys previous revolving credit facility discussed note 6 well existing cash resources august 2015 legg mason executed currency forward contract economically hedge risk movement exchange rate us dollar australian dollar initial cash payment denominated currency forward contract closed october 2015 see note 15 additional information regarding derivatives hedging addition contingent consideration may due march 31 2017 2018 aggregating 81320 using foreign exchange rate march 31 2016 maximum 106000 australian dollar amount per related agreements dependent achievement certain net revenue targets subject potential catchup adjustments extending march 31 2019 noncontrolling interests put holders called legg mason settlement fair value except nonmanagement portion noncontrolling interests callable preagreed formula specified agreements fair value noncontrolling interests reflects total business enterprise value appropriate discounts lack marketability control fair value acquired amortizable intangible asset management contracts useful life 12 years acquisition purchase price allocated intangible assets goodwill deductible australian tax purposes goodwill principally attributable synergies expected arise rare infrastructure management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows fair value contingent consideration estimated using monte carlo simulation riskneutral framework various observable inputs well various unobservable data inputs level 3 measurements simulation considered variables including aum growth performance fee levels consistent riskneutral framework projected aum performance fees dampened measure risk referred market price risk account market risk systematic risk calculating earnout payments earnout payments discounted commensurate timing summary various assumption values follows significant increases decreases projected aum performance fees would result significantly higher lower contingent consideration liability fair value contingent consideration liability established closing acquisition date fair value 25000 using foreign exchange rate october 21 2015 march 31 2016 fair value contingent consideration liability 27145 7001 relates first anniversary payment included current contingent consideration consolidated balance sheet remainder included noncurrent contingent consideration consolidated balance sheet increase 2145 october 21 2015 attributable changes exchange rate included accumulated comprehensive loss net foreign currency translation adjustment accretion contingent consideration liability recorded entity australian dollar functional currency related changes exchange rate impact net income loss company presented pro forma combined results operations acquisition results operations reported accompanying consolidated statements income loss would materially different financial results rare infrastructure included legg masons consolidated financial results year ended march 31 2016 include revenues 18420 material impact net income loss attributable legg mason inc martin currie holdings limited october 1 2014 legg mason acquired outstanding equity interests martin currie holdings limited martin currie international equity specialist based united kingdom acquisition required initial payment 202577 using foreign exchange rate october 1 2014 £125000 contract amount funded existing cash addition contingent consideration payments may due march 31 following second third anniversaries closing aggregating approximately 467076 using foreign exchange rate march 31 2016 maximum £325000 contract amount inclusive payment certain potential pension obligations dependent achievement certain financial metrics march 31 2017 2018 specified share purchase agreement provided potential first anniversary payment due march 31 2016 however payment due based relevant financial metrics fair value amortizable intangible asset management contracts asset amortized period 12 years goodwill principally attributable synergies expected arise martin currie acquired intangible assets goodwill deductible uk tax purposes management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows fair value contingent consideration measured using monte carlo simulation various unobservable market data inputs level 3 measurements simulation considered variables including aum growth performance fee levels relevant product performance projected aum performance fees earnout payments discounted appropriate summary various assumption values follows significant future increases decreases projected aum performance fees would result significantly higher lower contingent consideration liability fair value contingent consideration liability established closing acquisition date fair value 75211 using foreign exchange rate october 1 2014 actual payments made may also include amounts certain potential pension obligations accounted separately march 31 2016 fair value contingent consideration liability 41222 decrease 28892 march 31 2015 year ended march 31 2016 decrease projected aum performance fees resulted 28361 reduction estimated contingent consideration liability recorded credit operating expense consolidated statement income loss changes related exchange rate 531 year ended march 31 2016 included accumulated comprehensive loss net foreign currency translation adjustment net accretion also impacted contingent consideration liability contingent consideration liability recorded entity british pound functional currency related changes exchange rate impact net income loss total contingent consideration liability march 31 2016 includes 12846 related second anniversary payment included current contingent consideration consolidated balance sheet remainder included noncurrent contingent consideration consolidated balance sheet company presented pro forma combined results operations acquisition results operations reported accompanying consolidated statements income loss would materially different financial results martin currie included legg masons consolidated financial results year ended march 31 2015 include revenues 32293 material impact net income loss attributable legg mason inc martin currie defined benefit pension plan martin currie sponsors retirement death benefits plan defined benefit pension plan assets held separate trusteeadministered fund plan assets measured fair value comprised 60 equities level 1 40 bonds level 2 march 31 2016 58 equities level 1 42 bonds level 2 march 31 2015 assumptions used determine expected return plan assets targets 55 45 equitybond allocation reference 15year ftse uk gilt yield equities uk longdated bond yields bonds plan liabilities measured actuarial basis using projected unit method discounted rate equivalent current rate high quality bond local uk market currency significant concentrations risk plan assets march 31 2016 2015 recent actuarial valuation performed may 31 2013 updated acquisition subsequent balance sheet dates accrual service credit plan ceased october 3 2014 resulting net benefit obligation comprised follows included march 31 2016 2015 consolidated balance sheets noncurrent liabilities change benefit obligation summarized change plan assets summarized years ended march 31 2016 2015 net periodic loss gain 92 815 respectively included compensation benefits expense consolidated statements income loss components net periodic loss gain year ended march 31 2016 period acquisition march 31 2015 follows net actuarial losses 6821 9595 included accumulated comprehensive loss net consolidated balance sheets march 31 2016 2015 respectively march 31 2016 plan expects make benefit payments next 10 fiscal years follows contingent consideration payments expected provide funding net plan benefit obligation provision share purchase agreement requiring certain amounts paid plan contingent consideration payments plan based determination plan benefit obligation local technical provisions utilized plan trustees absent funding regulatory requirement additional payments martin currie expects contribute 2156 plan year ending march 31 2017 contingent consideration provisions share purchase agreement also require designated percentage earnout payments net pension contribution allocated fund incentive plan martin curries management payments employees arrangement made end earnout period estimated payment adjusted quarterly amortized earnout term december 2015 martin currie acquired certain assets pk investment management llp pk investments london based equity manager initial cash payment 4981 estimated contingent payment 2469 due december 31 2017 amount ultimate contingent payment based certain financial metrics initial cash payment funded existing cash resources connection acquisition legg mason recognized indefinitelife intangible fund management contracts goodwill 6619 827 respectively qs investors holdings llc effective may 31 2014 legg mason acquired outstanding equity interests qs investors customized solutions global quantitative equities provider initial purchase price cash payment 11000 funded existing cash addition contingent consideration 10000 20000 second fourth anniversary payments may due july 2016 july 2018 respectively dependent achievement certain net revenue targets subject potential catchup adjustment fourth anniversary payment second anniversary payment shortfall fair value amortizable intangible asset management contracts useful life 10 years acquisition purchase price allocated goodwill expected deductible us tax purposes period 15 years management estimated fair values amortizable intangible asset management contracts based upon discounted cash flow analysis contingent consideration expected paid discounted based upon probabilityweighted revenue projections using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows revenues discount rates summarized follows goodwill principally attributable synergies expected arise qs investors contingent consideration liability established closing acquisition date fair value 13370 march 31 2016 fair value contingent consideration liability accreted 13749 increase 196 march 31 2015 13749 6549 relates second anniversary payment included current contingent consideration consolidated balance sheet remainder included noncurrent contingent consideration consolidated balance sheet march 31 2016 company presented pro forma combined results operations acquisition results operations reported accompanying consolidated statements income loss would materially different financial results qs investors included legg masons consolidated financial results year ended march 31 2015 include revenues 12340 material impact net income loss attributable legg mason inc legg mason integrated two existing affiliates batterymarch lmgaa qs investors capture synergies leverage best capabilities entity connection integration total charges restructuring transition costs 38404 recognized completion plan march 31 2015 includes 35846 2558 years ended march 31 2015 2014 respectively primarily recorded compensation benefits consolidated statements income loss costs primarily comprised charges employee termination benefits including severance retention incentives well real estate related charges additional charges related integration expected material table presents summary changes restructuring transitionrelated liability december 31 2013 march 31 2016 cumulative charges incurred completion plan fiscal 2015 1 includes lease loss reserve 6760 space permanently abandoned 2 includes stockbased compensation expense accelerated fixed asset depreciation fauchier partners management limited march 13 2013 permal whollyowned subsidiary legg mason acquired outstanding share capital fauchier partners management limited fauchier european based manager fundsofhedge funds initial purchase price cash payment 63433 funded existing cash resources may 2015 legg mason paid contingent consideration 22765 using exchange rate may 5 2015 maximum £15000 payment amount second anniversary payment additional contingent consideration approximately 28743 using exchange rate march 31 2016 £20000 maximum contract amount may due fourth anniversary closing dependent achieving certain levels revenue net distribution costs fair value amortizable intangible asset management contracts amortized period six years acquired intangible assets goodwill deductible uk tax purposes management estimated fair values indefinitelife intangible fund management contracts based upon discounted cash flow analyses contingent consideration expected paid based upon probabilityweighted revenue projections using unobservable market data inputs level 3 measurements typical acquisition portion business larger financial services firm related operations legg mason expected initial contraction acquired business significant assumptions used analyses acquisition including projected annual cash flows revenues discount rates summarized follows march 31 2016 contingent consideration liability included consolidated balance sheet liability 27117 included march 31 2015 three months ended december 31 2015 due lower actual expected performance fees earned earn period contingent consideration liability reduced 5014 recorded credit operating expense consolidated statement income loss decrease 27117 march 31 2015 reflects reduction payment discussed offset part changes exchange rate net accretion december 2015 legg mason closed currency forward contracts previously executed economically hedge risk movements exchange rate us dollar british pound estimated contingent liability payment amounts denominated see note 15 additional information regarding derivatives hedging precidian investments llc january 22 2016 legg mason acquired minority equity position precidian investments llc precidian firm specializing creating innovative products solutions solving market structure issues particularly regard exchange traded funds marketplace transaction required cash payment funded existing cash resources terms transaction legg mason acquired series b preferred units precidian entitle legg mason approximately 20 voting economic interests precidian along customary preferred equity protections sole option 48 months following initial investment legg mason may subject satisfaction certain closing conditions convert preferred units 75 common equity precidian fully diluted basis legg mason accounts investment precidian included assets consolidated balance sheet march 31 2016 equity method accounting entrustpermal may 2 2016 legg mason closed transaction combine permal legg masons existing hedge fund platform entrust alternative asset management firm largely complimentary investment strategies investor base business mix permal connection combination legg mason expects incur total restructuring transitionrelated charges approximately 100000 primarily comprised charges employee termination benefits including severance retention incentives real estate related charges restructuring transition costs year ended march 31 2016 43296 primarily recorded transitionrelated compensation consolidated statement income loss legg mason expects approximately 40000 50000 remaining anticipated costs associated combination incurred year ending march 31 2017 table presents summary changes restructuring transitionrelated liability december 31 2015 march 31 2016 cumulative charges incurred march 31 2016 1 includes lease loss reserve 7212 space permanently abandoned 2 includes stockbased compensation expense accelerated fixed asset depreciation clarion partners april 13 2016 legg mason acquired majority equity interest clarion partners diversified real estate asset management firm based new york clarion partners managed approximately 41500000 aum april 30 2016 see note 18 additional information regarding acquisitions entrust clarion partners disposition legg mason investment counsel trust november 7 2014 legg mason completed previously announced sale equity interests legg mason investment counsel trust company na lmic proceeds 47000 stifel financial corporations global wealth management segment sale material impact legg masons consolidated financial condition results operations 3 investments fair values assets liabilities disclosures include details legg masons financial assets financial liabilities measured fair value excluding financial assets financial liabilities civs see note 17 variable interest entities consolidation investment vehicles information related assets liabilities civs measured fair value fair values financial assets liabilities company determined using following categories inputs 1 cash equivalents include highly liquid investments original maturities 90 days less cash investments actively traded money market funds measured nav classified level 1 cash investments time deposits measured amortized cost approximates fair value short time purchase instrument expected realization classified level 2 trading investments proprietary fund products trading investments consist approximately 68 32 equity debt securities respectively march 31 2016 approximately 63 37 equity debt securities respectively march 31 2015 3 includes 54392 noncontrolling interests associated consolidated seed investment products march 31 2016 4 primarily mutual funds minimal market risk company change value primarily offset adjustment compensation expense related deferred compensation liability 5 legg masons equity method investments investment companies record underlying investments fair value therefore fair value measured using legg masons share investees underlying net income loss predominately representative fair value adjustments investments held equity method investee 6 excludes seed capital investments 13641 15553 related legg masons investments civs march 31 2016 2015 respectively 7 amounts included noncurrent assets consolidated balance sheets periods presented 8 see note 15 9 see note 2 note 8 proprietary fund products include seed capital investments made legg mason fund new investment strategies products legg mason seed capital investments proprietary fund products totaled 368920 392039 march 31 2016 2015 respectively substantially comprised investments 63 funds 52 funds respectively individually greater 1000 minimal thirdparty investment together comprise 90 total seed capital investments period end see notes 1 17 information regarding determination whether investments proprietary fund products represent vies consolidation substantially financial instruments valuation methods rely observable market inputs significant input utilize equity method cost method nav practical expedient discussed measurement uncertainty little relevance net realized unrealized gain loss investment securities classified trading 27654 10545 22963 years ended march 31 2016 2015 2014 respectively net unrealized gains losses relating trading investments still held reporting dates 35111 10858 26618 years ended march 31 2016 2015 2014 respectively changes financial assets liabilities measured fair value using significant unobservable inputs level 3 years ended march 31 2016 2015 presented tables na applicable na applicable realized unrealized gains losses recorded level 3 investments primarily included nonoperating income expense consolidated statements income loss change unrealized gains losses level 3 investments liabilities still held reporting date 24182 2439 5210 years ended march 31 2016 2015 2014 respectively significant transfers level 1 level 2 years ended march 31 2016 2015 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 2016 2015 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 liquidation restrictions 2 daily redemption 11 monthly redemption 87 quarterly redemption march 31 2016 2 liquidations expected remaining term 3 balance 28 remaining term less one year 72 remaining term 16 years 4 comprised 1 36 63 level 1 level 2 level 3 assets respectively march 31 2016 38 62 level 2 level 3 assets respectively march 31 2015 current plans sell investments held march 31 2016 march 31 2016 2015 legg mason hold availableforsale investments 4 fixed assets following table reflects components fixed assets march 31 depreciation amortization expense related fixed assets 55318 52461 50531 years ended march 31 2016 2015 2014 respectively expense includes accelerated depreciation amortization 4147 fiscal 2016 primarily related reduced space requirements restructuring permal combination entrust 1265 fiscal 2015 primarily related integration batterymarch qs investors 2542 fiscal 2014 primarily related various corporate initiatives 5 intangible assets goodwill indefinitelife intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair value assets exceeds book value intangible assets subject amortization considered impairment reporting period fair value less book value legg mason record impairment charge following table reflects components intangible assets 1 march 31 2016 amortizable intangible asset management contracts net fund management contracts trade names include 69610 130419 5063 respectively related acquisition rare infrastructure see note 2 additional information certain legg masons intangible assets denominated currencies us dollar balances related assets fluctuate changes related foreign currency exchange rates legg mason completed annual impairment testing process december 31 2015 determined carrying value permal indefinitelife fundsofhedge funds management contracts intangible asset inclusive related indefinitelife fundsofhedge funds management contracts intangible asset fauchier permal trade name asset exceeded respective fair values assets impaired aggregate amount 371000 impairment charges resulted number current trends factors including periods moderate inflows outflows recent years related reductions aum ii reduced growth assumptions next five years iii decrease projected margins next two years iv increase rate used discount projected future cash flows primarily due company specific factors including continued market influences changes resulted reduction projected cash flows legg masons overall assessment fair value assets fair values permal fundsofhedge funds contracts asset permal trade name declined carrying values accordingly impaired 364000 7000 respectively management estimated fair values assets based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used cash flow analyses included projected revenue growth rates discount rates total revenues related permal fundsofhedge funds contracts assumed annual growth rates ranging 6 average 5 projected cash flows permal fundsofhedge funds contracts discounted 165 projected revenue growth rates assets dependent client aum flows changes market conditions product investment performance discount rates also influenced changes market conditions well interest rates factors decreases projected revenue growth rates andor increases discount rates could result lower fair value measurements potential additional impairments indefinitelife intangible assets amortizable management contracts intangible assets goodwill december 31 2015 legg mason also determined triggering events occurred march 31 2016 would require impairment testing december 31 2015 assessed fair value indefinitelife domestic mutual funds contracts asset related citigroup asset management cam acquisition exceeds carrying value 48 march 31 2016 amortizable intangible asset management contracts amortized weightedaverage remaining life 109 years estimated amortization expense next five fiscal years follows change carrying value goodwill summarized legg mason recognizes tax benefit amortization excess tax benefit related cam acquisition accordance accounting guidance income taxes tax benefit recorded reduction goodwill deferred tax liabilities benefit realized 6 shortterm borrowings longterm debt shortterm borrowings june 2012 legg mason entered unsecured credit agreement provided 500000 revolving credit facility january 2014 legg mason entered 250000 incremental borrowing credit facility contemplated addition 500000 revolving credit facility revolving credit facilities expire june 2017 revolving credit facilities interest rates libor plus 150 basis points annual commitment fees 20 basis points available capital needs general corporate purposes october 2015 legg mason borrowed 40000 facilities partially finance acquisition rare infrastructure borrowings outstanding facilities march 31 2015 december 29 2015 legg mason entered new unsecured credit agreement provides 1000000 multicurrency revolving credit facility legg mason borrowed 40000 revolving credit facility remained outstanding march 31 2016 used proceeds repay 40000 outstanding borrowings previous revolving credit facility discussed previous revolving credit facility terminated effective upon repayment new revolving credit facility may increased aggregate amount 500000 subject approval lenders expires december 2020 repaid time revolving credit facility interest rate monthly eurocurrency rate plus 125 basis points annual commitment fee 175 basis points march 31 2016 effective interest rate 19 interest payable least quarterly amounts outstanding revolving credit facility interest rate may change future based changes legg masons credit ratings revolving credit facility available fund working capital needs general corporate purposes revolving credit facility standard financial covenants modified march 2016 include maximum net debt ebitda ratio defined documents 35 1 period march 31 2016 september 30 2016 325 1 period october 1 2016 december 31 2016 30 1 thereafter minimum ebitda interest ratio defined documents 40 1 march 31 2016 legg masons net debt ebitda ratio 13 1 ebitda interest expense ratio 130 1 therefore legg mason maintained compliance applicable covenants march 31 2016 2015 legg mason 960000 750000 undrawn revolving credit facility capacity april 29 2016 legg mason entered forward starting amortizing interest rate swap agreement financial intermediary designated cash flow hedge interest rate swap used hedge interest rate risk outstanding borrowings revolving credit facility swap 467year term five reductions beginning march 31 2017 expires december 29 2020 terms interest rate swap agreement legg mason pay fixed interest rate 23 notional amount 500000 previously discussed interest rate revolving credit facility may change future based changes legg masons credit ratings change would result corresponding change fixed interest rate paid interest rate swap agreement interest rate swap similar terms underlying debt hedged changes market value interest rate swap recorded comprehensive income consolidated balance sheets may 2016 legg mason used additional borrowings new revolving credit facility finance acquisition entrust discussed note 18 replenish cash used complete acquisitions clarion partners april 2016 rare infrastructure october 2015 amount total borrowings outstanding facility 500000 date filing longterm debt longterm debt consists following 1 previously discussed note 1 year ended march 31 2016 legg mason elected early adopt updated accounting guidance requires unamortized debt issuance costs presented balance sheet direct deduction carrying value associated longterm debt liability updated guidance adopted retrospective basis therefore carrying value debt march 31 2015 reduced amount related unamortized debt issuance costs march 2016 legg mason issued 450000 475 senior notes due 2026 notes 250000 6375 junior subordinated notes due 2056 notes legg mason used net proceeds offerings finance acquisitions entrust may 2016 clarion partners april 2016 discussed note 18 may 2012 legg mason repurchased companys outstanding 25 convertible notes convertible notes terms repurchase included noncash exchange warrants holders convertible notes replicated extended contingent conversion feature convertible notes warrants issued holders convertible notes connection repurchase convertible notes provide purchase aggregate subject adjustment 14205 shares common stock net share settled basis exercise price 88 per share warrants expire july 2017 settled companys election either shares common stock cash accordingly warrants accounted equity january 2014 legg mason issued 400000 5625 senior notes due january 2044 net proceeds together cash hand used repay 450000 borrowings companys outstanding fiveyear term loan 5625 senior notes sold discount 6260 amortized interest expense 30year term june 2014 legg mason issued 250000 27 senior notes due 2019 notes 250000 395 senior notes due 2024 notes additional 150000 existing 5625 senior notes due 2044 notes together 2019 notes 2024 notes july 2014 company used 658769 proceeds sale notes net related fees together cash hand call outstanding 650000 55 senior notes pay related makewhole premium 98418 discussed june 23 2014 legg mason entered reverse treasury rate lock contract financial intermediary notional amount 650000 designated cash flow hedge contract issued connection retirement 55 senior notes company entered reverse treasury rate lock agreement order hedge variability retirement payment entire principal amount debt reverse treasury rate lock contract effectively fixed present value forecasted debt makewhole payment priced july 18 2014 eliminate risk associated changes fiveyear us treasury yield 55 senior notes retired july 23 2014 resulted pretax nonoperating charge 107074 consisting makewhole premium 98418 call 55 senior notes net 638 settlement reverse treasury lock related administrative fees 8656 associated existing deferred charges original issue discount 27 senior notes due july 2019 250000 2019 notes sold discount 553 amortized interest expense fiveyear term 2019 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 020 together related accrued unpaid interest june 23 2014 legg mason entered interest rate swap contract financial intermediary notional amount 250000 designated fair value hedge interest rate swap used effectively convert 2019 notes fixed rate debt floating rate debt identical terms underlying debt hedged ineffectiveness expected related hedging gains losses offset one another resulting net income loss impact swap fiveyear term matures july 15 2019 fair value contract march 31 2016 2015 derivative asset 7599 5462 respectively classified assets consolidated balance sheets increase 2137 5462 years ended march 31 2016 2015 respectively reflects gain hedging activity related fair value adjustment derivative asset recorded income gain hedging activity consolidated statements income loss carrying value debt consolidated balance sheets likewise increased 7599 5462 march 31 2016 2015 respectively increase 2137 5462 years ended march 31 2016 2015 respectively reflects loss hedging activity related fair value adjustment debt recorded expense loss hedging activity consolidated statements income loss swap payment dates coincide debt payment dates july 15 january 15 related receiptspayments legg mason recorded interest expense consolidated statements income loss since original terms conditions hedged instruments unchanged swap effective fair value hedge april 21 2016 fair value hedge swap terminated receipt approximately 6500 amortized hedge term 395 senior notes due july 2024 250000 2024 notes sold discount 458 amortized interest expense 10year term 2024 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 025 together related accrued unpaid interest 475 senior notes due march 2026 450000 2026 notes sold discount 207 legg mason incurred debt issuance costs 2970 connection issuance 2026 notes redeemed part aggregate greater related principal amount time redemption sum remaining scheduled payments discounted treasury rate defined plus 045 together related accrued unpaid interest 5625 senior notes due january 2044 previously discussed january 2014 legg mason issued 400000 5625 senior notes sold discount 6260 amortized interest expense 30year term additional 150000 2044 notes issued june 2014 sold premium 9779 also amortized interest expense 30year term 2044 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 030 together related accrued unpaid interest 6375 junior subordinated notes due march 2056 250000 2056 notes issued 100 principal amount legg mason incurred debt issuance costs 7909 connection issuance 2056 notes rank junior subordinate right payment legg masons current future senior indebtedness prior march 15 2021 2056 notes redeemed aggregate part 100 principal amount plus accrued unpaid interest called tax event defined 102 principal amount plus accrued unpaid interest called rating agency event defined march 15 2021 2056 notes redeemed aggregate part 100 principal amount plus related accrued unpaid interest march 31 2016 250000 longterm debt matures fiscal 2020 1500000 matures thereafter 7 income taxes components income loss income tax provision follows components income tax expense benefit follows reconciliation difference effective income tax rate statutory federal income tax rate follows 1 state income taxes include changes valuation allowances related change apportionment provision return differences net impact deferred tax assets changes state apportionment factors planning strategies effect foreign tax rates fiscal 2016 also includes 66780 tax benefit noncash impairment charges related intangible assets permal business discussed note 5 2 see schedule change valuation allowances jurisdiction july 2013 finance bill 2013 enacted reduced main uk corporate tax rate 23 21 effective april 1 2014 20 effective april 1 2015 november 2015 uk finance bill 2015 enacted reduced main uk corporate tax rate 19 effective april 1 2017 18 effective april 1 2020 reductions uk corporate tax rate resulted tax benefits 8383 19164 recognized fiscal 2016 2014 respectively result revaluation deferred tax assets liabilities new rates deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows certain tax benefits associated legg masons employee stock plans recorded directly stockholders equity tax benefit recorded equity fiscal 2016 2015 2014 due cumulative net operating loss position company march 31 2016 aggregate 22585 tax benefit recognized increase stockholders equity related net operating losses ultimately realized legg mason various loss tax credit carryforwards may provide future tax benefits related valuation allowances established accordance accounting guidance income taxes managements opinion likely benefits realized extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets march 1 2016 legg mason executed agreements management whollyowned subsidiary royce associates royce changed tax reporting royce disregarded entity partnership result legg masons deferred balance tax basis differences partnership investments changed 68526 offsetting change tax basis temporary differences substantially legg masons deferred tax assets relate us federal state uk taxing jurisdictions march 31 2016 us federal deferred tax assets aggregated 711535 realization expected require approximately 3200000 future us earnings 740000 must foreign sourced earnings based estimates future taxable income using assumptions consistent used legg masons goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realizable respect deferred tax assets relating foreign tax credit carryforwards likely tax benefits relating utilization approximately 23465 foreign taxes credits realized valuation allowance established companys estimates assumptions contemplate certain possible future changes ownership legg mason stock us internal revenue code could limit utilization net operating loss foreign tax credit benefits limitation would impact timing amount net operating loss foreign tax credit benefits ultimately realized expire march 31 2016 federal valuation allowances aggregated 20950 decrease federal valuation allowances prior year 12677 relates expiring foreign tax credits reclassified net operating losses release offset part 6916 2500 relates foreign tax credits 3443 relates charitable contributions 973 relates martin currie’s operating losses tax planning may enhance legg masons tax positions realization tax benefits deferred tax assets valuation allowances provided dependent implementation significant tax strategies march 31 2016 us state deferred tax assets aggregated approximately 175749 due limitations utilization net operating loss carryforwards taking consideration certain state tax planning strategies related valuation allowance 26816 substantially established prior years state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized foreign jurisdictions decrease valuation allowances 11438 fiscal 2016 primarily relates change statutory rates expiration certain deferred tax assets utilization attributes previously considered unrealizable following deferred tax assets valuation allowances relating carryforwards recorded march 31 2016 2015 respectively 1 substantially us state net operating losses carryforward fiscal 2036 2 due potential change factors relating apportionment income various states legg masons effective state tax rates subject fluctuation impact value companys deferred tax assets including net operating losses could material impact future effective tax rate company legg mason total gross unrecognized tax benefits approximately 73873 92344 77892 march 31 2016 2015 2014 respectively totals approximately 49629 62775 51518 respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates fiscal 2016 result net impact effective settlement tax examinations previously unrecognized benefits 24106 realized 5145 recorded equity reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 2016 2015 2013 follows although management cannot predict degree certainty timing ultimate resolution matters review various taxing jurisdictions reasonably possible company’s gross unrecognized tax benefits balance may change within next 12 months 9000 result expiration statutes limitations completion tax authorities examinations april 13 2015 reforms new york city’s corporate tax structure enacted included changes calculation net operating loss carryforwards changes way sales revenue sourced revaluation deferred tax assets liabilities new rules resulted recognition onetime income tax benefit 17053 year ended march 31 2016 company accrues interest related unrecognized tax benefits interest expense recognizes penalties operating expense years ended march 31 2016 2015 2014 company recognized approximately 4441 1492 580 respectively substantially interest march 31 2016 2015 2014 legg mason approximately 1900 8570 7300 respectively accrued interest penalties tax contingencies consolidated balance sheets legg masons prior year tax returns subject examination internal revenue service majesty’s revenue customs brazilian tax authorities various countries states following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal 2014 us federal fiscal 2014 uk calendar year 2008 brazil fiscal 2011 state california fiscal 2008 state new york fiscal 2012 states connecticut maryland company anticipate making significant cash payments settlement audits excess amounts reserved except noted legg mason intends permanently reinvest overseas substantially cumulative undistributed earnings foreign subsidiaries accordingly additional us federal income taxes provided undistributed earnings extent permanently reinvested legg masons foreign operations practical time determine income tax liability would result upon repatriation additional accumulated foreign earnings order increase amount cash available us general corporate purposes legg mason plans utilize 170000 foreign cash next several years 8500 accumulated foreign earnings additional tax provision associated repatriations previously recognized repatriation accumulated prior period foreign earnings currently planned however circumstances change legg mason provide pay applicable additional us taxes connection repatriation offshore funds practical time determine income tax liability would result repatriation accumulated foreign earnings excluding cash used fund acquisitions clarion partners april 2016 entrust may 2016 legg mason available domestically cash equivalents approximately 375000 march 31 2016 borrowing 460000 may 2016 connection acquisitions 500000 remaining undrawn capacity revolving credit facility meet domestic liquidity needs subject compliance applicable covenants provide flexibility maximizing cost effective capital deployment without repatriating additional accumulated foreign earnings 8 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2028 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2016 minimum annual aggregate rentals operating leases service agreements follows minimum rental commitments shown reduced 140780 minimum sublease rentals received future noncancelable subleases approximately 35 due one counterparty lease reserve liability included table space subleased march 31 2016 2015 31745 43726 respectively subtenant defaults sublease legg mason may incur operating charges adjust existing lease reserve liability reflect expected future sublease rentals reduced amounts result current commercial real estate market minimum rental commitments include 633350 real estate equipment leases 71560 service maintenance agreements minimum rental commitments shown include 32395 commitments related space vacated subleases pursued related lease reserve liability also included table 20495 2213 march 31 2016 2015 respectively remains subject adjustment based circumstances real estate markets may require change assumptions actual terms sublease ultimately secured lease reserve liability takes consideration various assumptions including expected amount time take secure sublease agreement prevailing rental rates applicable real estate markets fiscal 2016 certain headquarters space permanently vacated pursue sublease certain office space permanently vacated connection restructuring permal combination entrust reflected lease reserve liability table lease reserve liability subleased space vacated space subleases pursued included current liabilities noncurrent liabilities consolidated balance sheets table presents summary changes lease reserve liability 1 included occupancy expense consolidated statements income loss 2 includes 7212 related restructuring permal merger entrust 6760 related integration batterymarch lmgaa qs investors years ended march 31 2016 2015 respectively see note 2 additional information following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes periods provided landlord free rent period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2016 legg mason commitments invest 28859 limited partnerships make private investments commitments expected outstanding funded required end respective investment periods ranging fiscal 2024 march 31 2016 legg mason various commitments pay contingent consideration relating business acquisitions following table presents summary maximum remaining contingent consideration changes contingent consideration liability legg masons recent acquisitions see note 2 additional details regarding significant acquisition 1 using applicable exchange rate march 31 2016 amounts denominated currencies us dollar 2 using applicable exchange rate date acquisition amounts denominated currencies us dollar normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications considered financial guarantees relevant accounting guidance legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily asset management securities brokerage investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial normal course business legg mason also received subpoenas currently involved governmental industry selfregulatory agency inquiries investigations time proceedings involving asset management activities accordance guidance accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings probable loss incurred reasonable estimate loss made legg mason cannot estimate reasonably possible loss range loss associated matters litigation proceedings including described customer complaints legal actions inquiries proceedings investigations inability provide reasonably possible amount range losses uncertainty ultimate outcome matter liability damage issues developed point legg mason conclude reasonable possibility loss meaningful amount range possible losses numerous aspects customer complaints legal actions inquiries proceedings investigations prevent legg mason estimating related amount range reasonably possible losses aspects include among things nature matters significant relevant facts known uncertain dispute damages sought specified uncertain unsupportable unexplained addition legal actions discovery may yet started may complete may conclusive meaningful settlement discussions may occurred regulatory matters investigations may run course without clear indication wrongdoing fault conclusion managements opinion adequate accrual made march 31 2016 provide probable losses may arise matters company could reasonably estimate amount legg masons financial condition results operations cash flows could materially affected period matter ultimately resolved addition ultimate costs litigationrelated charges vary significantly periodtoperiod depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement reductions compensation revenue share arrangements march 31 2016 2015 legg masons liability losses contingencies 400 200 respectively fiscal 2016 2015 2014 legg mason incurred charges relating litigation proceedings approximately 250 200 respectively net recoveries 19300 fiscal 2014 described note 2 legg mason may obligated settle noncontrolling interests related rare infrastructure balance related noncontrolling interests 67155 march 31 2016 also described note 11 april 2016 conjunction permal restructuring preparation combination entrust permal management equity plan liquidated payment 7150 participants described note 18 subsequent march 31 2016 legg mason acquired clarion partners entrust acquisitions resulted redeemable noncontrolling interests clarion partners acquisition terms included implementation affiliate management equity plan 9 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees plans legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation match employee 401k contributions matches range 50 100 employee 401k contributions maximum lesser 6 employee compensation specified amount 16 per year corporate profit sharing matching contributions together contributions made subsidiary plans totaled 33152 27888 29355 fiscal 2016 2015 2014 respectively addition employees make voluntary contributions certain plans connection acquisition martin currie october 1 2014 legg mason assumed obligations martin curries defined benefit pension plan fully discussed note 2 10 capital stock march 31 2016 authorized numbers common preferred shares 500000 4000 respectively march 31 2016 2015 6988 8815 shares common stock respectively reserved issuance legg masons equity plans may 2012 legg masons board directors approved share repurchase authorization 1000000 purchases common stock 13515 share repurchases authorization completed march 2015 remaining share repurchases authorization completed april 2015 january 2015 legg masons board directors approved new share repurchase authorization 1000000 additional repurchases common stock expiration attached share repurchase authorization fiscal 2016 2015 2014 legg mason purchased retired 4537 6931 9677 shares common stock respectively 209632 356522 359996 respectively open market purchases remaining balance authorized stock buyback approximately 804000 discussed note 6 warrants issued connection repurchase convertible notes could result issuance maximum 14205 shares legg mason common stock subject adjustment certain conditions met changes common stock years ended march 31 2016 2015 2014 respectively follows dividends declared per share 080 064 052 fiscal 2016 2015 2014 respectively dividends declared paid march 31 2016 2015 2014 22038 17837 14945 respectively included current liabilities consolidated balance sheets 11 stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units affiliate management equity plans deferred compensation payable stock shares available issuance active equity incentive stock plan march 31 2016 6476 options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments four five years expire within eight ten years date grant discussed components legg masons total stockbased compensation expense years ended march 31 2016 2015 2014 follows stock options stock option transactions legg masons equity incentive plans years ended march 31 2016 2015 2014 summarized total intrinsic value options exercised years ended march 31 2016 2015 2014 5811 14351 6064 respectively march 31 2016 aggregate intrinsic value options outstanding 11009 following information summarizes legg masons stock options outstanding march 31 2016 march 31 2016 2015 2014 options exercisable 2544 2202 2531 shares respectively weightedaverage exercise price 3222 4150 5404 respectively stock options exercisable march 31 2016 weightedaverage remaining contractual life 39 years march 31 2016 aggregate intrinsic value exercisable shares 9070 following summarizes legg masons stock options exercisable march 31 2016 following information summarizes unvested stock options legg masons equity incentive plans year ended march 31 2016 years ended march 31 2016 2015 2014 income tax benefits related stock options 3730 4681 5244 respectively unamortized compensation cost march 31 2016 13480 related unvested options 1962 shares unamortized compensation cost march 31 2016 expected recognized weightedaverage period 17 years cash received exercises stock options legg masons equity incentive plans 9516 22069 23818 years ended march 31 2016 2015 2014 respectively tax benefit expected realized tax deductions option exercises totaled 1962 4856 1815 years ended march 31 2016 2015 2014 respectively weightedaverage fair value servicebased stock options granted years ended march 31 2016 2015 2014 excluding granted chief executive officer may 2013 discussed using blackscholes option pricing model 1126 1203 1213 per share respectively following weightedaverage assumptions used model grants fiscal 2016 2015 2014 legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values may 2013 legg mason awarded options purchase 500 shares legg mason inc common stock exercise price 3146 equal current market value legg masons common stock chief executive officer included outstanding options table award grant date fair value 5525 subject vesting requirements satisfied may 2015 vesting requirements follows 25 twoyear service period 25 twoyear service period subject legg masons common stock price equaling exceeding 3646 20 consecutive trading days 25 subject legg masons common stock price equaling exceeding 4146 20 consecutive trading days 25 subject legg masons common stock price equaling exceeding 4646 20 consecutive trading days requirement certain shares received upon exercise retained twoyear period january june 2014 25 50 aggregate award vested legg mason stock price met exceeded 4146 4646 respectively 20 consecutive trading days may 2015 remaining 50 award vested twoyear service period satisfied weightedaverage fair value per share awards 1105 estimated grant date using grant price 3146 monte carlo option pricing model following assumptions restricted stock restricted stock restricted stock unit transactions years ended march 31 2016 2015 2014 summarized restricted stock restricted stock units noncash transactions years ended march 31 2016 2015 2014 legg mason recognized income tax benefits related restricted stock restricted stock unit awards 20597 18246 18575 respectively unamortized compensation cost related unvested restricted stock restricted stock unit awards 3058 shares yet recognized march 31 2016 81271 expected recognized weightedaverage period 17 years connection change legg masons chief executive officer september 2012 325 shares restricted stock granted certain executives key employees vesting 85 shares accelerated connection termination recipients employment remaining shares vested march 31 2014 affiliate management equity plans effective march 1 2016 legg mason executed agreements management existing whollyowned subsidiary royce regarding employment arrangements royce management revised revenue sharing implementation management equity plan key employees management equity plan minority equity interests equivalent 169 royce entity issued management team interests allow holders receive quarterly distributions royces net revenues amounts equal percentage ownership represented equity hold previously existing revenue sharing arrangement terminated arrangement plan whereby percentage royce net revenues reserved pay expenses including bonus awards reduced reflect percentage revenues paid equity units increased percentage legg mason legg mason receives permanent increase two percent royces net revenues percentage provided prior revenue sharing arrangement phased 13month period management equity plan also provides option issuance additional equity next three years current future grants plan vest immediately upon issuance related grantdate fair value equity units recognized compensation benefits expense consolidated statements income loss reflected consolidated balance sheets nonredeemable noncontrolling interest result implementation management equity plan legg mason incurred noncash charge 21400 year ended march 31 2016 march 31 2016 redemption amount units plan 22202 conjunction december 2012 modification employment arrangements certain employees subsidiary permal legg mason completed implementation management equity plan quarter ended june 30 2013 march 31 2014 similar management equity plan implemented legg mason certain employees subsidiary clearbridge investments llc clearbridge plans better align interests affiliates management legg mason shareholders provide among things higher margins specified higher revenue levels affiliate management equity plans entitle certain key employees affiliate participate 15 future growth respective affiliates enterprise value subject appropriate discounts subsequent date grant current future grants plans vest 20 annually five years independent valuations determined aggregate cost awards approximately 9000 16000 permal clearbridge respectively recognized compensation benefits expense consolidated statements income loss related vesting periods december 2017 march 2019 respectively total compensation expense related permal clearbridge affiliate management equity plans 4784 5206 2270 years ended march 31 2016 2015 2014 respectively arrangements provide onehalf respective cost absorbed affiliates incentive pool vested plan units put legg mason settlement fair value beginning one year holder terminates employment legg mason also call plan units generally post employment settlement fair value changes control legg mason either affiliate impact vesting settlement provisions units however upon sale substantially affiliates assets vesting respective units would accelerate participants would receive fair value payment respect interests plan future grants additional plan units dilute participation existing outstanding units 15 future growth respective affiliates enterprise value subsequent related future grant date additional compensation expense would incurred future grants either plan entitle plan participants collectively aggregate 15 future growth respective affiliates enterprise value upon vesting grantdate fair value vested plan units reflected consolidated balance sheets redeemable noncontrolling interests adjustment additional paidin capital thereafter redeemable noncontrolling interests continue adjusted ultimate maximum estimated redemption value expected term retained earnings adjustments march 31 2016 redemption amount vested units clearbridge plan currently redeemable aggregated approximately 22160 april 2016 conjunction permal restructuring preparation combination entrust permal management equity plan liquidated payment 7150 participants remaining 3481 unamortized cost expensed legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 4500 total share limit plan purchases made payroll deductions legg mason provides 15 contribution towards purchases charged earnings legg mason’s contribution increased 10 15 january 2014 fiscal years ended march 31 2016 2015 2014 approximately 134 107 85 shares respectively purchased open market behalf participating employees legg mason also equity plan nonemployee directors current equity plan directors may elect receive shares stock restricted stock units prior july 19 2007 amendment plan directors could also elect receive stock options immediately exercisable price equal market value shares date grant term ten years shares options restricted stock units issuable equity plan limited 625 aggregate 384 359 shares issued march 31 2016 2015 respectively march 31 2016 2015 nonemployee directors held stock options march 31 2014 nonemployee directors held 32 stock options included outstanding options table years ended march 31 2016 2015 2014 nonemployee directors exercise stock options year ended march 31 2016 stock options canceled forfeited current equity plan years ended march 31 2015 2014 32 26 stock options canceled forfeited current equity plan nonemployee directors respectively year ended march 31 2014 54 stock options canceled forfeited related equity plan nonemployee directors discontinued july 2005 march 31 2016 2015 2014 nonemployee directors held 53 45 64 restricted stock units respectively vest grant date therefore included unvested shares restricted stock restricted stock units table years ended march 31 2016 2015 2014 nonemployee directors granted 9 8 12 restricted stock units respectively 16 23 47 shares common stock respectively year ended march 31 2016 restricted stock units distributed years ended march 31 2015 2014 27 39 restricted stock units distributed respectively may 2015 2014 legg mason granted certain executive officers total 107 78 performance share units respectively part fiscal 2015 2014 incentive award aggregate value 4312 3457 respectively vesting performance share units granted may 2015 2014 number shares payable vesting determined based legg mason’s relative total stockholder return threeyear period ending march 31 2018 2017 respectively grant date fair value per unit may 2015 2014 performance share units 4029 4411 respectively estimated grant date using monte carlo pricing model following assumptions fiscal 2012 legg mason established longterm incentive plan ltip equity incentive plan provided additional element compensation based performance determined achievement predefined amount legg mason’s cumulative adjusted earnings per share three year performance period ltip executive officers granted cash value performance units quarter ended september 2012 total targeted amount 1850 september 2012 grant performance period ended march 31 2015 resulted payment amount 1000 settled cash may 31 2015 deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends effective january 1 2015 additional contributions plan remaining 271 shares reserved future dividend distributions fiscal 2016 2015 2014 legg mason issued 12 44 51 shares respectively plan weightedaverage fair value per share grant date 4182 4583 3190 respectively undistributed shares issued plan held rabbi trust assets rabbi trust consolidated employer value employers stock held rabbi trust classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plan presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2016 2015 2014 583 660 672 respectively 12 earnings per share basic earnings per share attributable legg mason inc shareholders eps calculated dividing net income loss attributable legg mason inc adjusted earnings allocated participating securities weightedaverage number shares outstanding legg mason issues employees restricted stock deemed participating securities prior vesting unvested restricted shares entitle holder nonforfeitable dividend rights circumstance accounting guidance requires “twoclass method” eps calculations excludes earnings potentially distributed undistributed allocated participating securities diluted eps similar basic eps adjusts effect potential common shares unless antidilutive periods net loss attributable legg mason inc potential common shares considered antidilutive therefore excluded calculation fiscal 2016 2015 2014 pursuant 1000000 share repurchase authorization discussed note 10 legg mason purchased retired 4537 6931 9677 shares common stock respectively 209632 356522 359996 respectively open market purchases total repurchases reduced weightedaverage shares outstanding 2564 3528 4908 shares years ended march 31 2016 2015 2014 respectively par value shares repurchased charged common stock excess purchase price par first charged additional paidin capital remaining balance charged retained earnings following table presents computations basic diluted eps weightedaverage shares years ended march 31 2016 2015 exclude weightedaverage unvested restricted shares deemed participating securities 2831 3065 respectively diluted eps calculations years ended march 31 2016 2015 2014 exclude potential common shares issuable 14205 warrants issued connection repurchase convertible notes may 2012 market price legg mason common stock exceed exercise price therefore warrants would antidilutive diluted eps calculation year ended march 31 2016 excludes 814 potential common shares antidilutive due net loss year options purchase 1319 2620 shares years ended march 31 2015 2014 respectively included computation diluted eps presumed proceeds exercising options including related income tax benefits exceed average price common shares period therefore options deemed antidilutive market performancebased awards excluded potential dilution designated market performance condition met unvested restricted shares years ended march 31 2016 2015 2014 antidilutive therefore impact diluted eps 13 accumulated comprehensive loss accumulated comprehensive loss includes cumulative foreign currency translation adjustments gains losses defined benefit pension plans change accumulated translation adjustments fiscal 2016 2015 primarily resulted impact changes brazilian real british pound australian dollar canadian dollar singaporean dollar relation us dollar net assets legg masons subsidiaries brazil uk australia canada singapore real pound australian dollar canadian dollar singaporean dollar functional currencies respectively summary legg masons accumulated comprehensive loss march 31 2016 2015 follows significant amounts reclassified accumulated comprehensive loss consolidated statements income loss years ended march 31 2016 2015 2014 except 405 net income tax provision 233 realized termination reverse treasury rate lock contract year ended march 31 2015 described note 6 14 noncontrolling interests net income loss attributable noncontrolling interests years ended march 31 included following amounts total redeemable nonredeemable noncontrolling interests years ended march 31 included following amounts 1 principally related vie seeded investment products 2 principally related rare infrastructure 3 related royce 15 derivatives hedging disclosures detail legg mason’s derivatives hedging activities excluding derivatives hedging activities civs see note 17 variable interest entities consolidated investment vehicles information related derivatives hedging civs legg mason uses currency forwards economically hedge risk movements exchange rates primarily us dollar australian dollar british pound euro japanese yen singapore dollar derivative transactions legg mason certain legally enforceable rights setoff governed international swaps derivative association isda master agreements derivative transactions legg mason one isda master agreement significant counterparties covers transactions counterparty respective isda agreements provides settlement netting closeout netting legg mason counterparty legally enforceable rights setoff assets recorded consolidated balance sheets march 31 2016 2015 8650 6042 respectively liabilities recorded consolidated balance sheets march 31 2016 2015 18079 8665 respectively legg mason also uses market hedges certain seed capital investments entering futures contracts sell index funds benchmark hedged seed capital investments exception interest rate swap contract reverse treasury rate lock contract discussed note 6 legg mason designated derivatives hedging instruments accounting purposes periods ended march 31 2016 2015 2014 march 31 2016 legg mason open currency forward contracts aggregate notional amounts totaling 334640 open futures contracts relating seed capital investments aggregate notional values totaling 127736 amounts representative level nonhedge designation derivative activity throughout fiscal 2016 march 31 2016 weightedaverage remaining contract terms currency forward contracts futures contracts relating seed capital investments three months discussed note 6 subsequent march 31 2016 legg mason executed 467year amortizing interest rate swap terminated previously existing interest rate swap following table presents derivative assets related offsets march 31 2016 following table presents derivative liabilities related offsets march 31 2016 following table presents derivative assets related offsets march 31 2015 following table presents derivative liabilities related offsets march 31 2015 following table presents gains losses recognized consolidated statements income loss derivative instruments described currency forward contracts futures forward contracts seed capital investments included economic hedges interest rate market risk certain operating investing activities legg mason including foreign exchange risk acquisition contingent consideration gains losses derivative instruments substantially offset gains losses economically hedged items connection acquisition rare infrastructure august 2015 legg mason executed us dollar australian dollar currency forward contract economically hedge currency changes affecting australian dollar denominated purchase price closed october 2015 1 relates currency forward executed august 2015 closed october 2015 connection october 2015 acquisition rare infrastructure 16 business segment information legg mason global asset management company provides investment management related services wide array clients company operates one reportable business segment global asset management global asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue global asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks revenues geographic location primarily based geographic location advisor domicile fund families managed legg mason table reflects revenues longlived assets geographic region march 31 17 variable interest entities consolidated investment vehicles discussed notes 1 3 accordance financial accounting standards legg mason consolidates certain sponsored investment vehicles designated civs march 31 2016 legg mason concluded primary beneficiary one sponsored investment fund vie consolidated designated civ march 31 2016 2015 2014 despite significant third party investments product march 31 2016 2015 2014 legg mason also concluded primary beneficiary 14 17 respectively employeeowned funds sponsors consolidated reported civs prior march 31 2015 legg mason also held longerterm controlling financial interest one sponsored investment fund vre thirdparty investors consolidated included civ prior three months ended march 31 2015 legg mason redeemed significant portion investment fund prior march 31 2015 result longer controlling financial interest fund therefore fund consolidated included civ subsequent march 31 2015 prior june 30 2014 legg mason concluded primary beneficiary one three clos variable interest balances related clo consolidated reported civ companys consolidated financial statements three months ended june 30 2014 clo substantially liquidated therefore consolidated legg mason subsequent june 30 2014 legg masons investment civs march 31 2016 2015 13641 15553 respectively represents maximum risk loss excluding uncollected advisory fees assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds following tables reflect impact civs consolidated balance sheets march 31 2016 2015 respectively consolidated statements income loss years ended march 31 2016 2015 2014 respectively consolidating balance sheets 1 represents consolidated sponsored investment vehicles designated civs consolidating statements income loss 1 represents consolidated sponsored investment vehicles designated civs nonoperating income expense includes interest income interest expense net gains losses investments consolidation civs impact net income loss attributable legg mason inc legg mason financial liabilities civs carried fair value march 31 2016 2015 fair value financial assets civs determined using following categories inputs march 31 2016 2015 substantially financial instruments valuation methods rely observable market inputs significant input utilize nav practical expedient measurement uncertainty little relevance quarter ended june 30 2014 clo substantially liquidated consolidated march 31 2015 changes assets liabilities civs measured fair value using significant unobservable inputs level 3 years ended march 31 2016 2015 presented tables realized unrealized gains losses recorded level 3 assets liabilities civs included nonoperating income expense civs consolidated statements income loss change unrealized losses level 3 investments liabilities civs relating assets liabilities still held reporting date 2580 79 years ended march 31 2016 2015 respectively transfers level 1 level 2 either years ended march 31 2016 2015 navs used practical expedient civs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 2016 2015 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 redemption restrictions 5 daily redemption 13 monthly redemption 10 quarterly redemption 72 subject three five year lockup side pocket provisions current plans sell investments held march 31 2016 march 31 2014 legg mason elected fair value option certain eligible assets liabilities including corporate loans debt consolidated clo legg mason elect fair value option assets liabilities march 31 2016 2015 clo longer consolidated year ended march 31 2014 total net losses 5914 recognized nonoperating income losses civs net consolidated statements income loss related assets liabilities fair value option elected clo loans clo debt measured fair value floating interest rates therefore substantially estimated gains losses included earnings year ended march 31 2014 attributable instrument specific credit risk march 31 2016 2015 derivative liabilities civs gains losses 1311 1537 respectively year ended march 31 2014 related derivative liabilities civs included nonoperating income loss civs march 31 2016 2015 vies legg mason holds variable interest sponsor holds variable interest primary beneficiary legg masons carrying value maximum risk loss follows 1 includes 32091 27463 related investments proprietary funds products march 31 2016 2015 respectively 2 includes equity investments company made required make earned uncollected management fees companys total aum unconsolidated vies 17170697 19527670 march 31 2016 2015 respectively assets vies primarily comprised cash equivalents investment securities clo loans liabilities primarily comprised clo debt various expense accruals vies consolidated either 1 legg mason power direct significant economic activities entity rightsobligations associated benefitslosses could significant entity 2 legg mason absorb majority vies expected losses receive majority vies expected residual gains 18 subsequent events clarion partners april 13 2016 legg mason acquired majority equity interest clarion partners diversified real estate asset management firm based new york clarion partners managed approximately 41500000 aum april 30 2016 terms transaction legg mason acquired 82 ownership interest clarion partners cash payment 577458 funded portion proceeds issuance 2026 notes 2056 notes march 2016 addition legg mason paid 16000 certain coinvestments dollarfordollar basis clarion partners management team retained 18 outstanding equity clarion partners addition legg mason implemented affiliate management equity plan management team clarion partners affiliate management equity plan entitles certain key employees clarion partners participate 15 future growth enterprise value subject appropriate discounts subsequent date grant initial grant plan vests immediately firms previous majority owner sold entire ownership interest transaction noncontrolling interests held management team put holders called legg mason settlement fair value starting three years closing agreement holders put limited certain amounts increase years four five acquired assets liabilities related results operations clarion partners included legg masons financial statements subsequent acquisition due timing acquisition purchase accounting adjustments related disclosures require additional analysis currently possible fiscal 2016 2807 costs incurred connection acquisition clarion partners entrust may 2 2016 legg mason closed transaction combine permal legg masons existing hedge fund platform entrust alternative asset management firm headquartered new york approximately 10000000 aum approximately 2000000 assets advisement committed capital closing largely complementary investment strategies investor base business mix permal result combination legg mason owns 65 new entity branded entrustpermal remaining 35 owned entrusts cofounder managing partner noncontrolling interests put holder called legg mason settlement fair value starting five years closing agreement transaction included cash payment 400000 funded borrowings legg masons revolving credit facility well portion proceeds issuance 475 senior notes due 2026 6375 junior subordinated notes due 2056 march 2016 acquired assets liabilities related results operations entrust included legg masons financial statements subsequent acquisition due timing acquisition purchase accounting adjustments related disclosures require additional analysis currently possible fiscal 2016 3492 costs incurred connection acquisition entrust connection combination legg mason expects incur total restructuring transitionrelated costs approximately 100000 43296 incurred fiscal 2016 see note 2 discussion restructuring transitionrelated costs quarterly financial data dollars thousands except per share amounts unless otherwise noted unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results may 17 2016 closing price legg masons common stock 3160 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2019 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework 2013 based assessment management concluded march 31 2019 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2019 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2019 joseph sullivan chairman chief executive officer peter h nachtwey senior executive vice president chief financial officer report independent registered public accounting firm board directors stockholders legg mason inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets legg mason inc subsidiaries “the company” march 31 2019 march 31 2018 related consolidated statements income loss comprehensive income loss changes stockholders’ equity cash flows three years period ended march 31 2019 including related notes collectively referred “consolidated financial statements” also audited companys internal control financial reporting march 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company march 31 2019 march 31 2018 results operations cash flows three years period ended march 31 2019 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2019 based criteria established internal control integrated framework 2013 issued coso basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions report independent registered public accounting firm continued definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 24 2019 served company’s auditor since least 1983 company became subject sec reporting requirements able determine specific year began serving auditor company legg mason inc subsidiaries consolidated balance sheets dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements income loss dollars thousands except per share amounts see notes consolidated financial statements legg mason inc subsidiaries consolidated statements comprehensive income loss dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements cash flows dollars thousands legg mason inc subsidiaries consolidated statements cash flows continued dollars thousands see notes consolidated financial statements legg mason inc subsidiaries notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted march 31 2019 1 significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see consolidation note 19 discussion vies material intercompany balances transactions eliminated certain amounts prior year financial statements reclassified conform new guidance andor current year presentation including classification presentation restricted cash certain distributions received equity method investees consolidated statements cash flows discussed references fiscal 2019 2018 2017 refer legg masons fiscal year ended march 31 year terms us company refer legg mason use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america applicable rules regulations securities exchange commission sec require management make assumptions estimates affect amounts reported consolidated financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements consolidation legg mason sponsors manages various types investment products services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinated management fees incentive fees legg masons exposure risk entities generally limited equity investment made required make earned uncollected management fees except total return swap arrangements executed additional risks discussed legg mason sell transfer investment assets investment products accordance financial accounting standards legg mason consolidates certain sponsored investment products designated reported consolidated investment vehicles civs consolidation sponsored investment products including designated civs impact net income loss attributable legg mason inc material impact legg masons consolidated operating results change value consolidated sponsored investment products recorded nonoperating income expense reflected net income loss attributable noncontrolling interests financial information certain consolidated sponsored investment products included companys consolidated financial statements threemonth lag based upon availability investment products financial information certain investment products legg mason sponsors manages considered vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights legg mason may fund initial cash investment certain vre investment products generate investment performance track record order attract thirdparty investors product legg masons initial investment new product typically represents 100 ownership product discussed note 3 products “seed capital investments” consolidated long legg mason maintains controlling financial interest product designated civs legg mason unless investment longerterm march 31 2019 2018 2017 consolidated vres designated civs vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity investors potential controlling financial interest legg mason must consolidate vie deemed primary beneficiary consolidation accounting guidance limited partners similar equity holders sponsored investment vehicle structured limited partnership similar entity either substantive investor rights replace manager kickout rights substantive participation rights general partner entities vies sponsor manager investment vehicle legg mason may deemed decision maker accounting guidance fees paid decision maker marketbased fees considered variable interests vie marketbased fees customary commensurate level effort required services provided additionally employee interests sponsored investment vehicle made circumvent consolidation guidance financed sponsor included variable interests assessment included primary beneficiary determination decision maker deemed primary beneficiary vie power direct activities significantly impact economic performance vie obligation absorb losses receive benefits variable interests could significant vie determining whether primary beneficiary vie legg mason considers qualitative quantitative factors voting rights equity holders guarantees implied relationships fee paid decision maker marketbased considered primary beneficiary determination march 31 2019 2018 2017 legg mason concluded primary beneficiary certain vies consolidated designated civs held significant financial interests funds addition legg mason entered various total return swap arrangements financial intermediaries respect certain legg mason sponsored exchange traded funds etfs terms total return swaps legg mason absorbs related gains losses underlying etf investments financial intermediaries therefore variable interests related funds significant may deemed primary beneficiary march 31 2019 2018 legg mason consolidated etfs significant open total return swap arrangements designated civs see note 19 additional information revenue recognition effective april 1 2018 legg mason adopted updated accounting guidance revenue recognition provides single comprehensive revenue recognition model contracts customers improves comparability removes inconsistencies revenue recognition practices across entities industries jurisdictions capital markets guidance also specifies accounting certain costs obtain fulfill contract customer revises criteria determining entity acting principal agent certain arrangements adoption updated guidance result significant changes legg mason’s prior revenue recognition practices except timing recognition certain performance incentive fees capitalization amortization certain sales commissions separate accounts net presentation certain fund expense reimbursements previously presented gross basis changes legg mason’s previous revenue recognition practices discussed legg mason adopted updated guidance modified retrospective basis contracts complete april 1 2018 recognized cumulative effect initially applying updated guidance certain sales commissions adjustment opening balance retained earnings totaling 12263 cumulative effect performance incentive fees fund expense reimbursement accounting comparative information prior periods restated continues reported prior accounting guidance effect periods summary cumulativeeffect changes legg mason’s consolidated balance sheet april 1 2018 included legg mason primarily earns revenues providing investment management services distribution shareholder services customers generally investment funds underlying investors separately managed accounts discussed revenues calculated based value investments management determine transaction price recognized obligations terms contracts customers satisfied generally time services rendered legg mason also responsibility valuation assets management aum substantially based observable market data independent pricing services fund accounting agents custodians brokers investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients generally investment management services single performance obligation include series distinct services substantially transferred customer time using timebased measure progress investment management services satisfied time customer simultaneously receives consumes benefits advisory services performed separate account funds advisory fees separate account funds advisory fees variable consideration primarily based predetermined percentages daily monthly quarterly average market value aum defined investment management agreements average market value aum subject change based fluctuations volatility financial markets separate account funds advisory fees constrained end month quarter actual average market value aum known significant revenue reversal longer probable therefore separate account fund advisory fees included transaction price allocated investment management services performance obligation end monthly quarterly reporting period specified investment management contract payment services investment management contracts due variable consideration allocated transaction price generally within 30 days recognition separate account funds advisory fee revenue updated guidance consistent legg mason’s prior revenue recognition process performance incentive fees performance incentive fees variable consideration may earned certain investment management contracts exceeding performance benchmarks relative absolute basis exceeding contractual return thresholds performance incentive fees estimated inception contract however range outcomes possible due factors outside control investment manager particularly market conditions performance incentive fees therefore excluded transaction price becomes probable significant reversal cumulative amount revenue recognized occur portion legg masons performance incentive fees earned based 12month performance periods end differing quarters year portion also based quarterly performance periods legg mason also earns performance incentive fees alternative certain products lock earlier investor’s termination date liquidation fund contract multipleyear intervals upon occurrence specific events sale assets certain products performance incentive fees may recognized revenue earlier updated guidance prior revenue recognition practices deferred recognition contingencies resolved performance fees recognized prior resolution contingencies recorded contract asset current assets noncurrent assets consolidated balance sheet depending length time contingencies resolved per terms certain acquisitions performance fees earned preclose aum acquired entities fully passed compensation expense therefore impact net income loss attributable legg mason inc fee waivers fund expense reimbursements legg mason may waive certain fees investors may reimburse investment funds certain operating expenses exceed certain threshold fee waivers continue reported reduction advisory fee revenue updated guidance prior accounting guidance fund expense reimbursements excess recognized revenue recorded expense consolidated statements income loss updated accounting guidance fund expense reimbursements exceed recognized revenue represent change transaction price therefore reported reduction investment advisory fees funds consolidated statements income loss distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds nondiscretionary advisory services assets advisement distribution service fees earned companysponsored investment funds reported revenue distribution services marketing services considered single performance obligation success selling underlying shares highly dependent upon sales marketing efforts ongoing shareholder servicing separate performance obligation services highly interrelated interdependent sale shares fees earned related distribution shareholder serving considered variable consideration calculated based average market value fund average market value fund subject change based fluctuations volatility financial markets distribution shareholder service fees generally constrained end month quarter actual market value fund known related revenue longer subject significant reversal therefore distribution service fees generally included transaction price end monthly quarterly reporting period allocated two performance obligations based amount specified agreement distribution services largely satisfied inception investment ultimate amounts revenue subject variable consideration constraint accordingly portion distribution service revenue recognized periods subsequent satisfaction performance obligation certain fund share classes charge distribution services inception investment based fixed percentage share price fixed price allocated performance obligation substantially satisfied time initial investment recognition distribution service fee revenue updated guidance consistent legg mason’s prior revenue recognition process legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution servicing expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties recorded distribution servicing expense consolidated statements income loss distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers contract costs deferred sales commissions legg mason incurs ordinary costs obtain investment management contracts services provided customers accordance investment management agreements costs include commissions paid wholesalers employees thirdparty broker dealers administration placement fees depending type services provided fees may paid time contract obtained ongoing basis updated guidance costs obtain contract capitalized costs incremental would incurred contract obtained costs fulfill contract capitalized relate directly contract costs generate enhance resources entity used satisfying performance obligations future costs expected recovered consistent prior accounting procedures fund launch costs including organizational underwriting costs placement fees commissions paid employees wholesalers brokerdealers sales fund shares expensed incurred costs would incurred regardless investor however commissions paid employees retail wholesalers connection sale retail separate accounts considered incremental fees relate obtaining specific contract calculated based specified rates recoverable management fees earned therefore capitalized updated accounting guidance commissions expensed incurred legg mason’s prior accounting practices capitalized sales commissions amortized based transfer services assets relate averages four years legg mason recorded cumulativeeffect adjustment consolidated balance sheet april 1 2018 referenced commissions paid legg mason financial intermediaries connection sales certain classes companysponsored mutual funds generally capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc consideration generally variable based timing investors redeem investment therefore variable consideration included transaction price investors redeem shares satisfied point time cdsc receipts recorded distribution service fee revenue received reduction unamortized balance deferred sales commissions corresponding expense deferred sales commissions included noncurrent assets consolidated balance sheets 1419 4047 march 31 2019 2018 respectively updated accounting guidance legg mason elected expense sales commissions related certain fund share classes amortization periods one year less incurred legg mason recorded cumulativeeffect adjustment consolidated balance sheet april 1 2018 referenced reflect expense associated commissions previously capitalized legg masons prior accounting practices impact adoption updated revenue recognition accounting guidance cumulative effect changes made legg mason’s consolidated balance sheet april 1 2018 adoption updated revenue recognition accounting guidance follows impact adoption updated revenue recognition accounting guidance consolidated balance sheet consolidated statement income loss follows consolidated statement income loss cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash restricted cash represents cash collateral required market hedge arrangements total return swap arrangements cash available legg mason general corporate use including cash consolidated investment vehicles affiliate benefit trust cash flow reporting effective april 1 2018 legg mason adopted updated accounting guidance retrospective basis clarifies classification presentation restricted cash investment activity items statements cash flows updated guidance requires entities include restricted cash restricted cash equivalents cash equivalents balances consolidated statements cash flows disclose reconciliation balances consolidated statements cash flows consolidated balance sheets updated guidance also clarifies distributions equity method investees classified based either cumulative earnings nature distribution approach legg mason elected apply nature distribution approach classifying distributions received equity method investees result adopting aspect updated guidance 5717 5308 reclassified cash provided operating activities cash used investing activities consolidated statement cash flows years ended march 31 2018 2017 respectively financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except legg masons longterm debt effective april 1 2018 legg mason adopted updated accounting guidance prospective basis requires equity investments measured fair value changes recognized earnings guidance apply investments accounted equity method adoption guidance material impact legg masons consolidated financial statements discussed consolidation proprietary fund investment products seed capital investments initially consolidated individual securities within portfolio accounted equity investments legg mason consolidates products long holds controlling financial interest product upon deconsolidation typically occurs several years legg mason accounts seed capital investments proprietary fund products equity method investments described ownership 20 50 otherwise ability significantly influence financial operating policies fund product partnerships llcs thirdparty investors may less ability influence operations equity method accounting considered legg masons ownership greater 3 changes fair value seed capital investments recognized nonoperating income expense net consolidated statements income loss legg mason generally redeems seed capital investments related product establishes sufficient track record thirdparty investments related product sufficient sustain strategy decision made longer pursue strategy length time legg mason holds majority interest product varies based number factors market demand market conditions investment performance see notes 3 19 additional information regarding legg masons seed capital investments determination whether investments proprietary fund investment products represent vies respectively equity investments legg mason control investee primary beneficiary vie exert significant influence financial operating policies investee legg mason follows equity method accounting evaluation whether legg mason exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence legg mason may governing board investee legal rights investors entity pursuant funds operating documents relationship legg mason investors entity legg masons equity method investees investment companies record underlying investments fair value therefore equity method accounting legg masons share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee legg masons share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense net portion earnings losses attributable legg masons equity method investments offsetting compensation expense adjustments revenue sharing arrangements deferred compensation arrangements therefore fluctuations market value investments offsets material impact net income loss attributable legg mason inc legg mason evaluates equity method investments impairment events changes circumstances indicate carrying value investment exceeds fair value decline fair value temporary legg mason also holds marketable equity securities fixed income securities classified equity investments updated accounting guidance classified trading securities prior accounting guidance certain investment securities including held civs also classified equity investments previously classified trading securities investments recorded fair value realized unrealized gains losses included current period earnings equity fixed income securities valued using closing market prices listed instruments broker price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices investments illiquid privatelyheld securities market prices quotations may readily available management estimates value securities using variety methods resources including current available financial information investment industry practical expedient legg mason relies net asset value nav certain investments partnerships limited liability company fair value navs provided investees derived fair values underlying investments reporting date updated accounting guidance adopted april 1 2018 also provides entities option elect measure equity investments readily determinable fair values qualify nav practical expedient adjusted cost adjusted cost method investments initially recorded cost subsequently adjusted increased decreased observable transaction involving investments similar investments issuer adjusted cost investment carrying values also reviewed adjusted impairment march 31 2019 approximately 12245 investments partnerships limited liability companies accounted using adjusted cost method march 31 2018 carrying value investments totaled 9578 accounted using cost method prior accounting guidance addition financial instruments described derivative instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair value longterm debt march 31 2019 2018 aggregated 2270964 2316154 respectively fair values estimated using publicly quoted market prices classified level 2 fair value hierarchy described derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason uses futures contracts index funds hedge market risk certain seed capital investments foreign exchange forwards hedge risk movement exchange rates certain assets liabilities legg mason also entered various total return swap arrangements financial intermediaries respect certain legg mason sponsored etfs resulted investments etfs financial intermediaries connection total return swap arrangements legg mason executed futures contracts partially hedge related market risk limited basis legg mason also used interest rate swaps hedge risks movement interest rates certain financial liabilities exception two interest rate swaps discussed note 6 legg mason designated financial instruments hedge accounting defined accounting literature periods presented gains losses derivative instruments designated hedge accounting included operating income expense nonoperating income expense net consolidated statements income loss depending strategy see note 16 additional information regarding derivatives hedging fair value measurements accounting guidance fair value measurements defines fair value establishes framework measuring fair value fair value defined exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date accounting guidance fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance objective fair value accounting measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically requires use judgment ascertain formerly active market become inactive determining fair values markets become inactive guidance also requires timely disclosures regarding expected cash flows credit losses aging securities unrealized losses fair value accounting guidance also establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value except longterm debt classified disclosed one following categories level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets certain derivative instruments level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category includes fixed income securities certain proprietary fund investment products certain longterm debt level 3 financial instruments values based unobservable inputs including little market activity legg mason category includes investments partnerships limited liability companies private equity funds real estate funds category may also include certain proprietary investment products redemption restrictions contingent consideration liabilities valuation asset liability may involve inputs one level hierarchy level fair value hierarchy fair value measurement falls entirety determined based lowest level input significant fair value measurement entirety certain proprietary fund products investments held civs valued nav determined applicable fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 nav practical expedient discussed based whether fund exchange traded frequency related nav determinations impact redemption restrictions futures contracts valued last settlement price end day exchange upon traded classified level 1 investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 legg mason holds investments real estate funds structured partnerships limited liability companies classified level 3 fair values investments real estate funds prepared giving consideration income cost sales comparison approaches estimating property value income approach estimates income stream property discounts income plus reversion presumed sale present value risk adjusted rate yield rates growth assumptions utilized approach derived market transactions well financial industry data discount rate exit capitalization rate significant inputs valuations rates based location type nature property current anticipated market conditions cost approach estimates replacement cost building less physical depreciation plus land value sales comparison approach compares recent transactions appraised property adjustments made dissimilarities typically provide range value many factors also considered determination fair value including limited operating cash flows financial performance properties property types geographic locations physical condition asset prevailing market capitalization rates prevailing market discount rates general economic conditions economic conditions specific market assets located specific rights terms associated investment inherent uncertainties valuation values may materially differ values would determined negotiations held parties sale transaction practical expedient legg mason relies nav certain investments partnerships limited liability company fair value navs provided investees derived fair values underlying investments reporting date investments fair value measured using nav practical expedient required categorized within fair value hierarchy transfers categories measured beginning period see note 3 additional information regarding fair value measurements fixed assets fixed assets primarily consist software leasehold improvements equipment capitalized software includes purchased software internally developed software equipment consists primarily communications technology hardware furniture fixtures fixed assets reported cost net accumulated depreciation amortization depreciation amortization determined use straightline method software amortized estimated useful lives assets generally three five years leasehold improvements amortized depreciated initial term lease unless options extend likely exercised equipment depreciated estimated useful lives assets generally ranging three eight years cost software used service contract legg mason control software expensed term contract maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life value impaired value impaired asset written fair value written asset determined longer value intangible assets goodwill legg masons identifiable intangible assets consist principally asset management contracts manage proprietary mutual funds hedge funds real estate funds fundsofhedge funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds hedge funds real estate funds fundsofhedge funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities indefinitelife intangible assets goodwill amortized financial statement purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred company perform quantitative tests include critical reviews significant factors assumptions determine intangible assets goodwill impaired legg mason considers factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected consolidated financial statements current fair value recognized expense period impairment determined triggering event occurred company performs quantitative tests annually indefinitelife intangible assets goodwill unless company qualitatively conclude likely respective fair values exceed related carrying values historically legg mason performed annual impairment test goodwill indefinitelife intangible assets december 31 year second quarter fiscal 2019 legg mason voluntarily changed date annual impairment test december 31 october 31 order better align impairment testing process existing longterm planning processes earnings release timing legg mason believe change accounting principle related annual impairment testing date delayed accelerated avoided impairment charge relative test date legg mason determined change accounting principle preferable circumstances fair values intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined market participants perspective based projected discounted cash flows take consideration estimates future revenues profit margins growth rates taxes discount rates proprietary fund contracts managed operated single unit meet criteria may aggregated impairment testing goodwill evaluated reporting unit level considered impairment carrying value reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit legg mason uses valuation techniques principally based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition goodwill deemed recoverable reporting unit level also operating segment level legg mason defines global asset management segment results fact chief operating decision maker legg masons chief executive officer regularly receives discrete financial information consolidated global asset management business level regularly receive discrete financial information operating results lower level asset management affiliate level allocations goodwill management restructures acquisitions dispositions based relative fair values respective businesses restructured acquired divested see note 5 additional information regarding intangible assets goodwill note 18 additional business segment information debt longterm debt recorded amortized cost unamortized premiums discounts debt issuance costs fair value hedge adjustments related longterm debt presented balance sheet direct adjustments carrying value associated longterm debt liability amortized interest expense legal term associated debt contingent consideration liabilities connection business acquisitions legg mason may required pay additional future consideration based achievement certain designated financial metrics legg mason estimates fair value potential future obligations time business combination consummated records contingent consideration liability consolidated balance sheet legg mason accretes contingent consideration liabilities expected payment amounts related earnout terms obligations ultimately paid resulting interest expense consolidated statements income loss expected payment amounts subsequently change contingent consideration liabilities reduced increased current period resulting gain loss reflected within contingent consideration fair value adjustments consolidated statements income loss see note 2 additional information regarding contingent consideration liabilities related fair value adjustments translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income loss gains losses resulting foreign currency transactions included net income loss income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforward benefits business combinations amortization intangible assets accrued compensation discussed note 7 december 22 2017 tax cuts jobs act 2017 tax law enacted tax law complex materially changed us corporate income tax rate 35 21 included various changes impact legg mason reduction us corporate tax rate resulted noncash provisional tax benefit 220935 year ended march 31 2018 due remeasurement certain existing deferred tax assets liabilities new income tax rate legg masons remeasurement deferred tax assets liabilities completed fiscal 2019 adjustments necessary tax law also created new taxes international operations including global intangible lowtaxed income gilti provision legg mason made accounting policy election record tax expense gilti inclusions period cost applicable rather recognizing deferred taxes related basis differences expected reverse applicable accounting guidance tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information companys accounting policy classify interest related tax matters interest expense related penalties operating expense see note 7 additional information regarding income taxes loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated estimates losses matters exist reporting date may adjusted prior related financial statement issuance changes likelihood outcome estimable amounts related insurance recoveries recorded separately underwriter confirmed coverage specific claim amount see note 8 additional information stockbased compensation legg masons stockbased compensation includes restricted stock units stock options employee stock purchase plan market performancebased performance shares payable common stock management equity plans certain affiliates deferred compensation payable stock compensation plans legg mason issues equity awards directors officers key employees accordance applicable accounting guidance compensation expense includes costs nonvested sharebased awards classified equity grant date fair value amortized respective vesting periods may reduced retirementeligible recipients straightline method grantdate fair value equityclassified sharebased awards immediate vesting also included compensation benefits expense effective april 1 2017 legg mason adopted updated accounting guidance stockbased compensation accounting updated guidance simplifies several aspects accounting stockbased compensation including income tax consequences clarifies classification criteria awards either equity liabilities classification related amounts statements cash flows updated guidance requires excess tax benefits deficiencies associated stockbased compensation recognized discrete items income tax provision benefit consolidated statements income loss reporting period occur thereby increasing volatility income tax provision benefit result fluctuations legg masons stock price legg mason adopted amendment modified retrospective basis recorded cumulativeeffect adjustment 24327 increase deferred tax assets retained earnings consolidated balance sheet april 1 2017 tax benefits previously recognized due legg masons cumulative tax loss position upon adoption updated guidance legg mason elected prospectively account forfeitures occur material impact consolidated financial statements also cash flows related income tax deductions excess less related stockbased compensation expense classified cash flows operating activities consolidated statements cash flows legg mason determines fair value stock options using blackscholes optionpricing model legg mason also determines fair value optionlike affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts performance share units valued using monte carlo pricing model see note 11 additional information regarding stockbased compensation earnings per share basic earnings per share attributable legg mason inc shareholders eps calculated dividing net income loss attributable legg mason inc adjusted removing earnings allocated participating securities weightedaverage number shares outstanding excludes participating securities legg mason issued employees restricted stock units deemed participating securities prior vesting related unvested restricted stock units entitle holder nonforfeitable dividend rights circumstance accounting guidance requires “twoclass method” eps calculations excludes earnings potentially distributed undistributed allocated participating securities allocate losses participating securities diluted eps similar basic eps effect potential common shares included calculation unless potential common shares antidilutive periods net loss potential common shares participating securities considered antidilutive excluded calculation see note 13 additional discussion eps restructuring costs discussed note 17 legg mason initiated strategic restructuring reduce costs associated strategic restructuring primarily relate employee termination benefits incentives retain employees transition period charges consolidating leased office space expenses professional fees termination benefits including severance retention incentives recorded compensation benefits consolidated statements income loss compensation items require employees provide future service therefore expensed ratably required service period costs expensed incurred charges consolidating leased office space recorded occupancy consolidated statements income loss expenses recorded appropriate operating expense classifications discussed note 2 legg mason restructured permal group ltd permal combination entrust capital entrust costs associated restructuring primarily related employee termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statements income loss charges consolidating leased office space recorded occupancy consolidated statement income loss noncontrolling interests noncontrolling interests include affiliate minority interests thirdparty investor equity consolidated sponsored investment products vested affiliate management equity plan interests affiliate minority interests holder may point request settlement classified redeemable noncontrolling interests civs consolidated sponsored investment products thirdparty investors related noncontrolling interests classified redeemable noncontrolling interests investors funds may request withdrawals time also included redeemable noncontrolling interests vested affiliate management equity plan interests holder may point request settlement interests redeemable noncontrolling interests reported consolidated balance sheets estimated settlement values except settlement values less issuance value reported amount issuance value changes expected settlement values recognized settlement period adjustments retained earnings nonredeemable noncontrolling interests include vested affiliate management equity plan interests permit holder request settlement interests nonredeemable noncontrolling interests reported consolidated balance sheets issuance value together undistributed net income allocated noncontrolling interests legg mason estimates settlement value noncontrolling interests fair value reported fair value consolidated balance sheets amounts affiliate noncontrolling interests management equity plan interests reflect related total business enterprise value appropriate discounts lack marketability control may also features equity interests dividend subordination contemplated valuations fair value optionlike management equity plan interests also relies blackscholes option pricing model calculations affiliate noncontrolling interests subsequent acquisition business enterprise values derived using various methods including discounted cash flows guideline public company guideline public transaction methods legg mason may engage thirdparty valuation experts perform independent determinations fair value review internally prepared valuations appropriate based relative significance related amounts related contractual provisions changes valuation inputs consolidated sponsored investment products investor may request withdrawal time fair value based market quotes underlying securities held investment products net income loss attributable noncontrolling interests consolidated statements income loss includes share net income loss respective subsidiary allocated minority interest holders see note 15 additional information regarding noncontrolling interests related parties services sponsored investment funds legg mason earns management fees incentive fees distribution service fees revenue incurs distribution servicing expenses disclosed consolidated statements income loss sponsored investment funds deemed affiliated entities related party definition relevant accounting guidance recent accounting developments august 2018 financial accounting standards board fasb updated guidance clarify accounting implementation costs incurred cloud computing arrangement service contract update conforms requirements capitalizing implementation costs incurred cloud computing arrangement service contract accounting guidance provides capitalization costs incurred develop obtain internalusesoftware updated guidance effective legg mason fiscal 2021 unless adopted earlier legg mason evaluating adoption august 2018 fasb also updated guidance fair value measurements updated guidance modifies disclosure requirements based revised fasb conceptual framework financial reporting finalized august 2018 improve effectiveness financial statement disclosures updated guidance effective fiscal 2021 unless adopted earlier legg mason evaluating adoption august 2017 fasb updated guidance accounting derivative hedging updated guidance closely aligns results cash flow fair value hedging designations risk management activities changes designation measurement guidance qualifying hedging relationships presentation hedge results financial statements new guidance also simplifies application hedge accounting updated guidance effective legg mason fiscal 2020 unless adopted earlier legg mason uses accounting hedge designation timetotime would potentially impacted derivative transactions designated hedging january 2017 fasb updated guidance simplify test goodwill impairment updated guidance still requires entities perform annual goodwill impairment tests comparing fair value reporting unit related carrying amount eliminates requirement potentially calculate implied fair value goodwill determine amount impairment new guidance entity recognize impairment charge reporting units carrying amount exceeds reporting unit’s fair value amount excess guidance effective fiscal 2020 unless adopted earlier legg mason evaluating adoption february 2016 fasb updated guidance accounting leases updated guidance requires lessee shall recognize assets liabilities arise lease transactions lessee recognize rightofuse asset use underlying asset liability lease payments updated guidance also requires evaluation inception service contract determine whether contract contains lease july 2018 fasb updated lease guidance make certain targeted improvements including allowing guidance adopted modified retrospective basis legg mason adopt guidance modified retrospective basis effective date april 1 2019 adoption include election related practical expedients accounting policy election capitalize leases remaining terms 12 months less upon adoption legg mason expects record right use asset approximately 340000 lease liability approximately 410000 related real property operating leases equipment financing leases expect adoption guidance material impact consolidated statement income loss consolidated statement cash flows 2 acquisitions dispositions acquisitions following table presents summary acquisitiondate fair values assets acquired liabilities assumed legg masons significant acquisitions completed periods presented 1 post combination entrustpermal noncontrolling interest 403200 also included fair value reclassification 15500 retained earnings time acquisition entrust capital may 2 2016 legg mason acquired entrust combined permal legg masons existing hedge fund platform form entrustpermal renamed entrust global march 2019 entrust alternative asset management firm headquartered new york 9600000 assets management aum approximately 2000000 assets advisement committed capital closing largely complementary investment strategies investor base business mix permal transaction included cash payment 400000 funded borrowings legg masons revolving credit facility well portion proceeds issuance 450000 475 senior notes due 2026 notes 250000 6375 junior subordinated notes due 2056 6375 2056 notes march 2016 result combination legg mason owns 65 new entity entrust global remaining 35 owned entrusts cofounder managing partner fair value acquired amortizable intangible asset management contracts useful life approximately eight years acquisition purchase price allocated intangible assets goodwill expected deductible us tax purposes period 15 years goodwill principally attributable synergies expected arise entrust management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows completion annual impairment testing process fiscal 2017 indefinitelife funds management contracts asset related entrust acquisition combined indefinitelife fundsofhedge funds management contracts asset related legacy permal business connection legg masons annual impairment testing process fiscal 2019 2018 combined entrust global indefinitelife funds management contracts asset impaired 274600 195000 respectively fiscal 2019 combined trade name asset also impaired 18200 see note 5 additional information costs incurred connection acquisition entrust 7046 year ended march 31 2017 financial results entrust included legg masons consolidated financial results year ended march 31 2017 included revenues 115327 material impact net income loss attributable legg mason inc connection combination entrust permal legg mason incurred aggregate charges restructuring transition costs totaling 93598 completion plan fiscal 2019 1468 7049 41785 recognized years ended march 31 2019 2018 2017 respectively costs primarily comprised charges employee termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statements income loss real estate related charges recorded occupancy consolidated statements income loss table presents summary changes restructuring transitionrelated liability cumulative charges incurred completion plan 1 includes lease loss reserve space permanently abandoned 9069 year ended march 31 2017 7212 year ended march 31 2016 2 includes stockbased compensation expense accelerated fixed asset depreciation clarion partners april 13 2016 legg mason acquired majority equity interest clarion partners diversified real estate asset management firm headquartered new york clarion partners managed approximately 41500000 aum date acquisition legg mason acquired 82 ownership interest clarion partners cash payment 631476 including payment cash delivered 36772 coinvestments 16210 funded portion proceeds issuance 2026 notes 6375 2056 notes march 2016 clarion partners management team retained 18 outstanding equity clarion partners clarion partners management team also retained rights full amount performance fee revenues earned historic aum place closing acquisition performance fees earned historic aum fully passed employees compensation per terms acquisition agreement recorded compensation expense legg mason expects full pass performance fees phase fiscal 2022 firms previous majority owner sold entire ownership interest transaction upon acquisition legg mason also granted certain key employees clarion partners total 716 performancebased legg mason restricted share units aggregate fair value 11121 vest upon clarion partners achieving certain level ebitda defined award agreements within designated period closing acquisition aggregate value award included purchase price determined grant date using monte carlo pricing model following assumptions connection transaction legg mason also implemented affiliate management equity plan management team clarion partners resulted noncash charge 15200 three months ended june 30 2016 see note 11 additional information related clarion partners management equity plan fair value acquired amortizable intangible asset management contracts average useful life approximately 10 years acquisition approximately 86 purchase price allocated intangible assets goodwill expected deductible us tax purposes period 15 years goodwill principally attributable synergies expected arise clarion partners management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows addition previously discussed charge 15200 incurred connection implementation clarion partners management equity plan year ended march 31 2017 10757 costs incurred connection acquisition clarion partners financial results clarion partners included legg masons consolidated financial results year ended march 31 2017 included revenues 249468 material impact net income loss attributable legg mason inc pro forma financial information following unaudited pro forma financial information presents combined financial results legg mason clarion partners entrust initial period acquisitions acquisition occurred april 1 2015 unaudited pro forma financial information reflects certain adjustments amortization expense related fair value acquired intangible assets acquisition transitionrelated costs interest expense related debt incurred finance acquisitions income tax impact pro forma adjustments unaudited pro forma financial information informational purposes excludes projected cost savings necessarily indicative financial results would achieved acquisitions actually occurred beginning first period presented financial guard llc august 17 2016 legg mason acquired 82 equity interests financial guard llc financial guard online registered investment advisor technologyenabled wealth management investment advice platform acquisition required initial cash payment funded existing cash resources potential contingent payment 3000 based certain metrics within first year acquisition contingent payment due based relevant metrics connection acquisition legg mason recognized certain business assets goodwill 11995 legg mason also committed contribute 5000 additional working capital financial guard paid twoyear period following acquisition august 2016 paid march 31 2019 precidian investments llc january 22 2016 legg mason acquired minority equity position precidian investments llc precidian firm specializing creating innovative products solutions solving market structure issues particularly regard etf marketplace transaction required cash payment funded existing cash resources terms transaction legg mason acquired series b preferred units precidian entitle legg mason approximately 20 voting economic interests precidian along customary preferred equity protections sole option 48 months following initial investment legg mason may subject satisfaction certain closing conditions upon payment consideration convert preferred units 75 common equity precidian fully diluted basis legg mason accounts investment precidian included noncurrent assets consolidated balance sheets march 31 2019 2018 equity method accounting april 10 2019 clarion partners acquired majority stake gramercy europe jersey limited european real estate investment business specializing paneuropean logistics industrial assets transaction required initial cash payment 11206 paid using existing cash resources potential contingent consideration payment approximately 3735 using foreign exchange rate april 10 2019 €3315 potential payment due fifth anniversary closing contingent consideration certain acquisitions provided potential contingent consideration payments following table presents summary changes contingent consideration liability 1 includes amounts related two small acquisitions completed december 2017 acquisition pk investment management llp pk investments december 31 2015 2 included contingent consideration fair value adjustments consolidated statements income loss 3 march 31 2019 1415 included noncurrent liabilities consolidated balance sheet march 31 2018 3707 included current liabilities 1900 included noncurrent liabilities consolidated balance sheet rare infrastructure limited october 2015 legg mason acquired majority interest rare infrastructure limited rare infrastructure terms related transaction agreements provided potential contingent consideration payments march 31 2017 2018 potential catchup adjustments march 31 2019 however payments due based relevant net revenue targets martin currie holdings limited october 2014 legg mason acquired outstanding equity interests martin currie holdings limited martin currie acquisition agreement provided potential first second third anniversary contingent payments due march 31 2016 2017 2018 respectively however payments due based relevant financial metrics provision share purchase agreement required certain amounts contingent consideration due paid martin currie pension plan fund portion net plan benefit obligation funding occurred contingent payments due see note 9 additional information regarding martin currie pension plan contingent consideration provisions share purchase agreement also required designated percentage earnout payments net pension contribution allocated fund incentive plan martin curries management estimated payment adjusted quarterly amortized earnout term contingent consideration due payments due employees arrangement related compensation expense reversed year ended march 31 2018 december 2015 martin currie acquired certain assets pk investments year ended march 31 2018 legg mason paid contingent consideration due 3242 qs investors holdings llc may 2014 legg mason acquired outstanding equity interests qs investors august 2016 legg mason paid contingent consideration 6587 second anniversary payment september 2018 legg mason paid 4319 final installment contingent consideration dispositions december 23 2016 march 31 2017 legg mason sold ownership interests small equity advisor poland small bostonbased private equity advisor also february 24 2017 legg mason liquidated share small equity advisory joint venture net proceeds transactions received year ended march 31 2017 19469 transactions material impact legg masons consolidated financial condition results operations years ended march 31 2019 2018 legg mason received additional contingent proceeds 932 3462 respectively 3 investments fair value assets liabilities disclosures include details legg masons financial assets financial liabilities measured fair value nav excluding financial assets financial liabilities civs see note 19 variable interest entities consolidation investment vehicles information related assets liabilities civs measured fair value fair values financial assets liabilities company determined using following categories inputs 1 cash investments actively traded money market funds classified level 1 cash investments time deposits measured amortized cost approximates fair value short time purchase instrument expected realization classified level 2 included investment securities consolidated balance sheets 3 primarily investments private equity real estate funds equity method investments investment companies primarily record underlying investments fair value therefore fair value investments measured using legg masons share investees underlying net income loss predominately representative fair value adjustments investments held equity method investee equity method investments measured fair value recurring basis 28160 27660 march 31 2019 2018 respectively excluded tables 4 included noncurrent assets consolidated balance sheets 5 see note 16 6 see note 2 net realized unrealized gains losses investment securities classified equity investments updated accounting guidance 13628 year ended march 31 2019 investment securities classified trading investments prior accounting guidance 31012 44534 years ended march 31 2018 2017 respectively net unrealized gains losses relating equity investments still held reporting date 12878 year ended march 31 2019 relating trading investments still held reporting date 7045 32862 years ended march 31 2018 2017 respectively discussed note 1 seed capital investments represent investments made legg mason fund new investment products strategies march 31 2019 2018 seed capital investments totaled 227756 268268 respectively investments excess 1000 52 funds 59 funds respectively comprising 90 total period end seed capital investments presented tables exclude 43712 43854 march 31 2019 2018 respectively related legg masons investments civs see note 19 additional information regarding legg masons investments civs changes financial asset liabilities measured fair value using significant unobservable inputs level 3 presented tables realized unrealized gains losses recorded level 3 investments included nonoperating income expense net consolidated statements income loss change unrealized gains level 3 investments liabilities still held reporting date 2876 927 45099 years ended march 31 2019 2018 2017 respectively significant transfers level 1 level 2 years ended march 31 2019 2018 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments respective reporting dates following table summarizes nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 liquidation restrictions 21 monthly redemption 1 quarterly redemption 78 subject redemption currently redeemable 2 liquidations expected remaining term 3 balance 68 remaining term less one year 32 remaining term 13 years current plans sell investments held march 31 2019 4 fixed assets following table reflects components fixed assets depreciation amortization expense related fixed assets 48391 48382 54023 years ended march 31 2019 2018 2017 respectively expense includes accelerated depreciation amortization 2688 year ended march 31 2017 primarily related space vacated connection restructuring permal combination entrust 5 intangible assets goodwill following table reflects components intangible assets certain legg masons intangible assets denominated currencies us dollar balances related assets fluctuate changes related foreign currency exchange rates indefinitelife intangible assets goodwill legg mason performed annual impairment testing goodwill indefinitelife intangible assets october 31 2018 due prior limited excess fair value related carrying values noted analyses entrust global indefinitelife fund management contracts asset rare infrastructure indefinitelife fund management contracts asset negative market trends analyses completed data december 31 2018 ultimately assets determined impaired result analyses trade name indefinitelife intangible assets related businesses also completed data december 31 2018 also determined impaired impairment charges entrust global primarily result continued net client outflows legacy high net worth fundoffunds products leading reduced growth expectations management fees performance fees declining margin higher discount rate changes resulted reduction projected cash flows legg mason’s overall assessment fair value assets carrying values entrust global fund management contracts intangible asset 401404 trade name asset 28500 impaired 274600 18200 respectively management estimated fair values assets based upon discounted cash flow analyses well relief royalty method trade name asset using unobservable market inputs level 3 measurements significant assumptions used cash flow analyses included projected revenue growth rates discount rates royalty rates base revenues related entrust global fund management contracts assumed annual growth contraction rates ranging 19 4 average 3 projected cash flows entrust global fund management contracts discounted 17 base revenues related entrust global trade name asset assumed annual growth rates ranging 0 5 average 4 royalty rate 10 discount rate 165 impairment charges rare infrastructure primarily result lower expected net client inflows performance fees leading lower margin higher discount rate changes resulted reduction related projected cash flows legg mason’s overall assessment fair value assets rare infrastructure fund management contracts asset carrying value approximately 120800 trade name asset carrying value 2800 impaired 65000 1000 respectively management estimated fair values assets based upon discounted cash flow analyses well relief royalty method trade name asset using unobservable market inputs level 3 measurements significant assumptions used cash flow analyses included projected revenue growth rates discount rates royalty rates base revenues related rare infrastructure fund management contracts assumed annual growth rates ranging 4 5 average 5 projected cash flows rare infrastructure fund management contracts discounted 165 base revenues related rare infrastructure trade name asset assumed annual growth rates ranging 1to 5 average 4 royalty rate 10 discount rate 165 projected revenue aum growth rates entrust global rare infrastructure indefinitelife intangible assets trade name assets dependent client aum flows market conditions product investment performance discount rates also influenced market conditions well interest rates factors decreases projected revenue aum growth rates andor increases discount rate could result lower fair value measurements potential additional impairments entrust global rare infrastructure indefinitelife fund management contracts intangible assets trade name intangible assets could significant legg mason determined triggering events occurred march 31 2019 would require impairment testing impairments indefinitelife intangible assets goodwill year ended march 31 2019 legg mason’s goodwill impairment testing noted assessed fair value global asset management business reporting unit exceeded related carrying value 4 market performance andor aum levels decrease near term cash flow projections deviate current projections reasonably possible asset could become impaired impairment could material amount legg masons annual impairment testing process fiscal 2018 determined carrying value entrust global indefinitelife fund management contracts intangible asset exceeded fair value resulted impairment 195000 quarter ended december 31 2017 impairment charge primarily result net client outflows legacy high net worth fundoffund products including transfers client funds products traditional separate accounts direct offerings related decline revenues management estimated fair value asset based upon discounted cash flow analysis using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected revenue growth rates discount rates base revenues related entrust global fund contracts assumed annual growth contraction rates ranging 13 6 average 5 projected cash flows entrust global fund contracts discounted 150 result aum losses factors three months ended june 30 2017 legg mason tested rare infrastructure trade name indefinitelife intangible asset impairment three months ended june 30 2017 carrying value trade name exceeded fair value 3057 june 30 2017 resulted impairment charge 2000 management estimated fair value rare infrastructure trade name june 30 2017 based upon relief royalty approach discounted cash flow method using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected annual revenue growth rates 5 18 average 8 royalty rate 10 discount rate 165 legg masons annual impairment testing process fiscal 2017 determined carrying value permal trade name indefinitelife asset exceeded fair value 21100 resulted impairment charge 17000 impairment charge primarily result decrease revenues reduction royalty rate reflecting decline value permal trade name due change branding decline use separate permal name following combination entrust management estimated fair value permal trade name based upon discounted cash flow analysis using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected annual revenue growth rates 3 9 average 7 royalty rate 15 discount rate 160 change carrying value goodwill summarized amortizable intangible asset management contracts three months ended december 31 2018 projected revenues related rare infrastructure separate account contracts asset declined due losses separate account clients aum based revised attrition estimates remaining useful life decreased three onehalf years two years december 31 2018 result decline projected revenues revised estimate useful life amortized carrying value approximately 6900 december 31 2018 determined exceed fair value impairment charge 6400 recorded three months ended december 31 2018 management estimated fair value asset december 31 2018 based discounted cash flow analysis using unobservable market inputs level 3 measurements addition useful life significant assumptions used cash flow analysis included projected revenue growth rates 7 discount rate 165 impairments amortizable management contract intangible assets year ended march 31 2019 march 31 2019 amortizable intangible asset management contracts amortized weightedaverage remaining life 62 years estimated amortization expense next five fiscal years thereafter follows three months ended june 30 2017 projected revenues related rare infrastructure separate account contracts amortizable asset declined due losses separate account aum factors based revised attrition estimates remaining useful life acquired contracts decreased eight years five years june 30 2017 result decline projected revenues revised estimate remaining useful life amortized carrying value determined exceed fair value impairment charge 32000 recorded three months ended june 30 2017 management estimated fair value asset based upon discounted cash flow analysis using unobservable market inputs level 3 measurements significant assumptions used cash flow analysis included projected aum growth rates 7 attrition rates 20 discount rate 165 nine months ended december 31 2016 revenues related rare infrastructure separate account contracts asset declined based revised attrition estimates remaining useful life acquired contracts decreased 11 years eight years december 31 2016 result client attrition related decline revenues revised estimate remaining useful life amortized carrying value management contracts asset determined exceed fair value impairment charge 18000 recorded three months ended december 31 2016 management estimated fair value asset based upon discounted cash flow analysis using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected aum growth rates 7 attrition rates 13 discount rate 155 6 shortterm borrowings longterm debt shortterm borrowings legg mason maintains unsecured credit agreement amended time credit agreement provides 500000 multicurrency revolving credit facility revolving credit facility may increased aggregate amount 500000 subject approval lenders expires december 2020 outstanding borrowings repaid time revolving credit facility available fund working capital needs general corporate purposes march 31 2019 legg mason 500000 undrawn revolving credit facility capacity discussed note 10 december 22 2017 legg mason borrowed 225500 credit agreement purchase 5568 shares legg mason common stock shanda asset management investment limited shanda march 2018 legg mason repaid 100000 borrowings march 31 2018 125500 borrowings outstanding credit agreement september 2018 legg mason repaid remaining 125500 outstanding borrowings outstanding credit agreement march 31 2019 may 2016 legg mason borrowed 460000 credit agreement finance acquisition entrust replenish cash used complete acquisitions clarion partners april 2016 rare infrastructure october 2015 august 2016 legg mason issued 500000 545 junior subordinated notes due 2056 545 2056 notes net proceeds together existing cash resources used repay aggregate 500000 outstanding borrowings credit agreement revolving credit facility interest rate threemonth eurocurrency rate plus 125 basis points annual commitment fee 175 basis points interest payable least quarterly amounts outstanding credit agreement interest rate may change future based changes legg masons credit ratings effective interest rate borrowings credit agreement 295 march 31 2018 credit agreement includes standard financial covenants include maximum net debt ebitda ratio defined documents 30 1 minimum ebitda interest ratio defined documents 40 1 march 31 2019 legg masons net debt ebitda ratio 25 1 ebitda interest expense ratio 54 1 therefore legg mason maintained compliance applicable covenants june 2 2017 credit agreement amended include legg mason inc parent entity among entities permitted incur liens secure obligations including related cash collateral provisions hedging agreements aggregate amount exceed 200000 one time prior amendment certain subsidiaries legg mason permitted incur liens cash collateral provided legg mason inc connection certain hedging agreements considered lien assets purposes lien covenant result legg mason compliance terms credit agreement times amendment provides waiver defaults credit agreement may arisen prior date amendment resulting provision cash collateral interest rate swap credit agreement april 29 2016 legg mason entered forward starting amortizing interest rate swap agreement financial intermediary designated cash flow hedge interest rate swap used convert outstanding borrowings credit agreement floating rate fixed rate debt terms interest rate swap agreement legg mason paid fixed interest rate 23 notional amount 500000 swap 467year term scheduled reductions notional amount expire december 29 2020 august 2016 connection repayment outstanding borrowings revolving credit facility interest rate swap terminated cash payment 3662 result legg mason reclassified loss 2249 net deferred income taxes 1413 representing fair value cash flow hedge accumulated comprehensive loss net nonoperating income expense net prior termination august 2016 swap settled monthly year ended march 31 2017 764 reclassified accumulated comprehensive loss net interest expense swap terminated original terms conditions hedged instruments unchanged swap effective cash flow hedge longterm debt longterm debt net consists following march 31 2019 250000 legg masons longterm debt matures fiscal 2020 2000000 matures fiscal 2024 march 31 2019 estimated fair value longterm debt 2270964 fair value debt estimated using publicly quoted market prices classified level 2 fair value hierarchy 27 senior notes due july 2019 june 2014 legg mason issued 250000 27 senior notes due july 2019 notes 2019 notes sold discount 553 amortized interest expense fiveyear term 2019 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 020 together related accrued unpaid interest june 23 2014 legg mason entered interest rate swap contract financial intermediary notional amount 250000 designated fair value hedge interest rate swap used effectively convert 2019 notes fixed rate debt floating rate debt identical terms underlying debt hedged related hedging gains losses offset one another resulted net income loss impact swap fiveyear term scheduled mature july 15 2019 april 21 2016 fair value hedge swap terminated cash receipt 6500 related fair value hedge adjustment amortized interest expense remaining life debt years ended march 31 2019 2018 2017 1804 amortized recorded interest expense consolidated statements income loss 395 senior notes due july 2024 june 2014 legg mason issued 250000 395 senior notes due july 2024 notes 2024 notes sold discount 458 amortized interest expense 10year term 2024 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 025 together related accrued unpaid interest 475 senior notes due march 2026 march 2016 legg mason issued 450000 2026 notes 2026 notes sold discount 207 2026 notes redeemed part aggregate greater related principal amount time redemption sum remaining scheduled payments discounted treasury rate defined plus 045 together related accrued unpaid interest 5625 senior notes due january 2044 january 2014 legg mason issued 400000 5625 senior notes due january 2044 notes sold discount 6260 amortized interest expense 30year term additional 150000 2044 notes issued june 2014 sold premium 9779 also amortized interest expense 30year term 2044 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 030 together related accrued unpaid interest 6375 junior subordinated notes due march 2056 march 2016 legg mason issued 250000 6375 2056 notes 6375 2056 notes issued 100 principal amount 6375 2056 notes rank junior subordinate right payment legg masons current future senior indebtedness prior march 15 2021 6375 2056 notes redeemed aggregate part 100 principal amount plus accrued unpaid interest called tax event defined 102 principal amount plus accrued unpaid interest called rating agency event defined march 15 2021 6375 2056 notes redeemed aggregate part 100 principal amount plus related accrued unpaid interest 545 junior subordinated notes due september 2056 august 2016 legg mason issued aggregate principal amount 500000 545 2056 notes net proceeds together cash hand used repay aggregate 500000 outstanding borrowings credit agreement 545 2056 notes rank junior subordinate right payment legg masons current future senior indebtedness prior september 15 2021 545 2056 notes redeemed aggregate part 100 principal amount plus accrued unpaid interest called tax event defined prospectus supplement 102 principal amount plus accrued unpaid interest called rating agency event defined prospectus supplement september 15 2021 545 2056 notes redeemed aggregate part 100 principal amount plus related accrued unpaid interest 7 income taxes components income loss income tax provision follows components income tax expense benefit follows reconciliation difference effective income tax rate statutory federal income tax rate follows 1 state income taxes include changes valuation allowances related change apportionment provision return differences net impact related deferred tax assets 2 includes impact deferred tax assets liabilities effects unremitted foreign earnings aspects tax law 3 reserves uncertain tax benefits recorded positions related prior years foreign federal state local tax return filing well positions reflected current year tax expense accrual 4 effect foreign tax rates fiscal 2019 2018 2017 include tax benefits 8711 33150 2890 respectively noncash impairment charges related intangible assets entrust global legacy permal businesses discussed note 5 additionally effect foreign tax rates fiscal 2019 includes 21720 tax benefit noncash impairment charges related intangible assets rare businesses 5 see schedule change valuation allowances jurisdiction 6 fiscal 2018 includes 90 federal impact 97 including state impact nondeductible charge regulatory matter discussed note 8 7 fiscal 2017 part larger strategic initiative legg mason restructured certain holding company businesses increased amount foreign tax credits available utilization december 22 2017 tax law enacted tax law complex materially changed us corporate income tax rate 35 21 included various changes impact legg mason reduction us corporate tax rate resulted onetime noncash provisional tax benefit 220935 recognized quarter ended december 31 2017 due remeasurement certain existing deferred tax assets liabilities new income tax rate addition noncash tax charge 7260 provisionally provided quarter ended december 31 2017 effects unremitted foreign earnings aspects tax law legg mason’s remeasurement deferred tax assets liabilities completed adjustments necessary legg masons accounting tax unremitted foreign earnings also completed additional expense 2164 recorded quarter ended december 31 2018 september 2016 uk finance act 2016 enacted reduced main uk corporate tax rate effective april 1 2020 18 17 reductions uk corporate tax rate resulted tax benefit 4055 recognized fiscal 2017 result revaluation deferred tax assets liabilities new rate deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows legg mason various loss tax credit carryforwards may provide future tax benefits related valuation allowances established accordance accounting guidance income taxes managements opinion likely benefits realized extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals including future increases relating tax amortization goodwill indefinitelife intangible assets well planning strategies measure value realizability deferred tax assets may 2 2016 permal business merged entrust part transaction legg mason paid cash 35 ownership permal business 65 ownership new entrustpermal known entrust global joint venture result transaction legg mason converted portion permal legacy business partnership decreased related deferred tax liability 4102 offsetting change tax basis differences amount 4370 march 31 2017 deferred tax liability related basis difference partnership investments march 31 2018 1510 intangible asset impairment charges recognized entrust global year ended march 31 2019 resulted deferred tax asset 53764 related basis difference partnership investments see note 5 additional information related impairment charges substantially legg masons deferred tax assets relate us federal state uk taxing jurisdictions march 31 2019 us federal deferred tax assets aggregated 594583 realization expected require approximately 3662000 us earnings next eight years 331000 must foreign sourced earnings based estimates future taxable income using assumptions similar used legg masons goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realized respect deferred tax assets relating foreign tax credit carryforwards likely tax benefits relating utilization approximately 1800 foreign taxes credits realized valuation allowance established companys estimates assumptions contemplate changes ownership legg mason stock could certain circumstances limit utilization net operating loss foreign tax credit benefits limitation would impact timing amount net operating loss foreign tax credit benefits ultimately realized expire march 31 2019 us state deferred tax assets aggregated approximately 225727 net valuation allowances 93185 primarily related state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized foreign jurisdictions net increase valuation allowances 6144 fiscal 2019 primarily related current year increases carried forward uk interest deductions discussed note 1 effective april 1 2017 legg mason adopted updated guidance stockbased compensation accounting guidance adopted modified retrospective basis tax asset 24327 recognized increase deferred tax assets retained earnings consolidated balance sheet april 1 2017 tax benefits previously recognized due legg masons cumulative tax loss position following deferred tax assets valuation allowances relating carryforwards recorded march 31 1 substantially us state net operating losses carryforward fiscal 2038 2 due potential change factors relating apportionment income various states legg masons effective state tax rates subject fluctuation impact value companys deferred tax assets including net operating losses could material impact future effective tax rate company legg mason total gross unrecognized tax benefits approximately 78776 62728 70787 march 31 2019 2018 2017 respectively totals approximately 67923 52772 50462 respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates fiscal 2019 net impact effective settlement tax examinations recent developments case law expiration statutes limitation certain jurisdictions resulted 3571 previously unrecognized benefits realized reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 follows although management cannot predict degree certainty timing ultimate resolution matters review various taxing jurisdictions reasonably possible company’s gross unrecognized tax benefits balance may change within next 12 months 41462 result expiration statutes limitations completion tax authorities examinations company accrues interest related unrecognized tax benefits interest expense recognizes penalties operating expense legg mason approximately 1937 march 31 2019 2018 2155 march 31 2017 accrued interest penalties tax contingencies consolidated balance sheets legg masons prior year tax returns subject examination taxing authorities us uk brazil various jurisdictions following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal 2017 us federal fiscal 2016 uk calendar year 2008 brazil fiscal 2015 state california fiscal 2011 state new york fiscal 2016 states connecticut maryland company anticipate making significant cash payments settlement audits excess amounts reserved tax law imposed onetime tax foreign earnings unremitted time enactment previously recognized tax provision associated earnings adjusted reflect impact tax law despite tax law changes except noted legg masons continuing intention permanently reinvest substantially accumulated future earnings foreign subsidiaries overseas march 31 2019 legg mason available domestic cash equivalents approximately 235000 500000 undrawn capacity credit agreement meet domestic liquidity needs subject compliance applicable covenants legg mason plans utilize approximately 20000 foreign cash annually next several years supplement amounts anticipates approximately 13000 amount consist debt service payments foreign affiliates remainder provided distribution forecasted future earnings repatriation foreign earnings currently planned accordingly additional state income taxes withholding taxes provided however circumstances change legg mason provide pay applicable additional us taxes connection repatriation offshore funds practical time determine income tax liability would result repatriation accumulated foreign earnings 8 commitments contingencies leases legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2039 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2019 minimum annual aggregate rentals operating leases service agreements follows 1 includes 464104 real estate equipment leases 95297 service maintenance agreements minimum rental commitments shown reduced 97816 minimum sublease rentals received future noncancelable subleases approximately 30 due one counterparty lease reserve liability included table space subleased march 31 2019 2018 19783 24188 respectively subtenant defaults sublease legg mason may incur operating charges adjust existing lease reserve liability reflect expected future sublease rentals reduced amounts dependent commercial real estate market time minimum rental commitments shown also include 7377 commitments related space vacated subleases pursued related lease reserve liability also included table 4280 5061 march 31 2019 2018 respectively remains subject adjustment based circumstances real estate markets may require change assumptions actual terms sublease ultimately secured lease reserve liability takes consideration various assumptions including expected amount time take secure sublease agreement prevailing rental rates applicable real estate markets lease reserve liability subleased space vacated space subleases pursued included current liabilities noncurrent liabilities consolidated balance sheets table presents summary changes lease reserve liability 1 related vacated subleased space primarily legg masons corporate headquarters included occupancy expense consolidated statements income loss following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes periods provided landlord free rent period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements noncontrolling interests provided related documents legg mason may obligated settle redeemable noncontrolling interests related certain affiliates march 31 2019 affiliate redeemable noncontrolling interests excluding amounts related management equity plans aggregated 540595 addition march 31 2019 estimated redemption fair value units affiliate management equity plans redeemable nonredeemable aggregated 81794 see notes 11 15 additional information regarding affiliate management equity plans noncontrolling interests respectively commitments contingencies march 31 2019 legg mason commitments invest 39342 limited partnerships make private investments commitments expected outstanding funded required end respective investment periods ranging fiscal 2030 also connection acquisition clarion partners april 2016 legg mason committed ultimately provide 100000 seed capital clarion partners products legg mason also committed contribute 5000 additional working capital financial guard paid twoyear period following acquisition august 2016 paid march 31 2019 normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications considered financial guarantees relevant accounting guidance legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred fiscal 2019 legg mason completed negotiations us department justice “doj” sec staff resolve foreign corrupt practices act investigation concerning activities former permal business connection managing assets libyan governmental entities structures established thirdparty financial institution investments made calendar years 2005 2007 terminated later 2012 matter relate current business activities client relationships legg mason affiliates focused actions former employees permal left firm four years ago resolution matter result restrictions ongoing business activities affiliates legg mason accrued 67000 charge earnings matter year ended march 31 2018 representing legg mason’s estimated liability settlement matter accrual based part net revenues approximately 31000 earned former permal business managing assets libyan governmental entities year ended march 31 2019 legg mason recorded additional operating charge earnings 4151 matter 71151 aggregate settlement amount paid year ended march 31 2019 legg mason subject customer complaints also named defendant various legal actions arising primarily asset management securities brokerage investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial normal course business legg mason also received subpoenas currently involved governmental industry selfregulatory agency inquiries investigations time proceedings involving asset management activities accordance guidance accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings probable loss incurred reasonable estimate loss made legg mason cannot estimate reasonably possible loss range loss associated matters litigation proceedings including described customer complaints legal actions inquiries proceedings investigations inability provide reasonably possible amount range losses uncertainty ultimate outcome matter liability damage issues developed point legg mason conclude reasonable possibility loss meaningful amount range possible losses numerous aspects customer complaints legal actions inquiries proceedings investigations prevent legg mason estimating related amount range reasonably possible losses aspects include among things nature matters significant relevant facts known uncertain dispute damages sought specified uncertain unsupportable unexplained addition legal actions discovery may yet started may complete may conclusive meaningful settlement discussions may occurred regulatory matters investigations may run course without clear indication wrongdoing fault conclusion managements opinion adequate accrual made march 31 2019 provide probable losses may arise matters company could reasonably estimate amount legg masons financial condition results operations cash flows could materially affected period probable losses become apparent matter ultimately resolved addition ultimate costs litigationrelated charges vary significantly periodtoperiod depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement reductions compensation revenue share arrangements march 31 2019 2018 legg masons liability losses contingencies 219 67225 respectively fiscal 2019 2018 2017 legg mason incurred charges relating litigation proceedings approximately 4800 67500 1100 respectively total charges fiscal 2019 2018 liability fiscal 2018 reflect charge previously discussed regulatory matter 9 employee benefits defined contribution plans legg mason subsidiaries maintains various defined contribution plans covering substantially employees plans legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation match employee 401k contributions matches range 50 100 employee 401k contributions maximum lesser 6 employee compensation internal revenue service limit corporate profit sharing matching contributions together contributions made subsidiary plans totaled 39191 38278 37249 fiscal 2019 2018 2017 respectively addition employees make voluntary contributions certain plans martin currie defined benefit pension plan martin currie sponsors retirement death benefits plan defined benefit pension plan assets held separate trusteeadministered fund plan assets measured fair value consist 64 equities level 1 36 bonds level 2 march 31 2019 64 equities level 1 35 bonds level 2 1 cash level 1 march 31 2018 assumptions used determine expected return plan assets targets 60 40 equitybond allocation reference 15year ftse uk gilt yield equities uk longdated bond yields bonds plan liabilities measured actuarial basis using projected unit method discounted rate equivalent current rate highquality bond local uk market currency significant concentrations risk plan assets march 31 2019 2018 march 31 2019 2018 41189 40554 total plan assets invested legg mason martin currie sponsored investment products recent actuarial valuation performed may 31 2016 updated subsequent balance sheet dates march 31 2019 accrual service credit plan ceased october 3 2014 legg mason uses corridor approach account plan corridor approach actuarial gains losses plan assets liabilities deferred reported comprehensive income loss except actuarial gains losses exceed 10 greater fair value plan assets plan benefit obligation excess amortized compensation benefits expense recovery period 15 years ended march 31 2019 2018 260 492 previously unrecognized losses expensed corridor approach resulting net benefit obligation summarized included march 31 2019 2018 consolidated balance sheets noncurrent liabilities change benefit obligation summarized change plan assets summarized years ended march 31 2019 2018 2017 net periodic benefit cost 734 389 93 respectively included compensation benefits expense consolidated statements income loss components net periodic loss gain years ended march 31 2019 2018 2017 follows net actuarial losses 17807 13635 included accumulated comprehensive loss net consolidated balance sheets march 31 2019 2018 respectively march 31 2019 plan expects make benefit payments next 10 fiscal years follows previously discussed provision share purchase agreement required certain amounts contingent consideration due paid pension plan fund portion net plan benefit obligation funding occurred contingent consideration payments due connection review pensions regulator uk regulator pension plans current structure funding status martin currie trustees pension regulator agreed revised plan structure august 10 2017 including redomiciliation plan uk additional guarantees martin currie entities provisions accelerated funding portion benefit obligation certain circumstances martin currie agreed plan trustees contribute 3015 using exchange rate march 31 2019 £2320 annual committed contribution amount plan annual basis beginning fiscal 2019 continuing may 2024 final payment 1899 using exchange rate march 31 2019 £1461 final payment amount due november 2024 10 capital stock march 31 2019 authorized numbers common preferred shares 500000 4000 respectively march 31 2019 2018 7872 8854 shares common stock respectively reserved issuance legg masons equity plans changes common stock follows fiscal 2019 2018 2017 legg mason retired 395 348 370 shares respectively common stock 15575 13233 12139 respectively net share settlements deferred compensation award vesting addition fiscal 2018 2017 legg mason purchased retired 6636 11697 shares common stock respectively 253649 381672 respectively open market purchases january 2015 legg masons board directors approved share repurchase authorization 1000000 repurchases legg mason common stock previously discussed december 22 2017 legg mason purchased retired 5568 shares legg mason common stock shanda aggregate purchase price 225490 legg masons board directors approved purchase shares utilizing remaining 169019 legg mason common stock previously authorized purchase january 2015 authorization authorizing purchase additional 56471 legg mason common stock complete transaction march 31 2019 purchases legg mason common stock authorized par value shares repurchased charged common stock excess purchase price par first charged additional paidin capital remaining balance charged retained earnings dividends declared per share 136 112 088 fiscal 2019 2018 2017 respectively dividends declared paid march 31 2019 2018 2017 29058 23623 21153 respectively included current liabilities consolidated balance sheets 11 stockbased compensation legg masons stockbased compensation includes restricted stock units stock options employee stock purchase plan market performancebased performance shares payable common stock affiliate management equity plans deferred compensation payable stock shares available issuance equity incentive stock plan march 31 2019 7520 options legg mason’s equity incentive stock plans granted prices less 100 fair market value date grant options generally exercisable equal increments four years expire within eight 10 years date grant discussed components legg masons total stockbased compensation expense follows restricted stock restricted stock restricted stock unit transactions summarized restricted stock restricted stock unit transactions reflected table noncash transactions years ended march 31 2019 2018 2017 legg mason recognized income tax benefits related restricted stock restricted stock unit awards 12767 20972 21138 respectively unamortized compensation cost related unvested restricted stock restricted stock unit awards march 31 2019 63109 expected recognized weightedaverage period 16 years stock options stock option transactions legg masons equity incentive plans summarized total intrinsic value options exercised years ended march 31 2019 2018 2017 1084 4647 2289 respectively march 31 2019 aggregate intrinsic value options outstanding 1277 following information summarizes legg masons stock options outstanding march 31 2019 march 31 2019 2018 2017 options exercisable 3233 2867 2688 shares respectively weightedaverage exercise price 3912 3764 3504 respectively stock options exercisable march 31 2019 weighted average remaining contractual life 32 years march 31 2019 aggregate intrinsic value exercisable shares 1277 following summarizes legg masons stock options exercisable march 31 2019 following information summarizes unvested stock options legg masons equity incentive plan year ended march 31 2019 years ended march 31 2019 2018 2017 income tax benefits related stock options 1170 2715 3178 respectively unamortized compensation cost related unvested options 882 shares march 31 2019 2900 expected recognized weightedaverage period 10 years cash received exercises stock options legg masons equity incentive plans 6114 14072 8988 years ended march 31 2019 2018 2017 respectively tax benefit expected realized tax deductions option exercises totaled 198 1408 725 years ended march 31 2019 2018 2017 respectively weightedaverage fair value servicebased stock options granted years ended march 31 2018 2017 using blackscholes option pricing model 841 778 per share respectively following weightedaverage assumptions used model grants legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values affiliate management equity plans connection acquisition clarion partners april 2016 legg mason implemented management equity plan clarion partners entitles certain key employees participate 15 future growth clarion partners enterprise value subject appropriate discounts subsequent date grant initial grant plan vested immediately related grantdate fair value 15200 determined independent valuation recognized compensation benefits expense consolidated statement income loss reflected consolidated balance sheet redeemable noncontrolling interest three months ended june 30 2016 future grants plan vest 20 annually five years result recognition additional compensation expense related vesting period subject various conditions including passage time vested plan units put legg mason settlement fair value legg mason also call plan units generally post employment settlement fair value march 31 2019 estimated aggregate redemption fair value units plan currently redeemable 11900 effective march 1 2016 legg mason implemented management equity plan royces key employees march 31 2019 2017 additional minority equity interests plan equivalent 55 21 respectively royce entity issued management team resulted compensation benefits expense 2400 4600 respectively corresponding increase nonredeemable noncontrolling interest including additional minority equity interests minority equity interests equivalent 245 interest royce entity issued certain key employees additional grants expected plan equity holders receive quarterly distributions portion royces pretax income amounts equal percentage ownership represented equity hold subject payment legg masons revenue share reasonable expenses march 31 2019 estimated aggregate redemption fair value units plan currently redeemable 29784 march 31 2014 legg mason implemented management equity plan granted units key employees subsidiary clearbridge investments llc clearbridge entitle participate 15 future growth clearbridge enterprise value subject appropriate discounts subsequent grant date independent valuation determined aggregate cost award approximately 16000 recognized compensation benefits expense consolidated statements income loss related vesting periods march 2019 total compensation expense related clearbridge affiliate management equity plan 2932 3103 3285 years ended march 31 2019 2018 2017 respectively arrangement provided onehalf cost absorbed clearbridge incentive pool vested plan units put legg mason settlement fair value beginning one year holder terminates employment legg mason also call plan units generally post employment settlement fair value changes control legg mason clearbridge impact vesting settlement provisions units however upon sale substantially clearbridge assets vesting units would accelerate participants would receive fair value payment respect interests plan future grants additional plan units dilute participation existing outstanding units 15 future growth respective affiliates enterprise value subsequent related future grant date additional compensation expense would incurred future grants entitle plan participants collectively aggregate 15 future growth clearbridge enterprise value upon vesting grantdate fair value vested plan units reflected consolidated balance sheets redeemable noncontrolling interests adjustment additional paidin capital thereafter redeemable noncontrolling interests continue adjusted ultimate maximum estimated redemption value expected term retained earnings adjustments march 31 2019 estimated aggregate redemption fair value vested units clearbridge plan currently redeemable approximately 40110 june 28 2013 legg mason implemented similar management equity plan key employees permal independent valuation determined aggregate cost awards approximately 9000 recognized compensation benefits expense consolidated statements income loss related vesting period december 2017 april 2016 conjunction permal restructuring preparation combination entrust permal management equity plan liquidated payment 7150 participants remaining 3481 unamortized cost expensed year ended march 31 2017 legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 4500 total share limit plan purchases made payroll deductions legg mason provides 15 contribution towards purchases recorded compensation benefits consolidated statements income loss years ended march 31 2019 2018 2017 approximately 141 128 164 shares respectively purchased open market behalf participating employees legg mason also equity plan nonemployee directors current equity plan directors may elect receive shares stock restricted stock units shares restricted stock units issuable equity plan limited 625 aggregate 494 460 427 shares issued march 31 2019 2018 2017 respectively march 31 2019 2018 2017 nonemployee directors held 99 80 66 restricted stock units respectively vest grant date therefore included unvested shares restricted stock units table years ended march 31 2019 2018 2017 nonemployee directors granted 15 12 11 restricted stock units respectively 15 19 30 shares common stock respectively discussed note 2 upon acquisition clarion partners april 2016 legg mason granted certain key employees clarion partners total 716 performancebased legg mason restricted share units included unvested shares restricted stock units table aggregate fair value 11121 included purchase price restricted share units vest upon clarion partners achieving certain level ebitda defined purchase agreement within designated period closing acquisition may 2018 2017 legg mason granted certain executive officers total 163 111 performance share units respectively part fiscal 2018 2017 incentive awards aggregate value 5820 3503 respectively vesting performance share units granted may 2018 number shares payable vesting determined based legg mason’s relative total stockholder return relative organic growth rate longterm aum threeyear period ending march 31 2021 recorded grant date fair value per performance share unit 3567 estimated based multiple fair value monte carlo pricing model expense associated may 2018 grant adjusted level relative organic growth expected ultimately achieved estimated fair values may 2018 grant range 1808 4446 per performance share unit share vesting performance share units granted may 2017 determined based legg masons relative total stockholder return threeyear period ending march 31 2020 grant date fair value per unit may 2017 performance share units 3142 estimated grant date using monte carlo pricing model following assumptions used monte carlo pricing models may 2018 2017 grants legg mason also granted certain executive officers 182 performance share units may 2016 aggregate award value 3528 performance period grant ended march 31 2019 resulted issuance 46 performance shares deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends since january 1 2015 additional contributions plan remaining 241 shares reserved future dividend distributions fiscal 2019 2018 2017 legg mason issued 20 14 17 shares respectively plan weightedaverage fair value per share grant date 2968 3763 2960 respectively undistributed shares issued plan held rabbi trust assets rabbi trust consolidated employer value employers stock held rabbi trust classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plan presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2019 2018 2017 456 462 540 respectively 12 revenue following table presents total operating revenues disaggregated asset class revenues geographic location primarily based location advisor domicile fund families managed legg mason necessarily reflect customer resides currency revenues denominated following table presents total operating revenues disaggregated geographic location previously discussed certain sales commissions paid connection obtaining assets managed retail separately managed accounts capitalized deferred costs march 31 2019 capitalized sales commissions 8126 included current assets 10147 included noncurrent assets consolidated balance sheet amortization related capitalized sales commissions included compensation benefits consolidated statement income loss 9228 year ended march 31 2019 impairment losses relation capitalized costs year ended march 31 2019 year ended march 31 2019 operating revenues reported united kingdom table exposure single nonus currency excess 30 total uk operating revenues addition march 31 2019 percentage legg masons longterm aum currency exposure aum invested securities denominated british pound euro applicable less 5 british pound euro march 31 2019 legg masons longterm aum country exposure aum invested securities entities domiciled united kingdom eurozone applicable less 5 uk approximately 5 eurozone 13 earnings per share following table presents computations basic diluted eps weightedaverage shares exclude weightedaverage unvested restricted shares deemed participating securities 3092 3327 3335 years ended march 31 2019 2018 2017 respectively discussed note 10 fiscal 2019 2018 2017 legg mason retired 395 348 370 shares common stock net share settlements deferred compensation award vesting addition fiscal 2018 2017 legg mason purchased retired 6636 11697 shares common stock respectively open market purchases fiscal 2018 also purchased retired 5568 shares common stock shanda total retired shares reduced weightedaverage shares outstanding 355 6050 6335 shares years ended march 31 2019 2018 2017 respectively diluted eps calculation year ended march 31 2019 excludes 106 potential common shares antidilutive due net loss year options purchase 1952 3454 shares years ended march 31 2018 2017 respectively included computation diluted eps presumed proceeds exercising options including related income tax benefits exceed average price common shares period therefore options deemed antidilutive diluted eps calculations years ended march 31 2018 2017 exclude potential common shares issuable 14205 warrants issued connection repurchase convertible notes may 2012 market price legg mason common stock exceed exercise price therefore warrants would antidilutive warrants expired unexercised july 2017 market performancebased awards excluded potential dilution designated market performance condition met 14 accumulated comprehensive loss accumulated comprehensive loss includes cumulative foreign currency translation adjustments gains losses defined benefit pension plans change accumulated translation adjustments fiscal 2019 fiscal 2018 primarily resulted impact changes british pound australian dollar brazilian real japanese yen singapore dollar relation us dollar net assets legg masons subsidiaries uk australia brazil japan singapore pound australian dollar singaporean dollar real yen functional currencies respectively summary legg masons accumulated comprehensive loss march 31 follows significant amounts reclassified accumulated comprehensive loss consolidated statements income loss years ended march 31 2019 2018 year ended march 31 2017 2493 cumulative foreign currency translation related sale legg mason poland 2718 net income tax benefit 1708 realized settlement termination interest rate swap described note 6 reclassified nonoperating income expense consolidated statements income loss 15 noncontrolling interests net income attributable noncontrolling interests included following amounts following table presents changes redeemable nonredeemable noncontrolling interests 1 related vie seeded investment products 2 related royce management equity plan 3 includes impact adoption updated consolidation accounting guidance following table presents changes redeemable noncontrolling interests affiliate exclusive management equity plans redeemable noncontrolling interests 35 outstanding equity entrust global 18 outstanding equity clarion partners 15 outstanding equity rare infrastructure put holders called legg mason settlement fair value subject various conditions including passage time july 2 2018 corporate minority owner rare infrastructure exercised put option 10 ownership interest settlement value 15547 based midpoint valuations determined independent valuation experts appointed legg mason corporate minority owner paid october 2018 along 981 dividends arrears 12345 difference settlement value carrying value noncontrolling interest 27892 settlement date recorded increase additional paidin capital may 10 2019 legg mason purchased 15 equity interest rare infrastructure held firms management team total consideration approximately 22200 including 2362 dividends arrears initial cash payment 11967 approximated related fair market value along related dividends arrears made may 10 2019 balance approximately 10100 recorded compensation benefits quarter ended june 30 2019 subject certain conditions due 50 one year closing 50 two years closing purchase part strategic restructuring discussed note 17 pursue operational efficiencies rare infrastructure clearbridge reduce costs enhance growth opportunities businesses 16 derivatives hedging legg mason uses currency forwards economically hedge risk movements exchange rates primarily us dollar british pound australian dollar singapore dollar japanese yen euro derivative transactions legg mason certain legally enforceable rights setoff governed international swaps derivative association isda master agreements derivative transactions legg mason one isda master agreement significant counterparties covers transactions counterparty respective isda agreements provides settlement netting closeout netting legg mason counterparty legally enforceable assets recorded consolidated balance sheets march 31 2019 2018 4183 4904 respectively liabilities recorded consolidated balance sheets march 31 2019 2018 7579 6446 respectively legg mason also uses market hedges certain seed capital investments entering futures contracts sell index funds treasuries benchmark hedged seed capital investments entered total return swap arrangements respect certain legg mason sponsored etfs discussed exception two interest rate swap contracts discussed note 6 legg mason designated derivatives hedging instruments accounting purposes years ended march 31 2019 2018 2017 march 31 2019 legg mason open currency forward contracts aggregate notional amounts totaling 408841 open futures contracts relating seed capital investments aggregate notional amounts totaling 128065 exception total return swap arrangements related futures contracts amounts representative level nonhedge designation derivative activity throughout years ended march 31 2019 2018 2017 march 31 2019 weightedaverage remaining contract terms currency forward contracts futures contracts relating seed capital investments three months legg mason entered various total return swap arrangements financial intermediaries respect certain legg mason sponsored etfs resulted investments financial intermediaries respective etf terms total return swap arrangements legg mason receives related investment gains losses underlying shares etf pays floating rate value underlying shares total return swap arrangements allows either party terminate part arrangement provides automatic termination upon occurrence certain events financial intermediary counterparty may hedge total return swap position investment etf financial intermediaries purchased interests respective legg mason etf date transactions aggregate notional amount total return swaps outstanding march 31 2019 61230 weightedaverage remaining contract term eight months floating rate paid value underlying securities total return swap arrangements outstanding march 31 2019 threemonth libor plus 16 discussed notes 1 19 total return swap arrangements create variable interests underlying funds legg mason significant legg mason deemed primary beneficiary accordingly legg mason may consolidate etf products significant open total return swap arrangements connection total return swap arrangements legg mason executed futures contracts notional amounts totaling 37027 march 31 2019 partially hedge gains losses recognized total return swaps following table presents derivative assets related offsets following table presents derivative liabilities related offsets following table presents derivative assets related offsets following table presents derivative liabilities related offsets following table presents gains losses recognized consolidated statements income loss derivative instruments described currency forward contracts futures forward contracts seed capital investments included economic hedges interest rate market risk certain operating investing activities legg mason 17 strategic restructuring february 2019 legg mason announced plan implement new global operating platform combine certain affiliate parent company operations since announcement plan evolved focus legg masons corporate operations part broader strategic restructuring reduce costs legg mason also expanded areas included restructuring include broader corporate distribution functions well efficiency initiatives certain smaller affiliates operate outside revenuesharing arrangements strategic restructuring expected substantially complete end fiscal 2021 plan involves restructuring costs primarily comprised employee termination benefits retention incentives transition period restructuring costs also include charges consolidating leased office space costs professional fees legg mason expects incur total strategic restructuring costs range 130000 150000 march 2021 expected result future cost savings total strategic restructuring costs incurred year ended march 31 2019 9352 included occupancy costs 2848 costs 6504 substantially costs incurred year ended march 31 2019 require cash estimates remaining strategic restructuring costs follows management expects total estimated costs within range disclosed nature costs may differ presented 18 business segment information legg mason global asset management company provides investment management related services wide array clients company operates one reportable business segment global asset management global asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue global asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks see note 12 total operating revenues disaggregated geographic location table reflects longlived assets geographic region march 31 19 variable interest entities consolidated investment vehicles accordance financial accounting standards legg mason consolidates certain sponsored investment products designated civs presented table legg mason concluded primary beneficiary certain vies held significant financial interests funds addition legg mason entered various total return swap arrangements financial intermediaries respect certain legg mason sponsored etfs terms total return swaps legg mason absorbs related gains losses underlying etf investments financial intermediaries therefore variable interests etfs open total return swap arrangements significant legg mason deemed primary beneficiary etfs determined primary beneficiary vies legg mason consolidated designated following funds civs consolidated balance sheets 1 represents legg masons maximum risk loss excluding uncollected advisory fees 2 total return swap arrangements legg mason receives related investment gains losses investments three legg masons etfs notional amounts totaling 61230 march 31 2019 see note 16 additional information regarding total return swaps assets civs primarily comprised investment securities currency forward derivatives liabilities civs primarily comprised payables purchased securities investors creditors civs recourse general credit assets legg mason beyond investment funds legg mason also consolidates certain vre products seed capital investments legg mason maintains controlling financial interest product see note 1 additional information regarding vies vres consolidation investment products following tables reflect impact civs consolidated sponsored investment products consolidated balance sheets consolidated statements income loss consolidating balance sheets 1 represents consolidated sponsored investment products vres designated civs consolidating statements income loss 1 represents consolidated sponsored investment products vres designated civs 1 represents consolidated sponsored investment products vres designated civs 1 represents consolidated sponsored investment products vres designated civs nonoperating income expense civs includes interest income interest expense net gains losses investments consolidation civs impact net income loss attributable legg mason inc march 31 2019 2018 financial assets civs carried fair value totaling 70197 128397 respectively valued using level 1 inputs totaling 12547 20692 respectively valued using nav practical expedient addition march 31 2019 financial assets civs carried fair value totaling 55182 valued using level 2 inputs march 31 2019 financial liabilities civs carried fair value 4217 valued using level 2 inputs legg mason financial liabilities civs carried fair value march 31 2018 transfers level 1 level 2 either years ended march 31 2019 2018 navs used practical expedient civs provided investees derived fair values underlying investments respective reporting dates following table summarizes nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 redemption restrictions 7 daily redemption 14 monthly redemption 70 quarterly redemption 9 subject three fiveyear lockup side pocket provisions legg masons carrying value maximum risk loss vies legg mason holds variable interest primary beneficiary follows 1 amounts related investments proprietary fund products 2 includes equity investments company made required make earned uncollected management fees companys total aum unconsolidated vies 29025764 31809837 march 31 2019 2018 respectively assets vies primarily comprised cash equivalents investment securities liabilities primarily comprised various expense accruals vies consolidated legg mason power direct significant economic activities entity rightsobligations associated benefitslosses could significant entity quarterly financial data dollars thousands except per share amounts unless otherwise noted unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2020 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework 2013 based assessment management concluded march 31 2020 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2020 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2020 joseph sullivan chairman chief executive officer peter h nachtwey senior executive vice president chief financial officer report independent registered public accounting firm board directors stockholders legg mason inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets legg mason inc subsidiaries “company” march 31 2020 2019 related consolidated statements income loss comprehensive income loss changes stockholders’ equity cash flows three years period ended march 31 2020 including related notes collectively referred “consolidated financial statements” also audited companys internal control financial reporting march 31 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company march 31 2020 2019 results operations cash flows three years period ended march 31 2020 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2020 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed note 1 consolidated financial statements company changed manner accounts leases april 1 2019 basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matters communicated matters arising current period audit consolidated financial statements communicated required communicated audit committee relate accounts disclosures material consolidated financial statements ii involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate indefinitelived intangibles impairment assessment described notes 1 5 consolidated financial statements company’s consolidated indefinitelived intangibles balance 32 billion march 31 2020 represented contracts manage proprietary mutual funds hedge funds fundsofhedge funds real estate funds trade names resulting acquisitions management conducts annual impairment test october 31 frequently triggering events occurred may indicate fair value declined carrying amount asset determined impaired current fair value indefinitelived intangibles unit account less recorded carrying value fair values estimated based discounted projected cash flows disclosed management determining fair value indefinitelived intangible assets using technique involved use significant assumptions related cash flow projections including estimates future revenues growth rates aum related profit margins taxes discount rates principal considerations determination performing procedures relating indefinitelived intangibles impairment assessment critical audit matter significant judgment management developing fair value estimate indefinitelived intangibles turn led high degree auditor judgment subjectivity effort performing procedures evaluate management’s significant assumptions including growth rates aum related profit margins discount rates addition audit effort involved use professionals specialized skill knowledge assist performing procedures evaluating audit evidence obtained addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating indefinitelived intangibles impairment assessment including controls determination cash flow projections significant assumptions used procedures also included among others testing management’s process developing fair value estimate evaluating appropriateness discounted cash flow model testing completeness accuracy relevance underlying data used model evaluating significant assumptions used management including growth rates aum profit margins discount rates evaluating reasonableness management’s assumptions related growth rates aum related profit margins involved considering past performance indefinitelived intangible assets consistency macroeconomic trends may impact growth rates aum related profit margin assumptions whether assumptions consistent evidence obtained areas audit professionals specialized skill knowledge used assist evaluation company’s discounted cash flow model certain significant assumptions including growth rates aum discount rates realizability deferred tax assets domestic net operating loss foreign tax credit carryforwards described notes 1 7 consolidated financial statements company’s consolidated gross deferred tax assets 929 million excluding 137 million valuation allowance march 31 2020 63 gross deferred tax assets relate domestic net operating loss foreign tax credit carryforwards realizability deferred tax assets related domestic operating losses foreign tax credit carryforwards determined based estimates future taxable income involving use significant assumptions related cash flow projections including estimates future revenues growth rates aum profit margins future state apportionment factors future effective state tax rates foreign sourced earnings principal considerations determination performing procedures relating realizability deferred tax assets domestic net operating loss foreign tax credit carryforwards critical audit matter significant judgment management determining realizability deferred tax assets related domestic operating losses foreign tax credit carryforwards turn led high degree auditor judgment subjectivity effort performing procedures evaluate realizability deferred tax assets estimates future taxable income significant assumptions including growth rates aum profit margins future state apportionment factors future effective state tax rates foreign sourced earnings addition audit effort involved use professionals specialized skill knowledge assist performing procedures evaluating audit evidence obtained addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating management’s realizability deferred tax assets including controls estimates future taxable income significant assumptions used procedures also included among others testing management’s process determining realizability deferred tax assets evaluating appropriateness undiscounted cash flow model evaluating significant assumptions used management developing estimates future taxable income including growth rates aum profit margins future state apportionment factors future effective state tax rates foreign sourced earnings testing completeness accuracy relevance data used calculations evaluating reasonableness management’s assumptions related growth rates aum profit margins involved considering past performance company consistency macroeconomic trends may impact growth rates aum profit margins whether assumptions consistent evidence obtained areas audit professionals specialized skill knowledge used assist evaluation certain significant assumptions including future state apportionment factors future effective state tax rates foreign sourced earnings baltimore maryland may 28 2020 served company’s auditor since least 1983 company became subject sec reporting requirements able determine specific year began serving auditor company legg mason inc subsidiaries consolidated balance sheets dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements income loss dollars thousands except per share amounts see notes consolidated financial statements legg mason inc subsidiaries consolidated statements comprehensive income loss dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements cash flows dollars thousands continued legg mason inc subsidiaries consolidated statements cash flows continued dollars thousands see notes consolidated financial statements legg mason inc subsidiaries notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted march 31 2020 1 significant accounting policies business basis presentation legg mason inc parent subsidiaries collectively legg mason principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see consolidation note 20 discussion vies material intercompany balances transactions eliminated certain amounts prior year financial statements reclassified conform current year presentation references fiscal 2020 2019 2018 refer legg masons fiscal year ended march 31 year terms us company refer legg mason plan merger franklin resources inc february 17 2020 legg mason entered agreement plan merger agreement franklin resources inc franklin templeton alpha sub inc merger sub wholly owned subsidiary franklin templeton pursuant company merged merger sub merger company continuing surviving corporation wholly owned subsidiary franklin templeton pursuant merger agreement outstanding share common stock company converted right receive franklin templeton 5000 cash transaction expected close end third calendar quarter 2020 subject satisfaction customary closing conditions parties including among others approval merger agreement holders majority legg masons outstanding common shares receipt required regulatory approvals risks uncertainties march 2020 world health organization declared outbreak novel coronavirus covid19 global pandemic recommended containment mitigation measures worldwide contagious disease outbreak adversely affected workforces customers economies global financial markets significant uncertainty around breadth duration business disruptions related covid19 well impact global economy therefore management currently unable determine extent potential impacts financial condition results operations use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america applicable rules regulations securities exchange commission sec require management make assumptions estimates affect amounts reported consolidated financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements consolidation legg mason sponsors manages various types investment products services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinated management fees incentive fees legg masons exposure risk entities generally limited equity investment made required make earned uncollected management fees except total return swap arrangements executed additional risks discussed legg mason sell transfer investment assets investment products accordance financial accounting standards legg mason consolidates certain sponsored investment products designated reported consolidated investment vehicles civs consolidation sponsored investment products including designated civs impact net income loss attributable legg mason inc material impact legg masons consolidated operating results change value consolidated sponsored investment products recorded nonoperating income expense reflected net income loss attributable noncontrolling interests financial information certain consolidated sponsored investment products included companys consolidated financial statements threemonth lag based upon availability investment products financial information certain investment products legg mason sponsors manages considered vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights legg mason may fund initial cash investment certain vre investment products generate investment performance track record order attract thirdparty investors product legg masons initial investment new product typically represents 100 ownership product discussed note 3 products “seed capital investments” consolidated long legg mason maintains controlling financial interest product designated civs legg mason unless investment longerterm march 31 2020 2019 2018 consolidated vres designated civs vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity investors potential controlling financial interest legg mason must consolidate vie deemed primary beneficiary consolidation accounting guidance limited partners similar equity holders sponsored investment vehicle structured limited partnership similar entity either substantive investor rights replace manager kickout rights substantive participation rights general partner entities vies sponsor manager investment vehicle legg mason may deemed decision maker accounting guidance fees paid decision maker marketbased fees considered variable interests vie marketbased fees customary commensurate level effort required services provided additionally employee interests sponsored investment vehicle made circumvent consolidation guidance financed sponsor included variable interests assessment included primary beneficiary determination decision maker deemed primary beneficiary vie power direct activities significantly impact economic performance vie obligation absorb losses receive benefits variable interests could significant vie determining whether primary beneficiary vie legg mason considers qualitative quantitative factors voting rights equity holders guarantees implied relationships fee paid decision maker marketbased considered primary beneficiary determination march 31 2020 2019 2018 legg mason concluded primary beneficiary certain vies consolidated designated civs held significant financial interests funds addition legg mason entered various total return swap arrangements financial intermediaries respect certain legg mason sponsored exchange traded funds etfs terms total return swaps legg mason absorbs related gains losses underlying etf investments financial intermediaries therefore variable interests related funds significant may deemed primary beneficiary march 31 2020 2019 2018 legg mason consolidated etfs significant open total return swap arrangements designated civs see note 20 additional information revenue recognition effective april 1 2018 legg mason adopted updated accounting guidance revenue recognition adoption updated guidance result significant changes legg mason’s prior revenue recognition practices except timing recognition certain performance incentive fees capitalization amortization certain sales commissions separate accounts net presentation certain fund expense reimbursements previously presented gross basis changes legg mason’s previous revenue recognition practices discussed legg mason adopted updated guidance modified retrospective basis contracts complete april 1 2018 recognized cumulative effect initially applying updated guidance certain sales commissions adjustment opening balance retained earnings totaling 12263 april 1 2018 cumulative effect performance incentive fees fund expense reimbursement accounting comparative information fiscal 2018 restated continues reported prior accounting guidance effect period legg mason primarily earns revenues providing investment management services distribution shareholder services customers generally investment funds underlying investors separately managed accounts discussed revenues calculated based value investments management determine transaction price recognized obligations terms contracts customers satisfied generally time services rendered legg mason also responsibility valuation assets management aum substantially based observable market data independent pricing services fund accounting agents custodians brokers investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients generally investment management services single performance obligation include series distinct services substantially transferred customer time using timebased measure progress investment management services satisfied time customer simultaneously receives consumes benefits advisory services performed separate account funds advisory fees separate account funds advisory fees variable consideration primarily based predetermined percentages daily monthly quarterly average market value aum defined investment management agreements average market value aum subject change based fluctuations volatility financial markets separate account funds advisory fees constrained end month quarter actual average market value aum known significant revenue reversal longer probable therefore separate account fund advisory fees included transaction price allocated investment management services performance obligation end monthly quarterly reporting period specified investment management contract payment services investment management contracts due variable consideration allocated transaction price generally within 30 days recognition separate account funds advisory fee revenue updated guidance consistent legg mason’s prior revenue recognition process performance incentive fees performance incentive fees variable consideration may earned certain investment management contracts exceeding performance benchmarks relative absolute basis exceeding contractual return thresholds performance incentive fees estimated inception contract however range outcomes possible due factors outside control investment manager particularly market conditions performance incentive fees therefore excluded transaction price becomes probable significant reversal cumulative amount revenue recognized occur portion legg masons performance incentive fees earned based 12month performance periods end differing quarters year portion also based quarterly performance periods legg mason also earns performance incentive fees alternative certain products lock earlier investor’s termination date liquidation fund contract multipleyear intervals upon occurrence specific events sale assets certain products performance incentive fees may recognized revenue earlier updated guidance prior revenue recognition practices deferred recognition contingencies resolved performance fees recognized prior resolution contingencies recorded contract asset current assets noncurrent assets consolidated balance sheet depending length time contingencies resolved per terms certain acquisitions performance fees earned preclose aum acquired entities fully passed compensation expense therefore impact net income loss attributable legg mason inc fee waivers fund expense reimbursements legg mason may waive certain fees investors may reimburse investment funds certain operating expenses exceed certain threshold fee waivers continue reported reduction advisory fee revenue updated guidance prior accounting guidance fund expense reimbursements excess recognized revenue recorded expense consolidated statements income loss updated accounting guidance fund expense reimbursements exceed recognized revenue represent change transaction price therefore reported reduction investment advisory fees funds consolidated statements income loss distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds nondiscretionary advisory services assets advisement distribution service fees earned companysponsored investment funds reported revenue distribution services marketing services considered single performance obligation success selling underlying shares highly dependent upon sales marketing efforts ongoing shareholder servicing separate performance obligation services highly interrelated interdependent sale shares fees earned related distribution shareholder serving considered variable consideration calculated based average market value fund average market value fund subject change based fluctuations volatility financial markets distribution shareholder service fees generally constrained end month quarter actual market value fund known related revenue longer subject significant reversal therefore distribution service fees generally included transaction price end monthly quarterly reporting period allocated two performance obligations based amount specified agreement distribution services largely satisfied inception investment ultimate amounts revenue subject variable consideration constraint accordingly portion distribution service revenue recognized periods subsequent satisfaction performance obligation certain fund share classes charge distribution services inception investment based fixed percentage share price fixed price allocated performance obligation substantially satisfied time initial investment recognition distribution service fee revenue updated guidance consistent legg mason’s prior revenue recognition process legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution servicing expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties recorded distribution servicing expense consolidated statements income loss distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers contract costs deferred sales commissions legg mason incurs ordinary costs obtain investment management contracts services provided customers accordance investment management agreements costs include commissions paid wholesalers employees thirdparty broker dealers administration placement fees depending type services provided fees may paid time contract obtained ongoing basis updated guidance costs obtain contract capitalized costs incremental would incurred contract obtained costs fulfill contract capitalized relate directly contract costs generate enhance resources entity used satisfying performance obligations future costs expected recovered consistent prior accounting procedures fund launch costs including organizational underwriting costs placement fees commissions paid employees wholesalers brokerdealers sales fund shares expensed incurred costs would incurred regardless investor however commissions paid employees retail wholesalers connection sale retail separate accounts considered incremental fees relate obtaining specific contract calculated based specified rates recoverable management fees earned therefore capitalized updated accounting guidance commissions expensed incurred legg mason’s prior accounting practices capitalized sales commissions amortized based transfer services assets relate averages four years legg mason recorded cumulativeeffect adjustment 14839 increase retained earnings consolidated balance sheet april 1 2018 commissions paid legg mason financial intermediaries connection sales certain classes companysponsored mutual funds generally capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc consideration generally variable based timing investors redeem investment therefore variable consideration included transaction price investors redeem shares satisfied point time cdsc receipts recorded distribution service fee revenue received reduction unamortized balance deferred sales commissions corresponding expense deferred sales commissions included noncurrent assets consolidated balance sheets 1895 1419 march 31 2020 2019 respectively updated accounting guidance legg mason elected expense sales commissions related certain fund share classes amortization periods one year less incurred legg mason recorded cumulativeeffect adjustment 2576 decrease retained earnings consolidated balance sheet april 1 2018 reflect expense associated commissions previously capitalized legg masons prior accounting practices cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash restricted cash represents cash collateral required market hedge arrangements total return swap arrangements cash available legg mason general corporate use including cash consolidated investment vehicles affiliate benefit trust cash financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except legg masons longterm debt discussed consolidation proprietary fund investment products seed capital investments initially consolidated individual securities within portfolio accounted equity investments legg mason consolidates products long holds controlling financial interest product upon deconsolidation typically occurs several years legg mason accounts seed capital investments proprietary fund products equity method investments described ownership 20 50 otherwise ability significantly influence financial operating policies fund product partnerships llcs thirdparty investors may less ability influence operations equity method accounting considered legg masons ownership greater 3 changes fair value seed capital investments recognized nonoperating income expense net consolidated statements income loss legg mason generally redeems seed capital investments related product establishes sufficient track record thirdparty investments related product sufficient sustain strategy decision made longer pursue strategy length time legg mason holds majority interest product varies based number factors market demand market conditions investment performance equity investments legg mason control investee primary beneficiary vie exert significant influence financial operating policies investee legg mason follows equity method accounting evaluation whether legg mason exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence legg mason may governing board investee legal rights investors entity pursuant funds operating documents relationship legg mason investors entity legg masons equity method investees investment companies record underlying investments fair value therefore equity method accounting legg masons share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee legg masons share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense net portion earnings losses attributable legg masons equity method investments offsetting compensation expense adjustments revenue sharing arrangements deferred compensation arrangements therefore fluctuations market value investments offsets material impact net income loss attributable legg mason inc distributions received equity method investees classified consolidated statements cash flows either operating investing activities based nature distribution legg mason evaluates equity method investments impairment events changes circumstances indicate carrying value investment exceeds fair value decline fair value temporary legg mason also holds marketable equity securities fixed income securities classified equity investments certain investment securities including held civs also classified equity investments recorded fair value realized unrealized gains losses included current period earnings equity fixed income securities valued using closing market prices listed instruments broker price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices investments illiquid privatelyheld securities market prices quotations may readily available management estimates value securities using variety methods resources including current available financial information investment industry practical expedient legg mason relies net asset value nav certain investments partnerships limited liability company fair value navs provided investees derived fair values underlying investments reporting date legg mason measures certain investments partnerships limited liability companies readily determinable fair values qualify nav practical expedient adjusted cost adjusted cost method investments initially recorded cost subsequently adjusted increased decreased observable transaction involving investments similar investments issuer adjusted cost investment carrying values also reviewed adjusted impairment see notes 3 20 additional information regarding legg masons seed capital investments determination whether investments proprietary fund investment products represent vies respectively addition financial instruments described derivative instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair value longterm debt march 31 2020 2019 aggregated 1970949 2270964 respectively fair values estimated using publicly quoted market prices classified level 2 fair value hierarchy described derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason uses futures contracts index funds hedge market risk certain seed capital investments foreign exchange forwards hedge risk movement exchange rates certain assets liabilities legg mason also entered various total return swap arrangements financial intermediaries respect certain legg mason sponsored etfs resulted investments etfs financial intermediaries connection total return swap arrangements legg mason executed futures contracts partially hedge related market risk limited basis legg mason also used interest rate swaps hedge risks movement interest rates certain financial liabilities legg mason designated financial instruments hedge accounting defined accounting literature periods presented gains losses derivative instruments designated hedge accounting included operating income expense nonoperating income expense net consolidated statements income loss depending strategy see note 17 additional information regarding derivatives hedging fair value measurements accounting guidance fair value measurements defines fair value establishes framework measuring fair value fair value defined exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date accounting guidance fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance objective fair value accounting measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically requires use judgment ascertain formerly active market become inactive determining fair values markets become inactive guidance also requires timely disclosures regarding expected cash flows credit losses aging securities unrealized losses fair value accounting guidance also establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value except longterm debt classified disclosed one following categories level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets certain derivative instruments level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category includes fixed income securities certain proprietary fund investment products certain longterm debt level 3 financial instruments values based unobservable inputs including little market activity legg mason category includes investments partnerships limited liability companies private equity funds real estate funds category may also include certain proprietary investment products redemption restrictions contingent consideration liabilities valuation asset liability may involve inputs one level hierarchy level fair value hierarchy fair value measurement falls entirety determined based lowest level input significant fair value measurement entirety certain proprietary fund products investments held civs valued nav determined applicable fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 nav practical expedient discussed based whether fund exchange traded frequency related nav determinations impact redemption restrictions futures contracts valued last settlement price end day exchange upon traded classified level 1 investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 legg mason holds investments real estate funds structured partnerships limited liability companies classified level 3 fair values investments real estate funds prepared giving consideration income cost sales comparison approaches estimating property value income approach estimates income stream property discounts income plus reversion presumed sale present value risk adjusted rate yield rates growth assumptions utilized approach derived market transactions well financial industry data discount rate exit capitalization rate significant inputs valuations rates based location type nature property current anticipated market conditions cost approach estimates replacement cost building less physical depreciation plus land value sales comparison approach compares recent transactions appraised property adjustments made dissimilarities typically provide range value many factors also considered determination fair value including limited operating cash flows financial performance properties property types geographic locations physical condition asset prevailing market capitalization rates prevailing market discount rates general economic conditions economic conditions specific market assets located specific rights terms associated investment inherent uncertainties valuation values may materially differ values would determined negotiations held parties sale transaction practical expedient legg mason relies nav certain investments partnerships limited liability companies fair value navs provided investees derived fair values underlying investments reporting date investments fair value measured using nav practical expedient required categorized within fair value hierarchy transfers categories measured beginning period see note 3 additional information regarding fair value measurements leases effective april 1 2019 legg mason adopted updated accounting guidance leases requires rightofuse rou assets lease liabilities recorded balance sheet leases guidance specifies inception contract entity must determine whether contract contains lease contract contains lease contract conveys right control use property plant equipment designated term exchange consideration legg mason’s evaluation contracts determine whether contain lease involves assessing whether right obtain substantially economic benefits use right direct use identified asset contract legg mason adopted guidance modified retrospective basis april 1 2019 related amounts prior periods restated legg mason operating leases primarily relate real property financing leases relate equipment practical expedient legg mason elected capitalize leases term 12 months less without purchase option likely exercise also practical expedient disclosure legg mason elected separate lease nonlease components operating financing leases lease components payment items directly attributable use underlying asset nonlease components explicit elements contract directly related use underlying asset including pass operating expenses common area maintenance real estate taxes utilities rou assets lease liabilities recognized consolidated balance sheet present value future lease payments life lease term implicit rates leases determinable company uses discount rates based incremental borrowing rates collateralized basis respective underlying assets terms similar respective leases lease costs included occupancy expense consolidated statements income loss fixed base payments operating leases paid directly lessor recorded lease expense straightline basis related variable payments based usage changes index market rate expensed incurred payments financing leases recorded lease expense levelyield basis upon adoption april 1 2019 legg mason recorded rou assets 342418 lease liabilities 411115 related real property operating leases equipment financing leases legg mason subleased vacated pursuing subleases certain office space march 31 2019 lease reserve liability subleased space vacated space subleases pursued 24063 included current noncurrent liabilities consolidated balance sheet prior accounting guidance upon adoption updated guidance existing lease reserve liability reclassified reduction rou assets rou assets tested impairment circumstances indicate carrying values may recoverable adoption guidance require cumulative effect adjustment material impact consolidated statements income loss consolidated statements cash flows see note 8 additional information fixed assets fixed assets primarily consist software leasehold improvements equipment capitalized software includes purchased software internally developed software equipment consists primarily communications technology hardware furniture fixtures fixed assets reported cost net accumulated depreciation amortization depreciation amortization determined use straightline method software amortized estimated useful lives assets generally three five years leasehold improvements amortized depreciated initial term lease unless options extend likely exercised equipment depreciated estimated useful lives assets generally ranging three eight years cost software used service contract legg mason control software expensed term contract maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life value impaired value impaired asset written fair value written asset determined longer value intangible assets goodwill legg masons identifiable intangible assets consist principally asset management contracts manage proprietary mutual funds hedge funds real estate funds fundsofhedge funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds hedge funds real estate funds fundsofhedge funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities indefinitelife intangible assets goodwill amortized financial statement purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred company perform quantitative tests include critical reviews significant factors assumptions determine intangible assets goodwill impaired legg mason considers factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected consolidated financial statements current fair value recognized expense period impairment determined triggering event occurred company performs quantitative tests annually october 31 indefinitelife intangible assets goodwill unless company qualitatively conclude likely respective fair values exceed related carrying values fair values intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined market participants perspective based projected discounted cash flows take consideration estimates future revenues profit margins growth rates taxes discount rates proprietary fund contracts managed operated single unit meet criteria may aggregated impairment testing goodwill evaluated reporting unit level considered impairment carrying value reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit legg mason uses valuation techniques principally based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition goodwill deemed recoverable reporting unit level also operating segment level legg mason defines global asset management segment results fact chief operating decision maker legg masons chief executive officer regularly receives discrete financial information consolidated global asset management business level regularly receive discrete financial information operating results lower level asset management affiliate level allocations goodwill management restructures acquisitions dispositions based relative fair values respective businesses restructured acquired divested see note 5 additional information regarding intangible assets goodwill note 19 additional business segment information debt longterm debt recorded amortized cost unamortized premiums discounts debt issuance costs fair value hedge adjustments related longterm debt presented balance sheet direct adjustments carrying value associated longterm debt liability amortized interest expense legal term associated debt translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income loss gains losses resulting foreign currency transactions included net income loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated estimates losses matters exist reporting date may adjusted prior related financial statement issuance changes likelihood outcome estimable amounts related insurance recoveries recorded separately underwriter confirmed coverage specific claim amount see note 9 additional information stockbased compensation legg masons stockbased compensation includes restricted stock units stock options employee stock purchase plan espp market performancebased performance shares payable common stock management equity plans certain affiliates deferred compensation payable stock compensation plans legg mason issued equity awards directors officers key employees terms merger agreement legg mason may grant new awards amend modify terms outstanding awards stockbased compensation plans addition purchase shares espp ceased february 2020 espp terminate immediately prior closing date merger accordance applicable accounting guidance compensation expense includes costs nonvested sharebased awards classified equity grant date fair value amortized respective vesting periods may reduced retirementeligible recipients straightline method grantdate fair value equityclassified sharebased awards immediate vesting also included compensation benefits expense merger agreement provides settlement outstanding equity awards vested unvested contingent upon merger closing settlement unvested awards accommodates franklins acquisition legg mason therefore legg mason incur related accelerated compensation expense excess tax benefits deficiencies associated stockbased compensation recognized discrete items income tax provision benefit consolidated statements income loss reporting period occur potentially increasing volatility income tax provision benefit result fluctuations legg masons stock price legg mason accounts forfeitures occur cash flows related income tax deductions excess less related stockbased compensation expense classified cash flows operating activities consolidated statements cash flows legg mason determines fair value optionlike affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts performance share units valued using monte carlo pricing model see note 12 additional information regarding stockbased compensation earnings per share basic earnings per share attributable legg mason inc shareholders eps calculated dividing net income loss attributable legg mason inc adjusted remove earnings allocated participating securities weightedaverage number shares outstanding excludes participating securities legg mason issued employees restricted stock units deemed participating securities prior vesting related unvested restricted stock units entitle holder nonforfeitable dividend rights circumstance accounting guidance requires “twoclass method” eps calculations excludes earnings potentially distributed undistributed allocated participating securities allocate losses participating securities contingently issuable shares excluded shares outstanding basic eps contingency resolved diluted eps similar basic eps effect potential common shares included calculation unless potential common shares antidilutive periods net loss potential common shares participating securities considered antidilutive excluded calculation also contingently issuable shares included diluted eps entire period contingency resolved see note 14 additional discussion eps restructuring costs discussed note 18 legg mason initiated strategic restructuring reduce costs associated strategic restructuring primarily relate employee termination benefits incentives retain employees transition period charges consolidating leased office space expenses professional fees termination benefits including severance retention incentives recorded compensation benefits consolidated statements income loss compensation items require employees provide future service therefore expensed ratably required service period costs expensed incurred charges consolidating leased office space recorded occupancy consolidated statements income loss expenses recorded appropriate operating expense classifications noncontrolling interests noncontrolling interests include affiliate minority interests thirdparty investor equity consolidated sponsored investment products vested affiliate management equity plan interests affiliate minority interests holder may point request settlement classified redeemable noncontrolling interests civs consolidated sponsored investment products thirdparty investors related noncontrolling interests classified redeemable noncontrolling interests investors funds may request withdrawals time also included redeemable noncontrolling interests vested affiliate management equity plan interests holder may point request settlement interests redeemable noncontrolling interests reported consolidated balance sheets estimated settlement values except settlement values less issuance value reported amount issuance value changes expected settlement values recognized settlement period adjustments retained earnings nonredeemable noncontrolling interests include vested affiliate management equity plan interests permit holder request settlement interests nonredeemable noncontrolling interests reported consolidated balance sheets issuance value together undistributed net income allocated noncontrolling interests legg mason estimates settlement value noncontrolling interests fair value reported fair value consolidated balance sheets amounts affiliate noncontrolling interests management equity plan interests reflect related total business enterprise value appropriate discounts lack marketability control may also features equity interests dividend subordination contemplated valuations fair value optionlike management equity plan interests also relies blackscholes option pricing model calculations affiliate noncontrolling interests subsequent acquisition business enterprise values derived using various methods including discounted cash flows guideline public company guideline public transaction methods legg mason engages thirdparty valuation experts perform independent determinations fair value review internally prepared valuations appropriate based relative significance related amounts related contractual provisions changes valuation inputs consolidated sponsored investment products investor may request withdrawal time fair value based market quotes underlying securities held investment products net income loss attributable noncontrolling interests consolidated statements income loss includes share net income loss respective subsidiary allocated minority interest holders see note 16 additional information regarding noncontrolling interests related parties services sponsored investment funds legg mason earns management fees incentive fees distribution service fees revenue incurs distribution servicing expenses disclosed consolidated statements income loss sponsored investment funds deemed affiliated entities related party definition relevant accounting guidance income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforward benefits business combinations amortization intangible assets accrued compensation discussed note 7 december 22 2017 tax cuts jobs act 2017 tax law enacted tax law complex materially changed us corporate income tax rate 35 21 included various changes impact legg mason reduction us corporate tax rate resulted noncash provisional tax benefit 220935 year ended march 31 2018 due remeasurement certain existing deferred tax assets liabilities new income tax rate legg masons remeasurement deferred tax assets liabilities completed fiscal 2019 adjustments necessary tax law also created new taxes international operations including global intangible lowtaxed income gilti provision legg mason made accounting policy election record tax expense gilti inclusions period cost applicable rather recognizing deferred taxes related basis differences expected reverse applicable accounting guidance tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information companys accounting policy classify interest related tax matters interest expense related penalties operating expense see note 7 additional information regarding income taxes recent accounting developments june 2016 financial accounting standards board “fasb” updated guidance accounting credit losses financial instruments commitments updated guidance replaces incurred loss impairment method one reflects expected credit losses requires consideration broader range information support credit loss estimates legg mason adopt guidance effective april 1 2020 expect adoption guidance material impact consolidated financial statements january 2017 fasb updated guidance simplify test goodwill impairment updated guidance still requires entities perform annual goodwill impairment tests comparing fair value reporting unit related carrying amount eliminates requirement potentially calculate implied fair value goodwill determine amount impairment new guidance entity recognize impairment charge reporting units carrying amount exceeds reporting unit’s fair value amount excess updated guidance effective fiscal 2021 legg mason expect adoption guidance material impact consolidated financial statements august 2018 fasb updated guidance clarify accounting implementation costs incurred cloud computing arrangement service contract update conforms requirements capitalizing implementation costs incurred cloud computing arrangement service contract accounting guidance provides capitalization costs incurred develop obtain internalusesoftware legg mason adopt guidance prospective basis effective april 1 2020 legg mason expect adoption guidance material impact consolidated financial statements august 2018 fasb also updated guidance fair value measurements updated guidance modifies disclosure requirements based revised fasb conceptual framework financial reporting finalized august 2018 improve effectiveness financial statement disclosures legg mason adopt guidance april 1 2020 expected material impact disclosures consolidated financial statements december 2019 fasb updated guidance simplify accounting income taxes removing certain exceptions general principles income tax accounting guidance reduce costs complexity application exceptions relate intraperiod allocations deferred tax liabilities respect foreign subsidiaries foreign equity method investments income tax benefits recognized interim period losses updated guidance also amends clarifies areas income tax accounting guidance improve consistency simplify application updated guidance effective fiscal 2022 unless adopted earlier legg mason evaluating adoption march 2020 fasb issued optional guidance limited period ease potential burden accounting reference rate reform financial reporting update provides optional expedients exceptions applying generally accepted accounting principles “gaap” contracts hedging relationships transactions affected reference rate reform certain criteria met amendments update elective beginning march 12 2020 december 31 2022 legg mason evaluating adoption 2 acquisitions gramercy europe jersey limited april 10 2019 clarion partners acquired majority stake gramercy europe jersey limited gramercy european real estate investment business specializing paneuropean logistics industrial assets transaction required initial cash payment 10247 net cash acquired paid using existing cash resources potential contingent consideration payment approximately 3735 using foreign exchange rate april 10 2019 €3315 potential payment due fifth anniversary closing connection acquisition clarion partners recognized amortizable intangible asset management contracts asset 5876 useful life eight years acquisition goodwill 20196 noncontrolling interest 11715 fair value contingent consideration acquisition 3389 precidian investments llc january 22 2016 legg mason acquired minority equity position precidian investments llc precidian terms transaction legg mason acquired series b preferred units precidian entitle legg mason approximately 20 voting economic interests precidian along customary preferred equity protections january 21 2020 legg mason provided notice intent convert preferred units 75 common equity precidian fully diluted basis cash payment 25000 transaction subject satisfaction certain closing conditions within nine months following legg masons notice legg mason accounts investment precidian included noncurrent assets consolidated balance sheets march 31 2020 2019 equity method accounting 3 investments fair value assets liabilities disclosures include details legg masons financial assets financial liabilities measured fair value nav excluding financial assets financial liabilities civs see note 20 variable interest entities consolidation investment vehicles information related assets liabilities civs measured fair value nav fair values financial assets liabilities company determined using following categories inputs 1 cash investments actively traded money market funds classified level 1 cash investments time deposits measured amortized cost approximates fair value short time purchase instrument expected realization classified level 2 included investment securities consolidated balance sheets 3 primarily investments private equity real estate funds equity method investments investment companies primarily record underlying investments fair value therefore fair value investments measured using legg masons share investees underlying net income loss predominately representative fair value adjustments investments held equity method investee equity method investments measured fair value recurring basis 28373 28160 march 31 2020 march 31 2019 respectively excluded tables 4 included noncurrent assets consolidated balance sheets 5 see note 17 6 see note 9 net realized unrealized gains losses investment securities classified equity investments updated investment accounting guidance 33585 13628 years ended march 31 2020 2019 respectively investment securities classified trading investments prior accounting guidance 31012 year ended march 31 2018 net unrealized gains losses relating equity investments still held reporting date 46929 12878 years ended march 31 2020 2019 respectively relating trading investments still held reporting date 7045 year ended march 31 2018 seed capital investments represent investments made legg mason fund new investment products strategies march 31 2020 2019 seed capital investments totaled 192760 227756 respectively investments excess 1000 41 funds 52 funds respectively comprising 85 total period end seed capital investments presented tables exclude 28397 43712 march 31 2020 2019 respectively related legg masons investments civs see note 20 additional information regarding legg masons investments civs changes financial assets liabilities measured fair value using significant unobservable inputs level 3 presented tables realized unrealized gains losses recorded level 3 investments included nonoperating income expense net consolidated statements income loss change unrealized gains level 3 investments liabilities still held reporting date 3145 2876 927 years ended march 31 2020 2019 2018 respectively level 3 purchases year ended march 31 2020 reflect seed capital investment real estatefocused fund designed individual investors adjusted cost minority investment uk retirement solutions provider significant transfers level 1 level 2 years ended march 31 2020 2019 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments respective reporting dates following table summarizes nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 liquidation restrictions 11 monthly redemption 89 subject redemption currently redeemable 2 liquidations expected remaining term current plans sell investments held march 31 2020 4 fixed assets following table reflects components fixed assets depreciation amortization expense related fixed assets 44839 48391 48382 years ended march 31 2020 2019 2018 respectively 5 intangible assets goodwill following table reflects components intangible assets 1 march 31 2020 includes 5019 related acquisition gramercy clarion partners see note 2 additional information certain legg masons intangible assets denominated currencies us dollar balances related assets fluctuate changes related foreign currency exchange rates indefinitelife intangible assets goodwill legg mason performed annual impairment testing goodwill indefinitelife intangible assets october 31 2019 determined impairment value assets given level market disruption associated covid19 legg mason assessed whether triggering event occurred identifiable indefinitelife intangible assets goodwill march 31 2020 certain indefinitelife intangible assets determined triggering events due combination significant market volatility uncertainty limited excess fair value related carrying values recent quantitative analyses october 31 2019 legg mason updated quantitative analyses indefinitelife intangible assets march 31 2020 determined impairment value assets discussed result heightened uncertainty regarding future market conditions economic results particularly amid covid19 pandemic assessing fair value reporting unit intangible assets requires management exercise significant judgment legg masons goodwill impairment testing noted assessed fair value global asset management business reporting unit exceeded related carrying value 22 legg mason determined triggering event occurred goodwill march 31 2020 company notes share price reporting unit fair value significantly impacted covid19 result merger agreement franklin templeton previously discussed per terms merger agreement franklin templeton acquire legg masons outstanding common stock 5000 per share cash valuing total transaction approximately 4500000 approximates fair value reporting unit determined recent impairment test reflected trading value legg mason common stock assessed fair values entrust global indefinitelife fund management contracts trade name assets exceeded respective carrying values 126804 10300 10 6 respectively october 31 2019 given uncertain markets relatively limited excess fair value recent impairment test entrust global fund management contracts asset deemed triggering event march 31 2020 legg mason expanded recent analysis asset consider several different outcomes probabilityweighted basis scenario reflecting reduced revenue growth rates lower operating margins particularly near term based probabilityweighted analysis related fair value exceeded carrying value approximately 1 march 31 2020 entrust global trade name asset also deemed triggering event tested impairment using relief royalty approach march 31 2020 resulting fair value entrust global trade name asset exceeded carrying value approximately 3 market performance flows andor related aum levels decrease near term factors change cash flow projections deviate current projections reasonably possible indefinitelife intangible assets goodwill could become impaired impairment could material amount legg masons annual impairment testing process fiscal 2019 determined carrying values entrust global indefinitelife fund management contracts trade name assets rare infrastructure indefinitelife fund management contracts trade name assets exceeded respective fair values resulted impairment charges totaling 358800 quarter ended december 31 2018 impairment charges entrust global fiscal 2019 primarily result continued net client outflows legacy high net worth fundoffund products leading reduced growth expectations management fees performance fees declining margin higher discount rate changes resulted reduction projected cash flows legg mason’s overall assessment fair value assets carrying values entrust global fund management contracts intangible asset 401404 trade name asset 28500 impaired 274600 18200 respectively management estimated fair values assets based upon discounted cash flow analyses well relief royalty method trade name asset using unobservable market inputs level 3 measurements significant assumptions used cash flow analyses included projected revenue growth rates discount rates royalty rates base revenues related entrust global fund management contracts assumed annual growth contraction rates ranging 194 39 average 30 projected cash flows entrust global fund management contracts discounted 17 base revenues related entrust global trade name asset assumed annual growth rates ranging 00 46 average 39 royalty rate 10 discount rate 165 impairment charges rare infrastructure fiscal 2019 primarily result lower expected net client inflows performance fees leading lower margin higher discount rate changes resulted reduction related projected cash flows legg mason’s overall assessment fair value assets rare infrastructure fund management contracts asset carrying value approximately 120800 trade name asset carrying value 2800 impaired 65000 1000 respectively management estimated fair values assets based upon discounted cash flow analyses well relief royalty method trade name asset using unobservable market inputs level 3 measurements significant assumptions used cash flow analyses included projected revenue growth rates discount rates royalty rates base revenues related rare infrastructure fund management contracts assumed annual growth rates ranging 44 49 average 48 projected cash flows rare infrastructure fund management contracts discounted 165 base revenues related rare infrastructure trade name asset assumed annual growth rates ranging 09 46 average 42 royalty rate 10 discount rate 165 legg masons annual impairment testing process fiscal 2018 determined carrying value entrust global indefinitelife fund management contracts intangible asset exceeded fair value resulted impairment 195000 quarter ended december 31 2017 impairment charge primarily result net client outflows legacy high net worth fundoffund products including transfers client funds products traditional separate accounts direct offerings related decline revenues management estimated fair value asset based upon discounted cash flow analysis using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected revenue growth rates discount rates base revenues related entrust global fund contracts assumed annual growth contraction rates ranging 13 6 average 5 projected cash flows entrust global fund contracts discounted 150 result aum losses factors three months ended june 30 2017 legg mason tested rare infrastructure trade name indefinitelife intangible asset impairment three months ended june 30 2017 carrying value trade name exceeded fair value 3057 june 30 2017 resulted impairment charge 2000 management estimated fair value rare infrastructure trade name june 30 2017 based upon relief royalty approach discounted cash flow method using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected annual revenue growth rates 5 18 average 8 royalty rate 1 discount rate 165 change carrying value goodwill summarized 1 see note 2 additional information amortizable intangible asset management contracts impairments amortizable management contract intangible assets year ended march 31 2020 march 31 2020 amortizable intangible asset management contracts amortized weightedaverage remaining life 54 years estimated amortization expense next five fiscal years thereafter follows three months ended december 31 2018 projected revenues related rare infrastructure separate account contracts asset declined due losses separate account clients aum based revised attrition estimates remaining useful life decreased three onehalf two years december 31 2018 result decline projected revenues revised estimate useful life amortized carrying value approximately 6900 december 31 2018 determined exceed fair value impairment charge 6400 recorded three months ended december 31 2018 management estimated fair value asset december 31 2018 based discounted cash flow analysis using unobservable market inputs level 3 measurements addition useful life significant assumptions used cash flow analysis included projected revenue growth rates 7 discount rate 165 6 shortterm borrowings longterm debt shortterm borrowings legg mason maintains unsecured credit agreement amended time credit agreement provides 500000 multicurrency revolving credit facility revolving credit facility may increased aggregate amount 500000 subject approval lenders expires december 2020 outstanding borrowings repaid time revolving credit facility available fund working capital needs general corporate purposes march 31 2020 borrowings outstanding credit agreement legg mason 500000 undrawn revolving credit facility capacity terms merger agreement legg mason may borrow 30000 revolving credit facility without prior consent franklin templeton april 3 2020 legg mason borrowed 250000 credit agreement precautionary measure provide additional liquidity general corporate purposes current uncertain market environment discussed note 11 december 22 2017 legg mason borrowed 225500 credit agreement purchase 5568 shares legg mason common stock shanda asset management investment limited shanda march 2018 legg mason repaid 100000 borrowings september 2018 legg mason repaid remaining 125500 borrowings outstanding march 31 2019 revolving credit facility interest rate threemonth eurocurrency rate plus 125 basis points annual commitment fee 175 basis points interest payable least quarterly amounts outstanding credit agreement interest rate may change future based changes legg masons credit ratings credit agreement includes standard financial covenants include maximum net debt ebitda ratio defined documents 30 1 minimum ebitda interest ratio defined documents 40 1 march 31 2020 legg masons net debt ebitda ratio 19 1 ebitda interest expense ratio 61 1 therefore legg mason maintained compliance applicable covenants longterm debt longterm debt net consists following july 15 2019 legg mason repaid 250000 27 senior notes due july 2019 using existing cash resources march 31 2020 250000 legg masons longterm debt matures fiscal 2025 1750000 matures fiscal 2025 395 senior notes due july 2024 june 2014 legg mason issued 250000 395 senior notes due july 2024 notes 2024 notes sold discount 458 amortized interest expense 10year term 2024 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 025 together related accrued unpaid interest 475 senior notes due march 2026 march 2016 legg mason issued 450000 475 senior notes due march 2026 notes 2026 notes sold discount 207 2026 notes redeemed part aggregate greater related principal amount time redemption sum remaining scheduled payments discounted treasury rate defined plus 045 together related accrued unpaid interest 5625 senior notes due january 2044 january 2014 legg mason issued 400000 5625 senior notes due january 2044 notes sold discount 6260 amortized interest expense 30year term additional 150000 2044 notes issued june 2014 sold premium 9779 also amortized interest expense 30year term 2044 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 03 together related accrued unpaid interest 6375 junior subordinated notes due march 2056 march 2016 legg mason issued 250000 6375 junior notes due march 2056 6375 2056 notes 6375 2056 notes issued 100 principal amount 6375 2056 notes rank junior subordinate right payment legg masons current future senior indebtedness prior march 15 2021 6375 2056 notes redeemed aggregate part 100 principal amount plus accrued unpaid interest called tax event defined 102 principal amount plus accrued unpaid interest called rating agency event defined march 15 2021 6375 2056 notes redeemed aggregate part 100 principal amount plus related accrued unpaid interest 545 junior subordinated notes due september 2056 august 2016 legg mason issued aggregate principal amount 500000 545 junior notes due september 2056 545 2056 notes net proceeds together cash hand used repay aggregate 500000 outstanding borrowings credit agreement 545 2056 notes rank junior subordinate right payment legg masons current future senior indebtedness prior september 15 2021 545 2056 notes redeemed aggregate part 100 principal amount plus accrued unpaid interest called tax event defined prospectus supplement 102 principal amount plus accrued unpaid interest called rating agency event defined prospectus supplement september 15 2021 545 2056 notes redeemed aggregate part 100 principal amount plus related accrued unpaid interest 7 income taxes components income loss income tax provision follows components income tax expense benefit follows reconciliation difference effective income tax rate statutory federal income tax rate follows 1 state income taxes include changes valuation allowances related change apportionment provision return differences net impact related deferred tax assets 2 includes impact deferred tax assets liabilities effects unremitted foreign earnings aspects tax law 3 reserves uncertain tax benefits recorded positions related prior years foreign federal state local tax return filing well positions reflected current year tax expense accrual fiscal 2020 state audit resolved favorably statute limitations expired certain tax returns uncertain tax benefit reserves established 4 effect foreign tax rates fiscal 2019 2018 include tax benefits 8711 33150 respectively noncash impairment charges related intangible assets entrust global legacy permal businesses discussed note 5 additionally effect foreign tax rates fiscal 2019 includes 21720 tax benefit noncash impairment charges related intangible assets rare infrastructure businesses 5 see schedule change valuation allowances jurisdiction 6 fiscal 2018 includes 90 federal impact 97 including state impact nondeductible charge regulatory matter discussed note 9 december 22 2017 tax law enacted tax law complex materially changed us corporate income tax rate 35 21 included various changes impact legg mason reduction us corporate tax rate resulted onetime noncash provisional tax benefit 220935 recognized quarter ended december 31 2017 due remeasurement certain existing deferred tax assets liabilities new income tax rate addition noncash tax charge 7260 provisionally provided year ended march 31 2018 effects unremitted foreign earnings aspects tax law legg mason’s remeasurement deferred tax assets liabilities completed adjustments necessary legg masons accounting tax unremitted foreign earnings also completed additional expense 2164 recorded year ended march 31 2019 deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows legg mason various loss tax credit carryforwards may provide future tax benefits related valuation allowances established accordance accounting guidance income taxes managements opinion likely benefits realized extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals including future increases relating tax amortization goodwill indefinitelife intangible assets well planning strategies measure value realizability deferred tax assets intangible asset impairment charges recognized entrust global year ended march 31 2019 resulted deferred tax asset 53764 related basis difference partnership investments related deferred tax asset 54112 march 31 2020 see note 5 additional information related impairment charges substantially legg masons deferred tax assets relate us federal state uk taxing jurisdictions march 31 2020 us federal deferred tax assets aggregated 627411 realization expected require approximately 3213000 us earnings next eight years approximately 349000 must foreign sourced earnings based estimates future taxable income using assumptions similar used legg masons goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realized respect deferred tax assets relating foreign tax credit carryforwards likely tax benefits relating utilization approximately 2400 foreign taxes credits realized valuation allowance established companys estimates assumptions contemplate changes ownership legg mason stock could certain circumstances limit utilization net operating loss foreign tax credit benefits limitation would impact timing amount net operating loss foreign tax credit benefits ultimately realized expire march 31 2020 us state deferred tax assets aggregated approximately 238337 net valuation allowances 91653 primarily related state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized foreign jurisdictions net increase valuation allowances 3750 fiscal 2020 primarily related current year increases carried forward uk interest deductions offset part unrealized gainslosses pension liabilities following deferred tax assets valuation allowances relating carryforwards recorded march 31 1 substantially us state net operating losses carryforward fiscal 2035 2 due potential change factors relating apportionment income various states legg masons effective state tax rates subject fluctuation impact value companys deferred tax assets including net operating losses could material impact future effective tax rate company legg mason total gross unrecognized tax benefits approximately 55465 78776 62728 march 31 2020 2019 2018 respectively totals approximately 49595 67923 52772 respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates fiscal 2020 net impact effective settlement tax examinations recent developments case law expiration statutes limitation certain jurisdictions resulted 13782 previously unrecognized benefits realized reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 follows although management cannot predict degree certainty timing ultimate resolution matters review various taxing jurisdictions reasonably possible company’s gross unrecognized tax benefits balance may change within next 12 months 20856 result expiration statutes limitations completion tax authorities examinations company accrues interest related unrecognized tax benefits interest expense recognizes penalties operating expense legg mason approximately 1930 march 31 2020 1937 march 31 2019 2018 accrued interest penalties tax contingencies consolidated balance sheets legg masons prior year tax returns subject examination taxing authorities us uk brazil various jurisdictions following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal 2017 us federal calendar year 2008 brazil fiscal 2016 states new york connecticut california maryland company anticipate making significant cash payments settlement audits excess amounts reserved except noted legg masons continuing intention permanently reinvest substantially accumulated future earnings foreign subsidiaries overseas march 31 2020 legg mason available domestic cash equivalents approximately 288694 addition giving effect 250000 borrowed credit agreement april 3 2020 previously discussed legg mason 250000 undrawn capacity meet domestic liquidity needs subject compliance applicable covenants terms merger agreement legg mason plans utilize approximately 13000 foreign cash annually next several years supplement amounts anticipates amount provided debt service payments foreign affiliates repatriation foreign earnings currently planned accordingly additional state income taxes withholding taxes provided however circumstances change legg mason provide pay applicable additional us taxes connection repatriation offshore funds practical time determine income tax liability would result repatriation accumulated foreign earnings 8 leases legg mason leases 1500 square feet office space approximately onethird currently subleased various firms majority within us office facilities equipment leased various noncancelable operating leases certain equipment also leased financing leases legg masons current leases remaining terms vary 18 years certain leases provide options extend periods 15 years andor options terminate within seven years previously disclosed note 1 lease reserve liability related subleased space vacated space subleases pursued 24063 march 31 2019 upon adoption updated lease accounting guidance april 1 2019 existing current noncurrent liabilities reclassified reduction rou asset recorded accordance updated guidance rou assets involve subleased vacant space aggregate 71257 march 31 2020 assets may become impaired tenants unable service obligations sublease andor estimates occupancy realized either may likely covid19 impacts evolve leases included consolidated balance sheets follows components lease expense included consolidated statement income loss follows 1 variable lease cost includes operating expenses real estate taxes amounts fluctuate amount therefore excluded fixed base rent 2 excludes occupancy expense 16841 year ended march 31 2020 respectively related leasehold amortization year ended march 31 2020 connection legg masons strategic restructuring discussed note 18 determined carrying values certain rou assets would recoverable related impairment charges 4328 exclusive accelerated depreciation 1603 recognized quarter ended december 31 2019 included operating lease cost table occupancy expense consolidated statement income loss fair value rightofuse asset related substantial portion charge estimated based discounted cash flow analysis using various level 3 assumptions consider prevailing rental rates applicable market amount time take secure sublease agreement lease expense incurred years ended march 31 2019 2018 88990 84963 respectively excluding leasehold amortization 16306 15796 lease expense net sublease income 21435 23316 respectively sublease amounts billed recorded reduction occupancy expense consolidated statement income loss amounts billed primarily fixed base rental payments combined variable lease cost reimbursements sublease amounts related base rent recorded straightline basis march 31 2020 undiscounted future cash flows next five fiscal years thereafter fixed payments related operating finance leases follows march 31 2020 weightedaverage remaining lease terms weightedaverage discount rates operating finance leases follows supplemental cash flow information related leases follows exception 4328 related previously discussed impairment certain rou assets significant noncash lease activity year ended march 31 2020 prior accounting guidance march 31 2019 minimum aggregate rentals operating leases follows 1 minimum rental commitments reduced 97816 minimum sublease rentals received noncancelable subleases 9 commitments contingencies march 31 2020 legg mason commitments invest 16372 limited partnerships make private investments commitments expected outstanding funded required end respective investment periods ranging fiscal 2030 also connection acquisition clarion partners april 2016 legg mason committed ultimately provide 100000 seed capital clarion partners products march 31 2020 legg mason also future commitments totaling 87209 related multiyear agreements certain services 45297 21737 due fiscal 2021 fiscal 2022 respectively remaining 20175 due fiscal 2028 normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications considered financial guarantees relevant accounting guidance legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily asset management securities brokerage investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial normal course business legg mason also received subpoenas currently involved governmental industry selfregulatory agency inquiries investigations time proceedings involving asset management activities accordance guidance accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings probable loss incurred reasonable estimate loss made matters litigation proceedings including described customer complaints legal actions inquiries proceedings investigations legg mason cannot estimate reasonably possible loss range loss inability provide reasonably possible amount range losses uncertainty ultimate outcome matter liability damage issues developed point legg mason conclude reasonable possibility loss meaningful amount range possible losses numerous aspects customer complaints legal actions inquiries proceedings investigations prevent legg mason estimating related amount range reasonably possible losses aspects include among things nature matters significant relevant facts known uncertain dispute damages sought specified uncertain unsupportable unexplained addition legal actions discovery may yet started may complete may conclusive meaningful settlement discussions may occurred regulatory matters investigations may run course without clear indication wrongdoing fault conclusion managements opinion adequate accrual made march 31 2020 provide probable losses may arise matters company could reasonably estimate amount legg masons financial condition results operations cash flows could materially affected period probable losses become apparent matter ultimately resolved addition ultimate costs litigationrelated charges vary significantly periodtoperiod depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement reductions compensation revenue share arrangements march 31 2020 2019 legg masons liability losses contingencies material charges incurred relating litigation proceedings fiscal 2020 material fiscal 2019 2018 legg mason incurred charges relating litigation proceedings approximately 4800 67500 total charges fiscal 2019 2018 reflect 4151 67000 respectively related resolution us department justice “doj” sec staff foreign corrupt practices act investigation concerning activities former permal business connection managing assets libyan governmental entities structures established thirdparty financial institution investments made calendar years 2005 2007 terminated later 2012 matter relate current business activities client relationships legg mason affiliates resolution matter result restrictions legg masons ongoing business activities affiliates merger agreement company made customary representations warranties merger agreement merger agreement also contains customary covenants agreements including covenants agreements relating conduct company’s business date signing merger agreement closing transactions contemplated merger agreement merger agreement contains certain termination rights company franklin templeton including right company terminate merger agreement accept superior proposal subject specified limitations provides upon termination merger agreement company franklin templeton specified situations terminating party required pay termination fee equal 115000 party addition foregoing termination rights subject certain limitations either party may terminate merger agreement merger consummated february 17 2021 connection subject merger closing legg mason committed certain severance retention payments employees aggregating approximately 200000 subject continuing employment closing merger noncontrolling interests legg mason may obligated settle redeemable noncontrolling interests related certain affiliates march 31 2020 affiliate redeemable noncontrolling interests excluding amounts related management equity plans aggregated 525422 addition march 31 2020 estimated redemption fair value units affiliate management equity plans redeemable nonredeemable aggregated 84695 see notes 12 16 additional information regarding affiliate management equity plans noncontrolling interests respectively contingent consideration discussed note 2 april 10 2019 clarion partners acquired majority interest gramercy transaction included potential contingent consideration payment 3646 using foreign exchange rate march 31 2020 €3315 potential payment due fifth anniversary closing upon achievement certain financial metrics march 31 2020 2019 contingent consideration liabilities totaling 3308 1415 respectively included noncurrent liabilities consolidated balance sheets years ended march 31 2019 2018 legg mason paid contingent consideration totaling 4869 3242 primarily related acquisitions qs investors may 2014 pk investment management december 2015 respectively year ended march 31 2018 legg mason recorded fair value adjustments totaling 31329 primarily reduce contingent consideration liabilities related acquisitions rare infrastructure october 2015 martin currie october 2014 contingent consideration due either acquisitions 10 employee benefits defined contribution plans legg mason subsidiaries maintains various defined contribution plans covering substantially employees plans legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation match employee 401k contributions matches range 50 100 employee 401k contributions maximum lesser 6 employee compensation internal revenue service limit corporate profit sharing matching contributions together contributions made subsidiary plans totaled 38122 39191 38278 fiscal 2020 2019 2018 respectively addition employees make voluntary contributions certain plans terms merger agreement legg mason 401k plan terminate immediately prior closing merger martin currie defined benefit pension plan martin currie sponsors retirement death benefits plan defined benefit pension plan assets held separate trusteeadministered fund plan assets measured fair value consist 50 equities level 1 49 bonds level 2 1 cash level 1 march 31 2020 64 equities level 1 36 bonds level 2 march 31 2019 assumptions used determine expected return plan assets targets 55 45 equitybond allocation reference 15year ftse uk gilt yield equities uk longdated bond yields bonds plan liabilities measured actuarial basis using projected unit method discounted rate equivalent current rate highquality bond local uk market currency significant concentrations risk plan assets march 31 2020 2019 march 31 2020 2019 34210 41189 total plan assets invested legg mason martin currie sponsored investment products recent actuarial valuation performed may 31 2019 updated subsequent balance sheet date march 31 2020 accrual service credit plan ceased october 3 2014 legg mason uses corridor approach account plan corridor approach actuarial gains losses plan assets liabilities deferred reported comprehensive income loss except actuarial gains losses exceed 10 greater fair value plan assets plan benefit obligation excess amortized compensation benefits expense recovery period 15 years ended march 31 2020 2019 542 260 previously unrecognized losses expensed corridor approach resulting net benefit obligation summarized included consolidated balance sheets noncurrent liabilities change benefit obligation summarized change plan assets summarized years ended march 31 2020 2019 2018 net periodic benefit 833 734 389 respectively included compensation benefits expense consolidated statements income loss components net periodic gain years ended march 31 follows net actuarial losses 791 17807 included accumulated comprehensive loss net consolidated balance sheets march 31 2020 2019 respectively march 31 2020 plan expects make benefit payments next 10 fiscal years follows connection review pensions regulator uk regulator pension plans current structure funding status martin currie trustees pension regulator agreed revised plan structure august 10 2017 including redomiciliation plan uk additional guarantees martin currie entities provisions accelerated funding portion benefit obligation certain circumstances martin currie agreed plan trustees contribute 2876 using exchange rate march 31 2020 £2320 annual committed contribution amount plan annual basis may 2024 final payment 1811 using exchange rate march 31 2020 £1461 final payment amount due november 2024 result may 31 2019 actuarial valuation martin currie plan trustees contemplating revised annual committed contribution amounts 11 capital stock march 31 2020 authorized numbers common preferred shares 500000 4000 respectively march 31 2020 2019 6634 7872 shares common stock respectively reserved issuance legg masons equity plans changes common stock follows fiscal 2020 2019 2018 legg mason retired 455 395 348 shares respectively common stock 15448 15575 13233 respectively net share settlements deferred compensation award vesting addition fiscal 2018 legg mason purchased retired 6636 shares common stock 253649 open market purchases january 2015 legg masons board directors approved share repurchase authorization 1000000 repurchases legg mason common stock december 22 2017 legg mason purchased retired 5568 shares legg mason common stock shanda aggregate purchase price 225490 legg masons board directors approved purchase shares utilizing remaining 169019 legg mason common stock previously authorized purchase january 2015 authorization authorizing purchase additional 56471 legg mason common stock complete transaction march 31 2020 purchases legg mason common stock authorized prohibited merger agreement merger pending par value shares repurchased charged common stock excess purchase price par first charged additional paidin capital remaining balance charged retained earnings dividends declared per share 160 136 112 fiscal 2020 2019 2018 respectively dividends declared paid march 31 2020 2019 2018 34930 29058 23623 respectively included current liabilities consolidated balance sheets merger agreement prohibits legg mason increasing quarterly dividend rates paying dividends dates consistent past practices time merger pending 12 stockbased compensation legg masons stockbased compensation includes restricted stock units stock options employee stock purchase plan market performancebased performance shares payable common stock affiliate management equity plans deferred compensation payable stock shares available issuance equity incentive stock plan march 31 2020 6331 options legg mason’s equity incentive stock plans granted prices less 100 fair market value date grant options generally exercisable equal increments four years expire within eight years 10 years date grant components legg masons total stockbased compensation expense follows restricted stock restricted stock restricted stock unit transactions summarized restricted stock restricted stock unit transactions reflected table noncash transactions years ended march 31 2020 2019 2018 legg mason recognized income tax benefits related restricted stock restricted stock unit awards 13553 12767 20972 respectively unamortized compensation cost related unvested restricted stock awards march 31 2020 50757 expected recognized weightedaverage period 16 years clarion performance shares part acquisition clarion partners april 2016 legg mason granted certain key employees clarion partners total 716 performancebased legg mason restricted share units included unvested shares restricted stock units table aggregate fair value 11121 included purchase price restricted share units vested upon clarion partners achieving certain level ebitda march 31 2020 stock options stock option transactions legg masons equity incentive plans summarized total intrinsic value options exercised years ended march 31 2020 2019 2018 17476 1084 4647 respectively march 31 2020 aggregate intrinsic value options outstanding 22864 following information summarizes legg masons stock options outstanding march 31 2020 march 31 2020 2019 2018 options exercisable 2115 3233 2867 shares respectively weightedaverage exercise price 4263 3912 3764 respectively stock options exercisable march 31 2020 weighted average remaining contractual life 30 years march 31 2020 aggregate intrinsic value exercisable shares 17283 following summarizes legg masons stock options exercisable march 31 2020 following information summarizes unvested stock options legg masons equity incentive plan year ended march 31 2020 years ended march 31 2020 2019 2018 income tax benefits related stock options 685 1170 2715 respectively unamortized compensation cost related unvested options 402 shares march 31 2020 616 expected recognized weightedaverage period 09 years cash received exercises stock options legg masons equity incentive plans 43386 6114 14072 years ended march 31 2020 2019 2018 respectively tax benefit expected realized tax deductions option exercises totaled 3289 198 1408 years ended march 31 2020 2019 2018 respectively weightedaverage fair value servicebased stock options granted year ended march 31 2018 using blackscholes option pricing model 841 following weightedaverage assumptions used model grants legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values affiliate management equity plans connection acquisition clarion partners april 2016 legg mason implemented management equity plan clarion partners entitles certain key employees participate 15 future growth clarion partners enterprise value subject appropriate discounts subsequent date grant initial grant plan vested immediately related grantdate fair value 15200 determined independent valuation future grants plan vest 20 annually five years result recognition additional compensation expense related vesting period subject various conditions including passage time vested plan units put legg mason settlement fair value legg mason also call plan units generally post employment settlement fair value march 31 2020 estimated aggregate redemption fair value units plan currently redeemable 14300 effective march 1 2016 legg mason implemented management equity plan royce investment partners royce key employees management equity plan minority equity interests equivalent 245 interest royce entity issued certain key employees 55 issued march 31 2019 resulted compensation benefits expense 2400 corresponding increase nonredeemable noncontrolling interest additional grants expected plan equity holders receive quarterly distributions portion royces pretax income amounts equal percentage ownership represented equity hold subject payment legg masons revenue share reasonable expenses subordination provisions certain cases march 31 2020 estimated aggregate redemption fair value units plan currently redeemable 10800 march 31 2014 legg mason implemented management equity plan granted units key employees subsidiary clearbridge investments llc clearbridge entitle participate 15 future growth clearbridge enterprise value subject appropriate discounts subsequent grant date independent valuation determined aggregate cost award approximately 16000 recognized compensation benefits expense consolidated statements income loss related vesting periods march 2019 total compensation expense related clearbridge affiliate management equity plan 1694 2932 3103 years ended march 31 2020 2019 2018 respectively compensation expense year ended march 31 2020 includes 1600 related modification plan settlement features resulted increase fair value awards arrangement provides onehalf cost absorbed clearbridge incentive pool vested plan units put legg mason settlement fair value beginning one year holder terminates employment legg mason also call plan units generally post employment settlement fair value changes control legg mason clearbridge impact vesting settlement provisions units however upon sale substantially clearbridge assets vesting units would accelerate participants would receive fair value payment respect interests plan future grants additional plan units dilute participation existing outstanding units 15 future growth respective affiliates enterprise value subsequent related future grant date additional compensation expense would incurred future grants entitle plan participants collectively aggregate 15 future growth clearbridge enterprise value upon vesting grantdate fair value vested plan units reflected consolidated balance sheets redeemable noncontrolling interests adjustment additional paidin capital thereafter redeemable noncontrolling interests continue adjusted ultimate maximum estimated redemption value expected term retained earnings adjustments march 31 2020 estimated aggregate redemption fair value vested units clearbridge plan currently redeemable approximately 59595 legg mason qualified espp covering substantially us employees shares common stock purchased open market behalf participating employees subject 4500 total share limit plan purchases made payroll deductions legg mason provides 15 contribution towards purchases recorded compensation benefits consolidated statements income loss years ended march 31 2020 2019 2018 approximately 104 141 128 shares respectively purchased open market behalf participating employees connection merger purchase shares espp ceased february 2020 espp terminate immediately prior closing merger legg mason also equity plan nonemployee directors current equity plan directors may elect receive shares stock restricted stock units shares restricted stock units issuable equity plan limited 625 aggregate 523 494 460 shares issued march 31 2020 2019 2018 respectively march 31 2020 2019 2018 nonemployee directors held 34 99 80 restricted stock units respectively vest grant date therefore included unvested shares restricted stock units table years ended march 31 2020 2019 2018 nonemployee directors granted 7 15 12 restricted stock units respectively 20 15 19 shares common stock respectively may 2019 2018 2017 legg mason granted certain executive officers total 168 163 111 performance share units respectively part fiscal 2019 2018 2017 incentive awards aggregate values 6334 5820 3503 respectively vesting performance share units granted may 2019 2018 number shares payable vesting determined based legg mason’s relative total stockholder return relative organic growth rate longterm aum threeyear periods ending march 31 2022 2021 respectively recorded grant date fair values per performance share unit 3763 3567 respectively estimated based multiple fair value monte carlo pricing models expense associated grants adjusted level relative organic growth expected ultimately achieved estimated fair values may 2019 grant range 2163 4563 per performance share unit may 2018 grant range 1808 4446 per performance share unit vesting performance share units granted may 2017 determined based legg masons relative total stockholder return threeyear period ending march 31 2020 grant date fair value per unit may 2017 performance share units 3142 estimated grant date using monte carlo pricing model following assumptions used monte carlo pricing models may 2019 2018 2017 grants performance period may 2017 grant ended march 31 2020 resulted issuance 117 performance shares legg mason also granted certain executive officers 182 performance share units may 2016 aggregate award value 3528 performance period grant ended march 31 2019 resulted issuance 46 performance shares merger agreement provides settlement outstanding sharebased equity awards vested unvested contingent upon merger closing deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends since january 1 2015 additional contributions plan remaining 201 shares reserved future dividend distributions fiscal 2020 2019 2018 legg mason issued 19 20 14 shares respectively plan weightedaverage fair value per share grant date 3492 2968 3763 respectively undistributed shares issued plan held rabbi trust assets rabbi trust consolidated employer value employers stock held rabbi trust classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plan presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2020 2019 2018 427 456 462 respectively 13 revenue following table presents total operating revenues disaggregated asset class revenues geographic location primarily based location advisor domicile fund families managed legg mason necessarily reflect customer resides currency revenues denominated following table presents total operating revenues disaggregated geographic location certain sales commissions paid connection obtaining assets managed retail separately managed accounts capitalized deferred costs march 31 2020 2019 capitalized sales commissions 8954 8126 respectively included current assets 11396 10147 respectively included noncurrent assets consolidated balance sheets amortization related capitalized sales commissions included compensation benefits consolidated statements income loss 9557 9228 years ended march 31 2020 2019 respectively impairment losses relation capitalized costs years ended march 31 2020 2019 14 earnings per share following table presents computations basic diluted eps 1 relates vesting performancebased legg mason restricted share units granted certain key employees clarion partners part clarion partners acquisition april 2016 see note 12 additional information weightedaverage shares exclude weightedaverage unvested restricted shares deemed participating securities 2884 3092 3327 years ended march 31 2020 2019 2018 respectively discussed note 11 fiscal 2020 2019 2018 legg mason retired 455 395 348 shares common stock net share settlements deferred compensation award vesting addition fiscal 2018 legg mason purchased retired 6636 shares common stock open market purchases also purchased retired 5568 shares common stock shanda total retired shares reduced weightedaverage shares outstanding 374 355 6050 shares years ended march 31 2020 2019 2018 respectively options purchase 1613 1952 shares years ended march 31 2020 2018 respectively included computation diluted eps presumed proceeds exercising options including related unamortized expense exceed average price common shares period therefore options deemed antidilutive diluted eps calculation year ended march 31 2019 excludes 106 potential common shares antidilutive due net loss year market performancebased awards issued legg mason executive officers excluded potential dilution designated market performance condition met 15 accumulated comprehensive loss accumulated comprehensive loss includes cumulative foreign currency translation adjustments gains losses defined benefit pension plans change accumulated translation adjustments fiscal 2020 fiscal 2019 primarily resulted impact changes australian dollar british pound brazilian real singapore dollar japanese yen relation us dollar net assets legg masons subsidiaries uk australia brazil japan singapore pound australian dollar singaporean dollar real yen functional currencies respectively summary legg masons accumulated comprehensive loss march 31 follows significant amounts reclassified accumulated comprehensive loss consolidated statements income loss years ended march 31 2020 2019 2018 16 noncontrolling interests net income attributable noncontrolling interests included following amounts following tables present changes redeemable nonredeemable noncontrolling interests 1 related vies seeded investment products 2 related royce management equity plan following tables present changes redeemable noncontrolling interests affiliate exclusive management equity plans redeemable noncontrolling interests 35 outstanding equity entrust global 18 outstanding equity clarion partners put holders called legg mason settlement fair value subject various conditions including passage time amounts noncontrolling interests reported fair value consolidated balance sheets reflect total business enterprise value combined entity appropriate discounts lack marketability control may 10 2019 legg mason purchased 15 equity interest rare infrastructure held firms management team total consideration 21988 initial cash payment 11967 included related dividends arrears 1759 paid may 10 2019 onehalf remaining balance paid may 2020 remaining onehalf due two years closing subject certain conditions 11440 difference fair value noncontrolling interest settlement date total consideration due excluding dividends arrears recorded compensation benefits year ended march 31 2020 25708 difference fair value carrying value noncontrolling interest 34497 settlement date recorded increase additional paid capital purchase part legg masons strategic restructuring discussed note 18 pursue operational efficiencies rare infrastructure clearbridge intended reduce costs enhance growth opportunities businesses july 2 2018 corporate minority owner rare infrastructure exercised put option 10 ownership interest settlement value 15547 based midpoint valuations determined independent valuation experts appointed legg mason corporate minority owner paid october 10 2018 along 981 dividends arrears 12345 difference settlement value carrying value noncontrolling interest 27892 settlement date recorded increase additional paid capital 17 derivatives hedging legg mason uses currency forwards economically hedge risk movements exchange rates primarily us dollar british pound australian dollar singapore dollar japanese yen euro derivative transactions legg mason certain legally enforceable rights setoff governed international swaps derivative association isda master agreements derivative transactions legg mason one isda master agreement significant counterparties covers transactions counterparty respective isda agreements provides legally enforceable settlement netting closeout netting legg mason counterparty assets recorded consolidated balance sheets march 31 2020 2019 4716 4183 respectively liabilities recorded consolidated balance sheets march 31 2020 2019 13872 7579 respectively legg mason also uses market hedges certain seed capital investments entering futures contracts sell index funds treasuries benchmark hedged seed capital investments entered total return swap arrangements respect certain legg mason sponsored etfs discussed legg mason designated derivatives hedging instruments accounting purposes years ended march 31 2020 2019 2018 march 31 2020 legg mason open currency forward contracts aggregate notional amounts totaling 323031 open futures contracts relating seed capital investments aggregate notional amounts totaling 74988 exception total return swap arrangements related futures contracts discussed amounts representative level nonhedge designation derivative activity throughout years ended march 31 2019 2018 2017 march 31 2020 weightedaverage remaining contract terms currency forward contracts six months futures contracts relating seed capital investments three months legg mason entered various total return swap arrangements financial intermediaries respect certain legg mason sponsored etfs resulted investments financial intermediaries respective etf terms total return swap arrangements legg mason receives related investment gains losses underlying shares etf pays floating rate value underlying shares total return swap arrangements allows either party terminate part arrangement provides automatic termination upon occurrence certain events financial intermediary counterparty may hedge total return swap position investment etf financial intermediaries purchased interests related legg mason etf date transactions aggregate notional amount two total return swaps outstanding march 31 2020 14164 weightedaverage remaining contract term six months floating rate paid value underlying securities total return swap arrangements outstanding march 31 2020 threemonth libor plus 16 connection total return swap arrangements legg mason executed futures contracts notional amounts totaling 6128 march 31 2020 partially hedge gains losses recognized total return swaps contracts weightedaverage remaining contract term three months discussed note 20 total return swap arrangements create variable interests underlying funds legg mason significant legg mason deemed primary beneficiary accordingly legg mason may consolidate etf products significant open total return swap arrangements following table presents derivative assets related offsets following table presents derivative liabilities related offsets following table presents derivative assets related offsets following table presents derivative liabilities related offsets following table presents gains losses recognized consolidated statements income loss derivative instruments described currency forward contracts futures forward contracts seed capital investments included economic hedges interest rate market risk certain operating investing activities legg mason 18 strategic restructuring fiscal 2019 legg mason initiated strategic restructuring reduce costs includes corporate distribution functions well efficiency initiatives certain smaller affiliates operate outside revenuesharing arrangements strategic restructuring expected substantially complete end fiscal 2021 legg mason expect merger impact strategic restructuring plan involves restructuring costs beginning january 1 2019 primarily comprised employee termination benefits retention incentives expensed identified transition periods restructuring costs also include charges consolidating leased office space costs including professional fees legg mason expects incur total strategic restructuring costs range 100000 105000 march 2021 expected result future cost savings cumulative strategic restructuring costs incurred march 31 2020 80386 table presents summary changes strategic restructuring liability january 1 2019 march 31 2020 cumulative charges incurred date 1 includes stockbased compensation expense accelerated fixed asset depreciation estimates remaining strategic restructuring costs expected incurred fiscal 2021 follows management expects total estimated costs within range disclosed ultimate nature timing costs may differ presented 19 business segment information legg mason global asset management company provides investment management related services wide array clients company operates one reportable business segment global asset management global asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue global asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks see note 13 total operating revenues disaggregated geographic location table reflects longlived assets geographic region march 31 20 variable interest entities consolidated investment vehicles accordance financial accounting standards legg mason consolidates certain sponsored investment products designated civs presented table legg mason concluded primary beneficiary certain vies held significant financial interests funds addition legg mason entered various total return swap arrangements financial intermediaries respect certain legg mason sponsored etfs terms total return swaps legg mason absorbs related gains losses underlying etf investments financial intermediaries therefore variable interests etfs open total return swap arrangements significant legg mason deemed primary beneficiary etfs determined primary beneficiary vies legg mason consolidated designated following funds civs consolidated balance sheets 1 represents legg masons maximum risk loss excluding uncollected advisory fees 2 total return swap arrangements legg mason receives related investment gains losses investments two legg masons etfs notional amounts totaling 14164 march 31 2020 see note 17 additional information regarding total return swaps assets civs primarily comprised investment securities march 31 2020 liabilities civs primarily comprised payables purchased securities investors creditors civs recourse general credit assets legg mason beyond investment funds legg mason also consolidates certain vre products seed capital investments legg mason maintains controlling financial interest product march 31 2020 2019 2018 legg mason consolidated four five eight vre products seed capital investments totaling 41774 24924 31959 respectively see note 1 additional information regarding vies vres consolidation investment products following tables reflect impact civs consolidated sponsored investment products consolidated balance sheets consolidated statements income loss consolidating balance sheets 1 represents consolidated sponsored investment product vres designated civs consolidating statements income loss 1 represents consolidated sponsored investment products vres designated civs 1 represents consolidated sponsored investment products vres designated civs 1 represents consolidated sponsored investment products vres designated civs nonoperating income expense civs includes interest income interest expense net gains losses investments consolidation civs impact net income loss attributable legg mason inc march 31 2020 2019 financial assets civs carried fair value totaling 93648 70197 respectively valued using level 1 inputs 23118 55182 respectively valued using level 2 inputs 2029 12547 respectively valued using nav practical expedient march 31 2019 financial liabilities civs carried fair value 4217 valued using level 2 inputs financial liabilities civs march 31 2020 transfers level 1 level 2 assets liabilities years ended march 31 2020 2019 navs used practical expedient civs provided investees derived fair values underlying investments respective reporting dates following table summarizes nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 redemption restrictions 11 monthly redemption 89 quarterly redemption legg masons carrying value maximum risk loss vies legg mason holds variable interest primary beneficiary follows 1 amounts related investments proprietary fund products 2 includes equity investments company made required make earned uncollected management fees companys total aum unconsolidated vies 31325927 29025764 march 31 2020 2019 respectively assets vies primarily comprised cash equivalents investment securities liabilities primarily comprised various expense accruals vies consolidated legg mason power direct significant economic activities entity rightsobligations associated benefitslosses could significant entity 21 subsequent event april 3 2020 legg mason borrowed 250000 credit agreement precautionary measure provide additional liquidity general corporate purposes current uncertain market environment quarterly financial data dollars thousands except per share amounts unless otherwise noted unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg mason’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg mason’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg mason’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg mason’s internal control financial reporting march 31 2008 based framework set forth committee sponsoring organizations treadway commission “coso” internal controlintegrated framework based assessment management concluded march 31 2008 legg mason’s internal control financial reporting effective based criteria established coso framework effectiveness legg mason’s internal control financial reporting march 31 2008 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg mason’s internal control financial reporting march 31 2008 mark r fetting president chief executive officer charles j daley jr senior vice president chief financial officer treasurer report independent registered public accounting firm board directors stockholders legg mason inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position legg mason inc subsidiaries march 31 2008 march 31 2007 results operations cash flows three years period ended march 31 2008 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 29 2008 consolidated statements income dollars thousands except per share amounts see notes consolidated financial statements consolidated balance sheets dollars thousands see notes consolidated financial statements consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements consolidated statements comprehensive income dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc “parent” subsidiaries collectively “legg mason” principally engaged providing asset management related financial services individuals institutions corporations municipalities december 1 2005 legg mason acquired substantially citigroup inc’s “citigroup” worldwide asset management business “cam” exchange legg mason’s private client capital markets “pccm” businesses common preferred stock cash also effective november 1 2005 legg mason acquired permal group ltd “permal” see notes 2 3 additional information consolidated financial statements include accounts parent subsidiaries controlling financial interest including cam permal dates acquisition generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity “vie” considered primary beneficiary see discussion special purpose variable interest entities follows discussion vies material intercompany balances transactions eliminated unless otherwise noted per share amounts include common shares legg mason shares issued connection acquisition legg mason canada inc exchangeable common shares legg mason oneforone basis time nonvoting convertible preferred stock convertible upon sale shares legg mason common stock nonvoting convertible preferred shares considered “participating securities” therefore included calculation basic earnings per common share connection sale legg mason’s pccm businesses fiscal 2006 legg mason reflected related results operations pccm businesses income discontinued operations consolidated statements income operating investing cash flows discontinued operations shown separately consolidated statements cash flows financing cash flows discontinued operations references fiscal 2008 2007 2006 refer legg mason’s fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america require management make assumptions estimates affect amounts reported financial statements accompanying notes including valuation financial instruments intangible assets goodwill stockbased compensation income taxes management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements cash equivalents cash equivalents highly liquid investments original maturities 90 days less repurchase agreements legg mason invests shortterm securities purchased overnight agreements resell collateralized us government agency securities purchased agreements resell accounted collateralized financings carried contractual amounts plus accrued interest restricted cash restricted cash march 31 2008 851688 primarily represents cash collateral required support arrangements certain liquidity funds subsidiaries manage cash available legg mason general corporate use see note 18 discussion support arrangements related liquidity funds financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except longterm debt legg mason holds debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders’ equity comprehensive income net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium recorded interest method included interest income certain investment securities classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings equity fixed income securities valued using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices legg mason evaluates nontrading investment securities “other temporary” impairment may exist fair value investment security adjusted cost extended period time “other temporary” impairment determined exist difference value investment security recorded financial statements fair value recognized charge income period impairment determined temporary march 31 2008 2007 amount unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations may readily available management must estimate value securities using variety methods resources including current available financial information investment industry order determine fair value march 31 2008 2007 legg mason approximately 1566 million 13 million respectively trading nontrading financial instruments valued based upon management’s assumptions estimates taking consideration available financial information company industry march 31 2008 2007 legg mason approximately 81703 58265 respectively investments partnerships limited liability corporations investments reflected noncurrent assets consolidated balance sheets accounted cost equity method addition financial instruments described derivative instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents securities purchased agreements resell shortterm borrowings fair value longterm debt march 31 2008 2007 2264720 1120253 respectively fair values estimated using current market prices derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason previously engage derivative hedging activities except described hedge interest rate risk debt described note 8 legg mason also used currency hedges hedge risk movement exchange rates interest rates financial assets limited basis legg mason applies hedge accounting defined sfas 133 “accounting derivative instruments hedging activities” “sfas 133” aforementioned debt interest rate risk hedge adjustment cash flow hedge recorded comprehensive income gains losses derivative instruments designated hedge accounting included income expense consolidated statements income material except described fiscal 2008 legg mason entered various credit support arrangements certain liquidity funds managed subsidiary arrangements included letters credit capital support agreements total return swap qualify derivative transactions described fully note 18 fair values derivative instruments based expected outcomes derived pricing data underlying securities andor detailed collateral analyses based recent available information fair values 457 million 5517 million derivatives included current assets current liabilities respectively consolidated balance sheet none derivative transactions designated hedge accounting defined sfas 133 related gains losses included nonoperating income expense consolidated statement income fiscal 2008 fixed assets fixed assets consist equipment software leasehold improvements capital lease assets equipment consists primarily communications technology hardware furniture fixtures software includes purchased software internally developed software fixed assets reported cost net accumulated depreciation amortization capital lease assets initially reported lesser present value related future minimum lease payments asset’s current fair value subsequently reduced accumulated depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements capital lease assets amortized depreciated initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill intangible assets consist principally asset management contracts manage proprietary funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife intangible assets goodwill amortized legg mason evaluates intangible assets goodwill quarterly basis considering factors projected cash flows revenue multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment determined fair values intangible assets subject amortization reviewed reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level deemed impaired carrying amount reporting unit goodwill exceeds implied fair value estimating fair value reporting unit legg mason uses valuation techniques based discounted cash flows similar models employed analyzing purchase price acquisition target legg mason defines reporting units managed investments institutional wealth management divisions operating segments allocations goodwill legg mason’s divisions acquisitions dispositions based relative fair values businesses added sold divisions see note 6 additional information regarding intangible assets goodwill note 19 additional business segment information translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders’ equity comprehensive income gains losses resulting foreign currency transactions included net income investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg mason’s clients fees primarily based predetermined percentages market value assets management “aum” recognized period services performed may billed advance period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks generally recognized end performance measurement period determined realizable distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution service fee expense accrued amounts owed third parties including finders’ fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges “cdsc” received shareholders funds upon redemption shares cdsc receipts recorded distribution servicing revenue received reduction unamortized balance deferred sales commissions corresponding expense management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2008 2007 2006 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 226 million 449 million march 31 2008 2007 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance management’s opinion likely benefits may realized legg mason’s deferred income taxes principally relate business combinations amortization accrued compensation effective april 1 2007 legg mason adopted provisions financial accounting standards board “fasb” interpretation 48 “accounting uncertainty income taxes” “fin 48” fin 48 clarifies previously issued fasb statement 109 “accounting income taxes” prescribing recognition threshold measurement attribute financial statements tax positions taken expected taken tax return fin 48 tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information fin 48 also provides guidance derecognition classification interest penalties interim accounting disclosure transition company’s accounting policy classify interest related tax matters interest expense related penalties operating expense see note 9 additional information regarding income taxes legg mason’s adoption fin 48 loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated stockbased compensation legg mason’s stockbased compensation includes stock options employee stock purchase plans restricted stock awards performance shares payable common stock deferred compensation payable stock compensation plans legg mason issues stock options officers key employees nonemployee members board directors fiscal 2007 legg mason adopted sfas 123 r “sharebased payment” related pronouncements using modifiedprospective method related transition election method compensation expense years ended march 31 2008 2007 includes compensation cost nonvested sharebased awards grantdate fair value amortized respective vesting periods straightline method legg mason determines fair value stock options using blackscholes option pricing model exception marketbased performance grants valued monte carlo optionpricing model prior fiscal 2007 awards also accounted grantdate fair value except awards granted prior april 1 2003 recorded intrinsic value result prior adoption sfas 123 r related compensation expense recognized awards granted prior april 1 2003 expense related stockbased employee compensation included determination net income fiscal 2006 less would included fair value method applied awards modifiedprospective method results year ended march 31 2006 restated additionally unamortized deferred compensation previously classified separate component stockholders’ equity reclassified reduction additional paidin capital also sfas 123 r cash flows related income tax deductions excess stockbased compensation expense 35587 14466 classified financing cash flows years ended march 31 2008 2007 respectively year ended march 31 2006 cash flows 92376 continue classified operating cash inflows see note 13 additional discussion stockbased compensation earnings per share basic earnings per share “eps” calculated dividing net income weighted average number shares outstanding calculation weighted average shares includes common shares exchangeable common stock convertible preferred shares considered participating securities diluted eps similar basic eps adjusts effect potential common shares see note 15 additional discussion eps special purpose variable interest entities special purpose entities “spes” trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse legg mason utilize spes form financing provide liquidity legg mason recognized gains losses sale assets spes accordance fasb interpretation number 46 r “consolidation variable interest entitiesan interpretation arb 51” “fin 46 r” spes designated either voting interest entity vie vies subject consolidation party deemed primary beneficiary vie entity sufficient equity risk finance activities without additional subordinated financial support either contractual implied equity investors characteristics controlling financial interest primary beneficiary entity absorb majority vie’s expected losses entity receive majority vie’s expected residual returns accordance fin 46 r legg mason’s determination expected residual returns excludes gross fees paid decision maker unlikely legg mason primary beneficiary vies created manage assets clients unless ownership interest including interests related parties vie substantial unless legg mason may earn significant performance fees vie unless legg mason considered material implied variable interest fin 46 r also requires disclosure vies legg mason considered significant variable interest determining whether variable interest significant legg mason considers factors used determination primary beneficiary determining whether primary beneficiary vies legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees implied relationships determining primary beneficiary legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks assumptions estimates significant bearing determination primary beneficiary legg mason’s assumptions estimates materially incorrect legg mason might required consolidate additional vies consolidation vies would result increase assets corresponding increase minority interests consolidated balance sheets increase revenues corresponding increase minority interests consolidated statements income see notes 17 18 additional discussion variable interests supplemental cash flow information following noncash activities excluded consolidated statements cash flows fiscal 2007 2006 holders 76 million 480 million zerocoupon contingent convertible senior notes converted notes 756 thousand 55 million shares common stock respectively zerocoupon contingent convertible senior notes outstanding conversion fiscal 2007 described note 2 fiscal 2006 legg mason issued 539 million shares common stock 13346632 shares nonvoting convertible preferred stock citigroup acquisition cam fiscal 2008 2006 legg mason issued approximately 553 million 496 million common shares respectively upon conversion approximately 553 496 shares respectively nonvoting convertible preferred stock addition 832 million promissory note described note 7 executed result final purchase price closing also described note 2 fiscal 2006 legg mason issued 19 million shares common stock valued 200 million acquire permal fiscal 2008 second anniversary contingent acquisition payments 240 million made former owners permal 208 million paid cash balance shares common stock described note 3 fiscal 2006 legg mason recognized gain sale pccm businesses citigroup based value 165 billion businesses portion consideration acquire cam assets liabilities pccm businesses transferred citigroup part transaction approximately 42 billion 37 billion respectively amounts reflected supplementary disclosure consolidated statements cash flows cash paid income taxes interest represent amounts continuing discontinued operations applicable recent accounting developments following relevant accounting pronouncements recently issued september 2006 fasb issued statement 157 “fair value measurements” “sfas 157” provide consistent definition fair value establish framework measuring fair value generally accepted accounting principles sfas 157 additional disclosure requirements effective fiscal year 2009 disclosure requirements include requirement allocate fair value measurements impacting entity’s financial statements among hierarchy prioritizes inputs valuation techniques used measure fair values three broad levels measurements level 1 based quoted prices active markets measurements level 2 based direct indirect observable inputs measurements level 3 based unobservable inputs february 2008 fasb issued fasb staff position “fsp” fas 1572 “effective date fasb statement 157” partially defers effective date sfas 157 one year nonrecurring fair value measurements nonfinancial assets liabilities acquired intangibles goodwill legg mason expect april 1 2008 adoption nondeferred provisions sfas 157 material impact consolidated financial statements legg mason continuing evaluate adoption deferred provisions sfas 157 nonrecurring fair value measurements cannot estimate time impact consolidated financial statements provisions sfas 157 recurring fair value measurements adopted legg mason april 1 2008 estimated less 3 total assets 11 total liabilities meet definition level 3 fair values based unobservable inputs including management’s estimates result fair values level 3 assets liabilities potentially subject significant fluctuations amounts ultimately realized february 2007 fasb issued statement 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” “sfas 159” sfas 159 permits companies choose measure many financial instruments certain items fair value standard requires unrealized gains losses items fair value option elected reported income provisions sfas 159 mandatory legg mason still evaluating potential future effect elections may make june 2007 emerging issues task force “eitf” fasb reached consensus issue 0611 “accounting income tax benefits dividends sharebased payments” “eitf 0611” subsequently ratified fasb eitf 0611 provides realized tax benefits dividends paid employees equity classified unvested shares share units options charged retained earnings recognized increase additional paidin capital eitf 0611 effective fiscal 2009 expected material impact legg mason’s consolidated financial statements december 2007 fasb issued statement nos 141 revised 2007 “business combinations” “sfas 141 r” 160 “noncontrolling interests consolidated financial statements amendment arb 51” “sfas 160” sfas 141 r significantly change business acquisitions accounted impact financial statements acquisition date subsequent periods sfas 141 r requires acquiring entity business combination recognize assets acquired liabilities assumed transaction including contingent consideration also requires acquisition related costs expensed incurred sfas 160 change accounting reporting minority interests recharacterized noncontrolling interests classified component equity sfas 141 r sfas 160 effective fiscal year 2010 sfas 141 r applied prospectively sfas 160 requires retroactive adoption presentation disclosure requirements existing minority interests requirements sfas 160 applied prospectively sfas 141 r adopted impact legg mason accounts acquisitions future legg mason currently evaluating adoption sfas 160 expected material impact legg mason’s consolidated financial statements march 2008 fasb issued statement 161 “disclosures derivatives hedging activities” “sfas 161” amends fasb statement 133 “accounting derivative instruments hedging activities” “sfas 133” requiring expanded disclosures entity’s derivative instruments hedging activities increased qualitative quantitative creditrisk factors sfas 161 contains disclosure provisions impact legg mason’s accounting derivative transactions april 2008 fasb issued final fsp fas 1423 “determination useful life intangible assets” amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset fasb statement 142 “goodwill intangible assets” “sfas 142” fsp fas 1423 effective fiscal 2010 expected material impact legg mason’s consolidated financial statements may 2008 fasb issued fsp apb 141 “accounting convertible debt instruments may settled cash upon conversion including partial cash settlement” “fsp apb 141” fsp requires issuers convertible debt instruments may settled cash upon conversion including partial cash settlement separately account liability equity conversion feature components instruments result interest expense imputed recognized based upon entity’s nonconvertible debt borrowing rate result lower net income 25 convertible senior notes issued legg mason january 2008 subject fsp apb 141 prior fsp apb 141 accounting principles board opinion 14 “accounting convertible debt issued stock purchase warrants” “apb 14” provided portion proceeds issuance instrument attributable conversion feature legg mason required retroactively adopt fsp apb 141 fiscal 2010 interest expense fiscal 2008 2009 increased 66 million 323 million respectively carrying amount 25 convertible senior notes discounted decreased additional paidin capital increased amount 2332 million march 31 2009 2 acquisitions dispositions february 26 2008 legg mason announced definitive agreement citigroup global markets inc affiliate citigroup would reacquire majority overlay implementation business legg mason private portfolio group “lmppg” includes managed account trading technology platform undertaking transaction legg mason continues focus core asset management business net assets held sale approximately 170 million comprised primarily intangible assets net allocated goodwill included current assets consolidated balance sheet march 31 2008 sale closed april 1 2008 cash proceeds approximately 181 million received transaction costs gain sale business approximately 5 million 3 million tax recognized first quarter fiscal 2009 december 1 2005 legg mason completed acquisition cam exchange outstanding stock legg mason subsidiaries constituted pccm businesses see note 3 discussion discontinued operations ii approximately 539 million shares common stock 13346632 shares 10 par value per share nonvoting legg mason convertible preferred stock convertible upon transfer approximately 1335 million shares common stock iii 512 million cash borrowed 700 million fiveyear syndicated term loan facility cam acquisition price initially aggregated 396 billion including 173 billion legg mason stock 539 million shares common stock 1335 million shares common stock issuable upon conversion convertible preferred stock 9205 per share 165 billion pccm business 512 million cash related costs 68 million accordance eitf 9912 “determination measurement date market price acquirer securities issued purchase business combination” common stock convertible stock issued transaction valued based average closing price legg mason common stock immediately following june 24 2005 date terms transaction agreed parties announced convertible preferred stock valued basis common stock classes economic rights value assigned pccm business based negotiations buyer citigroup seller legg mason using market metrics revenue book value earnings multiples developed conjunction independent thirdparty advisors time acquisition cam managed assets approximately 4086 billion excluded certain assets expected retained cam determination purchase price made basis among things revenues profitability growth rates cam acquisition cam fit one legg mason’s strategic objectives become pure global asset management company summary fair values net assets acquired follows amortizable asset management contracts amortized periods ranging six twelve years excluding certain contracts approximately 11 million amortized 16 months value indefinitelife mutual fund contracts subject amortization evaluated quarterly impairment approximately 739 million goodwill deductible 15 years tax purposes accordance terms acquisition agreement cam postclosing purchase price adjustment 847 million paid citigroup september 2006 quarter based retention certain acquired aum payment recorded additional goodwill therefore impact future earnings extent recorded goodwill becomes impaired prior consummation cam transaction senior management began assess formulate plans restructuring business combined entities included reductions acquired workforce rationalization realignment acquired mutual funds evaluation office lease obligations assumed transaction several geographic regions costs associated reductions acquired workforce accrued acquisition date time specific plans communication plans finalized costs associated mutual fund realignment office space rationalization accrued fiscal 2007 management finalized plans amounts could reasonably estimated part fund realignment certain domestic funds merged funds similar strategy certain funds redomiciled liquidated approved boards directors funds fund shareholders fund realignment costs associated incurred generate revenues combined entity consummation date incremental costs incurred conduct activities prior transaction date incurred direct result plan exit certain cam activities evaluation excess office space several geographic regions resulted staff reductions business integrations excess office space costs include amounts incurred existing contractual obligations cam continue economic benefit penalties incurred cancel contractual obligations acquired business costs workforce reductions mutual fund realignment excess office space aggregating 846 million associated integration acquired cam business reasons described costs reflected additional goodwill impact future earnings extent recorded goodwill becomes impaired summary accrued restructuring costs follows purchase price allocation completed fiscal 2007 legg mason expects remaining accrued costs paid contractual terms future years connection acquisition cam effective october 3 2005 legg mason entered threeyear global distribution agreement citigroup pursuant legg mason intends distribute asset management products services cam subsidiaries including legg mason funds family mutual funds citigroup’s various distribution businesses include citigroup’s retail securities brokerage retail institutional banks life variable annuity representatives citigroup’s retail securities brokerage exclusive retail distributor legg mason funds managed legg mason capital management subject exceptions term exclusivity three years subject certain conditions prior acquisition cam conjunction citigroup entity smith barney fund management llc “sbfm” one entities acquired citigroup completed settlement us securities exchange commission “sec” resolving investigation sec matters relating arrangements certain smith barney mutual funds citigroup affiliated transfer agent unaffiliated subtransfer agent terms settlement sbfm paid 184 million us treasury distributed pursuant distribution plan subject approval sec although transfer agency business included acquisition cam liabilities sbfm assumed acquisition include approximately 184 million amounts paid pursuant plan distribution approved addition assets acquired include receivable approximately 184 million amount returned legg mason us treasury distribution pursuant plan settlement yet disbursed receivable balance included receivables related liability included current liabilities march 31 2008 2007 effective november 1 2005 legg mason acquired 80 outstanding equity permal leading global fundsofhedge funds manager concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares resulting legg mason owning 100 outstanding voting common stock permal legg mason right purchase preference shares four years closing right exercised holders shares right require legg mason purchase interests general time frame approximately consideration aggregate consideration paid legg mason closing 800 million excluding 85 million acquisitionrelated costs 200 million form approximately 1889 newly issued shares legg mason common stock remainder cash maximum aggregate price including earnout payments related purchase based upon future revenue levels equity interests permal 1386 billion 9695 million minimum price including acquisition costs accordance terms deal legg mason acquired preference shares representing additional 75 ownership interest permal december 31 2007 quarter anticipated legg mason acquire remaining 125 four years initial closing prices based permal’s revenues additional payments treated contingent consideration second anniversary contingent acquisition payments 240 million made former owners permal 208 million paid cash balance shares common stock remaining minimum obligation 81 million march 31 2008 payable november 2011 unless earned earlier agreements provide additional consideration 265 million based permal’s future revenues earnings legg mason may elect deliver 25 future payments form shares common stock payments preference shares including dividends contingent earnouts exceeding 9695 million minimum purchase price recognized additional goodwill fiscal 2008 2007 legg mason paid approximately 12 million dividends period preference shares time acquisition permal managed assets approximately 175 billion excluding approximately 20 billion assets crossinvested among managed funds 27 billion assets permal expect retain acquisition permal fits one legg mason’s strategic objectives expand global asset management business summary fair values net assets acquired follows 1 subsequent acquisition adjustments certain contractual agreements occurred vies longer required consolidated approximately 60 million 100 million fair value asset management contracts amortized two years remainder amortized average life nine years values indefinitelife trade name fundsofhedge funds contracts subject amortization evaluated quarterly impairment following unaudited pro forma consolidated results presented though acquisitions cam permal occurred beginning period presented exclude results discontinued operations including gain sale pccm businesses pro forma results include adjustments exclude certain nontransferred cam businesses accordance terms transaction agreement conform accounting policies acquired entities adjust effect acquisition related expenses former owners private capital management “pcm” earned maximum fifth anniversary payment 3000 million accrued march 31 2006 paid escrow account fiscal 2007 payment recorded additional goodwill subject certain limited clawback provisions 3 discontinued operations december 1 2005 legg mason sold entities comprised pccm businesses citigroup portion consideration purchase citigroup’s global asset management businesses accordance sfas 144 “accounting impairment disposal longlife assets” aftertax results operations pccm reflected income discontinued operations consolidated income statements fiscal year ended march 31 2006 result sale legg mason recognized gain 109 billion net 972 million costs related sale including 787 million accelerated vesting employee stock option deferred compensation awards required sfas 123 modification terms option award makes valuable shall treated exchange original award new award incremental value shall measured difference fair value modified option determined accordance provisions sfas 123 b value old option immediately terms modified determined based shorter 1 remaining expected life 2 expected life modified option 864 thousand unvested options transaction date exercisable original contractual provisions therefore value terms options modified vesting periods shortened december 1 2005 transaction date ninety days thereafter exercise modified options expected exercised immediately therefore fair value options time value component equal aggregate transaction date market price less respective strike prices modified option sale resulted aftertax gain 6413 million fiscal 2007 company completed filing income tax return related sale also adjusted liabilities related sale actions resulted adjustment aftertax gain sale 572 results operations discontinued operations fiscal 2006 summarized follows 1 see note 19 additional information net revenues march 31 2006 legg mason sold operations subsidiary legg mason real estate services “lmres” sales price net assets approximately 8093 received cash subsequent closing legg mason recognized pretax gain net transaction costs 4698 2739 net taxes 1959 gain sale reflected gain sale discontinued operations consolidated statements income sale lmres result legg mason’s longterm strategic objective focus core asset management business 4 investments legg mason investments debt equity securities generally classified availableforsale heldtomaturity trading described note 1 investments march 31 2008 2007 follows 1 includes assets deferred compensation plans 207305 191684 respectively fiscal 2008 includes 141509 investments issued structured investment vehicles conduit investments acquired proprietary liquidity funds remainder represents seed investments proprietary products investments vies 2 includes investments private equity securities readily determinable fair values legg mason uses specific identification method determine cost security sold amount reclassified accumulated comprehensive income earnings proceeds gross realized gains losses sales maturities available forsale investments follows net unrealized gain loss investment securities classified trading 62001 7141 8360 fiscal 2008 2007 2006 respectively unrealized loss fiscal 2008 primarily related losses investments issued structured investment vehicles “sivs” conduit investments acquired proprietary liquidity funds legg mason’s availableforsale investments consist mortgagebacked securities us government agency securities equity securities gross unrealized gains losses investments classified availableforsale 154 82 respectively march 31 2008 407 303 respectively march 31 2007 legg mason investments classified heldtomaturity march 31 2008 2007 5 fixed assets following table reflects components fixed assets march 31 depreciation amortization expense 83812 69442 35308 fiscal 2008 2007 2006 respectively net 4243 fiscal 2006 allocated discontinued operations reflect use certain fixed assets discontinued operations prior sale 6 intangible assets goodwill indefinite life intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair market value assets exceeds book value fair value less book value legg mason record impairment charge following tables reflect components intangible assets march 31 decrease amortizable asset management contracts fiscal 2008 primarily due impairment intangible assets acquired acquisition pcm 151000 net accumulated amortization 88824 transfer 102640 net accumulated amortization 24775 relating pending sale overlay implementation business lmppg current assets held sale acquired management contracts pcm transaction related assets management declined significantly fiscal year 2008 based revised attrition estimates remaining useful lives acquired contracts one five years march 31 2008 fair value pcm’s remaining acquired management contracts determined using valuation techniques based discounted cash flows fiscal 2007 approximately 2016 impairment charges recorded operating expenses certain amortizable asset management contracts impairment charges fiscal 2006 march 31 2008 management contracts amortized weightedaverage life 80 years estimated amortization expense next five fiscal years follows change indefinitelife intangible assets primarily attributable impact foreign currency translation increase carrying value goodwill since april 1 2007 summarized based revenues earnings permal additional contingent consideration 160000 recognized fiscal year 2008 corresponding increase goodwill march 31 2008 legg mason transferred 65724 goodwill relating pending sale overlay implementation business lmppg current assets held sale fiscal 2007 legg mason began recognizing tax benefit amortization excess tax basis related cam acquisition accordance sfas 109 “accounting income taxes” tax benefit recorded reduction goodwill deferred tax liabilities 7 shortterm borrowings october 14 2005 legg mason entered unsecured 5year 500 million revolving credit agreement november 2007 legg mason borrowed 500 million unsecured revolving credit facility general corporate purposes proceeds invested shortterm instruments january 3 2008 legg mason amended revolving credit agreement increase maximum amount legg mason may borrow 500 million 1 billion allow draw portion availability form letters credit march 7 2008 legg mason elected procure letter credit money market fund support 150 million fund’s holdings certain sivissued securities using capacity revolving credit agreement collateral connection amendments revolving credit facility rate increased libor plus 35 basis points libor plus 60 basis points rates may change future based changes legg mason’s credit ratings march 31 2008 500 million outstanding facility borrowings outstanding facility march 31 2007 legg mason maintains two additional borrowing facilities 50 million 3year revolving credit agreement 40 million credit line facilities general operating purposes borrowings outstanding facilities march 31 2008 2007 legg mason maintained compliance applicable covenants facilities connection acquisition cam legg mason entered two 364day borrowing arrangements one 130 million revolving credit facility interest rate including commitment fees libor plus 27 basis points 832 million promissory note interest rate including commitment fees libor plus 35 basis points average effective interest rate 832 million credit facility 56 period ended march 31 2007 fiscal year ended march 31 2007 legg mason paid available cash 832 million balance outstanding shortterm promissory note citigroup legg mason borrow 130 million credit facility expired november 2006 8 longterm debt longterm debt march 31 2008 2007 consists following 675 senior notes july 2 2001 legg mason issued 425000 principal amount senior notes due july 2 2008 bear interest 675 notes sold discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs 5year term loan october 14 2005 legg mason entered unsecured term loan agreement amount exceed 700 million legg mason used term loan pay portion purchase price including acquisition related costs acquisition cam term loan facility payable full maturity calendar year 2010 bears interest libor plus 60 basis points fiscal 2008 2007 legg mason repaid 100 million 50 million respectively resulting outstanding balance march 31 2008 550 million average interest rate 55 fiscal 2008 3year term loan connection cam acquisition december 1 2005 legg mason entered 16 million 3year term loan year ended march 31 2008 3year term loan repaid revolving credit agreement 5year term loan entered connection citigroup transaction contain standard covenants including leverage interest coverage ratios legg mason maintained compliance applicable covenants borrowing facilities third party distribution financing july 31 2006 legg mason entered fouryear agreement financial institution finance nonrecourse basis 907 million commissions paid financial intermediaries connection sales certain share classes proprietary funds outstanding balance march 31 2008 89 million distribution fee revenues used repay distribution financing based average aum respective funds interest imputed average rate 38 25 convertible senior notes related hedge transactions january 14 2008 legg mason sold 125 billion 25 convertible senior notes “the notes” notes convertible certain conditions met initial conversion rate 113636 shares legg mason common stock per 1000 principal amount notes equivalent conversion price approximately 8800 per share maximum 142 million shares subject adjustment upon conversion 1000 principal amount note holder receive cash amount equal 1000 less conversion value note conversion value exceeds principal amount note conversion legg mason also deliver election cash common stock combination cash common stock conversion value excess 1000 agreement governing issuance notes contains certain covenants benefit initial purchaser notes including leverage interest coverage ratio requirements may result notes becoming immediately due payable covenants met connection sale notes january 14 2008 legg mason entered convertible note hedge transactions respect common stock “purchased call options” financial institution counterparties “hedge providers” purchased call options exercisable solely connection conversions notes event market value per share legg mason common stock time exercise greater exercise price purchased call options equal 88 conversion price notes subject adjustment simultaneously separate transactions legg mason also sold hedge providers warrants purchase aggregate subject adjustment 142 million shares common stock net sharesettled basis exercise price 10746 per share common stock purchased call options warrants part terms notes affect holders’ rights notes hedging transactions net cost 83 million paid proceeds notes recorded reduction additional paidin capital notes converted market price per share legg mason common stock exceeds 88 exercise price purchased call options purchased call options entitle legg mason receive hedge providers shares legg mason common stock cash combination shares common stock cash match shares cash legg mason must deliver terms notes additionally time market price per share legg mason common stock exceeds 10746 exercise price warrants legg mason required deliver hedge providers net shares common stock amount based excess market price per share common stock exercise price warrants transactions effectively increase conversion price notes 10746 per share common stock legg mason contractual rights execution related agreements ability settle obligations conversion feature notes purchased call options warrants legg mason common stock accordingly transactions accounted equity subsequent adjustment changes value obligations term loans legg mason entered loan fiscal 2005 finance leasehold improvements outstanding balance march 31 2008 100 million bears interest 42 due october 31 2010 fiscal 2006 legg mason entered 128 million term loan agreement finance acquisition aircraft loan bears interest 59 secured aircraft maturity date january 1 2016 outstanding balance march 31 2008 115 million 5year credit agreement november 23 2005 legg mason entered unsecured 5year floatingrate credit agreement amount exceed 300 million legg mason borrowed 100 million agreement fund portion purchase price cam transaction payable outside us borrowing payable full maturity five business days transaction closing date made november 25 2005 repaid december 2 2005 entire amount credit facility including repaid amounts initial loan became available december 2 2005 fund additional purchase price payable cam transaction result final postclosing payment made available cash see note 2 agreement drawn upon terminated accordance terms fiscal 2007 march 31 2008 aggregate maturities longterm debt current accreted value 2257773 based contractual terms follows interest rate swap effective december 1 2005 legg mason executed 3year amortizing interest rate swap “swap” large financial institution hedge interest rate risk portion 700 million 5year term loan terms swap legg mason pay fixed interest rate 49 notional amount 400 million march 2007 quarter swap began unwind 50 million per quarter quarterly payments receipts swap matched exactly offset changes floating rate interest payments 400 million principal term loan since terms conditions hedge expected changed long least unamortized balance swap outstanding 5year term loan swap continue effective cash flow hedge result changes market value swap recorded component comprehensive income march 31 2008 unrealized loss 938 net tax benefit 666 market value remaining 150 million swap reflected comprehensive income estimated unrealized loss included comprehensive income march 31 2008 expected reclassified realized loss within next twelve months actual amount vary result changes market conditions quarterly basis legg mason assesses effectiveness cash flow hedge confirming payments balance liability hedged match swap see note 20 issuance 115 billion equity units may 2008 9 income taxes components income tax expense continuing operations follows reconciliation difference effective income tax rate statutory federal income tax rate continuing operations follows deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years details legg mason’s deferred tax assets liabilities follows certain tax benefits associated legg mason’s employee stock plans recorded directly stockholders’ equity stockholders’ equity increased 35587 14466 92376 2008 2007 2006 respectively result tax benefits connection sale notes january 2008 legg mason entered purchase call options hedge providers see note 8 2975 million cost call options reflected financial statements reduction additional paidin capital income tax purposes call options notes considered part single integrated transaction cost call options therefore tax deductible term notes accordingly legg mason related future tax benefits 1139 million period seven year term notes benefit deferred tax asset recorded increase additional paidin capital therefore reduce future tax provisions legg mason various loss carryforwards may provide future tax benefits related valuation allowances established accordance sfas 109 “accounting income taxes” management’s opinion likely benefits may realized following deferred tax assets valuation allowances relating loss carryforwards recorded march 31 2008 2007 respectively 1 us subsidiaries permal file separate federal income tax returns apart legg mason inc’s consolidated federal income tax return due permal acquisition structure separate state income tax returns 2 valuation allowance relating nonus net operating loss carryforwards acquired cam acquisition totaling 10957 reduce goodwill legg mason subsequently recognizes deferred tax asset result adoption fin 48 effective april 1 2007 company recorded decrease beginning retained earnings increase liability unrecognized tax benefits approximately 36 million net federal benefit state tax liabilities amount recognized would reduce future income tax provisions favorably impact effective tax rates legg mason total gross unrecognized tax benefits approximately 287 million 293 million april 1 2007 march 31 2008 respectively totals 187 million 211 million respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates reconciliation beginning ending amount unrecognized gross tax benefits follows march 31 2008 management anticipate material increases decreases amounts unrecognized tax benefits next twelve months april 1 2007 march 31 2008 legg mason approximately 30 million 35 million respectively interest accrued tax contingencies consolidated balance sheets legg mason believe subject penalties related tax contingencies therefore accrued liability penalties april 1 2007 march 31 2008 legg mason examination internal revenue service tax authorities various states following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal year 2002 us federal fiscal year 2005 united kingdom fiscal year 2000 state new york fiscal year 2004 state maryland quarter ended september 30 2007 united kingdom enacted finance act 2007 reduced corporate tax rate 30 28 tax periods ending april 1 2008 impact existing deferred tax liabilities onetime tax benefit approximating 185 million legg mason plans repatriate earnings certain foreign subsidiaries order replenish funds used 225 million contingent acquisition payments us obligations former owners permal discussed note 10 december quarter 36 million repatriated since legg mason previously intended permanently reinvest cumulative undistributed earnings nonus subsidiaries nonus operations us federal income taxes previously provided however additional income tax provision approximately 184 million recognized fiscal 2008 respect repatriation plan described repatriation beyond 225 million foreign earnings contemplated except noted legg mason intends permanently reinvest cumulative undistributed earnings nonus subsidiaries nonus operations accordingly us federal income taxes provided undistributed earnings extent permanently reinvested legg mason’s nonus operations practical time determine income tax liability would result upon repatriation earnings 10 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2025 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2008 minimum annual aggregate rentals operating leases servicing agreements follows minimum rental commitments shown reduced 99053 minimum sublease rentals received future noncancelable subleases table also include aggregate rental commitments 36183 property equipment capital leases fiscal 2007 legg mason entered lease agreement office space located new york lease annual base rent approximately 180 million per year agreement provides initial term 16 years right renew either additional 10year term two 5year terms fiscal 2007 legg mason entered agreement lease new office space baltimore replacement current headquarters lease expires fiscal 2010 lease annual base rent approximately 111 million building currently construction legg mason anticipates taking possession space fall 2009 initial lease term expire april 2024 two renewal options 10 five years fiscal 2008 legg mason entered put purchase option agreement owner land building currently leased legg mason agreement fixed price 28950 executed included capital lease seller put option november 2011 buyer purchase option becomes exercisable remaining future rent obligations existing lease also included capital leases april 2008 legg mason entered sublease agreement two floors office building new york sublease total commitment 98469 term initial term lease sublease rentals include sublease agreement following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes period provided landlord “free rent” period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2008 2007 legg mason commitments invest approximately 50585 39300 respectively limited partnerships make private investments commitments funded required end respective investment periods ranging fiscal 2008 2011 fiscal 2008 legg mason recorded contingent payment obligations 160 million related permal acquisition addition 161 million previously recorded obligation described note 6 intangible assets goodwill fiscal year payments 240 million made former owners permal 208 million paid cash balance common stock remaining obligation 81 million payable november 2011 unless earned earlier agreements provide additional consideration 265 million based permal’s future revenues earnings additionally preferred dividends approximately 8 million payable former owners permal november 2008 2009 see note 18 liquidity fund support additional information related legg mason’s commitments normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency inquiries investigations proceedings citigroup transaction legg mason transferred citigroup subsidiaries constituted pccm businesses thus transferring entities would primary liability customer complaint litigation regulatory liabilities proceedings arising businesses however part transaction legg mason agreed indemnify citigroup customer complaint litigation regulatory liabilities legg mason’s former pccm businesses result preclosing events similarly although citigroup transferred legg mason entities would primarily liable customer complaint litigation regulatory liabilities proceedings cam business citigroup agreed indemnify legg mason customer complaint litigation regulatory liabilities cam business result preclosing events accordance sfas 5 “accounting contingencies” legg mason established provisions estimated losses pending complaints legal actions investigations proceedings ultimate resolution matters cannot currently determined opinion management consultation legal counsel legg mason believe resolution actions material adverse effect legg mason’s financial condition however results operations could materially affected period liabilities period differ legg mason’s prior estimates legg mason’s cash flows could materially affected period matters resolved addition ultimate costs litigationrelated charges vary significantly period depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement legg mason two officers named defendants consolidated legal action alleges defendants violated securities exchange act 1934 securities act 1933 making misleading statements public omitting certain material facts respect acquisition cam business public statements prospectus used secondary stock offering order artificially inflate price legg mason common stock action seeks certification class shareholders purchased legg mason common stock either february 1 2006 october 10 2006 secondary public offering march 9 2006 seeks unspecified damages legg mason intends defend action vigorously march 17 2008 court granted legg mason’s motion dismiss action however plaintiffs subsequently filed notice appeal dismissal legg mason cannot accurately predict eventual outcome appeal point whether action material adverse effect legg mason march 31 2008 2007 legg mason’s liability losses contingencies 1700 2600 respectively fiscal 2008 2007 2006 legg mason recorded litigationrelated charges continuing operations approximately 1100 100 respectively net recoveries 100 fiscal 2008 fiscal 2006 legg mason recorded litigationrelated charges discontinued operations approximately 5900 net recoveries 800 fiscal 2008 2007 2006 liability reduced settlement payments approximately 2100 1800 21500 respectively reversal 8300 accruals fiscal 2006 primarily related civil copyright lawsuit 11 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees primary plan legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation 50 match employee 401k contributions 6 employee compensation maximum five thousand dollars per year contributions charged continuing operations amounted 39446 40686 22670 fiscal 2008 2007 2006 respectively contributions charged discontinued operations 20295 fiscal 2006 addition employees make voluntary contributions certain plans 12 capital stock march 31 2008 authorized numbers common preferred exchangeable shares 500 million 4 million unlimited number respectively addition march 31 2008 2007 73 million 103 million shares common stock respectively reserved issuance legg mason’s equity plans 20 million 21 million common shares respectively reserved exchangeable shares issued connection acquisition legg mason canada inc exchangeable shares exchangeable time holder oneforone basis shares legg mason’s common stock included basic shares outstanding connection acquisition cam legg mason issued 1335 shares 10 par value per share nonvoting legg mason convertible preferred stock convertible upon transfer 1335 million shares common stock fiscal 2008 2006 legg mason issued approximately 553 million 496 million common shares respectively upon conversion approximately 553 496 shares respectively nonvoting convertible preferred stock also fiscal 2008 legg mason repurchased 25 shares nonvoting convertible preferred stock using proceeds 25 convertible senior notes march 31 2008 approximately 036 shares nonvoting convertible preferred stock outstanding upon conversion notes legg mason may pay excess conversion value cash shares legg mason’s common stock combination cash common stock maximum amount shares may issued upon conversion notes subject adjustment reserved issuance 142 million discussed note 20 may 2008 legg mason issued 115 billion equity units unit consisting 5 interest 1000 principal amount senior notes due june 30 2021 purchase contract committing holder purchase shares legg mason’s common stock june 30 2011 maximum amount shares may issued reserved issuance approximately 204 million subject adjustment changes common stock shares exchangeable common stock three years ended march 31 2008 follows dividends declared per share 096 081 069 fiscal 2008 2007 2006 respectively dividends declared paid march 31 2008 2007 2006 33103 29430 24912 respectively included current liabilities july 19 2007 legg mason announced board directors authorized purchase 50 million shares legg mason common stock openmarket purchases authorization replaced prior board directors authorization purchase 30 million shares legg mason common stock expiration date attached new authorization fiscal year ended march 31 2008 11 million shares repurchased authorization 97945 fiscal years ended march 31 2007 2006 shares repurchased november 1 2005 connection acquisition permal described note 2 legg mason issued 1889 shares common stock portion consideration paid december 1 2005 connection acquisition cam described note 2 legg mason issued 5394 shares common stock portion purchase price fiscal 2008 legg mason issued 392 common shares connection contingent acquisition payment made former owners permal 13 stockbased compensation legg mason’s stockbased compensation includes stock options employee stock purchase plans restricted stock awards performance shares payable common stock deferred compensation payable stock effective july 19 2007 number shares authorized issued legg mason’s active equity incentive stock plan increased 5 million 29 million increasing shares available issuance approximately 7 million however legg mason agreed issue final 1 million shares without additional stockholders approval options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments three five years expire within five ten years date grant see note 1 discussion stockbased compensation expense continuing operations relating stock options stock purchase plan deferred compensation payable stock years ended march 31 2008 2007 2006 25188 23817 11877 respectively related income tax benefit years ended march 31 2008 2007 2006 9724 8452 4255 respectively effect adopting sfas 123 r net income year ended march 31 2008 2007 reduction 295 1872 respectively following tables reflect pro forma results compensation expense associated option grants regardless grant date stock purchase plan recognized vesting period discussed note 3 connection sale pccm businesses legg mason accelerated vesting stock option equitybased deferred compensation awards previously granted employees pccm businesses accelerated vesting stock options reduced gain sale 737 million 617 million tax reflecting increase fair value awards vesting date original grant date approximately 431 million charge related incentive stock options tax benefit consolidated statements income stock option transactions legg mason’s option plans three years ended march 31 2008 summarized total intrinsic value options exercised years ended march 31 2008 2007 2006 109626 55046 384153 respectively march 31 2008 aggregate intrinsic value options outstanding 66956 following information summarizes legg mason’s stock options outstanding march 31 2008 march 31 2008 2007 2006 options exercisable 3197 4156 4123 shares respectively weightedaverage exercise prices 4554 3388 2802 respectively stock options exercisable march 31 2008 weighted average remaining contractual life 23 years march 31 2008 aggregate intrinsic value options exercisable 65892 following information summarizes legg mason’s stock options exercisable march 31 2008 following information summarizes unvested stock options legg mason’s equity incentive plans year ended march 31 2008 1 generally vesting occurs july year unamortized compensation cost related unvested options march 31 2008 67615 expected recognized weightedaverage period 22 years legg mason also equity plan nonemployee directors replaced stock option plan nonemployee directors fiscal 2006 equity plan directors may elect receive shares stock restricted stock units prior july 19 2007 amendment plan directors could also elect receive stock options granted either plan immediately exercisable price equal market value shares date grant term ten years shares options restricted stock units issuable equity plan limited 625 shares aggregate 84 shares issued plan march 31 2008 march 31 2008 382 stock options 16 restricted stock units outstanding plans cash received exercises stock options legg mason’s equity incentive plans 30944 20690 128728 years ended march 31 2008 2007 2006 respectively tax benefit expected realized tax deductions option exercises totaled 41189 13965 104807 years ended march 31 2008 2007 2006 respectively 2006 amount includes amounts attributable discontinued operations weightedaverage fair value stock options granted fiscal 2008 2007 2006 using blackscholes option pricing model 3176 3317 4090 per share respectively following weightedaverage assumptions used model grants fiscal 2008 2007 2006 fiscal 2006 legg mason determined using combination implied historical volatility accurate measure expected volatility calculating blackscholes option values effective stock option grants made quarter ended december 31 2005 legg mason began estimating expected volatility equal weighting implied historical measures change accounting estimate material impact net income legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 45 million total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged earnings fiscal years ended march 31 2008 2007 2006 approximately 59 43 91 shares respectively purchased open market behalf participating employees october 17 2005 compensation committee legg mason approved grants senior officers options acquire 300 shares legg mason common stock exercise price 10400 per share subject certain conditions grants vest ratably july 17 four years following grant date options exercisable july 17 2009 legg mason common stock closed 12750 per share 30 consecutive trading days condition met fiscal 2006 options expire july 17 2013 weightedaverage fair value 3719 per share options included pro forma net income shown estimated grant date using monte carlo optionpricing model following assumptions july 19 2005 independent directors legg mason approved grant legg mason’s chairman chief executive officer options acquire 500 shares legg mason common stock exercise price 11153 per share subject certain conditions grant vest ratably four years starting effective grant date july 19 2005 subject continuing legg mason’s chairman chief executive officer least two years continuing provide agreedupon ongoing services legg mason two years thereafter options exercisable within four years grant date legg mason common stock closed 12750 per share 30 consecutive trading days condition met fiscal 2006 options expire eighth anniversary grant date fair value 4233 per share options granted included pro forma net income shown estimated date grant using monte carlo optionpricing model following assumptions monte carlo optionpricing model used value option grants order properly factor impact performance market conditions specified grant january 28 2008 compensation committee legg mason approved grants senior officers 120 performance shares upon vesting subject certain conditions distributed shares common stock grants vest ratably january 28 five years following grant date upon attaining service criteria stock price hurdles beginning 7797 year one ending 11415 year five weightedaverage fair value per share awards 1181 estimated grant date using grant price 7088 monte carlo optionpricing model following assumptions restricted stock transactions years ended march 31 2008 2007 2006 respectively summarized restricted stock awards noncash transactions fiscal 2008 2007 2006 legg mason recognized 25015 17039 6049 respectively compensation expense restricted stock awards related continuing operations fiscal 2006 legg mason recognized 3408 compensation expense restricted stock awards related discontinued operations including nonemployee directors’ awards tax benefit expected realized tax deductions restricted stock totaled 4771 5320 1722 years ended march 31 2008 2007 2006 respectively unamortized compensation cost related unvested restricted stock awards 642 shares yet recognized march 31 2008 50687 expected recognized weightedaverage period 28 years deferred compensation payable shares legg mason common stock granted certain employees mandatory elective plans programs legg mason’s equity incentive plan vesting plans programs ranges immediate periods six years plans programs provide discounts 10 contributions dividends limit number shares authorized issued one remaining active deferred plan plans replaced similar programs legg mason’s equity incentive plan fiscal 2005 terminated december 2005 connection citigroup transaction fiscal 2008 2007 2006 legg mason recognized 254 247 6635 respectively compensation expense fiscal 2006 value principally related discontinued operations deferred compensation arrangements payable shares common stock fiscal 2008 2007 2006 legg mason issued 48 46 112 shares respectively deferred compensation arrangements weightedaverage fair value per share grant date 8411 8726 8369 respectively 14 deferred compensation stock trust legg mason issued shares connection certain deferred compensation plans held rabbi trusts assets rabbi trusts consolidated employer value employer’s stock held rabbi trusts classified stockholders’ equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders’ equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2008 2007 1190 1417 respectively 15 earnings per share basic earnings per share “eps” calculated dividing net earnings weighted average number shares outstanding calculation weighted average shares includes common shares exchangeable common stock convertible preferred shares considered participating securities diluted eps similar basic eps adjusts effect potential common shares december 1 2005 issued 13346632 shares nonvoting convertible preferred stock connection acquisition cam nonvoting convertible preferred shares entitled receive dividends asconverted basis paid common stock convert automatically upon transfer entity affiliate citigroup aggregate 13346632 shares common stock march 31 2008 2007 036 839 shares nonvoting convertible preferred stock outstanding respectively following table presents computations basic diluted eps march 31 2008 2007 2006 options purchase 2780 1086 741 shares respectively included computation diluted earnings per share presumed proceeds exercising options including related income tax benefits exceed average price common shares period therefore options deemed antidilutive also march 31 2008 warrants issued connection convertible note hedge transactions described note 8 excluded calculation diluted earnings per share effect would antidilutive basic diluted earnings per share fiscal year ended march 31 2008 2007 2006 include vested shares restricted stock diluted earnings per share periods also include unvested shares restricted stock unless shares deemed antidilutive march 31 2008 2007 2006 707 526 429 unvested shares restricted stock respectively deemed antidilutive therefore excluded computation diluted earnings per share see note 20 subsequent event regarding issuance additional potentially dilutive securities issued subsequent march 31 2008 16 accumulated comprehensive income accumulated comprehensive income includes cumulative foreign currency translation adjustments net tax gains losses interest rate swap net tax gains losses investment securities change accumulated translation adjustments fiscal 2008 2007 primarily resulted impact changes brazilian real british pound polish zloty japanese yen relation us dollar net assets legg mason’s subsidiaries brazil united kingdom poland japan real pound zloty yen functional currencies respectively summary legg mason’s accumulated comprehensive income march 31 2008 2007 follows 17 special purpose variable interest entities normal course business legg mason manager various types investment vehicles considered vies services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees legg mason sell transfer assets vies legg mason’s exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees vies material march 31 2008 2007 legg mason issued investment performance guarantees vies investors fiscal 2008 legg mason variable interests certain liquidity funds provided various forms credit capital support described note 18 evaluating contractual implied variable interests funds march 31 2008 determined legg mason primary beneficiary funds aum liquidity funds 943 billion march 31 2008 march 31 2008 2007 legg mason required consolidate vies material consolidated financial statements 18 liquidity fund support fiscal year ended march 31 2008 legg mason entered several arrangements provide support certain proprietary liquidity funds hold securities issued sivs support amounts related collateral income statement impact follows 1 included current restricted cash consolidated balance sheet 2 pretax charges include reductions value underlying securities costs support included nonoperating income expense fiscal 2008 consolidated statements income 3 income taxes giving effect related adjustments revenue sharing agreement subsidiary 4 securities issued structured investment vehicles letters credit november 2007 order support aaaaaa credit ratings two liquidity funds legg mason elected procure letters credit “locs” two large banks aggregate amount approximately 335 million locs support investments two rated funds aggregate approximately 670 million asset backed commercial paper “abcp” issued two sivs may drawn funds realize loss disposition restructuring abcp addition funds draw locs end oneyear terms time continue hold investments restructured securities rated a1 p1 standard poor’s moody’s investors service respectively locs may terminated without drawn terms expire certain circumstances including underlying abcp sold funds restructured securities rated a1 p1 standard poor’s moody’s respectively without incurring loss march 2008 legg mason elected procure loc large bank support liquidity fund loc supports investments fund aggregate approximately 522 million abcp issued siv agreement provides support 150 million may drawn certain circumstances including upon fund’s realizing loss disposition restructuring position upon agreement’s termination unpaid amounts remain certain fund’s sivissued securities certain circumstances upon ratings downgrades issuing bank loc terminate later march 3 2009 fund required sell position holds day loc expires part loc arrangements legg mason agreed reimburse banks amounts may drawn locs support agreement provided approximately 286 million cash collateral march 31 2008 date locs issued legg mason established derivative liability fair value guarantee reimburse banks amounts may drawn locs fair value liability increase decrease legg mason’s obligation guarantee fluctuates based market value sivissued securities march 31 2008 legg mason reported derivative liabilities 2355 million letters credit capital support agreements december 2007 legg mason also entered capital support agreement “csa” one two rated liquidity funds discussed pursuant legg mason agreed provide 15 million capital contributions fund recognizes losses certain investments continues hold underlying securities expiration oneyear term agreement applicable time fund’s net asset value less specified threshold march 2008 legg mason also entered csas another liquidity fund legg mason make capital contributions fund realizes loss sale certain events relating two sivissued securities portfolio two underlying positions aggregate approximately 15 billion face amount legg mason make maximum 400 million contributions fund csas fully collateralized obligation csas terminate one year fund must sell underlying securities hold expiration march 31 2008 legg mason reported derivative liabilities 3162 million capital support agreements total return swap december 28 2007 legg mason entered total return swap arrangement major banking institution “bank” pursuant bank purchased securities issued three sivs dublindomiciled liquidity fund managed subsidiary legg mason 890 million securities face amount commercial paper purchased bank cash aggregate amount 832 million represents estimate value determined collateral purposes addition legg mason reimbursed fund 595 million difference fund’s carrying value including accrued interest amount paid securities market value 886 million march 31 2008 expected financing costs exceeds amount paid bank 457 million difference accounted derivative asset included current assets consolidated balance sheet represents amount legg mason expects recover bank upon maturity sale underlying securities total return swap legg mason pay bank losses including losses incurred sale securities principal repaid maturity bank incurs ownership securities return purchase price paid securities equal onemonth libor rate plus 1 bank pay legg mason principal interest receives securities excess price paid securities total return swap arrangement terminates november 2008 however legg mason may elect earlier terminate total return swap arrangement time bank may elect early termination total return swap arrangement certain circumstances including event material adverse effect legg mason’s business financial condition credit ratings legg mason’s senior debt reduced bbb standard poor’s baa2 moody’s investors service legg mason maintain consolidated basis least 250 million aggregate cash equivalents plus amounts available borrowed revolving credit facilities upon termination total return swap arrangement outstanding securities sold market prices legg mason responsible reimburse bank losses bank incurs sale secure obligations arrangement legg mason provided 139 million cash collateralize total return swap may increased decreased based changes market value securities upon maturity default securities maximum future amount legg mason could required pay total return swap arrangement would aggregate price paid bank securities 832 million plus financing costs purchase nonbank sponsored siv securities december 2007 legg mason purchased cash aggregate 132 million principal amount nonbank sponsored siv securities dublindomiciled liquidity fund january 2008 may 2008 approximately 50 million 82 million respectively principal amount securities matured paid full purchase canadian conduit securities december quarter legg mason acquired cash aggregate 98 million principal amount conduit securities issued canadian abcp issuers fund managed legg mason subsidiary conduits securities currently undergoing restructuring process canada charges incurred result liquidity fund support transactions recorded consolidated statements income included nonoperating income expense liability 5517 million connection unrealized losses recorded loc csa liquidity fund support transactions included current liabilities consolidated balance sheet securities purchased classified trading included investment securities march 31 2008 consolidated balance sheet 19 business segment information legg mason global asset management company provides investment management related services wide array clients legg mason operates three divisions operating segments managed investments institutional wealth management economic characteristics products services offered production process distribution methods regulatory aspects division similar accordingly legg mason aggregates three divisions one reportable business segment asset management continuing operations asset management provides investment advisory services institutional individual clients company sponsored investment funds primary sources revenue asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution fees companysponsored investment funds included asset management along corresponding expense representing fees paid unaffiliated distributors funds including parties related parties prior sale legg mason principally operates united states united kingdom revenues expenses geographical purposes generally allocated based location office providing services income continuing operations income tax provision minority interests united states year ended march 31 2008 decreased prior years primarily result net losses related liquidity fund support 6083 million impairment charge certain acquired management contracts 1510 million current fiscal year intangible assets net goodwill united states year ended march 31 2008 decreased prior year primarily due impairment charge transfer 1026 million amortizable asset management contracts assets heldforsale relating pending sale lmppg completed april 1 2008 see note 18 additional discussion liquidity fund support note 6 additional discussion intangible assets goodwill results geographic region follows discontinued operations financial results discontinued operations’ business segments follows 1 represents distribution fees proprietary mutual funds historically reported private client reclassified asset management distribution fee revenue corresponding distribution expense reflect legg mason’s continuing role funds’ distributor fiscal year ended march 31 2006 net revenues net income legg mason’s private client capital markets businesses reflect activity eight months legg mason owned businesses results discontinued operations geographic region follows private client distributed wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds feebased account fees net interest customers’ margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets consisted legg mason’s equity fixed income institutional sales trading corporate public finance primary sources revenue equity fixed income institutional sales trading included commissions principal credits transactions corporate municipal products legg mason maintained proprietary fixed income equity securities inventory primarily facilitate customer transactions result recognized trading profits losses legg mason’s trading activities corporate finance revenues included underwriting fees advisory fees private placements mergers acquisitions sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also included realized unrealized gains losses investments acquired connection merchant investment banking activities 20 subsequent events february 26 2008 legg mason announced definitive agreement cgmi affiliate citigroup would reacquire majority overlay implementation business lmppg includes managed account trading technology platform undertaking transaction legg mason continues focus asset management open architecture structure net assets held sale approximately 170 million comprised primarily allocated intangible assets net goodwill included current assets consolidated balance sheet march 31 2008 sale closed april 1 2008 cash proceeds approximately 181 million received transaction costs gain sale business approximately 5 million 3 million tax recognized first quarter fiscal 2009 may 2008 legg mason issued 115 billion equity units net proceeds approximately 111 billion unit consists 5 interest 1000 principal amount 56 senior notes due june 30 2021 purchase contract committing holder purchase shares legg mason’s common stock 50 per share june 30 2011 holders’ obligations purchase shares legg mason’s common stock collateralized pledge notes holders also receive quarterly contract adjustment payments annual rate 14 purchase contract obligates legg mason sell number newly issued shares common stock based settlement rate defined maximum settlement rate 08881 shares legg mason common stock subject adjustment equity unit applicable market value legg mason common stock 6756 minimum settlement rate 07401 shares legg mason common stock subject adjustment equity unit applicable market value legg mason common stock 5630 applicable market value legg mason common stock 5630 6756 settlement rate number shares legg mason common stock equal 50 divided applicable market value maximum number shares may issued subject adjustment 204 million certain covenants existing debt arrangements modified issuance convertible securities net proceeds offering used general corporate purposes may include support liquidity funds managed subsidiaries financing acquisitions repayment outstanding debt quarterly financial data dollars thousands except per share amounts unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results 2 quarter ending march 31 2008 includes 151000 impairment charge related acquired asset management contracts 3 quarters ending march 31 2008 december 31 2007 include 517221 91083 respectively charges resulting providing support liquidity funds may 20 2008 closing price legg mason’s common stock 5536 quarterly financial data continued dollars thousands except per share amounts unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2014 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework 1992 based assessment management concluded march 31 2014 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2014 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2014 joseph sullivan president chief executive officer director peter h nachtwey senior executive vice president chief financial officer report independent registered public accounting firm board directors stockholders legg mason inc opinion accompanying consolidated balance sheets related consolidated statements income loss comprehensive income loss changes stockholders’ equity cash flows present fairly material respects financial position legg mason inc subsidiaries “the company” march 31 2014 march 31 2013 results operations cash flows three years period ended march 31 2014 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2014 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 23 2014 consolidated balance sheets dollars thousands see notes consolidated financial statements consolidated statements income loss dollars thousands except per share amounts see notes consolidated financial statements consolidated statements comprehensive income loss dollars thousands see notes consolidated financial statements consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands consolidated statements cash flows continued dollars thousands see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see consolidation note 17 discussion vies material intercompany balances transactions eliminated certain amounts prior year financial statements reclassified conform current year presentation references fiscal 2014 2013 2012 refer legg masons fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america us applicable rules regulations securities exchange commission sec require management make assumptions estimates affect amounts reported financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes consolidation management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements consolidation normal course business legg mason sponsors manager various types investment vehicles services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinated management fees incentive fees legg masons exposure risk entities generally limited equity investment made required make earned uncollected management fees legg mason sell transfer assets investment vehicles accordance financial accounting standards consolidation legg mason consolidates separately identifies certain sponsored investment vehicles consolidated investment vehicles “civs” significant collateralized loan obligation entity “clo” consolidation investment vehicles impact net income loss attributable legg mason inc material impact legg masons consolidated operating results change value consolidated investment vehicles recorded nonoperating income expense reflected net income loss net amounts allocated noncontrolling interests certain investment vehicles legg mason sponsors manager considered vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights investment vehicles considered vres consolidated legg mason controlling financial interest investment vehicle absent substantive investor rights replace manager entity kickout rights legg mason may also fund initial cash investment certain vre investment vehicles generate investment performance track record order attract thirdparty investors product legg masons initial investment new product typically represents 100 ownership product discussed “seed capital investments” consolidated long legg mason maintains controlling financial interest product included civs unless legg masons investment longer term legg mason held longerterm controlling financial interest one sponsored investment fund vre thirdparty investors consolidated included civ march 31 2014 2013 2012 vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity potential controlling financial interest investment company vies sponsored investment funds deemed investment companies including money market funds legg mason determines primary beneficiary vie absorbs majority vies expected losses receives majority vies expected residual returns legg masons determination expected residual returns excludes gross fees paid decision maker certain criteria met determining whether primary beneficiary investment company vie legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party including employees’ ownership guarantees implied relationships legg mason concluded primary beneficiary one sponsored investment fund vie consolidated designated civ march 31 2014 2013 2012 despite significant third party investments product march 31 2014 legg mason also concluded primary beneficiary 16 employeeowned funds sponsors consolidated reported civs vies sponsored investment funds meet investment company criteria legg mason determines primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits potentially could significant vie legg mason concluded primary beneficiary one three clos variable interest although holds equity interest investment vehicles power control significant variable interest one clo level expected subordinated fees march 31 2014 2013 2012 balances related clo consolidated reported civ companys consolidated financial statements clos consolidated level expected fees insignificant determining primary beneficiary investment company vies legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks legg masons investment civs march 31 2014 2013 39434 39056 respectively represents maximum risk loss excluding uncollected advisory fees material assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds see note 17 additional information vies vres cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash restricted cash primarily represents longterm escrow deposits cash collateral required market hedge arrangements cash available legg mason general corporate use financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except legg masons longterm debt discussed consolidation seed capital investments proprietary fund products initially consolidated individual securities within portfolio accounted trading investments legg mason consolidates products long holds controlling financial interest product upon deconsolidation typically occurs several years legg mason accounts investments proprietary fund products equity method investments described ownership 20 50 otherwise ability significantly influence financial operating policies investee partnerships llcs thirdparty investors may less ability influence operations equity method accounting considered legg masons ownership greater 3 changes fair value proprietary fund products classified trading equity method investments recognized nonoperating income expense consolidated statements income loss legg mason generally redeems investment proprietary fund products related product establishes sufficient track record thirdparty investments related product sufficient sustain strategy decision made longer pursue strategy length time legg mason holds majority interest product varies based number factors market demand market conditions investment performance see notes 3 17 additional information regarding legg masons seed capital investments determination whether investments proprietary fund products represent vies respectively equity investments legg mason control investee primary beneficiary vie exert significant influence financial operating policies investee legg mason follows equity method accounting evaluation whether legg mason exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence legg mason may governing board investee legal rights investors entity pursuant funds operating documents relationship legg mason investors entity substantially legg masons equity method investees investment companies record underlying investments fair value therefore equity method accounting legg masons share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee legg masons share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense significant portion earnings losses attributable legg masons equity method investments offsetting compensation expense adjustments revenue sharing agreements deferred compensation arrangements therefore fluctuations market value investments material impact net income loss attributable legg mason inc legg mason also holds debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders equity noncontrolling interests comprehensive income loss net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium recorded interest method included interest income certain investment securities including held civs classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings equity fixed income securities classified trading availableforsale valued using closing market prices listed instruments broker price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices legg mason evaluates nontrading investment securities otherthantemporary impairment may exist fair value investment security adjusted cost extended period time otherthantemporary impairment determined exist amount impairment relates credit losses recognized charge income march 31 2014 2013 2012 amount temporary unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations may readily available including certain investments held civs management estimates value securities using variety methods resources including current available financial information investment industry addition financial instruments described derivative instruments clo loans bonds debt described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair values longterm debt march 31 2014 2013 aggregated 1135103 1206166 respectively fair values estimated using publicly quoted market prices discounted cash flow analyses appropriate classified level 2 fair value hierarchy described derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason used foreign exchange forwards interest rate swaps hedge risk movement exchange rates interest rates financial assets liabilities limited basis also legg mason used futures contracts index funds hedge market risk certain seed capital investments addition certain civs use derivative instruments however risk legg mason relation derivative assets liabilities civs excess investment funds legg mason designated financial instruments hedge accounting defined accounting literature periods presented gains losses derivative instruments designated hedge accounting included income expense nonoperating income expense consolidated statements income loss exception gains losses derivative instruments civs recorded nonoperating income loss consolidated investment vehicles net consolidated statements income loss fair value measurements accounting guidance fair value measurements defines fair value establishes framework measuring fair value fair value defined exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date accounting guidance fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance objective fair value accounting measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically requires use judgment ascertain formerly active market become inactive determining fair values markets become inactive accounting guidance also relates otherthantemporary impairments intended bring greater consistency timing impairment recognition also intended provide greater clarity investors credit noncredit components impaired debt securities expected sold guidance also requires timely disclosures regarding expected cash flows credit losses aging securities unrealized losses fair value accounting guidance also establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category may include fixed income securities certain proprietary fund products category also includes clo loans derivative liabilities civ level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds clo debt civ category may also include certain proprietary fund products redemption restrictions valuation asset liability may involve inputs one level hierarchy level fair value hierarchy fair value measurement falls entirety determined based lowest level input significant fair value measurement entirety certain proprietary fund products investments held civs valued net asset value nav determined applicable fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available including certain investments held civs management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 fair values clo loans bonds determined based prices wellrecognized thirdparty pricing services utilize available market data therefore classified level 2 legg mason established controls designed assess reasonableness prices provided fair value clo debt valued using discounted cash flow methodology inputs used determine expected cash flows include assumptions forecasted default recovery rates market participant would use determining fair value clos underlying collateral assets given significance unobservable inputs fair value measurement clo debt valuation classified level 3 exchange traded options valued using last sale price absence sale last offering price options traded counter valued using dealer supplied valuations options classified level 1 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient legg mason relies nav certain investments classified level 2 level 3 fair value navs provided investees derived fair values underlying investments reporting date transfers categories measured beginning period see note 3 additional information regarding fair value measurements fair value option legg mason elected fair value option certain eligible assets liabilities including corporate loans debt clo consolidating see note 17 management believes use fair value option mitigates impact certain timing differences better matches changes fair value assets liabilities related clo unrealized gains losses assets liabilities fair value option elected reported earnings decision elect fair value option determined instrument basis must applied entire instrument irrevocable elected assets liabilities measured fair value pursuant fair value option included assets liabilities consolidated investment vehicles consolidated balance sheets time company elected apply fair value option financial instruments appropriated retained earnings upon election fair value option eligible assets liabilities clo described legg mason recorded cumulative effect adjustment appropriated retained earnings consolidated investment vehicle consolidated balance sheets equal difference fair values clos assets liabilities difference recorded appropriated retained earnings consolidated investment vehicle investors clo legg mason shareholders ultimately realize benefits losses associated clo changes fair values clo assets liabilities recorded net income loss attributable noncontrolling interests consolidated statements income loss appropriated retained earnings consolidated investment vehicle consolidated balance sheets march 31 2014 clo final stage liquidation fair value assets liabilities substantially equal appropriated retained earnings fixed assets fixed assets primarily consist equipment software leasehold improvements equipment consists primarily communications technology hardware furniture fixtures software includes purchased software internally developed software fixed assets reported cost net accumulated depreciation amortization depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements amortized depreciated initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill legg masons identifiable intangible assets consist principally asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary mutual funds fundsofhedge funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities indefinitelife intangible assets goodwill amortized financial statement purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred company perform quantitative tests include critical reviews significant factors assumptions determine intangible assets goodwill impaired legg mason considers factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected consolidated financial statements current fair value recognized expense period impairment determined triggering event occurred company performs quantitative tests annually december 31 indefinitelife intangible assets goodwill unless company qualitatively conclude likely respective fair values exceed related carrying values fair values intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined market participants perspective based projected discounted cash flows take consideration estimates future fees profit margins growth rates taxes discount rates proprietary fund contracts managed operated single unit meet criteria may aggregated impairment testing goodwill evaluated reporting unit level considered impairment carrying value reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit legg mason uses valuation techniques principally based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition goodwill deemed recoverable reporting unit level also operating segment level legg mason defines global asset management segment results fact chief operating decision maker legg masons chief executive officer regularly receives discrete financial information consolidated global asset management business level regularly receive discrete financial information operating results lower level asset management affiliate level allocations goodwill management restructures acquisitions dispositions based relative fair values respective businesses restructured added sold divisions see note 5 additional information regarding intangible assets goodwill note 16 additional business segment information translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income loss gains losses resulting foreign currency transactions included net income loss investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients fees primarily based predetermined percentages market value assets management aum recognized period services performed may billed advance period earned based aum beginning billing period accordance related advisory contracts revenue associated advance billings deferred included current liabilities consolidated balance sheets recognized period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks relative absolute basis depending product recognized end performance measurement period accordingly neither advanced billings performance fees subject reversal largest portion performance fees earned based 12month performance periods end differing quarters year portion also based quarterly performance periods legg mason responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution servicing expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc receipts recorded distribution service fee revenue received reduction unamortized balance deferred sales commissions corresponding expense management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2014 2013 2012 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 8031 8259 march 31 2014 2013 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforward benefits business combinations amortization intangible assets accrued compensation applicable accounting guidance tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information companys accounting policy classify interest related tax matters interest expense related penalties operating expense see note 7 additional information regarding income taxes loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated related insurance recoveries recorded separately underwriter confirmed coverage specific claim amount see note 8 additional information stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units management equity plans certain affiliates deferred compensation payable stock compensation plans legg mason issues equity awards directors officers key employees accordance applicable accounting guidance compensation expense includes costs nonvested sharebased awards classified equity grant date fair value amortized respective vesting periods straightline method legg mason determines fair value stock options affiliate management equity plan grants using blackscholes optionpricing model exception marketbased performance grants valued monte carlo optionpricing model see developments note 11 additional information regarding stockbased compensation earnings per share basic earnings per share attributable legg mason inc common shareholders eps calculated dividing net income loss attributable legg mason inc weightedaverage number shares outstanding calculation weightedaverage shares includes common shares exchangeable common stock certain unvested sharebased payment awards considered participating securities contain nonforfeitable rights dividends diluted eps similar basic eps adjusts effect potential common shares unless antidilutive periods net loss potential common shares considered antidilutive see note 12 additional discussion eps restructuring costs may 2010 legg masons management committed plan streamline business model described note 15 streamlining initiative completed march 31 2012 costs associated initiative primarily related employee termination benefits incentives retain employees transition period charges consolidating leased office space contract termination costs termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statements income loss compensation items required employees provide future service therefore expensed ratably required service period contract termination costs expensed incurred discussed note 2 march 2014 legg mason entered definitive agreement acquire qs investors holdings llc qs investors legg mason plans integrate two existing affiliates batterymarch financial management inc batterymarch legg mason global asset allocation llc lmgaa qs investors time leverage best aspects subsidiary costs anticipated integration primarily relate employee termination benefits including severance retention incentives recorded compensation benefits consolidated statements income loss see note 2 additional information developments conjunction december 2012 modification employment arrangements certain employees subsidiary permal group ltd permal legg mason completed implementation management equity plan quarter ended june 30 2013 march 31 2014 similar management equity plan implemented legg mason certain employees clearbridge investments llc clearbridge plans better align interests affiliates management legg mason shareholders provide among things higher margins specified higher revenue levels management equity plans entitle certain key employees affiliate participate 15 future growth respective affiliates enterprise value subject appropriate discounts subsequent date grant current future grants plans vest 20 annually five years related grantdate fair values recognized compensation expense consolidated statements income vested plan units put legg mason settlement fair value beginning one year holder terminates employment legg mason also call plan units generally post employment settlement fair value changes control legg mason either affiliate impact vesting settlement provisions units however upon sale substantially affiliates assets vesting respective units would accelerate participants would receive fair value payment respect interests plan future grants additional plan units dilute participation existing outstanding units 15 future growth respective affiliates enterprise value subsequent related future grant date additional compensation expense would incurred future grants either plan entitle plan participants collectively aggregate 15 future growth respective affiliates enterprise value upon vesting grantdate fair value vested plan units reflected consolidated balance sheets redeemable noncontrolling interests adjustment additional paidin capital thereafter redeemable noncontrolling interests continue adjusted ultimate maximum estimated redemption value expected term retained earnings adjustments see note 11 additional information noncontrolling interests civs thirdparty investors related noncontrolling interests classified redeemable noncontrolling interests investors funds may request withdrawals time also included redeemable noncontrolling interests vested affiliate management equity plan units nonredeemable noncontrolling interests march 31 2014 2013 noted net income loss attributable noncontrolling interests consolidated statements income loss also includes net income loss reclassified appropriated retained earnings consolidated investment vehicle consolidated balance sheets net income loss attributable noncontrolling interests years ended march 31 2014 2013 2012 included following amounts redeemable noncontrolling interests years ended march 31 2014 2013 2012 included following amounts recent accounting developments june 2013 financial accounting standards board fasb updated guidance investment company entities update clarifies characteristics investment company provides comprehensive guidance assessing whether entity investment company requires investment company measure noncontrolling ownership interests investment companies fair value rather using equity method requires additional disclosures update effective legg mason fiscal 2015 legg mason currently evaluating adoption expected material impact legg masons consolidated financial statements december 2013 fasb ratified emerging issues task force eitf consensus update guidance measuring financial assets financial liabilities consolidated collateralized financing entities update require entity electing apply guidance measure financial assets financial liabilities using fair value consolidated collateralized financing entity’s financial assets financial liabilities whichever observable subject formal issuance fasb update also require certain disclosures entities apply provisions effective legg mason fiscal 2016 unless adopted earlier legg mason evaluating adoption 2 acquisitions fauchier partners management limited march 13 2013 permal whollyowned subsidiary legg mason completed acquisition outstanding share capital fauchier partners management limited fauchier european based manager fundsofhedge funds bnp paribas investment partners sa accordance sale purchase agreement spa entered december 2012 transaction significantly expands permals institutional business creating global institutional capability across geographies client profiles time acquisition fauchier managed assets approximately 5400000 initial purchase price cash payment 63433 using exchange rate british pound us dollar acquisition date funded existing cash resources addition contingent consideration approximately 25000 approximately 33000 using exchange rate british pound us dollar march 31 2014 may due second fourth anniversaries closing respectively dependent achieving certain levels revenue net distribution costs subject potential catchup adjustment fourth anniversary payment second anniversary payment shortfall contingent consideration liability established closing acquisition date fair value 21566 represented present value contingent consideration expected paid march 31 2014 fair value contingent consideration liability 29553 increase 7653 march 31 2013 5000 attributable revised estimates amounts payable 2653 attributable changes exchange rate interest amortization contingent consideration liability included liabilities consolidated balance sheet increase contingent consideration liability due revised estimates amounts payable recorded expenses consolidated statements income loss year ended march 31 2014 legg mason executed currency forwards economically hedge risk movements exchange rate us dollar british pound estimated contingent liability payment amounts denominated see note 14 additional information regarding derivatives hedging summary acquisitiondate fair values assets acquired liabilities assumed follows fair value amortizable asset management contracts amortized period six years none acquired intangible assets goodwill deductible uk tax purposes management estimated fair values indefinitelife fund management contracts based upon discounted cash flow analyses contingent consideration expected paid based upon probabilityweighted revenue projections using unobservable market data inputs level 3 measurements typical acquisition portion business larger financial services firm related operations legg mason expected initial contraction acquired business significant assumptions used analyses acquisition included projected annual cash flows revenues discount rates summarized follows revised contingent consideration estimate march 31 2014 considers higher level fauchier performance fees date includes various scenarios net revenue growth rates ranging 0 8 weightedaverage 2 discount rate 27 company presented pro forma combined results operations acquisition results operations reported accompanying consolidated statements income loss years ended march 31 2013 2012 would materially different financial results fauchier included legg masons consolidated financial results year ended march 31 2014 include revenues 72088 fauchier operations integrated related expenses readily identifiable qs investors llc march 2014 legg mason entered definitive agreement acquire qs investors customized solutions global quantitative equities provider approximately 5000000 aum nearly 100000000 assets advisement march 31 2014 legg mason plans integrate time two existing affiliates batterymarch lmgaa qs investors leverage best capabilities entity legg mason pay initial purchase price 11000 addition contingent consideration 10000 20000 may due second fourth anniversaries closing respectively dependent achievement certain net revenue targets subject potential catchup adjustment fourth anniversary payment second anniversary payment shortfall acquisition expected close first quarter fiscal 2015 connection integration legg mason expects incur restructuring transition costs approximately 35000 primarily comprised charges employee related costs charges restructuring transition costs year ended march 31 2014 approximately 2500 primarily represent costs severance retention incentives recorded compensation benefits consolidated statements income loss legg mason expects approximately 30000 remaining anticipated costs associated integration incurred year ending march 31 2015 3 investments fair values assets liabilities disclosures include details legg masons assets liabilities measured fair value excluding assets liabilities civs see note 17 variable interest entities consolidation investment vehicles information related assets liabilities civs measured fair value legg mason investments debt equity securities generally classified trading described note 1 investments march 31 2014 2013 follows 1 includes investments private equity securities readily determinable fair values net unrealized realized gain loss investment securities classified trading 22963 18260 6063 fiscal 2014 2013 2012 respectively legg masons availableforsale investments consist mortgage backed securities us government agency securities equity securities gross unrealized gains losses investments classified availableforsale 203 451 respectively march 31 2014 230 188 respectively march 31 2013 legg mason uses specific identification method determine cost security sold amount reclassified accumulated comprehensive income earnings proceeds gross realized gains losses sales maturities availableforsale investments follows legg mason investments classified heldtomaturity march 31 2014 2013 fair values financial assets liabilities company determined using following categories inputs 1 cash equivalents include highly liquid investments original maturities 90 days less cash investments actively traded money market funds measured nav classified level 1 cash investments time deposits measured amortized cost approximates fair value short time purchase instrument expected realization classified level 2 primarily mutual funds minimal market risk company change value primarily offset adjustment compensation expense related deferred compensation liability 3 trading investments proprietary fund products trading investments consist approximately 53 47 equity debt securities respectively march 31 2014 approximately 49 51 equity debt securities respectively march 31 2013 4 substantially legg masons equity method investments investment companies record underlying investments fair value fair value measured using legg masons share investees underlying net income loss predominately representative fair value adjustments investments held equity method investee 5 includes investments equity method approximate fair value relating longterm incentive compensation plans 14125 43741 march 31 2014 2013 respectively proprietary fund products investments 8497 12600 march 31 2014 2013 respectively classified investment securities consolidated balance sheets 6 amounts included noncurrent assets consolidated balance sheets periods presented 7 see note 2 proprietary fund products include seed capital investments made legg mason fund new investment strategies products legg mason investments proprietary fund products totaled 405918 304713 march 31 2014 2013 respectively substantially comprised investments 46 funds 39 funds march 31 2014 2013 respectively individually greater 1000 together comprise 90 seed capital investment total period see note 1 additional information regarding seed capital investments substantially financial instruments valuation methods rely observable market inputs significant input utilize equity method cost method nav practical expedient discussed measurement uncertainty little relevance changes financial assets liabilities measured fair value using significant unobservable inputs level 3 years ended march 31 2014 2013 presented tables realized unrealized gains losses recorded level 3 investments primarily included nonoperating income expense consolidated statements income loss change unrealized losses level 3 investments liabilities still held reporting date 5210 1229 years ended march 31 2014 2013 respectively also included realized unrealized losses net year ended march 31 2014 change fair value contingent consideration liability significant transfers level 1 level 2 years ended march 31 2014 2013 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 nature investments related liquidation restrictions factors may impact ultimate value realized nanot applicable 1 40 monthly redemption 60 quarterly redemption march 31 2014 49 monthly redemption 51 quarterly redemption march 31 2013 remaining lockup expired june 2013 2 liquidations expected remaining term 3 balance 10 remaining term less one year 90 remaining term 19 years 4 comprised approximately 31 69 level 2 level 3 assets respectively march 31 2014 32 68 level 2 level 3 assets respectively march 31 2013 current plans sell investments held march 31 2014 4 fixed assets following table reflects components fixed assets march 31 depreciation amortization expense related fixed assets 50531 73829 74221 fiscal 2014 2013 2012 respectively includes accelerated depreciation amortization 2542 fiscal 2014 primarily related various corporate initiatives 21020 fiscal 2013 related initiative reduce space requirements 10256 fiscal 2012 related business streamlining initiative 5 intangible assets goodwill indefinitelife intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair value assets exceeds book value intangible assets subject amortization considered impairment reporting period fair value less book value legg mason record impairment charge following table reflects components intangible assets change indefinitelife intangible assets attributable impact foreign currency translation legg mason completed annual impairment testing process goodwill indefinitelife intangible assets determined impairment value assets december 31 2013 result uncertainty regarding future market conditions economic results assessing fair value reporting unit intangible assets requires management exercise significant judgment current assessed fair value indefinitelife domestic mutual funds contracts asset related citigroup asset management cam acquisition exceeds carrying value approximately 21 current assessed fair value indefinitelife fundsofhedge funds contracts asset related permal fauchier acquisitions exceeds combined carrying values approximately 10 market performance flows related assets management levels decrease near term cash flow projections deviate current projections reasonably possible assets could deemed impaired material amount legg mason also determined triggering events occurred march 31 2014 would require impairment testing part legg masons annual impairment testing process december 31 2012 company concluded carrying value two significant indefinitelife fund management contract intangible assets trade name asset exceeded respective fair values assets impaired aggregate amount 734000 impairment charges resulted number current trends factors resulted reduction projected cash flows legg masons overall assessment fair value assets fair value domestic mutual fund management contracts asset permal fundsofhedge fund management contracts asset permal trade name declined carrying values accordingly impaired 396000 321000 17000 respectively management estimated fair values indefinitelife intangible assets based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used cash flow analyses december 31 2012 included projected cash flows discount rates summarized follows projected cash flow growth rates assets dependent product investment performance client aum flows market conditions discount rates influenced changes market conditions well interest rates factors decreases projected cash flow growth rates andor increases discount rates could result lower fair value measurements potential additional impairments could material march 31 2014 amortizable asset management contracts amortized weightedaverage remaining life 32 years estimated amortization expense next five fiscal years follows change carrying value goodwill summarized legg mason recognizes tax benefit amortization excess tax basis related cam acquisition accordance accounting guidance income taxes tax benefit recorded reduction goodwill deferred tax liabilities benefit realized 6 shortterm borrowings longterm debt disclosures include details legg mason’s debt excluding debt civs see note 17 variable interest entities consolidation investment vehicles information related debt civs march 31 2014 2013 legg mason 750000 500000 respectively revolving credit facility capacity pursuant capital plan june 2012 legg mason entered unsecured credit agreement provided 500000 revolving credit facility 500000 term loan repaid fiscal 2014 discussed proceeds term loan used repay 500000 outstanding borrowings previous revolving credit facility terminated january 2014 legg mason entered 250000 incremental borrowing credit facility contemplated addition 500000 revolving credit facility revolving credit facilities expire june 2017 revolving credit facilities interest rates libor plus 150 basis points annual commitment fees 20 basis points interest rates may change future based changes legg masons credit ratings revolving credit facilities available fund working capital needs general corporate purposes borrowings outstanding either facilities march 31 2014 2013 revolving credit facilities standard financial covenants including maximum net debt ebitda ratio defined documents 25 1 minimum ebitda interest ratio defined documents 40 1 march 31 2014 legg masons net debt ebitda ratio 12 1 ebitda interest expense ratio 125 1 therefore legg mason maintained compliance applicable covenants accreted value longterm debt consists following january 2008 legg mason sold 1250000 25 convertible senior notes convertible notes” due 2015 refinanced may 2012 pursuant aforementioned capital plan refinancing effected issuance 650000 55 senior notes 55 senior notes due may 2019 net proceeds together cash hand 250000 additional borrowing existing revolving credit facility used repurchase entire 1250000 face amount convertible notes 55 senior notes 650000 55 senior notes due may 2019 sold discount 6754 amortized interest expense sevenyear term 55 senior notes subject certain nonfinancial covenants including provisions relating dispositions certain assets could require percentage related proceeds applied accelerated repayments 55 senior notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 050 together related accrued unpaid interest february 2013 55 senior notes registered trade publicly consistent terms registration rights agreement signed connection issuance addition terms 55 senior notes interest rate paid notes increase modestly legg masons credit ratings reduced investment grade 5625 senior notes january 2014 legg mason issued 400000 5625 senior notes due 2044 5625 senior notes proceeds plus cash hand used repay 450000 outstanding borrowings fiveyear term loan entered conjunction unsecured credit agreement noted 5625 senior notes sold discount 6260 amortized interest expense 30year term 5625 senior notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 030 together related accrued unpaid interest 25 convertible senior notes related hedge transactions prior repurchase convertible notes may 2012 previously discussed legg mason accreting carrying value convertible notes principal amount maturity using interest rate 65 effective borrowing rate nonconvertible debt time issuance expected life seven years resulting interest expense 5839 39077 years ended march 31 2013 2012 respectively convertible notes convertible certain conditions met initial conversion rate 113636 shares legg mason common stock per one thousand dollar principal amount convertible notes equivalent conversion price approximately 88 per share maximum 14205 shares subject adjustment unconverted notes would mature par january 2015 upon conversion one thousand dollar principal amount note holder would receive cash amount equal one thousand dollars less conversion value note conversion value exceeded principal amount note conversion legg mason would also deliver election cash common stock combination cash common stock conversion value excess one thousand dollars connection sale convertible notes january 2008 legg mason entered convertible note hedge transactions respect common stock “purchased call options” financial institution counterparties “hedge providers” purchased call options exercisable solely connection conversions convertible notes event market value per share legg mason common stock time exercise greater exercise price purchased call options equal 88 conversion price convertible notes subject adjustment simultaneously separate transactions legg mason also sold hedge providers warrants purchase aggregate subject adjustment 14205 shares common stock net sharesettled basis exercise price 10746 per share common stock purchased call options warrants part terms convertible notes affect holders rights convertible notes hedging transactions net cost approximately 83000 paid proceeds convertible notes recorded reduction additional paidin capital transactions effectively increased conversion price convertible notes 10746 per share common stock legg mason contractual rights execution related agreements ability settle obligations conversion feature convertible notes purchased call options warrants legg mason common stock accordingly transactions accounted equity subsequent adjustment changes value obligations terms repurchase convertible notes may 2012 noted included repayment par plus accrued interest prepayment fee 6250 noncash exchange warrants “warrants” holders convertible notes replicated extended contingent conversion feature convertible notes cash payment 1256250 repurchase convertible notes allocated liability equity components based liability fair value 1193971 determined using current market interest rate 41 resulting loss debt extinguishment 68975 including 7851 accelerated deferred issue costs remaining balance cash payment allocated equity component convertible notes 62279 reduction additional paidin capital offset related tax benefits 31446 1193971 amount cash repurchase payment allocated liability component convertible notes upon extinguishment exceeds initial allocated value issuance 977933 requiring consolidated statements cash flows year ended march 31 2013 include allocation 216038 excess operating activities warrants issued holders convertible notes connection repurchase convertible notes provide purchase aggregate subject adjustment 14205 shares legg mason common stock net share settled basis exercise price 88 per share upon exercise warrants legg mason required deliver holders warrants election either shares common stock cash amount based excess market price per share common stock exercise price warrants expire july 2017 legg mason option settle obligations warrants legg mason common stock accordingly warrants accounted equity connection extinguishment convertible notes hedge transactions purchased call options warrants executed connection initial issuance convertible notes also terminated march 31 2014 aggregate maturities longterm debt based contractual terms follows 7 income taxes components income loss income tax provision benefit follows components income tax expense benefit follows reconciliation difference effective income tax benefit rate statutory federal income tax benefit rate follows 1 state income taxes include changes related valuation allowances net impact deferred tax assets changes state apportionment factors planning strategies effect foreign tax rates also includes changes related valuation allowances includes changes federal valuation allowances permanent tax adjustments see schedule change valuation allowances jurisdiction july 2011 uk finance act 2011 act enacted act reduced main uk corporate tax rate 27 26 effective april 1 2011 26 25 effective april 1 2012 july 2012 uk finance act 2012 enacted reduced main uk corporate tax rate 24 effective april 1 2012 23 effective april 1 2013 july 2013 finance bill 2013 enacted reducing main uk corporate tax rate 21 effective april 1 2014 20 effective april 1 2015 reductions uk corporate tax rate resulted tax benefits 19164 18075 18268 recognized fiscal 2014 2013 2012 respectively result revaluation deferred tax assets liabilities new rates addition year ended march 31 2012 legg mason recorded 18254 tax benefits related restructuring australian business deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows certain tax benefits associated legg masons employee stock plans recorded directly stockholders equity tax benefit recorded equity fiscal 2014 2013 2012 due net operating loss position company march 31 2014 additional 7424 net operating loss recognized increase stockholders equity ultimately realized legg mason various loss carryforwards may provide future tax benefits related valuation allowances established accordance accounting guidance income taxes managements opinion likely benefits realized substantially legg masons deferred tax assets related us federal state uk taxing jurisdictions march 31 2014 us federal deferred tax assets aggregated 762699 realization expected require approximately 3800000 future us earnings approximately 673317 must form foreign source income based estimates future taxable income using assumptions consistent used legg masons goodwill impairment testing likely current federal tax benefits relating net operating losses realizable valuation allowance necessary time respect resulting foreign tax credits likely tax benefits relating utilization 39919 foreign tax credits realized additional valuation allowance 2340 provided fiscal 2014 addition valuation allowance established prior years substantial portion deferred tax assets relating uk taxing jurisdictions tax planning may enhance legg masons tax positions realization current tax benefits dependent significant tax strategies march 31 2014 us state deferred tax assets aggregated approximately 180183 due limitations utilization net operating loss carryforwards taking consideration certain state tax planning strategies valuation allowance established prior years state net operating loss benefits generated certain jurisdictions additional valuation allowance 8639 established fiscal 2014 additional tax benefits generated jurisdictions additionally 34831 fully reserved deferred tax assets relating us state capital loss carryforwards expired unused fiscal 2014 due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary increase valuation allowance approximately 467 fiscal 2014 primarily related current year change certain uk deferred tax assets full valuation allowance previously recognized extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets following deferred tax assets valuation allowances relating carryforwards recorded march 31 2014 2013 respectively 1 substantially us state net operating losses carryforward fiscal 2029 2 due potential change factors relating apportionment income various states companys effective state tax rates subject fluctuation impact value companys deferred tax assets including net operating losses could material impact future effective tax rate company legg mason total gross unrecognized tax benefits approximately 77892 72650 90831 march 31 2014 2013 2012 respectively totals approximately 51518 46340 62400 respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates fiscal 2014 result net impact expiring statutes limitation completion tax authority examinations unrecognized benefits 2927 realized reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 2014 2013 2012 follows although management cannot predict degree certainty timing ultimate resolution matters review various taxing jurisdictions time company anticipate changes gross unrecognized tax benefits balance within next 12 months result statutes limitations completion tax authorities examinations company accrues interest related unrecognized tax benefits interest expense recognizes penalties operating expense years ended march 31 2014 2013 2012 company recognized approximately 580 5500 1300 respectively substantially interest march 31 2014 2013 2012 legg mason approximately 7300 14000 10000 respectively accrued interest penalties tax contingencies consolidated balance sheets legg masons prior year tax returns subject examination internal revenue service inland revenue service brazilian tax authorities various countries states following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal 2009 us federal fiscal 2012 united kingdom uk fiscal 2005 brazil fiscal 2009 state california fiscal 2008 state new york fiscal 2010 states connecticut maryland massachusetts company anticipate making significant cash payments settlement audits excess amounts reserved year ended march 31 2014 legg mason revised plan completed repatriation approximately 301000 foreign accumulated earnings order make cash available us general corporate purposes due certain tax planning strategies legg mason anticipates generate benefit approximately 12000 respect repatriations adjusted tax reserve accordingly repatriation accumulated prior period foreign earnings currently planned however circumstances change legg mason provide pay applicable additional us taxes connection repatriation funds practical time determine income tax liability would result repatriation accumulated foreign earnings except noted legg mason intends permanently reinvest cumulative undistributed earnings foreign subsidiaries foreign operations accordingly us federal income taxes provided undistributed earnings extent permanently reinvested legg masons foreign operations practical time determine income tax liability would result upon repatriation earnings 8 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2026 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2014 minimum annual aggregate rentals operating leases service agreements follows minimum rental commitments shown reduced 172526 minimum sublease rentals received future noncancelable subleases approximately 40 due one counterparty lease reserve liability included table space subleased march 31 2014 36170 subtenant defaults sublease legg mason may incur operating charges adjust existing lease reserve liability reflect expected future sublease rentals reduced amounts result current commercial real estate market minimum rental commitments include 784221 real estate equipment leases 74582 service maintenance agreements minimum rental commitments shown include 30200 commitments related space vacated subleases pursued related lease reserve liability included table 19330 march 31 2014 remains subject adjustment based circumstances real estate markets may require change assumptions actual terms sublease ultimately secured lease reserve liability takes consideration various assumptions including expected amount time take secure sublease agreement prevailing rental rates applicable real estate markets table presents summary changes lease reserve liability subleased space vacated space subleases pursued 1 included occupancy expense consolidated statements income loss table includes activity related business streamlining initiative see note 15 additional information following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes period provided landlord free rent period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2014 legg mason commitments invest approximately 34536 limited partnerships make private investments commitments expected funded required end respective investment periods ranging fiscal 2021 connection acquisition fauchier discussed note 2 contingent consideration approximately 25000 approximately 33000 using exchange rate british pound us dollar march 31 2014 may due second fourth anniversaries closing respectively dependent upon achieving certain levels revenue net distribution costs subject potential catchup adjustment fourth anniversary payment second anniversary payment shortfall fair value contingent consideration liability 29553 march 31 2014 increase 7653 march 31 2013 5000 attributable revised estimates amounts payable 2653 attributable changes exchange rate interest amortization legg mason executed currency forwards economically hedge risk movements exchange rate us dollar british pound estimated contingent liability payment amounts denominated see note 14 additional information regarding derivatives hedging connection acquisition qs investors discussed note 2 legg mason pay initial purchase price 11000 contingent consideration 10000 20000 may due second fourth anniversaries closing respectively dependent achievement certain net revenue targets subject potential catchup adjustment fourth anniversary payment second anniversary payment shortfall normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications considered financial guarantees relevant accounting guidance legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial normal course business legg mason also received subpoenas currently involved governmental industry selfregulatory agency inquiries investigations time proceedings involving asset management activities accordance guidance accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings probable loss incurred reasonable estimate loss made transaction citigroup december 2005 legg mason transferred citigroup subsidiaries constituted private clientcapital markets pccm businesses thus transferring entities would primary liability customer complaint litigation regulatory liabilities proceedings arising businesses however part transaction legg mason agreed indemnify citigroup customer complaint litigation regulatory liabilities legg masons former pccm businesses result preclosing events ultimate resolution matters cannot determined based current information consultation legal counsel management believes accrual range reasonably possible losses march 31 2014 material similarly although citigroup transferred legg mason entities would primarily liable customer complaint litigation regulatory liabilities proceedings cam business citigroup agreed indemnify legg mason customer complaint litigation regulatory liabilities cam business result preclosing events one legg masons asset management subsidiaries named defendant lawsuit filed former institutional client late august 2011 legg mason settled matter fourth quarter fiscal 2014 settlement substantially covered insurance material effect legg masons financial position results operations cash flows additionally two matters subject regulatory investigations involving one legg masons asset management subsidiaries regarding compliance applicable legal requirements respect investments made certain client accounts matters settled regulators settlements substantially covered insurance material effect legg masons financial position results operations cash flows legg mason cannot estimate reasonably possible loss range loss associated matters litigation proceedings including described customer complaints legal actions inquiries proceedings investigations inability provide reasonably possible amount range losses uncertainty ultimate outcome matter liability damage issues developed point legg mason conclude reasonable possibility loss meaningful amount range possible losses numerous aspects customer complaints legal actions inquiries proceedings investigations prevent legg mason estimating related amount range reasonably possible losses aspects include among things nature matters significant relevant facts known uncertain dispute damages sought specified uncertain unsupportable unexplained addition legal actions discovery may yet started may complete may conclusive meaningful settlement discussions may occurred regulatory matters investigations may run course without clear indication wrongdoing fault conclusion managements opinion adequate accrual made march 31 2014 provide probable losses may arise matters company could reasonably estimate amount legg masons financial condition results operations cash flows could materially affected period matter ultimately resolved addition ultimate costs litigationrelated charges vary significantly periodtoperiod depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement reductions compensation revenue share arrangements march 31 2014 2013 legg masons liability losses contingencies 500 20300 respectively fiscal 2014 2013 2012 legg mason charges relating litigation proceedings approximately 200 5200 1100 respectively net recoveries 19300 15200 fiscal 2014 2013 respectively 9 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees plans legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation match employee 401k contributions matches range 50 100 employee 401k contributions maximum lesser 6 employee compensation specified amount 15 per year corporate profit sharing matching contributions together contributions made subsidiary plans totaled 29355 25868 22336 fiscal 2014 2013 2012 respectively addition employees make voluntary contributions certain plans 10 capital stock march 31 2014 authorized numbers common preferred shares 500000 4000 respectively march 31 2014 2013 10333 11948 shares common stock respectively reserved issuance legg masons equity plans may 2012 part capital plan legg masons board directors authorized 1000000 additional purchases legg mason common stock well completion remaining 155000 previously authorized share repurchase program expiration date attached authorization fiscal 2014 legg mason purchased retired 9677 shares common stock 359996 open market purchases fiscal 2013 legg mason purchased retired 16199 shares common stock 425475 open market purchases completed repurchase common stock previous authorization began purchases new authorization remaining balance authorized stock buyback approximately 370000 may 2008 legg mason issued 1150000 equity units unit consisting 5 interest one thousand dollar principal amount senior notes due june 30 2021 purchase contract committing holder purchase shares legg masons common stock june 30 2011 fiscal 2012 legg mason issued 1830 shares legg mason common stock upon exercise purchase contracts remaining equity units senior notes equity units retired remarketing discussed note 6 warrants issued connection repurchase notes could result issuance maximum 14205 shares legg mason common stock subject adjustment certain conditions met changes common stock three years ended march 31 2014 2013 2012 respectively follows dividends declared per share 052 044 032 fiscal 2014 2013 2012 respectively dividends declared paid march 31 2014 2013 2012 14945 14185 11493 respectively included current liabilities 11 stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units management equity plans deferred compensation payable stock effective july 26 2011 number shares authorized issued legg masons active equity incentive stock plan increased 6500 41500 shares available issuance active equity incentive stock plan march 31 2014 9740 options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments four five years expire within eight ten years date grant stock options compensation expense relating stock options years ended march 31 2014 2013 2012 13530 10979 14076 respectively related income tax benefit years ended march 31 2014 2013 2012 5244 4293 5539 respectively stock option transactions legg masons equity incentive plans years ended march 31 2014 2013 2012 summarized total intrinsic value options exercised years ended march 31 2014 2013 2012 6064 168 398 respectively march 31 2014 aggregate intrinsic value options outstanding 72724 following information summarizes legg masons stock options outstanding march 31 2014 march 31 2014 2013 2012 options exercisable 2531 3254 3334 shares respectively weightedaverage exercise prices 5404 6907 7360 respectively stock options exercisable march 31 2014 weightedaverage remaining contractual life 30 years march 31 2014 aggregate intrinsic value options exercisable 31180 following information summarizes legg masons stock options exercisable march 31 2014 following information summarizes unvested stock options legg masons equity incentive plans year ended march 31 2014 unamortized compensation cost related unvested options march 31 2014 16905 expected recognized weightedaverage period 15 years cash received exercises stock options legg masons equity incentive plans 23818 660 2851 years ended march 31 2014 2013 2012 respectively tax benefit expected realized tax deductions option exercises totaled 1815 45 47 years ended march 31 2014 2013 2012 respectively weightedaverage fair value servicebased stock option grants years ended march 31 2014 2013 2012 excluding granted chief executive officer may 2013 discussed using blackscholes option pricing model 1213 947 1313 per share respectively following weightedaverage assumptions used model grants fiscal 2014 2013 2012 legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values may 2013 legg mason awarded options purchase 500 shares legg mason inc common stock exercise price 3146 equal current market value legg masons common stock chief executive officer included outstanding options table award grant date fair value 5525 subject vesting requirements 25 vests twoyear service period 25 vests twoyear service period subject legg masons common stock price equaling exceeding 3646 20 consecutive trading days 25 subject legg masons common stock price equaling exceeding 4146 20 consecutive trading days 25 subject legg masons common stock price equaling exceeding 4646 20 consecutive trading days well requirement certain shares received upon exercise retained twoyear period january 2014 25 award vested legg mason stock price met exceeded 4146 20 consecutive trading days weightedaverage fair value per share awards 1105 estimated grant date using grant price 3146 monte carlo option pricing model following assumptions restricted stock restricted stock restricted stock unit transactions years ended march 31 2014 2013 2012 summarized restricted stock restricted stock unit awards noncash transactions fiscal 2014 2013 2012 legg mason recognized 48263 46351 32826 respectively compensation expense related tax benefits 18575 17697 12705 respectively restricted stock restricted stock unit awards unamortized compensation cost related unvested restricted stock restricted stock unit awards 3334 shares yet recognized march 31 2014 63479 expected recognized weightedaverage period 17 years connection change legg masons chief executive officer september 2012 325 shares restricted stock granted certain executives key employees aggregate value 8400 march 2013 vesting 85 shares accelerated remaining shares vested march 31 2014 compensation expense year ended march 31 2013 includes approximately 6400 accelerated stockbased net compensation costs associated departure legg mason executive officers fiscal 2013 1400 relates accelerated vesting shares march 2013 january 28 2008 legg mason compensation committee approved grants senior officers 120 marketbased performance shares fiscal 2013 remaining 100 shares award forfeited resulting outstanding balance march 31 2013 legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 4500 total share limit plan purchases made payroll deductions effective january 2014 legg mason provides 15 contribution towards purchases charged earnings prior january 2014 legg masons contribution 10 fiscal years ended march 31 2014 2013 2012 approximately 85 107 shares respectively purchased open market behalf participating employees fiscal 2014 2013 2012 legg mason recognized 315 238 267 respectively compensation expense related stock purchase plan june 2013 legg mason implemented management equity plan granted units key employees permal entitle participate 15 future growth permal enterprise value subject appropriate discounts subsequent grant date march 31 2014 similar management equity plan implemented legg mason grant certain key employees clearbridge independent valuations determined aggregate cost awards approximately 9000 16000 permal clearbridge respectively recognized compensation expense consolidated statements income loss related vesting periods december 2017 march 2019 respectively arrangements provide onehalf respective cost absorbed affiliates incentive pool compensation expense related permal management equity plan 2270 year ended march 31 2014 legg mason also equity plan nonemployee directors current equity plan directors may elect receive shares stock restricted stock units prior july 19 2007 amendment plan directors could also elect receive stock options granted old plan immediately exercisable price equal market value shares date grant term ten years fiscal 2014 2013 2012 legg mason recognized expense 1950 1250 1375 respectively awards plan shares options restricted stock units issuable equity plan limited 625 shares aggregate 360 shares issued plan march 31 2014 march 31 2014 2013 2012 nonemployee directors held 32 112 184 stock options respectively included outstanding options table march 31 2014 2013 2012 nonemployee directors held 64 91 74 restricted stock units respectively vest grant date therefore included unvested shares restricted stock restricted stock units table year ended march 31 2014 39 restricted stock units distributed nonemployee directors exercise stock options years ended march 31 2013 2012 nonemployee directors exercise stock options restricted stock units distributed years ended march 31 2014 2013 2012 nonemployee directors granted 12 17 12 restricted stock units 47 35 31 shares common stock respectively year ended march 31 2014 26 stock options canceled forfeited current equity plan nonemployee directors years ended march 31 2013 2012 stock options canceled forfeited current equity plan nonemployee directors years ended march 31 2014 2013 2012 54 72 36 stock options canceled forfeited respectively related prior equity plan nonemployee directors discontinued july 2005 fiscal 2012 legg mason established longterm incentive plan ltip equity incentive plan provided additional element compensation executives based performance determined achievement predefined amount legg masons cumulative adjusted earnings per share respective performance periods ltip current executive officers granted cash value performance units quarters ended june 2011 september 2012 target amounts 1850 period awards granted ltip vest may settled cash andor shares legg mason common stock discretion legg mason estimated payout amounts awards expensed future vesting periods based probability assessment expected outcome ltip provisions june 2011 grant performance period ended march 31 2014 cash andor shares due september 2012 grant performance period ends march 31 2015 grants intended deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends 327 additional shares reserved future issuance plan fiscal 2014 2013 2012 legg mason recognized 160 165 191 respectively compensation expense related plan fiscal 2014 2013 2012 legg mason issued 51 71 68 shares respectively plan weightedaverage fair value per share grant date 3190 2307 2705 respectively undistributed shares issued plan held rabbi trust assets rabbi trust consolidated employer value employers stock held rabbi trust classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plan presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2014 2013 2012 672 726 690 respectively 12 earnings per share basic eps calculated dividing net income loss attributable legg mason inc weightedaverage number shares outstanding calculation weightedaverage shares includes common shares unvested restricted shares deemed participating securities diluted eps similar basic eps adjusts effect potentially issuable common shares except inclusion antidilutive periods net loss attributable legg mason inc reported inclusion potentially issuable common shares decrease net loss per share since would antidilutive shares excluded calculation may 2012 part capital plan legg masons board directors authorized 1000000 additional purchases legg mason common stock well completion remaining 155000 previously authorized share repurchase program capital plan authorizes using 65 cash generated future operations purchase shares legg mason common stock years ended march 31 2014 2013 2012 legg mason purchased retired 9677 16199 13597 shares common stock respectively 359996 425475 400266 open market purchases fiscal 2013 purchases completed repurchase common stock previous authorization included approximately 270000 purchases new authorization repurchases reduced weightedaverage shares outstanding 4908 8449 9716 shares years ended march 31 2014 2013 2012 respectively par value shares repurchased charged common stock excess purchase price par first charged additional paidin capital remaining balance charged retained earnings june 2011 legg mason issued 1830 shares common stock upon exercise purchase contracts remaining outstanding equity units shares 1380 shares included weightedaverage shares outstanding year ended march 31 2012 following table presents computations basic diluted eps 1 diluted shares basic shares periods net loss diluted eps calculations years ended march 31 2014 2013 exclude potential common shares issuable 14205 warrants issued connection repurchase 25 convertible senior notes may 2012 market price legg mason common stock exceed exercise price therefore warrants would antidilutive diluted eps calculations years ended march 31 2013 2012 exclude potential common shares issuable 25 convertible senior notes market price legg mason common stock exceeded price conversion would dilutive using treasury stock method also march 31 2012 warrants issued connection convertible note hedge transactions associated issuance 25 convertible senior notes excluded calculation diluted eps effect would antidilutive options purchase 2620 5239 shares years ended march 31 2014 2012 respectively included computation diluted eps presumed proceeds exercising options including related income tax benefits exceed average price common shares period therefore options deemed antidilutive marketbased options excluded potential dilution designated market condition met diluted eps calculation year ended march 31 2013 excludes 5730 potential common shares antidilutive due net loss fiscal year 13 accumulated comprehensive income accumulated comprehensive income includes cumulative foreign currency translation adjustments net tax gains losses investment securities change accumulated translation adjustments fiscal 2014 2013 primarily resulted impact changes brazilian real australian dollar japanese yen british pound relation us dollar net assets legg masons subsidiaries brazil australia japan uk real australian dollar yen pound functional currencies respectively summary legg masons accumulated comprehensive income march 31 2014 2013 follows significant amounts reclassified accumulated comprehensive income consolidated statements income loss years ended march 31 2014 2013 2012 14 derivatives hedging disclosures detail legg mason’s derivatives hedging activities excluding derivatives hedging activities civs see note 17 variable interest entities consolidation investment vehicles information related derivatives hedging civs legg mason uses currency forwards economically hedge risk movements exchange rates primarily us dollar british pound japanese yen australian dollar euro singapore dollar chinese yuan indonesian rupiah malaysian ringgit philippine peso thai baht south korean consolidated balance sheets legg mason nets fair value certain foreign currency forwards futures contracts executed counterparty legg mason legal right intent settle contracts net basis resulting net assets 1249 1158 march 31 2014 2013 respectively legg mason designated derivatives hedging instruments accounting purposes periods ended march 31 2014 2013 legg mason also uses market hedges certain seed capital investments entering futures contracts sell index funds benchmark hedged seed capital investments open futures contracts required cash collateral 12985 7131 march 31 2014 2013 respectively following table presents fair values march 31 2014 2013 derivative instruments designated accounting purposes hedging instruments classified assets liabilities following table presents gains losses recognized derivative instruments years ended march 31 2014 2013 2012 described currency futures forward contracts included economic hedges interest rate market risk certain operating investing activities legg mason gains losses derivatives substantially offset gains losses hedged items 15 restructuring may 2010 legg mason announced plan streamline business model drive increased profitability growth primarily involved transitioning certain shared services investment affiliates closer actual client relationships plan involved headcount reductions operations technology administrative areas partially offset headcount increases affiliates enabled legg mason eliminate portion corporate office space primarily dedicated operations technology employees initiative completed march 31 2012 total transitionrelated costs 127500 including noncash charges 30841 completion plan march 2012 total transitionrelated costs incurred 79686 related charges employee termination benefits retention incentives transition period recorded transitionrelated compensation consolidated statements income loss remainder represents costs including charges consolidating leased office space early contract terminations asset disposals professional fees recorded appropriate operating expense classifications charges transitionrelated costs 73066 54434 years ended march 31 2012 2011 respectively primarily represent costs lease loss accruals fixed asset accelerated depreciation related space permanently abandoned well costs severance retention incentives charges transitionrelated costs associated initiative years ended march 31 2014 2013 table presents summary changes transitionrelated liability march 31 2011 march 31 2014 1 amounts related lease reserve liability also included note 8 2 includes lease loss accruals 17983 space permanently abandoned see note 2 information regarding restructuring transition costs associated planned integration time two existing affiliates batterymarch lmgaa conjunction acquisition qs investors 16 business segment information legg mason global asset management company provides investment management related services wide array clients company operates one reportable business segment global asset management global asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue global asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks revenues geographic location primarily based geographic location advisor domicile fund families managed legg mason table reflects revenues longlived assets geographic region march 31 17 variable interest entities consolidation investment vehicles discussed notes 1 3 accordance financial accounting standards consolidation legg mason consolidates separately identifies certain sponsored investment vehicles civs significant clo legg mason concluded primary beneficiary one three clos variable interest march 31 2014 2013 2012 balances related clo consolidated reported civ companys consolidated financial statements addition legg mason concluded primary beneficiary one sponsored investment fund vie consolidated designated civ march 31 2014 2013 2012 despite significant third party investments product march 31 2014 legg mason also concluded primary beneficiary 16 employeeowned funds sponsors consolidated reported civs finally legg mason held longerterm controlling financial interest one sponsored investment fund vre thirdparty investors consolidated included civ march 31 2014 2013 2012 legg masons investment civs march 31 2014 2013 39434 39056 respectively represents maximum risk loss excluding uncollected advisory fees assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds following tables reflect impact civs consolidated balance sheets march 31 2014 2013 respectively consolidated statements income loss years ended march 31 2014 2013 2012 respectively consolidating balance sheets consolidating statements income loss nonoperating income expense includes interest income interest expense net gains losses investments longterm debt determined accrual basis consolidation civs impact net income loss attributable legg mason inc fair value financial assets liabilities civs determined using following categories inputs march 31 2014 except clo debt substantially financial instruments valuation methods rely observable market inputs significant input utilize nav practical expedient measurement uncertainty little relevance april 2014 clo completing winddown subsequent distribution cash settle liabilities march 31 2014 carrying value clo debt approximated amount paid investors appreciable measurement uncertainty following table provides summary qualitative information relating valuation clo debt march 31 2013 changes assets liabilities civs measured fair value using significant unobservable inputs level 3 years ended march 31 2014 2013 presented table realized unrealized gains losses recorded level 3 assets liabilities civs included nonoperating income expense civs consolidated statements income loss total unrealized losses level 3 investments liabilities civs relating assets liabilities still held reporting date 2284 11842 years ended march 31 2014 2013 respectively transfers level 1 level 2 either years ended march 31 2014 2013 navs used practical expedient civs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 2014 march 31 2013 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 10 daily redemption 6 monthly redemption 2 quarterly redemption 82 subject three five year lockup side pocket provisions 2 11 daily redemption 8 monthly redemption 2 quarterly redemption 79 subject three five year lockup side pocket provisions 3 liquidations expected remaining term current plans sell investments held march 31 2014 legg mason elected fair value option certain eligible assets liabilities including corporate loans debt consolidated clo management believes use fair value option mitigates impact certain timing differences better matches changes fair value assets liabilities related clo following table presents fair value unpaid principal balance clo loans bonds debt carried fair value fair value option march 31 2014 march 31 2013 years ended march 31 2014 2013 total net losses 5914 8455 respectively recognized nonoperating income loss civs consolidated statements income loss related assets liabilities fair value option elected clo loans clo debt measured fair value floating interest rates therefore substantially estimated gains losses included earnings years ended march 31 2014 2013 attributable instrument specific credit risk clo debt bears interest variable rates based libor plus predefined spread ranges 25 basis points 400 basis points outstanding debt matures july 15 2018 clo commenced winddown july 2012 proceeds securities cannot reinvested applied reduce debt outstanding quarter subsequent receipt required payments noted clo completing winddown april 2014 total derivative liabilities civs 1888 2930 march 31 2014 2013 respectively recorded liabilities civs gains losses 1311 1537 respectively fiscal year ended march 31 2014 942 1223 respectively fiscal year ended march 31 2013 related derivative liabilities civs included nonoperating income loss civs risk legg mason relation derivative assets liabilities civs excess investment funds march 31 2014 2013 vies legg mason holds variable interest sponsor holds variable interest primary beneficiary legg masons carrying value maximum risk loss follows 1 includes 23404 33918 related investments proprietary funds products march 31 2014 2013 respectively 2 includes equity investments company made required make earned uncollected management fees companys total aum unconsolidated vies 16032764 17090267 march 31 2014 2013 respectively assets vies primarily comprised cash equivalents investment securities liabilities primarily comprised debt various expense accruals vies consolidated either 1 legg mason power direct significant economic activities entity rightsobligations associated benefitslosses could significant entity 2 legg mason absorb majority vies expected losses receive majority vies expected residual gains quarterly financial data dollars thousands except per share amounts unless otherwise noted unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results may 20 2014 closing price legg masons common stock 4811 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2015 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework 2013 based assessment management concluded march 31 2015 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2015 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2015 joseph sullivan chairman chief executive officer peter h nachtwey senior executive vice president chief financial officer report independent registered public accounting firm board directors stockholders legg mason inc opinion accompanying consolidated balance sheets related consolidated statements income loss comprehensive income loss changes stockholders’ equity cash flows present fairly material respects financial position legg mason inc subsidiaries “the company” march 31 2015 march 31 2014 results operations cash flows three years period ended march 31 2015 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 22 2015 consolidated balance sheets dollars thousands see notes consolidated financial statements consolidated statements income loss dollars thousands except per share amounts see notes consolidated financial statements consolidated statements comprehensive income loss dollars thousands see notes consolidated financial statements consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands consolidated statements cash flows continued dollars thousands see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason company principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see consolidation note 16 discussion vies material intercompany balances transactions eliminated certain amounts prior year financial statements reclassified conform current year presentation including contingent consideration liabilities redeemable noncontrolling interests affiliate management equity plans references fiscal 2015 2014 2013 refer legg masons fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america us applicable rules regulations securities exchange commission require management make assumptions estimates affect amounts reported consolidated financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes consolidation management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements consolidation normal course business legg mason sponsors manages various types investment vehicles services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinated management fees incentive fees legg masons exposure risk entities generally limited equity investment made required make earned uncollected management fees legg mason sell transfer assets investment vehicles accordance financial accounting standards legg mason consolidates certain sponsored investment vehicles designated consolidated investment vehicles “civs” consolidation investment vehicles impact net income loss attributable legg mason inc material impact legg masons consolidated operating results change value civs recorded nonoperating income expense reflected net income loss net amounts allocated noncontrolling interests certain investment vehicles legg mason sponsors manager considered vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights investment vehicles considered vres consolidated legg mason controlling financial interest investment vehicle absent substantive investor rights replace manager entity kickout rights legg mason may also fund initial cash investment certain vre investment vehicles generate investment performance track record order attract thirdparty investors product legg masons initial investment new product typically represents 100 ownership product discussed “seed capital investments” consolidated long legg mason maintains controlling financial interest product designated civs legg mason unless investment longerterm legg mason held longerterm controlling financial interest one sponsored investment fund vre thirdparty investors consolidated included civ march 31 2014 2013 fiscal 2015 legg mason redeemed significant portion investment fund result longer controlling financial interest fund therefore fund included civ march 31 2015 vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity potential controlling financial interest investment company vies sponsored investment fund vies deemed investment companies including money market funds legg mason determines primary beneficiary vie absorbs majority vies expected losses receives majority vies expected residual returns legg masons determination expected residual returns excludes gross fees paid decision maker certain criteria relating fees met determining whether primary beneficiary investment company vie legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party including employees ownership guarantees implied relationships legg mason concluded primary beneficiary one sponsored investment fund vie consolidated designated civ march 31 2015 2014 2013 despite significant third party investments product march 31 2015 2014 legg mason also concluded primary beneficiary 17 employeeowned funds sponsors consolidated reported civs vies sponsored investment funds meet investment company criteria legg mason determines fund basis primary beneficiary vie power direct activities vie significantly impact entitys economic performance obligation absorb losses right receive benefits potentially could significant vie march 31 2015 legg mason variable interest three collateralized loan obligations clos legg mason concluded primary beneficiary clos consolidated holds equity interest investment vehicles level fees estimated pay legg mason insignificant march 31 2014 2013 legg mason variable interest two clos also consolidated either periods march 31 2014 2013 legg mason concluded primary beneficiary another clo held variable interest although held equity interest investment vehicle power control significant variable interest level expected subordinated fees march 31 2014 2013 balances related clo consolidated reported civ companys consolidated financial statements three months ended june 30 2014 clo substantially liquidated therefore consolidated legg mason subsequent june 30 2014 legg masons investment civs march 31 2015 2014 15553 39434 respectively represents maximum risk loss excluding uncollected advisory fees material assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds see note 16 additional information regarding vies vres cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash restricted cash represents longterm escrow deposits cash collateral required market hedge arrangements cash available legg mason general corporate use financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except legg masons longterm debt designated hedging transaction discussed consolidation seed capital investments proprietary fund products initially consolidated individual securities within portfolio accounted trading investments legg mason consolidates products long holds controlling financial interest product upon deconsolidation typically occurs several years legg mason accounts investments proprietary fund products equity method investments described ownership 20 50 otherwise ability significantly influence financial operating policies investee partnerships llcs thirdparty investors may less ability influence operations equity method accounting considered legg masons ownership greater 3 changes fair value proprietary fund products classified trading equity method investments recognized nonoperating income expense consolidated statements income loss legg mason generally redeems investment proprietary fund products related product establishes sufficient track record thirdparty investments related product sufficient sustain strategy decision made longer pursue strategy length time legg mason holds majority interest product varies based number factors market demand market conditions investment performance see notes 3 16 additional information regarding legg masons seed capital investments determination whether investments proprietary fund products represent vies respectively equity investments legg mason control investee primary beneficiary vie exert significant influence financial operating policies investee legg mason follows equity method accounting evaluation whether legg mason exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence legg mason may governing board investee legal rights investors entity pursuant funds operating documents relationship legg mason investors entity substantially legg masons equity method investees investment companies record underlying investments fair value therefore equity method accounting legg masons share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee legg masons share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense significant portion earnings losses attributable legg masons equity method investments offsetting compensation expense adjustments revenue sharing agreements deferred compensation arrangements therefore fluctuations market value investments material impact net income loss attributable legg mason inc legg mason also holds debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders equity noncontrolling interests comprehensive income loss net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium recorded interest method included interest income certain investment securities including held civs classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings equity fixed income securities classified trading availableforsale valued using closing market prices listed instruments broker price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices legg mason evaluates nontrading investment securities otherthantemporary impairment may exist fair value investment security adjusted cost extended period time otherthantemporary impairment determined exist amount impairment relates credit losses recognized charge income march 31 2015 2014 2013 amount temporary unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations may readily available management estimates value securities using variety methods resources including current available financial information investment industry addition financial instruments described derivative instruments clo loans bonds debt described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair values longterm debt march 31 2015 2014 aggregated 1166697 1135103 respectively except longterm debt designated hedging transaction fair values estimated using publicly quoted market prices discounted cash flow analyses appropriate classified level 2 fair value hierarchy described 27 senior notes due 2019 designated hedging transaction valued sum amortized cost debt fair value related interest rate contract designated hedging transaction approximates debt fair value classified level 2 measurement discussed derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason used foreign exchange forwards interest rate swaps hedge risk movement exchange rates interest rates financial assets liabilities limited basis also legg mason used futures contracts index funds hedge market risk certain seed capital investments exception reverse treasury rate lock contract interest rate swap discussed note 6 legg mason designated financial instruments hedge accounting defined accounting literature periods presented gains losses derivative instruments designated hedge accounting included operating income expense nonoperating income expense consolidated statements income loss depending strategy gains losses derivative instruments civs recorded nonoperating income loss consolidated investment vehicles net consolidated statements income loss see note 14 additional information regarding derivatives hedging fair value measurements accounting guidance fair value measurements defines fair value establishes framework measuring fair value fair value defined exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date accounting guidance fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance objective fair value accounting measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically requires use judgment ascertain formerly active market become inactive determining fair values markets become inactive accounting guidance also relates otherthantemporary impairments intended bring greater consistency timing impairment recognition also intended provide greater clarity investors credit noncredit components impaired debt securities expected sold guidance also requires timely disclosures regarding expected cash flows credit losses aging securities unrealized losses fair value accounting guidance also establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value except debt designated hedging transaction classified disclosed one following categories level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets certain derivative instruments level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category may include fixed income securities certain proprietary fund products longterm debt level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds prior june 2014 clo debt civ category may also include certain proprietary fund products redemption restrictions valuation asset liability may involve inputs one level hierarchy level fair value hierarchy fair value measurement falls entirety determined based lowest level input significant fair value measurement entirety certain proprietary fund products investments held civs valued net asset value nav determined applicable fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available including certain investments held civs prior june 2014 management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 fair value clo debt existed june 2014 valued using discounted cash flow methodology inputs used determine expected cash flows included assumptions forecasted default recovery rates market participant would use determining fair value clos underlying collateral assets given significance unobservable inputs fair value measurement clo debt valuation classified level 3 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient legg mason relies nav certain investments classified level 2 level 3 fair value navs provided investees derived fair values underlying investments reporting date transfers categories measured beginning period see note 3 additional information regarding fair value measurements fair value option march 31 2014 legg mason elected fair value option certain eligible assets liabilities including corporate loans debt consolidated clo see consolidation note 16 management believed use fair value option mitigated impact certain timing differences better matched changes fair value assets liabilities related clo unrealized gains losses assets liabilities fair value option elected reported earnings decision elect fair value option determined instrument basis must applied entire instrument irrevocable elected liabilities measured fair value pursuant fair value option included debt current liabilities consolidated investment vehicles consolidated balance sheet march 31 2014 clo substantially liquidated deconsolidated june 2014 subsequently legg mason elected fair value option financial assets liabilities appropriated retained earnings upon election fair value option eligible assets liabilities clo described legg mason recorded cumulative effect adjustment appropriated retained earnings consolidated investment vehicle consolidated balance sheets equal difference fair values clos assets liabilities difference recorded appropriated retained earnings consolidated investment vehicle investors clo legg mason shareholders would ultimately realize benefits losses associated clo changes fair values clo assets liabilities recorded net income loss attributable noncontrolling interests consolidated statements income loss appropriated retained earnings consolidated investment vehicle consolidated balance sheets march 31 2014 clo final stage liquidation fair value assets liabilities substantially equal appropriated retained earnings june 30 2014 clo deconsolidated fixed assets fixed assets primarily consist equipment software leasehold improvements equipment consists primarily communications technology hardware furniture fixtures capitalized software includes purchased software internally developed software cost software used service contract legg mason control software expensed term contract fixed assets reported cost net accumulated depreciation amortization depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements amortized depreciated initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill legg masons identifiable intangible assets consist principally asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary mutual funds fundsofhedge funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities indefinitelife intangible assets goodwill amortized financial statement purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred company perform quantitative tests include critical reviews significant factors assumptions determine intangible assets goodwill impaired legg mason considers factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected consolidated financial statements current fair value recognized expense period impairment determined triggering event occurred company performs quantitative tests annually december 31 indefinitelife intangible assets goodwill unless company qualitatively conclude likely respective fair values exceed related carrying values fair values intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined market participants perspective based projected discounted cash flows take consideration estimates future fees profit margins growth rates taxes discount rates proprietary fund contracts managed operated single unit meet criteria may aggregated impairment testing goodwill evaluated reporting unit level considered impairment carrying value reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit legg mason uses valuation techniques principally based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition goodwill deemed recoverable reporting unit level also operating segment level legg mason defines global asset management segment results fact chief operating decision maker legg masons chief executive officer regularly receives discrete financial information consolidated global asset management business level regularly receive discrete financial information operating results lower level asset management affiliate level allocations goodwill management restructures acquisitions dispositions based relative fair values respective businesses restructured acquired divested see note 5 additional information regarding intangible assets goodwill note 15 additional business segment information contingent consideration liabilities connection business acquisitions legg mason may required pay additional future consideration based achievement certain designated financial metrics legg mason estimates fair value potential future obligations time business combination consummated records contingent consideration liability consolidated balance sheets legg mason accretes contingent consideration liabilities expected payment amounts related earnout terms obligations ultimately paid resulting interest expense consolidated statements income loss expected payment amounts subsequently change contingent consideration liabilities reduced increased current period resulting gain loss reflected within operating expense consolidated statements income loss see notes 2 8 additional information regarding contingent consideration liabilities translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income loss gains losses resulting foreign currency transactions included net income loss investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients fees primarily based predetermined percentages market value assets management aum recognized period services performed may billed advance period earned based aum beginning billing period accordance related advisory contracts revenue associated advance billings deferred included current liabilities consolidated balance sheets recognized period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks relative absolute basis depending product recognized end performance measurement period accordingly neither advanced billings performance fees subject reversal largest portion performance fees earned based 12month performance periods end differing quarters year portion also based quarterly performance periods legg mason responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds nondiscretionary advisory services distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution servicing expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc receipts recorded distribution service fee revenue received reduction unamortized balance deferred sales commissions corresponding expense management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2015 2014 2013 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 10422 8031 march 31 2015 2014 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforward benefits business combinations amortization intangible assets accrued compensation applicable accounting guidance tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information companys accounting policy classify interest related tax matters interest expense related penalties operating expense see note 7 additional information regarding income taxes loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated related insurance recoveries recorded separately underwriter confirmed coverage specific claim amount see note 8 additional information stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units management equity plans certain affiliates deferred compensation payable stock compensation plans legg mason issues equity awards directors officers key employees accordance applicable accounting guidance compensation expense includes costs nonvested sharebased awards classified equity grant date fair value amortized respective vesting periods straightline method legg mason determines fair value stock options affiliate management equity plan grants using blackscholes optionpricing model exception marketbased performance grants valued monte carlo optionpricing model see developments note 11 additional information regarding stockbased compensation conjunction december 2012 modification employment arrangements certain employees subsidiary permal group ltd permal legg mason completed implementation management equity plan quarter ended june 30 2013 march 31 2014 similar management equity plan implemented legg mason certain employees subsidiary clearbridge investments llc clearbridge plans better align interests affiliates management legg mason shareholders provide among things higher margins specified higher revenue levels affiliate management equity plans entitle certain key employees affiliate participate 15 future growth respective affiliates enterprise value subject appropriate discounts subsequent date grant current future grants plans vest 20 annually five years related grantdate fair values recognized compensation expense consolidated statements income vested plan units put legg mason settlement fair value beginning one year holder terminates employment legg mason also call plan units generally post employment settlement fair value changes control legg mason either affiliate impact vesting settlement provisions units however upon sale substantially affiliates assets vesting respective units would accelerate participants would receive fair value payment respect interests plan future grants additional plan units dilute participation existing outstanding units 15 future growth respective affiliates enterprise value subsequent related future grant date additional compensation expense would incurred future grants either plan entitle plan participants collectively aggregate 15 future growth respective affiliates enterprise value upon vesting grantdate fair value vested plan units reflected consolidated balance sheets redeemable noncontrolling interests adjustment additional paidin capital thereafter redeemable noncontrolling interests continue adjusted ultimate maximum estimated redemption value expected term retained earnings adjustments see note 11 additional information affiliate management equity plans earnings per share basic earnings per share attributable legg mason inc shareholders eps calculated dividing net income loss attributable legg mason inc adjusted earnings allocated participating securities weightedaverage number shares outstanding legg mason issues employees restricted stock deemed participating securities prior vesting unvested restricted shares entitle holder nonforfeitable dividend rights circumstance accounting guidance requires “twoclass method” eps calculations excludes earnings allocated distributed undistributed participating securities diluted eps similar basic eps adjusts effect potential common shares unless antidilutive periods net loss potential common shares potentially unvested restricted shares considered antidilutive see note 12 additional discussion eps restructuring costs discussed note 2 march 2014 legg mason entered definitive agreement acquire qs investors holdings llc qs investors legg mason integrating two existing affiliates batterymarch financial management inc batterymarch legg mason global asset allocation llc lmgaa qs investors time leverage best aspects subsidiary costs anticipated integration primarily relate employee termination benefits including severance retention incentives recorded compensation benefits consolidated statements income loss see note 2 additional information noncontrolling interests civs thirdparty investors related noncontrolling interests classified redeemable noncontrolling interests investors funds may request withdrawals time also included redeemable noncontrolling interests vested affiliate management equity plan interests nonredeemable noncontrolling interests march 31 2015 2014 net income attributable noncontrolling interests consolidated statement income loss year ended march 31 2013 also includes net income reclassified appropriated retained earnings consolidated investment vehicle consolidated balance sheet net income attributable noncontrolling interests years ended march 31 included following amounts total redeemable noncontrolling interests years ended march 31 included following amounts recent accounting developments may 2015 financial accounting standards board “fasb” updated guidance fair value measurement updated guidance removes requirement categorize within fair value hierarchy related sensitivity disclosures investments fair value measured using nav practical expedient amount investments would instead disclosed reconciling item fair value hierarchy table investment amounts reported balance sheet guidance effective legg mason fiscal 2017 unless adopted earlier legg mason evaluating impact adoption february 2015 fasb updated guidance consolidation requirements updated guidance eliminates presumption general partner consolidate limited partnership modifies evaluation whether limited partnerships similar legal entities vies vres additionally updated guidance affects conclusion certain fees paid decision makers longer variable interests certain related party relationships sponsored investment fund may longer require consolidation update also eliminates deferral accounting guidance requires separate evaluation investment company vies update effective legg mason fiscal 2017 unless adopted earlier legg mason evaluating timing impact adoption august 2014 fasb updated guidance measuring financial assets financial liabilities consolidated collateralized financing entities update requires entity electing apply guidance measure financial assets financial liabilities using fair value consolidated collateralized financing entity’s financial assets financial liabilities whichever observable update also requires certain disclosures entities apply provisions effective legg mason fiscal 2017 unless adopted earlier legg mason evaluating impact adoption may 2014 fasb updated guidance revenue recognition updated guidance improves comparability removes inconsistencies revenue recognition practices across entities industries jurisdictions capital markets update tentatively effective legg mason fiscal 2018 legg mason evaluating impact adoption 2 acquisitions disposition acquisitions martin currie october 1 2014 legg mason acquired outstanding equity interests martin currie holdings limited martin currie pursuant share purchase agreement dated july 24 2014 martin currie international equity specialist based united kingdom approximately 9500000 aum date acquisition required initial payment 202577 using foreign exchange rate october 1 2014 £125000 contract amount funded existing cash addition contingent consideration payments may due march 31 following first second third anniversaries closing aggregating approximately 483000 using foreign exchange rate march 31 2015 maximum £325000 contract amount inclusive payment certain potential pension obligations dependent achievement certain financial metrics specified share purchase agreement march 31 2016 2017 2018 contingent consideration liability established closing acquisition date fair value 75211 using foreign exchange rate october 1 2014 actual payments made may also include amounts certain potential pension obligations accounted separately march 31 2015 fair value contingent consideration liability 70114 decrease 5097 october 1 2014 attributable changes exchange rate net accretion included accumulated comprehensive income foreign currency translation adjustment contingent consideration liability included noncurrent contingent consideration consolidated balance sheet march 31 2015 contingent consideration liability recorded entity british pound functional currency related changes exchange rate impact net income summary acquisitiondate fair values assets acquired liabilities assumed certain measurement period adjustments follows fair value amortizable intangible asset management contracts asset amortized period 12 years goodwill principally attributable synergies expected arise martin currie acquired intangible assets goodwill deductible uk tax purposes management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows fair value contingent consideration measured using monte carlo simulation various unobservable market data inputs level 3 measurements simulation considered variables including aum growth performance fee levels relevant product performance projected aum performance fees earnout payments discounted appropriate summary various assumption values follows significant increases decreases projected aum performance fees would result significantly higher lower contingent consideration liability fair value company presented pro forma combined results operations acquisition results operations reported accompanying consolidated statements income loss would materially different financial results martin currie included legg masons consolidated financial results year ended march 31 2015 include revenues 32293 material impact net income attributable legg mason inc martin currie defined benefit pension plan martin currie sponsors retirement death benefits plan defined benefit pension plan assets held separate trusteeadministered fund plan assets comprised 58 equities level 1 42 bonds level 2 measured fair value assumptions used determine expected return plan assets targets 55 45 equitybond allocation reference 15year ftse uk gilt yield equities uk longdated bond yields bonds plan liabilities measured actuarial basis using projected unit method discounted rate equivalent current rate high quality bond local uk market currency march 31 2015 significant concentrations risk plan assets recent actuarial valuation performed may 31 2013 updated acquisition balance sheet dates accrual service credit plan ceased october 3 2014 resulting net benefit obligation comprised follows included march 31 2015 consolidated balance sheet noncurrent liabilities change benefit obligation period acquisition march 31 2015 summarized change plan assets period acquisition march 31 2015 summarized year ended march 31 2015 net periodic benefit gain 815 included compensation benefits expense consolidated statement income components net periodic benefit gain period acquisition march 31 2015 follows net actuarial losses 9595 included accumulated comprehensive income consolidated balance sheet march 31 2015 march 31 2015 plan expects make benefit payments next 10 fiscal years follows contingent consideration payments expected provide funding net plan benefit obligation provision requiring certain amounts paid plan contingent consideration payments plan based determination plan benefit obligation local technical provisions utilized plan trustees absent funding regulatory requirement accelerate funding martin currie expects contribute 2228 plan year ending march 31 2016 contingent consideration provisions share purchase agreement also require designated percentage earnout payments net pension contribution allocated fund incentive plan martin curries management payments employees arrangement made end earnout period estimated payment adjusted quarterly amortized earnout term qs investors llc effective may 31 2014 legg mason acquired outstanding equity interests qs investors customized solutions global quantitative equities provider time acquisition qs investors approximately 5000000 aum nearly 100000000 assets advisement initial purchase price cash payment 11000 funded existing cash addition contingent consideration 10000 20000 second fourth anniversary payments may due july 2016 july 2018 respectively dependent achievement certain net revenue targets subject potential catchup adjustment fourth anniversary payment second anniversary payment shortfall contingent consideration liability established closing acquisition date fair value 13370 represented present value contingent consideration expected paid contingent consideration liability included noncurrent contingent consideration consolidated balance sheet march 31 2015 accreted 13553 summary acquisitiondate fair values assets acquired liabilities assumed certain measurement period adjustments follows fair value amortizable intangible asset management contracts useful life 10 years acquisition purchase price allocated goodwill expected deductible us tax purposes period 15 years management estimated fair values amortizable intangible asset management contracts based upon discounted cash flow analysis contingent consideration expected paid discounted based upon probabilityweighted revenue projections using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows revenues discount rates summarized follows goodwill principally attributable synergies expected arise qs investors company presented pro forma combined results operations acquisition results operations reported accompanying consolidated statements income loss would materially different financial results qs investors included legg masons consolidated financial results year ended march 31 2015 include revenues 12340 material impact net income attributable legg mason inc time legg mason integrating two existing affiliates batterymarch lmgaa qs investors capture synergies leverage best capabilities entity connection integration total charges restructuring transition costs 38404 recognized march 31 2015 includes 35846 2558 years ended march 31 2015 2014 respectively primarily recorded compensation benefits consolidated statements income loss costs primarily comprised charges employee termination benefits including severance retention incentives well real estate related charges additional charges related integration expected material table presents summary changes restructuring transitionrelated liability december 31 2013 march 31 2015 cumulative charges incurred date 1 includes lease loss reserve 6760 space permanently abandoned 2 includes stockbased compensation expense accelerated fixed asset depreciation fauchier partners management limited march 13 2013 permal acquired outstanding share capital fauchier partners management limited fauchier european based manager fundsofhedge funds bnp paribas investment partners sa time acquisition fauchier managed assets approximately 5400000 initial purchase price cash payment 63433 funded existing cash resources march 31 2015 22276 using exchange rate march 31 2015 maximum £15000 payment amount due agreements governing acquisition second anniversary contingent consideration payment paid may 2015 addition contingent consideration approximately 30000 using exchange rate march 31 2015 £20000 maximum contract amount may due fourth anniversary closing dependent achieving certain levels revenue net distribution costs march 31 2015 fair value related contingent consideration liability 27117 22276 relates second anniversary payment included current contingent consideration consolidated balance sheet remainder included noncurrent contingent consideration consolidated balance sheet decrease 2436 march 31 2014 attributable changes exchange rate net accretion legg mason executed currency forwards economically hedge risk movements exchange rate us dollar british pound estimated contingent liability payment amounts denominated see note 14 additional information regarding derivatives hedging summary acquisitiondate fair values assets acquired liabilities assumed follows fair value amortizable intangible asset management contracts amortized period six years acquired intangible assets goodwill deductible uk tax purposes management estimated fair values indefinitelife intangible fund management contracts based upon discounted cash flow analyses contingent consideration expected paid based upon probabilityweighted revenue projections using unobservable market data inputs level 3 measurements typical acquisition portion business larger financial services firm related operations legg mason expected initial contraction acquired business significant assumptions used analyses acquisition included projected annual cash flows revenues discount rates summarized follows contingent consideration estimate revised march 31 2014 consider higher level fauchier performance fees march 31 2014 included various scenarios net revenue growth rates ranging 0 8 weightedaverage 2 discount rate 27 company presented pro forma combined results operations acquisition results operations reported accompanying consolidated statements income loss would materially different financial results fauchier included legg masons consolidated financial results year ended march 31 2014 included revenues 72088 material impact net income attributable legg mason inc disposition legg mason investment counsel trust november 7 2014 legg mason completed previously announced sale equity interests legg mason investment counsel trust company na lmic proceeds 47000 stifel financial corporations global wealth management segment sale material impact legg masons consolidated financial condition results operations 3 investments fair value assets liabilities disclosures include details legg masons financial assets financial liabilities measured fair value excluding financial assets financial liabilities civs see note 16 variable interest entities consolidation investment vehicles information related assets liabilities civs measured fair value legg mason investments debt equity securities generally classified trading described note 1 investments march 31 2015 2014 follows 1 includes investments private equity securities readily determinable fair values net unrealized realized gain loss investment securities classified trading 10545 22963 18260 fiscal 2015 2014 2013 respectively availableforsale investments held legg masons subsidiary lmic connection previously discussed sale lmic related assets liabilities reclassified assets held sale effective first quarter fiscal 2015 therefore march 31 2015 legg mason longer held availableforsale investments march 31 2014 availableforsale investments consisted mortgage backed securities us government agency securities equity securities gross unrealized gains losses investments classified availableforsale 203 451 respectively march 31 2014 availableforsale investments legg mason used specific identification method determine cost security sold amount reclassified accumulated comprehensive income earnings proceeds gross realized gains losses sales maturities availableforsale investments follows legg mason investments classified heldtomaturity march 31 2015 2014 fair values financial assets liabilities company determined using following categories inputs 1 cash equivalents include highly liquid investments original maturities 90 days less cash investments actively traded money market funds measured nav classified level 1 cash investments time deposits measured amortized cost approximates fair value short time purchase instrument expected realization classified level 2 primarily mutual funds minimal market risk company change value primarily offset adjustment compensation expense related deferred compensation liability 3 trading investments proprietary fund products trading investments consist approximately 63 37 equity debt securities respectively march 31 2015 approximately 53 47 equity debt securities respectively march 31 2014 4 substantially legg masons equity method investments investment companies record underlying investments fair value fair value measured using legg masons share investees underlying net income loss predominately representative fair value adjustments investments held equity method investee 5 includes investments equity method approximate fair value relating longterm incentive compensation plans 8728 14125 march 31 2015 march 31 2014 respectively proprietary fund products investments 7444 8497 march 31 2015 march 31 2014 respectively classified investment securities consolidated balance sheets 6 amounts included noncurrent assets consolidated balance sheets periods presented 7 see note 14 8 longterm debt amount sum amortized cost longterm debt fair value interest rate swap contract designated fair value hedge see note 6 9 see note 2 proprietary fund products include seed capital investments made legg mason fund new investment strategies products legg mason investments proprietary fund products totaled 392039 405918 march 31 2015 2014 respectively substantially comprised investments 52 funds 46 funds respectively individually greater 1000 minimal thirdparty investment together comprise 90 total seed capital investments period see notes 1 16 information regarding determination whether investments proprietary fund products represent vies consolidation substantially financial instruments valuation methods rely observable market inputs significant input utilize equity method cost method nav practical expedient discussed measurement uncertainty little relevance changes financial assets liabilities measured fair value using significant unobservable inputs level 3 years ended march 31 2015 2014 presented tables realized unrealized gains losses recorded level 3 investments primarily included nonoperating income expense consolidated statements income loss change unrealized gains losses level 3 investments liabilities still held reporting date 2439 5210 years ended march 31 2015 2014 respectively significant transfers level 1 level 2 years ended march 31 2015 2014 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 2015 march 31 2014 nature investments related liquidation restrictions factors may impact ultimate value realized nanot applicable 1 liquidation restrictions 9 monthly redemption 91 quarterly redemption march 31 2015 40 monthly redemption 60 quarterly redemption march 31 2014 2 liquidations expected remaining term 3 balance 21 remaining term less one year 79 remaining term 18 years 4 comprised 38 62 level 2 level 3 assets respectively march 31 2015 31 69 level 2 level 3 assets respectively march 31 2014 current plans sell investments held march 31 2015 4 fixed assets following table reflects components fixed assets depreciation amortization expense related fixed assets 52461 50531 73829 years ended march 31 2015 2014 2013 respectively includes accelerated depreciation amortization 1265 fiscal 2015 primarily arising integration time batterymarch qs investors 2542 2014 primarily arising various corporate initiatives 21020 fiscal 2013 arising initiative reduce space requirements 5 intangible assets goodwill indefinitelife intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair value assets exceeds book value intangible assets subject amortization considered impairment reporting period fair value less book value legg mason record impairment charge following table reflects components intangible assets 1 march 31 2015 fund management contracts trade names include 124002 6524 respectively related acquisition martin currie connection previously discussed sale lmic amortizable intangible asset management contracts cost 36864 accumulated amortization 30205 sold november 7 2014 also acquisitions martin currie qs investors included amortizable intangible asset management contracts 15234 7060 respectively acquisition martin currie also included indefinitelife trade name value 7130 see note 2 additional information acquisitions disposition legg mason completed annual impairment testing process goodwill indefinitelife intangible assets determined impairment value assets december 31 2014 result uncertainty regarding future market conditions economic results assessing fair value reporting unit intangible assets requires management exercise significant judgment current assessed fair value indefinitelife fundsofhedge funds contracts asset related permal fauchier acquisitions exceeds combined carrying values 13 market performance flows related aum levels decrease near term factors change cash flow projections deviate current projections reasonably possible assets could deemed impaired material amount current assessed fair value indefinitelife domestic mutual funds contracts asset related citigroup asset management cam acquisition exceeds carrying value 41 legg mason also determined triggering events occurred march 31 2015 would require impairment testing march 31 2015 amortizable intangible asset management contracts amortized weightedaverage remaining life 93 years estimated amortization expense next five fiscal years follows change carrying value goodwill summarized legg mason recognizes tax benefit amortization excess tax benefit related cam acquisition accordance accounting guidance income taxes tax benefit recorded reduction goodwill deferred tax liabilities benefit realized 6 shortterm borrowings longterm debt disclosures include details legg mason’s debt excluding debt civs see note 16 variable interest entities consolidation investment vehicles information related debt civs march 31 2015 2014 legg mason 750000 revolving credit facility capacity pursuant capital plan june 2012 legg mason entered unsecured credit agreement provided 500000 revolving credit facility 500000 term loan repaid fiscal 2014 discussed proceeds term loan used repay 500000 outstanding borrowings previous revolving credit facility terminated january 2014 legg mason entered 250000 incremental borrowing credit facility contemplated addition 500000 revolving credit facility revolving credit facilities expire june 2017 revolving credit facilities interest rates libor plus 150 basis points annual commitment fees 20 basis points interest rates may change future based changes legg masons credit ratings revolving credit facilities available capital needs general corporate purposes borrowings outstanding either facilities march 31 2015 2014 revolving credit facilities standard financial covenants including maximum net debt ebitda ratio defined documents 25 1 minimum ebitda interest ratio defined documents 40 1 march 31 2015 legg masons net debt ebitda ratio 13 1 ebitda interest expense ratio 135 1 therefore legg mason maintained compliance applicable covenants longterm debt consists following may 2012 legg mason announced capital plan included refinancing companys outstanding 25 convertible notes convertible notes refinancing effected issuance 650000 55 senior notes due 2019 55 senior notes net proceeds together cash hand 250000 remaining borrowing capacity existing revolving credit facility used repurchase 1250000 convertible notes terms repurchase included repayment convertible notes par plus accrued interest prepayment fee 6250 noncash exchange warrants holders convertible notes replicated extended contingent conversion feature convertible notes cash payment 1256250 repurchase convertible notes allocated liability equity components based liability fair value 1193971 determined using current market interest rate 41 resulting loss debt extinguishment 68975 including 7851 accelerated deferred issue costs remaining balance cash payment allocated equity component convertible notes 62279 reduction additional paidin capital offset related tax benefits 31446 1193971 amount cash repurchase payment allocated liability component convertible notes upon extinguishment exceeded initial allocated value issuance 977933 requiring consolidated statements cash flows year ended march 31 2013 include allocation 216038 excess operating activities warrants issued holders convertible notes connection repurchase convertible notes provide purchase aggregate subject adjustment 14205 shares common stock net share settled basis exercise price 88 per share warrants expire july 2017 settled companys election either shares common stock cash accordingly warrants accounted equity connection extinguishment convertible notes hedge transactions purchased call options warrants executed connection initial issuance convertible notes also terminated 650000 55 senior notes sold discount 6754 amortized interest expense sevenyear term prior redemption 55 senior notes july 2014 discussed 55 senior notes could redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 05 together related accrued unpaid interest january 2014 legg mason issued 400000 5625 senior notes due january 2044 net proceeds together cash hand used repay 450000 outstanding borrowings fiveyear term loan entered conjunction unsecured credit agreement noted 5625 senior notes sold discount 6260 amortized interest expense 30year term june 2014 legg mason issued 250000 27 senior notes due 2019 notes 250000 395 senior notes due 2024 notes additional 150000 existing 5625 senior notes due 2044 notes together 2019 notes 2024 notes july 2014 company used 658769 proceeds sale notes net related fees together cash hand call outstanding 650000 55 senior notes pay related makewhole premium 98418 discussed june 23 2014 legg mason entered reverse treasury rate lock contract financial intermediary notional amount 650000 designated cash flow hedge contract issued connection retirement 55 senior notes company entered reverse treasury rate lock agreement order hedge variability retirement payment entire principal amount debt reverse treasury rate lock contract effectively fixed present value forecasted debt makewhole payment priced july 18 2014 eliminate risk associated changes fiveyear us treasury yield 55 senior notes retired july 23 2014 resulted pretax nonoperating charge 107074 consisting makewhole premium 98418 call 55 senior notes net 638 settlement reverse treasury lock related administrative fees 8656 associated existing deferred charges original issue discount 27 senior notes due july 2019 250000 2019 notes sold discount 553 amortized interest expense fiveyear term 2019 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 020 together related accrued unpaid interest june 23 2014 legg mason entered interest rate swap contract financial intermediary notional amount 250000 designated fair value hedge interest rate swap used effectively convert 2019 notes fixed rate debt floating rate debt identical terms underlying debt hedged ineffectiveness expected swap fiveyear term matures july 15 2019 fair value contract march 31 2015 derivative asset 5462 classified assets corresponding fair value adjustment recorded income gain hedging activity consolidated statement income year ended march 31 2015 carrying value debt consolidated balance sheet likewise increased 5462 corresponding fair value adjustment recorded expense loss hedging activity consolidated statement income year ended march 31 2015 related hedging gains losses offset one another net income loss impact swap payment dates coincide debt payment dates july 15 january 15 related receiptspayments legg mason recorded interest expense consolidated statement income since original terms conditions hedged instruments unchanged swap continues effective fair value hedge 395 senior notes due july 2024 250000 2024 notes sold discount 458 amortized interest expense 10year term 2024 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 025 together related accrued unpaid interest 5625 senior notes due january 2044 previously discussed january 2014 legg mason issued 400000 5625 senior notes additional 150000 2044 notes issued june 2014 sold premium 9779 also amortized interest expense 30year term 2044 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 030 together related accrued unpaid interest march 31 2015 250000 longterm debt matures fiscal 2020 800000 matures thereafter march 31 2015 estimated fair value longterm debt approximately 1166697 including 255462 2019 notes carried amount approximates fair value consolidated balance sheets debt fair value estimated using publicly quoted market prices classified level 2 fair value hierarchy 7 income taxes components income loss income tax provision benefit follows components income tax expense benefit follows reconciliation difference effective income tax benefit rate statutory federal income tax benefit rate follows 1 state income taxes include changes related valuation allowances net impact deferred tax assets changes state apportionment factors planning strategies effect foreign tax rates also includes changes related valuation allowances includes changes federal valuation allowances permanent tax adjustments see schedule change valuation allowances jurisdiction july 2012 uk finance act 2012 enacted reduced main uk corporate tax rate 25 24 effective april 1 2012 23 effective april 1 2013 july 2013 finance bill 2013 enacted reducing main uk corporate tax rate 21 effective april 1 2014 20 effective april 1 2015 reductions uk corporate tax rate resulted tax benefits 19164 18075 recognized fiscal 2014 2013 respectively result revaluation deferred tax assets liabilities new rates deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows certain tax benefits associated legg masons employee stock plans recorded directly stockholders equity tax benefit recorded equity fiscal 2015 2014 2013 due net operating loss position company march 31 2015 aggregate 15444 tax benefit recognized increase stockholders equity related net operating losses ultimately realized legg mason various loss tax credit carryforwards may provide future tax benefits related valuation allowances established accordance accounting guidance income taxes managements opinion likely benefits realized extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals well future increases relating tax amortization goodwill indefinitelife intangible assets substantially legg masons deferred tax assets relate us federal state uk taxing jurisdictions march 31 2015 us federal deferred tax assets aggregated 702233 realization expected require approximately 3500000 future us earnings based estimates future taxable income using assumptions consistent used legg masons goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realizable respect deferred tax assets relating foreign tax credit carryforwards likely tax benefits relating utilization approximately 40000 foreign taxes credits realized valuation allowance established prior period except relates martin curries deferred tax assets discussed additional federal valuation allowance established fiscal 2015 addition valuation allowance established prior years substantial portion deferred tax assets relating uk foreign taxing jurisdictions tax planning may enhance legg masons tax positions realization tax benefits deferred tax assets valuation allowances provided dependent implementation significant tax strategies march 31 2015 us state deferred tax assets aggregated approximately 186944 due limitations utilization net operating loss carryforwards taking consideration certain state tax planning strategies valuation allowance 34600 established prior years state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized valuation allowance 9359 released fiscal 2015 due updated forecasts state law changes planned implementation various tax planning strategies due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary march 31 2015 company valuation allowance 18441 deferred tax assets related martin currie entities amount approximately 17000 established purchase accounting adjustment recorded upon acquisition based historical current net operating losses martin currie following deferred tax assets valuation allowances relating carryforwards recorded march 31 2015 2014 respectively 1 substantially us state net operating losses carryforward fiscal 2029 2 due potential change factors relating apportionment income various states legg masons effective state tax rates subject fluctuation impact value companys deferred tax assets including net operating losses could material impact future effective tax rate company legg mason total gross unrecognized tax benefits approximately 92344 77892 72650 march 31 2015 2014 2013 respectively totals approximately 62775 51518 46340 respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates fiscal 2015 result net impact effective settlement tax examinations previously unrecognized benefits 6719 realized reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 2015 2014 2013 follows although management cannot predict degree certainty timing ultimate resolution matters review various taxing jurisdictions reasonably possible company’s gross unrecognized tax benefits balance may change within next 12 months 17000 result expiration statutes limitations completion tax authorities examinations april 13 2015 reforms new york city’s corporate tax structure enacted included changes calculation net operating loss carryforwards changes way sales revenue sourced legg mason currently estimates revaluation deferred tax assets liabilities new rules result recognition onetime income tax benefit approximately 10000 20000 first quarter fiscal 2016 company accrues interest related unrecognized tax benefits interest expense recognizes penalties operating expense years ended march 31 2015 2014 2013 company recognized approximately 1492 580 5500 respectively substantially interest march 31 2015 2014 2013 legg mason approximately 8570 7300 14000 respectively accrued interest penalties tax contingencies consolidated balance sheets legg masons prior year tax returns subject examination internal revenue service majesty’s revenue customs brazilian tax authorities various countries states following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal 2009 us federal fiscal 2013 uk calendar year 2006 brazil fiscal 2009 state california fiscal 2008 state new york fiscal 2010 states connecticut maryland massachusetts company anticipate making significant cash payments settlement audits excess amounts reserved except noted legg mason intends permanently reinvest overseas substantially cumulative undistributed earnings foreign subsidiaries accordingly additional us federal income taxes provided undistributed earnings extent permanently reinvested legg masons foreign operations practical time determine income tax liability would result upon repatriation additional accumulated foreign earnings order increase amount cash available us general corporate purposes legg mason plans utilize 257000 foreign cash next several years 16000 accumulated foreign earnings due certain tax planning strategies legg mason anticipates generate tax benefit approximately 12000 respect repatriation adjusted tax reserve accordingly fiscal 2014 repatriation accumulated prior period foreign earnings currently planned however circumstances change legg mason provide pay applicable additional us taxes connection repatriation offshore funds practical time determine income tax liability would result repatriation accumulated foreign earnings march 31 2015 legg mason available domestically cash equivalents approximately 400000 750000 undrawn credit facility meet domestic liquidity needs provide flexibility maximizing cost effective capital deployment without repatriating additional accumulated foreign earnings 8 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2028 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2015 minimum annual aggregate rentals operating leases service agreements follows minimum rental commitments shown reduced 162826 minimum sublease rentals received future noncancelable subleases approximately 35 due one counterparty lease reserve liability included table space subleased march 31 2015 march 31 2014 43726 36170 respectively subtenant defaults sublease legg mason may incur operating charges adjust existing lease reserve liability reflect expected future sublease rentals reduced amounts result current commercial real estate market minimum rental commitments include 703481 real estate equipment leases 88672 service maintenance agreements minimum rental commitments shown include 5176 commitments related space vacated subleases pursued related lease reserve liability also included table 2213 19330 march 31 2015 march 31 2014 respectively remains subject adjustment based circumstances real estate markets may require change assumptions actual terms sublease ultimately secured lease reserve liability takes consideration various assumptions including expected amount time take secure sublease agreement prevailing rental rates applicable real estate markets lease reserve liability subleased space vacated space subleases pursued included current liabilities noncurrent liabilities consolidated balance sheets table presents summary changes lease reserve liability 1 included occupancy expense consolidated statements income loss following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes periods provided landlord free rent period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2015 legg mason commitments invest approximately 34261 limited partnerships make private investments commitments expected outstanding funded required end respective investment periods ranging fiscal 2021 march 31 2015 legg mason various commitments pay contingent consideration relating business acquisitions fair value aggregates 110784 22276 current liability commitments described connection acquisition martin currie october 2014 discussed note 2 contingent consideration payments may due march 31 following first second third anniversaries closing aggregating approximately 483000 using foreign exchange rate march 31 2015 maximum £325000 contract amount inclusive payment certain potential pension obligations dependent achievement certain financial metrics specified share purchase agreement march 31 2016 2017 2018 contingent consideration liability established closing acquisition date fair value 75211 using foreign exchange rate october 1 2014 actual payments made also include amounts certain potential pension obligations accounted separately march 31 2015 fair value contingent consideration liability 70114 decrease 5097 october 1 2014 substantially attributable changes exchange rate net accretion connection acquisition qs investors may 2014 discussed note 2 contingent consideration approximately 10000 approximately 20000 second fourth anniversary payments may due july 2016 july 2018 respectively dependent achievement certain net revenue targets subject potential catchup adjustment fourth anniversary payment second anniversary payment shortfall contingent consideration liability established closing acquisition date fair value 13370 represented present value contingent consideration expected paid accreted 13553 march 31 2015 connection acquisition fauchier march 2013 discussed note 2 contingent consideration 22276 using foreign exchange rate march 31 2015 maximum £15000 payment amount due march 31 2015 second anniversary contingent consideration payment paid may 2015 addition approximately 30000 using foreign exchange rate march 31 2015 £20000 maximum contractual amount may due fourth anniversary closing dependent upon achievement certain levels revenue net distribution costs fair value contingent consideration liability 27117 march 31 2015 22276 relates second anniversary payment decrease 2436 march 31 2014 attributable changes exchange rate net accretion legg mason executed currency forwards economically hedge risk movements exchange rate us dollar british pound estimated contingent liability payment amounts denominated see note 14 additional information regarding derivatives hedging normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications considered financial guarantees relevant accounting guidance legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial normal course business legg mason also received subpoenas currently involved governmental industry selfregulatory agency inquiries investigations time proceedings involving asset management activities accordance guidance accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings probable loss incurred reasonable estimate loss made legg mason cannot estimate reasonably possible loss range loss associated matters litigation proceedings including described customer complaints legal actions inquiries proceedings investigations inability provide reasonably possible amount range losses uncertainty ultimate outcome matter liability damage issues developed point legg mason conclude reasonable possibility loss meaningful amount range possible losses numerous aspects customer complaints legal actions inquiries proceedings investigations prevent legg mason estimating related amount range reasonably possible losses aspects include among things nature matters significant relevant facts known uncertain dispute damages sought specified uncertain unsupportable unexplained addition legal actions discovery may yet started may complete may conclusive meaningful settlement discussions may occurred regulatory matters investigations may run course without clear indication wrongdoing fault conclusion managements opinion adequate accrual made march 31 2015 provide probable losses may arise matters company could reasonably estimate amount legg masons financial condition results operations cash flows could materially affected period matter ultimately resolved addition ultimate costs litigationrelated charges vary significantly periodtoperiod depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement reductions compensation revenue share arrangements march 31 2015 2014 legg masons liability losses contingencies 200 500 respectively fiscal 2015 2014 2013 legg mason charges relating litigation proceedings approximately 200 5200 respectively net recoveries 19300 15200 fiscal 2014 2013 respectively 9 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees plans legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation match employee 401k contributions matches range 50 100 employee 401k contributions maximum lesser 6 employee compensation specified amount 16 per year corporate profit sharing matching contributions together contributions made subsidiary plans totaled 27888 29355 25868 fiscal 2015 2014 2013 respectively addition employees make voluntary contributions certain plans connection acquisition martin currie october 1 2014 legg mason assumed obligations martin curries defined benefit pension plan fully discussed note 2 10 capital stock march 31 2015 authorized numbers common preferred shares 500000 4000 respectively march 31 2015 2014 8815 10333 shares common stock respectively reserved issuance legg masons equity plans may 2012 legg masons board directors authorized 1000000 additional purchases legg mason common stock 13515 remained march 31 2015 january 2015 legg masons board directors authorized 1000000 additional purchases legg mason common stock addition 13515 remaining prior authorized share repurchase program expiration date attached either authorization fiscal 2015 2014 2013 legg mason purchased retired 6931 9677 16199 shares common stock respectively 356522 359996 425475 respectively open market purchases discussed note 6 warrants issued connection repurchase convertible notes could result issuance maximum 14205 shares legg mason common stock subject adjustment certain conditions met changes common stock years ended march 31 2015 2014 2013 respectively follows dividends declared per share 064 052 044 fiscal 2015 2014 2013 respectively dividends declared paid march 31 2015 2014 2013 17837 14945 14185 respectively included current liabilities consolidated balance sheets 11 stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units affiliate management equity plans deferred compensation payable stock effective july 26 2011 number shares authorized issued legg masons active equity incentive stock plan 41500 remaining shares available issuance active equity incentive stock plan march 31 2015 8267 options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments four five years expire within eight ten years date grant discussed components total stockbased compensation expense years ended march 31 2015 2014 2013 follows stock options compensation expense relating stock options years ended march 31 2015 2014 2013 11584 13530 10979 respectively related income tax benefit years ended march 31 2015 2014 2013 4681 5244 4293 respectively stock option transactions legg masons equity incentive plans years ended march 31 2015 2014 2013 summarized total intrinsic value options exercised years ended march 31 2015 2014 2013 14351 6064 168 respectively march 31 2015 aggregate intrinsic value options outstanding 85351 following information summarizes legg masons stock options outstanding march 31 2015 march 31 2015 2014 2013 options exercisable 2202 2531 3254 shares respectively weightedaverage exercise prices 4150 5404 6907 respectively stock options exercisable march 31 2015 weightedaverage remaining contractual life 33 years march 31 2015 aggregate intrinsic value exercisable shares 46303 following summarizes legg masons stock options exercisable march 31 2015 following information summarizes unvested stock options legg masons equity incentive plans year ended march 31 2015 unamortized compensation cost related unvested options march 31 2015 15371 expected recognized weighted average period 17 years cash received exercises stock options legg masons equity incentive plans 22069 23818 660 years ended march 31 2015 2014 2013 respectively tax benefit expected realized tax deductions option exercises totaled 4856 1815 45 years ended march 31 2015 2014 2013 respectively weightedaverage fair value servicebased stock option grants years ended march 31 2015 2014 2013 excluding granted chief executive officer may 2013 discussed using blackscholes option pricing model 1203 1213 947 per share respectively following weightedaverage assumptions used model grants fiscal 2015 2014 2013 legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values may 2013 legg mason awarded options purchase 500 shares legg mason inc common stock exercise price 3146 equal current market value legg masons common stock chief executive officer included outstanding options table award grant date fair value 5525 subject vesting requirements 25 vests twoyear service period 25 vests twoyear service period subject legg masons common stock price equaling exceeding 3646 20 consecutive trading days 25 subject legg masons common stock price equaling exceeding 4146 20 consecutive trading days 25 subject legg masons common stock price equaling exceeding 4646 20 consecutive trading days well requirement certain shares received upon exercise retained twoyear period january june 2014 25 50 aggregate award vested legg mason stock price met exceeded 4146 4646 respectively 20 consecutive trading days weightedaverage fair value per share awards 1105 estimated grant date using grant price 3146 monte carlo option pricing model following assumptions restricted stock restricted stock restricted stock unit transactions years ended march 31 2015 2014 2013 summarized restricted stock restricted stock units noncash transactions years ended march 31 2015 2014 2013 legg mason recognized 45975 48263 46351 respectively compensation expense related tax benefits 18246 18575 17697 respectively restricted stock restricted stock unit awards unamortized compensation cost related unvested restricted stock restricted stock unit awards 3050 shares yet recognized march 31 2015 70478 expected recognized weightedaverage period 17 years connection change legg masons chief executive officer september 2012 325 shares restricted stock granted certain executives key employees aggregate value 8400 march 2013 vesting 85 shares accelerated connection termination recipients employment remaining shares vested march 31 2014 compensation expense year ended march 31 2013 includes approximately 6400 accelerated stockbased net compensation costs associated departure legg mason executive officers fiscal 2013 1400 relates accelerated vesting shares march 2013 legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 4500 total share limit plan purchases made payroll deductions legg mason provides 15 contribution towards purchases charged earnings legg mason’s contribution increased 10 15 january 2014 fiscal years ended march 31 2015 2014 2013 approximately 107 85 107 shares respectively purchased open market behalf participating employees fiscal 2015 2014 2013 legg mason recognized 673 315 238 respectively compensation expense related stock purchase plan june 28 2013 legg mason implemented management equity plan granted units key employees permal entitle participate 15 future growth permal enterprise value subject appropriate discounts subsequent grant date march 31 2014 similar management equity plan implemented legg mason grant certain key employees clearbridge independent valuations determined aggregate cost awards approximately 9000 16000 permal clearbridge respectively recognized compensation benefits expense consolidated statements income related vesting periods december 2017 march 2019 respectively arrangements provide onehalf respective cost absorbed affiliates incentive pool total compensation expense related affiliate management equity plans 5206 2270 years ended march 31 2015 2014 respectively march 31 2015 redemption amount vested units plans currently redeemable aggregated approximately 10000 legg mason also equity plan nonemployee directors current equity plan directors may elect receive shares stock restricted stock units prior july 19 2007 amendment plan directors could also elect receive stock options granted old plan immediately exercisable price equal market value shares date grant term ten years fiscal 2015 2014 2013 legg mason recognized expense 1550 1950 1250 respectively awards plan shares options restricted stock units issuable equity plan limited 625 aggregate 359 shares issued march 31 2015 march 31 2015 nonemployee directors held stock options march 31 2014 2013 nonemployee directors held 32 112 stock options respectively included outstanding options table years ended march 31 2015 2014 2013 nonemployee directors exercise stock options years ended march 31 2015 2014 32 26 stock options canceled forfeited current equity plan nonemployee directors respectively year ended march 31 2013 stock options canceled forfeited current equity plan years ended march 31 2014 2013 54 72 stock options canceled forfeited respectively related equity plan nonemployee directors discontinued july 2005 march 31 2015 2014 2013 nonemployee directors held 45 64 91 restricted stock units respectively vest grant date therefore included unvested shares restricted stock restricted stock units table years ended march 31 2015 2014 2013 nonemployee directors granted 8 12 17 restricted stock units respectively 23 47 35 shares common stock respectively years ended march 31 2015 2014 27 39 restricted stock units distributed respectively year ended march 31 2013 restricted stock units distributed may 2014 legg mason granted certain executive officers total 78 performance share units part fiscal 2014 incentive award aggregate value 3457 vesting performance share units number shares payable vesting determined based legg mason’s relative total stockholder return threeyear period ending april 30 2017 compensation expense relating performance units year ended march 31 2015 1056 grant date fair value per unit awards 4411 estimated grant date using monte carlo pricing model following assumptions fiscal 2012 legg mason established longterm incentive plan ltip equity incentive plan provided additional element compensation based performance determined achievement predefined amount legg masons cumulative adjusted earnings per share respective performance periods ltip executive officers granted cash value performance units quarter ended june 2011 quarter ended september 2012 target amounts 1850 period awards granted ltip vest may settled cash andor shares legg mason common stock discretion legg mason september 2012 grant performance period ended march 31 2015 resulted payment amount 1000 settled cash june 15 2015 june 2011 grant performance period ended march 31 2014 cash andor shares due deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends effective january 1 2015 additional contributions plan remaining 283 shares reserved future dividend distributions fiscal 2015 2014 2013 legg mason recognized 201 160 165 respectively compensation expense related plan fiscal 2015 2014 2013 legg mason issued 44 51 71 shares respectively plan weightedaverage fair value per share grant date 4583 3190 2307 respectively undistributed shares issued plan held rabbi trust assets rabbi trust consolidated employer value employers stock held rabbi trust classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plan presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2015 2014 2013 660 672 726 respectively 12 earnings per share basic earnings per share attributable legg mason inc shareholders eps calculated dividing net income loss attributable legg mason inc adjusted earnings allocated participating securities weightedaverage number shares outstanding legg mason issues employees restricted stock deemed participating securities prior vesting unvested restricted shares entitle holder nonforfeitable dividend rights circumstance accounting guidance requires “twoclass method” eps calculations excludes earnings distributed undistributed allocated participating securities diluted eps similar basic eps adjusts effect potential common shares unless antidilutive periods net loss potential common shares potentially unvested restricted shares considered antidilutive may 2012 legg masons board directors authorized 1000000 additional purchases legg mason common stock 13515 remained march 31 2015 january 2015 legg masons board directors authorized 1000000 additional purchases legg mason common stock addition 13515 remaining prior authorization expiration date attached either share repurchase authorization years ended march 31 2015 2014 2013 legg mason repurchased retired 6931 9677 16199 shares common stock respectively 356522 359996 425475 respectively open market purchases par value shares repurchased charged common stock excess purchase price par first charged additional paidin capital remaining balance charged retained earnings following table presents computations basic diluted eps weightedaverage shares year ended march 31 2015 excludes 3065 weightedaverage unvested restricted shares deemed participating securities exclusion weightedaverage unvested restricted shares deemed participating securities allocation earnings participating securities would materially impact calculation basic diluted earnings per share either fiscal 2014 2013 diluted eps calculations years ended march 31 2015 2014 2013 exclude potential common shares issuable 14205 warrants issued connection repurchase convertible notes may 2012 market price legg mason common stock exceed exercise price therefore warrants would antidilutive options purchase 1319 2620 shares years ended march 31 2015 2014 respectively included computation diluted eps presumed proceeds exercising options including related income tax benefits exceed average price common shares period therefore options deemed antidilutive market performancebased awards excluded potential dilution designated market performance condition met diluted eps calculation year ended march 31 2013 excludes 5730 potential common shares antidilutive due net loss fiscal year unvested restricted shares years ended march 31 2015 2014 2013 antidilutive therefore impact diluted eps 13 accumulated comprehensive income loss accumulated comprehensive income includes cumulative foreign currency translation adjustments net tax gains losses investment securities change accumulated translation adjustments fiscal 2015 2014 primarily resulted impact changes british pound brazilian real australian dollar japanese yen relation us dollar net assets legg masons subsidiaries uk brazil australia japan pound real australian dollar yen functional currencies respectively summary legg masons accumulated comprehensive income loss march 31 2015 2014 follows significant amounts reclassified accumulated comprehensive income loss consolidated statements income loss years ended march 31 2015 2014 2013 except 405 net income tax provision 233 realized termination reverse treasury rate lock contract year ended march 31 2015 described note 6 14 derivatives hedging disclosures detail legg mason’s derivatives hedging activities excluding derivatives hedging activities civs see note 16 variable interest entities consolidation investment vehicles information related derivatives hedging civs legg mason uses currency forwards economically hedge risk movements exchange rates primarily us dollar british pound japanese yen australian dollar euro chinese yuan indian rupee indonesian rupiah malaysian ringgit philippine peso chilean peso south korean derivative transactions legg mason certain legally enforceable rights setoff governed international swaps derivative association isda master agreements derivative transactions one isda master agreement significant counterparties cover transactions counterparty respective isda agreements provide settlement netting closeout netting legg mason counterparty legally enforceable rights setoff assets liabilities recorded consolidated balance sheet march 31 2015 6042 8665 respectively net assets activities recorded consolidated balance sheet march 31 2014 1249 legg mason also uses market hedges certain seed capital investments entering futures contracts sell index funds benchmark hedged seed capital investments open futures contracts required cash collateral 8343 12985 march 31 2015 2014 respectively exception reverse treasury rate lock contract interest rate swap contract discussed note 6 legg mason designated derivatives hedging instruments accounting purposes periods ended march 31 2015 2014 march 31 2015 legg mason open currency forward contracts open futures forwards contracts relating seed capital investments aggregate notional values totaling 165291 162965 respectively march 31 2015 weightedaverage remaining contract terms currency forward contracts futures forward contracts relating seed capital investments four months three months respectively following table presents derivative assets related offsets march 31 2015 following table presents derivative liabilities related offsets march 31 2015 following table presents fair values march 31 2014 derivative instruments classified assets liabilities consolidated balance sheets following tables present gains losses recognized consolidated statements income loss derivative instruments described currency forward contracts futures forward contracts seed capital investments included economic hedges interest rate market risk certain operating investing activities legg mason including foreign exchange risk acquisition contingent consideration gains losses derivative instruments substantially offset gains losses economically hedged items 15 business segment information legg mason global asset management company provides investment management related services wide array clients company operates one reportable business segment global asset management global asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue global asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks revenues geographic location primarily based geographic location advisor domicile fund families managed legg mason table reflects revenues longlived assets geographic region march 31 16 variable interest entities consolidated investment vehicles discussed notes 1 3 accordance financial accounting standards legg mason consolidates certain sponsored investment vehicles designated civs march 31 2015 legg mason concluded primary beneficiary one sponsored investment fund vie consolidated designated civ march 31 2015 2014 2013 despite significant third party investments product march 31 2015 2014 legg mason also concluded primary beneficiary 17 employeeowned funds sponsors consolidated reported civs legg mason also held longerterm controlling financial interest one sponsored investment fund vre thirdparty investors consolidated included civ march 31 2014 2013 january 2015 legg mason redeemed significant portion investment fund result longer controlling financial interest fund therefore fund included civ march 31 2015 addition march 31 2014 2013 legg mason concluded primary beneficiary one three clos variable interest march 31 2014 2013 balances related clo consolidated reported civ companys consolidated financial statements three months ended june 30 2014 clo substantially liquidated therefore consolidated legg mason subsequent june 30 2014 legg masons investment civs march 31 2015 2014 15553 39434 respectively including vres 19659 march 31 2014 represents maximum risk loss excluding uncollected advisory fees assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds following tables reflect impact civs consolidated balance sheets march 31 2015 2014 respectively consolidated statements income loss years ended march 31 2015 2014 2013 respectively consolidating balance sheets consolidating statements income loss nonoperating income expense includes interest income interest expense net gains losses investments longterm debt civs determined accrual basis consolidation civs impact net income loss attributable legg mason inc fair value financial assets liabilities civs determined using following categories inputs march 31 2015 2014 except clo debt substantially financial instruments valuation methods rely observable market inputs significant input utilize nav practical expedient measurement uncertainty little relevance quarter ended june 30 2014 clo substantially liquidated consolidated march 31 2015 march 31 2014 carrying value clo debt approximated amount paid investors appreciable measurement uncertainty changes assets liabilities civs measured fair value using significant unobservable inputs level 3 years ended march 31 2015 2014 presented tables realized unrealized gains losses recorded level 3 assets liabilities civs included nonoperating income expense civs consolidated statements income loss total unrealized losses level 3 investments liabilities civs relating assets liabilities still held reporting date 79 2284 years ended march 31 2015 2014 respectively transfers level 1 level 2 either years ended march 31 2015 2014 navs used practical expedient civs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 2015 2014 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 redemption restrictions 8 daily redemption 5 monthly redemption 3 quarterly redemption 84 subject three five year lockup side pocket provisions 2 redemption restrictions 10 daily redemption 6 monthly redemption 2 quarterly redemption 82 subject three five year lockup side pocket provisions 3 fund longer consolidated march 31 2015 current plans sell investments held march 31 2015 march 31 2014 legg mason elected fair value option certain eligible assets liabilities including corporate loans debt consolidated clo management believed use fair value option mitigated impact certain timing differences better matched changes fair value assets liabilities related clo legg mason elect fair value option assets liabilities march 31 2015 clo longer consolidated following table presents fair value unpaid principal balance clo debt carried fair value fair value option march 31 2014 year ended march 31 2014 total net losses 5914 recognized nonoperating income losses civs net consolidated statements income loss related assets liabilities fair value option elected clo loans clo debt measured fair value floating interest rates therefore substantially estimated gains losses included earnings year ended march 31 2014 attributable instrument specific credit risk march 31 2015 derivative liabilities civs total derivative liabilities civs 1888 march 31 2014 recorded liabilities civs gains losses 1311 1537 respectively year ended march 31 2014 related derivative liabilities civs included nonoperating income loss civs march 31 2015 2014 vies legg mason holds variable interest sponsor holds variable interest primary beneficiary legg masons carrying value maximum risk loss follows 1 includes 27463 23404 related investments proprietary funds products march 31 2015 2014 respectively 2 includes equity investments company made required make earned uncollected management fees companys total aum unconsolidated vies 19527670 16032764 march 31 2015 2014 respectively assets vies primarily comprised cash equivalents investment securities liabilities primarily comprised debt various expense accruals vies consolidated either 1 legg mason power direct significant economic activities entity rightsobligations associated benefitslosses could significant entity 2 legg mason absorb majority vies expected losses receive majority vies expected residual gains quarterly financial data dollars thousands except per share amounts unless otherwise noted unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results may 19 2015 closing price legg masons common stock 5430 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2017 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework 2013 based assessment management concluded march 31 2017 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2017 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2017 joseph sullivan chairman chief executive officer peter h nachtwey senior executive vice president chief financial officer report independent registered public accounting firm board directors stockholders legg mason inc opinion accompanying consolidated balance sheets related consolidated statements income loss comprehensive income loss changes stockholders’ equity cash flows present fairly material respects financial position legg mason inc subsidiaries “the company” march 31 2017 march 31 2016 results operations cash flows three years period ended march 31 2017 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 24 2017 legg mason inc subsidiaries consolidated balance sheets dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements income loss dollars thousands except per share amounts see notes consolidated financial statements legg mason inc subsidiaries consolidated statements comprehensive income loss dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements cash flows dollars thousands legg mason inc subsidiaries consolidated statements cash flows continued dollars thousands see notes consolidated financial statements legg mason inc subsidiaries notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted march 31 2017 1 significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason company principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see consolidation note 17 discussion vies material intercompany balances transactions eliminated certain amounts prior year financial statements reclassified conform current year presentation references fiscal 2017 2016 2015 refer legg masons fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america applicable rules regulations securities exchange commission require management make assumptions estimates affect amounts reported consolidated financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements consolidation normal course business legg mason sponsors manages various types investment products services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinated management fees incentive fees legg masons exposure risk entities generally limited equity investment made required make earned uncollected management fees legg mason sell transfer investment assets investment products accordance financial accounting standards legg mason consolidates certain sponsored investment products designated reported consolidated investment vehicles “civs” consolidation sponsored investment products including designated civs impact net income loss attributable legg mason inc material impact legg masons consolidated operating results change value consolidated sponsored investment products recorded nonoperating income expense reflected net income loss attributable noncontrolling interests certain investment products legg mason sponsors manages considered vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights sponsored investment products considered vres consolidated legg mason controlling financial interest investment vehicle absent substantive investor rights replace manager entity kickout rights legg mason may fund initial cash investment certain vre investment products generate investment performance track record order attract thirdparty investors product legg masons initial investment new product typically represents 100 ownership product discussed products “seed capital investments” consolidated long legg mason maintains controlling financial interest product designated civs legg mason unless investment longerterm march 31 2017 2016 consolidated vres designated civs vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity investors potential controlling financial interest legg mason must consolidate vie deemed primary beneficiary legg masons investment civs march 31 2017 2016 28300 13641 respectively represents maximum risk loss excluding uncollected advisory fees material assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds updated consolidation accounting guidance effective april 1 2016 legg mason adopted updated consolidation accounting guidance modified retrospective basis updated guidance limited partners similar equity holders sponsored investment vehicle structured limited partnership similar entity either substantive kickout substantive participation rights general partner entities vies sponsor manager investment vehicle legg mason may deemed decision maker accounting guidance fees paid decision maker marketbased fees considered variable interests vie marketbased fees customary commensurate level effort required services provided additionally employee interests sponsored investment vehicle made circumvent consolidation guidance financed sponsor included variable interests assessment included primary beneficiary determination decision maker deemed primary beneficiary vie power direct activities significantly impact economic performance vie obligation absorb losses receive benefits variable interests could significant vie determining whether primary beneficiary vie legg mason considers qualitative quantitative factors voting rights equity holders guarantees implied relationships fee paid decision maker marketbased considered primary beneficiary determination adoption accounting guidance april 1 2016 resulted certain sponsored investment products reside foreign mutual fund trusts previously accounted vres evaluated vies consolidation nine funds also designated civs updated accounting guidance legg mason also concluded primary beneficiary one entrust capital entrust sponsored investment fund vie consolidated designated civ upon merger entrust permal group ltd permal adoption also resulted deconsolidation 13 14 previously consolidated employeeowned funds legg mason longer variable interest 13 funds march 31 2017 legg mason longer held significant financial interest seven foreign mutual funds therefore concluded longer primary beneficiary result seven funds consolidated march 31 2017 addition year ended march 31 2017 legg mason concluded primary beneficiary one additional foreign mutual fund consolidated designated civ legg mason also concluded primary beneficiary one sponsored investment fund vie consolidated designated civ march 31 2017 sponsored investment fund also consolidated prior accounting guidance discussed adoption updated accounting guidance consolidated balance sheet march 31 2017 resulted net reductions 5276 assets 4362 liabilities 4959 redeemable noncontrolling interests civs prior consolidation accounting guidance prior accounting guidance sponsored investment fund vies deemed investment companies including money market funds legg mason determined primary beneficiary vie absorbed majority vies expected losses received majority vies expected residual returns legg masons determination expected residual returns excluded gross fees paid decision maker certain criteria relating fees met determining whether primary beneficiary vie legg mason considered qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees implied relationships sponsored investment funds meet investment company criteria legg mason determined primary beneficiary vie power direct activities vie significantly impacted entitys economic performance obligation absorb losses right receive benefits could significant vie legg mason concluded primary beneficiary one sponsored investment fund vie consolidated march 31 2016 2015 despite significant thirdparty investments product also march 31 2016 2015 legg mason concluded primary beneficiary 14 17 employeeowned funds respectively sponsored consolidated designated civs discussed effective april 1 2016 new accounting guidance one employeeowned funds longer qualified vies 13 employeeowned funds consolidated march 31 2016 therefore deconsolidated march 31 2016 legg mason variable interest three collateralized loan obligations clos legg mason concluded primary beneficiary clos consolidated held equity interest investment products level fees expected pay legg mason insignificant new guidance effective april 1 2016 clos longer qualify vies legg mason might primary beneficiary see notes 3 17 additional information related vies cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash restricted cash represents cash collateral required market hedge arrangements cash available legg mason general corporate use financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except legg masons longterm debt designated hedging transaction discussed consolidation proprietary fund products seed capital investments initially consolidated individual securities within portfolio accounted trading investments legg mason consolidates products long holds controlling financial interest product upon deconsolidation typically occurs several years legg mason accounts investments proprietary fund products equity method investments described ownership 20 50 otherwise ability significantly influence financial operating policies investee partnerships llcs thirdparty investors may less ability influence operations equity method accounting considered legg masons ownership greater 3 changes fair value proprietary fund products classified trading equity method investments recognized nonoperating income expense net consolidated statements income loss legg mason generally redeems investments proprietary fund products related product establishes sufficient track record thirdparty investments related product sufficient sustain strategy decision made longer pursue strategy length time legg mason holds majority interest product varies based number factors market demand market conditions investment performance see notes 3 17 additional information regarding legg masons seed capital investments determination whether investments proprietary fund products represent vies respectively equity investments legg mason control investee primary beneficiary vie exert significant influence financial operating policies investee legg mason follows equity method accounting evaluation whether legg mason exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence legg mason may governing board investee legal rights investors entity pursuant funds operating documents relationship legg mason investors entity legg masons equity method investees investment companies record underlying investments fair value therefore equity method accounting legg masons share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee legg masons share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense net portion earnings losses attributable legg masons equity method investments offsetting compensation expense adjustments revenue sharing arrangements deferred compensation arrangements therefore fluctuations market value investments material impact net income loss attributable legg mason inc legg mason also holds debt marketable equity investments classified trading certain investment securities including held civs also classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings equity fixed income securities classified trading valued using closing market prices listed instruments broker price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices legg mason evaluates nontrading investment securities otherthantemporary impairment may exist fair value investment security adjusted cost extended period time otherthantemporary impairment determined exist amount impairment relates credit losses recognized charge income march 31 2017 2016 2015 amount temporary unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations may readily available management estimates value securities using variety methods resources including current available financial information investment industry addition financial instruments described derivative instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair value longterm debt march 31 2017 2016 aggregated 2264867 1773852 respectively except longterm debt designated hedging transaction march 31 2016 fair values estimated using publicly quoted market prices classified level 2 fair value hierarchy described march 31 2016 27 senior notes due 2019 designated hedging transaction valued sum amortized cost debt fair value related interest rate contract designated hedging transaction approximates debt fair value classified level 2 measurement discussed fiscal 2017 related interest rate contract terminated therefore march 31 2017 fair value 27 senior notes estimated using publicly quoted market prices classified level 2 fair value hierarchy derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason used foreign exchange forwards interest rate swaps hedge risk movement exchange rates interest rates financial assets liabilities limited basis also legg mason used futures contracts index funds hedge market risk certain seed capital investments exception interest rate swaps reverse treasury rate lock contract discussed note 6 legg mason designated financial instruments hedge accounting defined accounting literature periods presented gains losses derivative instruments designated hedge accounting included operating income expense nonoperating income expense net consolidated statements income loss depending strategy gains losses derivative instruments civs recorded nonoperating income loss consolidated investment vehicles net consolidated statements income loss applicable see note 15 additional information regarding derivatives hedging fair value measurements accounting guidance fair value measurements defines fair value establishes framework measuring fair value fair value defined exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date accounting guidance fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance objective fair value accounting measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically requires use judgment ascertain formerly active market become inactive determining fair values markets become inactive accounting guidance also relates otherthantemporary impairments intended bring greater consistency timing impairment recognition also intended provide greater clarity investors credit noncredit components impaired debt securities expected sold guidance also requires timely disclosures regarding expected cash flows credit losses aging securities unrealized losses fair value accounting guidance also establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value except debt designated hedging transaction classified disclosed one following categories fair value hierarchy level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets certain derivative instruments level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category may include fixed income securities certain proprietary fund products certain longterm debt level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds real estate funds category may also include certain proprietary fund products redemption restrictions contingent consideration valuation asset liability may involve inputs one level hierarchy level fair value hierarchy fair value measurement falls entirety determined based lowest level input significant fair value measurement entirety certain proprietary fund products investments held civs valued net asset value nav determined applicable fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments reporting date effective april 1 2016 legg mason retroactively adopted updated accounting guidance fair value measurement removed requirement categorize within fair value hierarchy investments fair value measured using nav practical expedient transfers categories measured beginning period result acquisition clarion partners llc clarion partners april 2016 legg mason holds investments real estate funds structured partnerships limited liability companies classified level 3 fair values investments real estate funds prepared giving consideration income cost sales comparison approaches estimating property value income approach estimates income stream property discounts income plus reversion presumed sale present value risk adjusted rate yield rates growth assumptions utilized approach derived market transactions well financial industry data discount rate exit capitalization rate significant inputs valuations rates based location type nature property current anticipated market conditions cost approach estimates replacement cost building less physical depreciation plus land value sales comparison approach compares recent transactions appraised property adjustments made dissimilarities typically provide range value many factors also considered determination fair value including limited operating cash flows financial performance properties property types geographic locations physical condition asset prevailing market capitalization rates prevailing market discount rates general economic conditions economic conditions specific market assets located specific rights terms associated investment inherent uncertainties valuation values may materially differ values would determined negotiations held parties sale transaction see note 3 additional information regarding fair value measurements fixed assets fixed assets primarily consist equipment software leasehold improvements equipment consists primarily communications technology hardware furniture fixtures capitalized software includes purchased software internally developed software cost software used service contract legg mason control software expensed term contract fixed assets reported cost net accumulated depreciation amortization depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements amortized depreciated initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill legg masons identifiable intangible assets consist principally asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds fundsofhedge funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities indefinitelife intangible assets goodwill amortized financial statement purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred company perform quantitative tests include critical reviews significant factors assumptions determine intangible assets goodwill impaired legg mason considers factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected consolidated financial statements current fair value recognized expense period impairment determined triggering event occurred company performs quantitative tests annually december 31 indefinitelife intangible assets goodwill unless company qualitatively conclude likely respective fair values exceed related carrying values fair values intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined market participants perspective based projected discounted cash flows take consideration estimates future fees profit margins growth rates taxes discount rates proprietary fund contracts managed operated single unit meet criteria may aggregated impairment testing goodwill evaluated reporting unit level considered impairment carrying value reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit legg mason uses valuation techniques principally based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition goodwill deemed recoverable reporting unit level also operating segment level legg mason defines global asset management segment results fact chief operating decision maker legg masons chief executive officer regularly receives discrete financial information consolidated global asset management business level regularly receive discrete financial information operating results lower level asset management affiliate level allocations goodwill management restructures acquisitions dispositions based relative fair values respective businesses restructured acquired divested see note 5 additional information regarding intangible assets goodwill note 16 additional business segment information debt longterm debt recorded amortized cost unamortized premiums discounts debt issuance costs fair value hedge adjustments related longterm debt presented balance sheet direct adjustments carrying value associated longterm debt liability amortized interest expense legal term associated debt contingent consideration liabilities connection business acquisitions legg mason may required pay additional future consideration based achievement certain designated financial metrics legg mason estimates fair value potential future obligations time business combination consummated records contingent consideration liability consolidated balance sheet legg mason accretes contingent consideration liabilities expected payment amounts related earnout terms obligations ultimately paid resulting interest expense consolidated statements income loss expected payment amounts subsequently change contingent consideration liabilities reduced increased current period resulting gain loss reflected within operating expense consolidated statements income loss see notes 2 8 additional information regarding contingent consideration liabilities translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income loss gains losses resulting foreign currency transactions included net income loss investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients fees primarily based predetermined percentages market value assets management aum recognized period services performed may billed advance period earned based aum beginning billing period accordance related advisory contracts revenue associated advance billings deferred included current liabilities consolidated balance sheets recognized period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks relative absolute basis depending product recognized end performance measurement period accordingly neither advanced billings performance fees subject reversal largest portion performance fees earned based 12month performance periods end differing quarters year portion also based quarterly performance periods legg mason also earns performance fees alternative products lock end varying investment periods multipleyear intervals legg mason responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds nondiscretionary advisory services assets advisement distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution servicing expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc receipts recorded distribution service fee revenue received reduction unamortized balance deferred sales commissions corresponding expense management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2017 2016 2015 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 4891 6713 march 31 2017 2016 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforward benefits business combinations amortization intangible assets accrued compensation applicable accounting guidance tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information companys accounting policy classify interest related tax matters interest expense related penalties operating expense see note 7 additional information regarding income taxes loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated related insurance recoveries recorded separately underwriter confirmed coverage specific claim amount see note 8 additional information stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units management equity plans certain affiliates deferred compensation payable stock compensation plans legg mason issues equity awards directors officers key employees accordance applicable accounting guidance compensation expense includes costs nonvested sharebased awards classified equity grant date fair value amortized respective vesting periods may reduced retirementeligible recipients straightline method grantdate fair value equityclassified sharebased awards immediate vesting also included compensation benefits expense legg mason determines fair value stock options using blackscholes optionpricing model exception marketbased performance grants valued monte carlo optionpricing model legg mason also determines fair value optionlike affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts see note 11 additional information regarding stockbased compensation earnings per share basic earnings per share attributable legg mason inc shareholders eps calculated dividing net income loss attributable legg mason inc adjusted removing earnings allocated participating securities weightedaverage number shares outstanding excludes participating securities legg mason issued employees restricted stock restricted stock units deemed participating securities prior vesting related unvested restricted sharesunits entitle holder nonforfeitable dividend rights circumstance accounting guidance requires “twoclass method” eps calculations excludes earnings potentially distributed undistributed allocated participating securities allocate losses participating securities diluted eps similar basic eps effect potential common shares included calculation unless potential common shares antidilutive periods net loss potential common shares participating securities considered antidilutive excluded calculation see note 12 additional discussion eps restructuring costs discussed note 2 legg mason restructured permal group ltd permal combination entrust capital entrust costs associated restructuring primarily related employee termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statement income loss charges consolidating leased office space recorded occupancy consolidated statement income loss also discussed note 2 may 2014 legg mason acquired qs investors holdings llc qs investors integrated two existing affiliates batterymarch financial management inc batterymarch legg mason global asset allocation llc lmgaa qs investors leverage best aspects subsidiary costs related integration primarily related employee termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statements income loss noncontrolling interests noncontrolling interests include affiliate minority interests thirdparty investor equity consolidated sponsored investment products vested affiliate management equity plan interests civs consolidated sponsored investment products thirdparty investors related noncontrolling interests classified redeemable noncontrolling interests investors funds may request withdrawals time also included redeemable noncontrolling interests vested affiliate management equity plan affiliate minority interests holder may point request settlement interests redeemable noncontrolling interests reported consolidated balance sheets estimated settlement values changes expected settlement values recognized settlement period adjustments retained earnings nonredeemable noncontrolling interests include vested affiliate management equity plan interests permit holder request settlement interests nonredeemable noncontrolling interests reported consolidated balance sheets issuance value together undistributed net income allocated noncontrolling interests legg mason estimates settlement value noncontrolling interests fair value consolidated sponsored investment products investor may request withdrawal time fair value based market quotes underlying securities held investment products affiliate minority interests management equity plan interests fair value reflects related total business enterprise value appropriate discounts lack marketability control may also features equity interests dividend subordination contemplated valuations fair value optionlike management equity plan interests also relies blackscholes option pricing model calculations net income loss attributable noncontrolling interests consolidated statements income loss includes share net income loss respective subsidiary allocated minority interest holders see note 14 additional information regarding noncontrolling interests related parties services sponsored investment funds legg mason earns management fees incentive fees distribution service fees revenue incurs distribution servicing expenses disclosed consolidated statements income loss sponsored investment funds deemed affiliated entities related party definition relevant accounting guidance recent accounting developments january 2017 financial accounting standards board fasb updated guidance simplify test goodwill impairment updated guidance still requires entities perform annual goodwill impairment tests comparing fair value reporting unit related carrying amount eliminates requirement potentially calculate implied fair value goodwill determine amount impairment new guidance entity recognize impairment charge reporting units carrying amount exceeds reporting unit’s fair value amount excess guidance effective fiscal 2020 option early adoption fiscal 2018 legg mason evaluating adoption august november 2016 fasb updated guidance classification certain cash receipts cash payments restricted cash statement cash flows updated guidance addresses reporting classification several specific cash flow items including restricted cash debt prepayment extinguishment costs contingent consideration payments distributions received equity method investees objective reducing diversity practice specific guidance exists current guidance unclear updated guidance effective fiscal 2019 option early adoption legg mason currently evaluating impact adoption march 2016 fasb updated guidance stockbased compensation accounting updated guidance simplifies several aspects accounting stockbased compensation including income tax consequences classification criteria awards either equity liabilities classification related amounts statements cash flows guidance effective fiscal 2018 accordance updated guidance legg mason record cumulativeeffect adjustment approximately 22600 increase deferred tax assets retained earnings consolidated balance sheet april 1 2018 tax benefits previously recognized due legg masons cumulative tax loss position updated guidance requires excess tax benefits deficiencies recognized discrete items income tax provision consolidated statements income loss reporting period occur thereby increasing volatility income tax provision result fluctuations legg masons stock price legg mason expects record related discrete income tax expense approximately 2500 first quarter fiscal 2018 vested stock awards grant date exercise price higher vesting date stock prices february 2016 fasb updated guidance accounting leases updated guidance requires lessee shall recognize assets liabilities arise lease transactions lessee recognize rightofuse asset use underlying asset liability representing lease payments updated guidance also requires evaluation inception service contract determine whether contract contains lease guidance effective fiscal 2020 legg mason evaluating impact adoption may 2014 fasb updated guidance revenue recognition updated guidance provides single comprehensive revenue recognition model contracts customers improves comparability removes inconsistencies revenue recognition practices across entities industries jurisdictions capital markets guidance also requires comprehensive disclosures nature timing uncertainty revenue cash flows arising contracts customers including significant judgments made applying guidance march 2016 fasb updated revenue guidance determining whether report revenue gross versus net basis updated guidance clarifies entities evaluate principal versus agent aspects revenue recognition guidance issued may 2014 evaluation require entities identify goods services provided customer determine whether obtain control good service transferred customer control would suggest principal relationship would accounted gross basis legg mason currently reviewing revenue contracts anticipate significant changes current revenue recognition practices except follows legg mason may required recognize longerterm performance incentive fees subject clawback reasonably possible earlier current revenue recognition process defers recognition contingencies resolved additionally legg mason evaluating whether certain separate account commissions currently expensed paid meet criteria capitalization amortization legg mason also evaluating whether revenuerelated costs currently recorded gross presentation recorded net presentation vice versa evaluation ongoing legg mason determined ultimate impact adoption transition method used upon adoption effective legg mason april 1 2018 2 acquistions dispositions acquisitions following table presents summary acquisitiondate fair values assets acquired liabilities assumed legg masons significant recent acquisitions 1 subject measurement period adjustments including amounts ultimately realized 2 post combination entrustpermal noncontrolling interest 403200 also includes fair value reclassification 15500 retained earnings entrust capital may 2 2016 legg mason acquired entrust combined permal legg masons existing hedge fund platform form entrustpermal entrust alternative asset management firm headquartered new york 9600000 assets management aum approximately 2000000 assets advisement committed capital closing largely complementary investment strategies investor base business mix permal transaction included cash payment 400000 funded borrowings legg masons revolving credit facility well portion proceeds issuance 450000 475 senior notes due 2026 notes 250000 6375 junior subordinated notes due 2056 6375 2056 notes march 2016 result combination legg mason owns 65 new entity entrustpermal remaining 35 owned entrusts cofounder managing partner noncontrolling interests put holder called legg mason settlement fair value subject various conditions including passage time fair value noncontrolling interests consolidated balance sheet reflects total business enterprise value combined entity appropriate discounts lack marketability control fair value acquired amortizable intangible asset management contracts useful life approximately eight years acquisition purchase price allocated intangible assets goodwill expected deductible us tax purposes period 15 years goodwill principally attributable synergies expected arise entrust management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows costs incurred connection acquisition entrust 7046 3492 years ended march 31 2017 2016 respectively financial results entrust included legg masons consolidated financial results year ended march 31 2017 include revenues 115327 currently material impact net income loss attributable legg mason inc connection combination legg mason incurred total charges restructuring transition costs 85081 march 31 2017 includes 41785 recognized year ended march 31 2017 costs primarily comprised charges employee termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statements income loss real estate related charges recorded occupancy consolidated statements income loss combination substantially complete legg mason expects incur additional costs totaling 5000 6000 fiscal 2018 2019 table presents summary changes restructuring transitionrelated liability december 31 2015 march 31 2017 cumulative charges incurred date 1 includes lease loss reserve space permanently abandoned 9069 year ended march 31 2017 7212 year ended march 31 2016 2 includes stockbased compensation expense accelerated fixed asset depreciation clarion partners april 13 2016 legg mason acquired majority equity interest clarion partners diversified real estate asset management firm headquartered new york clarion partners managed approximately 41500000 aum date acquisition legg mason acquired 82 ownership interest clarion partners cash payment 631476 including payment cash delivered 36772 coinvestments 16210 funded portion proceeds issuance 2026 notes 6375 2056 notes march 2016 clarion partners management team retained 18 outstanding equity clarion partners clarion partners management team also retained rights full amount performance fee revenues earned historic aum place closing acquisition performance fees earned historic aum fully passed per terms acquisition agreement recorded compensation expense legg mason expects full pass performance fees phase approximately five years postclosing firms previous majority owner sold entire ownership interest transaction noncontrolling interests held management team put holders called legg mason settlement fair value subject various conditions including passage time fair value noncontrolling interests reflects total business enterprise value appropriate discounts lack marketability control upon acquisition legg mason also granted certain key employees clarion partners total 716 performancebased legg mason restricted share units aggregate fair value 11121 vest upon clarion partners achieving certain level ebitda defined award agreements within designated period closing acquisition aggregate value award included purchase price determined grant date using monte carlo pricing model following assumptions connection transaction legg mason also implemented affiliate management equity plan management team clarion partners resulted noncash charge 15200 three months ended june 30 2016 see note 11 additional information related clarion partners management equity plan fair value acquired amortizable intangible asset management contracts average useful life approximately 10 years acquisition approximately 82 purchase price allocated intangible assets goodwill expected deductible us tax purposes period 15 years goodwill principally attributable synergies expected arise clarion partners management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows addition previously discussed charge 15200 incurred connection implementation clarion partners management equity plan years ended march 31 2017 2016 10757 2807 respectively costs incurred connection acquisition clarion partners financial results clarion partners included legg masons consolidated financial results year ended march 31 2017 include revenues 249468 currently material impact net income loss attributable legg mason inc pro forma financial information following unaudited pro forma financial information presents combined financial results legg mason clarion partners entrust though acquisitions occurred april 1 2015 unaudited pro forma financial information reflects certain adjustments amortization expense related fair value acquired intangible assets acquisition transitionrelated costs interest expense related debt incurred finance acquisitions income tax impact pro forma adjustments unaudited pro forma financial information informational purposes excludes projected cost savings necessarily indicative financial results would achieved acquisitions actually occurred beginning first period presented rare infrastructure limited october 21 2015 legg mason acquired majority equity interest rare infrastructure limited rare infrastructure rare infrastructure specializes global listed infrastructure security investing headquartered sydney australia approximately 6800000 aum closing transaction terms related transaction agreements legg mason acquired 75 ownership interest firm firms management team retained 15 equity interest treasury group subsequently renamed pacific current group continuing minority owner retained 10 acquisition required initial cash payment 213739 using foreign exchange rate october 21 2015 296000 australian dollar payment funded approximately 40000 net borrowings companys previous revolving credit facility well existing cash resources august 2015 legg mason executed currency forward contract economically hedge risk movement exchange rate us dollar australian dollar initial cash payment denominated currency forward contract closed october 2015 see note 15 additional information regarding derivatives hedging addition contingent consideration may due march 31 2018 aggregating 81063 using foreign exchange rate march 31 2017 maximum 106000 australian dollar amount per related agreements dependent achievement certain net revenue targets subject potential catchup adjustments extending march 31 2019 transaction also provided potential contingent payment march 31 2017 however payment due based relevant net revenue targets noncontrolling interests put holders called legg mason settlement fair value except nonmanagement portion noncontrolling interests callable preagreed formula specified agreements fair value noncontrolling interests reflects total business enterprise value rare infrastructure appropriate discounts lack marketability control fair value acquired amortizable intangible asset management contracts useful life 12 years acquisition purchase price allocated intangible assets goodwill deductible australian tax purposes goodwill principally attributable synergies expected arise rare infrastructure management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows year ended march 31 2017 amortizable intangible asset management contracts asset impaired 18000 see note 5 additional information fair value contingent consideration estimated using monte carlo simulation riskneutral framework various observable inputs well various unobservable data inputs level 3 measurements simulation considered variables including aum growth performance fee levels consistent riskneutral framework projected aum performance fees dampened measure risk referred market price risk account market risk systematic risk calculating earnout payments earnout payments discounted commensurate timing summary various assumption values follows significant increases decreases projected aum performance fees would result significantly higher lower contingent consideration liability fair value contingent consideration liability established closing acquisition date fair value 25000 using foreign exchange rate october 21 2015 march 31 2017 fair value contingent consideration liability 17444 decrease 9701 march 31 2016 year ended march 31 2017 reductions projected aum revenues resulted 10000 reduction estimated contingent consideration liability recorded credit operating expense consolidated statement income loss reduction offset part increase 299 attributable changes exchange rate included accumulated comprehensive loss net foreign currency translation adjustment accretion contingent consideration liability recorded entity australian dollar functional currency related changes exchange rate impact net income loss total contingent consideration liability 7791 included current contingent consideration consolidated balance sheet march 31 2017 remaining 9653 included noncurrent contingent consideration company presented pro forma combined results operations acquisition results operations reported accompanying consolidated statements income loss would materially different financial results rare infrastructure included legg masons consolidated financial results year ended march 31 2016 include revenues 18420 material impact net income loss attributable legg mason inc see note 18 regarding aggregate 34000 impairment rare infrastructure amortizable asset management contracts asset trade name indefinitelife intangible asset 11500 reduction estimated contingent consideration liability subsequent march 31 2017 martin currie holdings limited october 1 2014 legg mason acquired outstanding equity interests martin currie holdings limited martin currie international equity specialist based united kingdom acquisition required initial payment 202577 using foreign exchange rate october 1 2014 £125000 contract amount funded existing cash addition contingent consideration payment may due march 31 following third anniversary closing aggregating approximately 407403 using foreign exchange rate march 31 2017 maximum £325000 contract amount inclusive payment certain potential pension obligations dependent achievement certain financial metrics march 31 2018 specified share purchase agreement also provided potential first second anniversary contingent payments march 31 2016 2017 respectively however payments due based relevant financial metrics fair value amortizable intangible asset management contracts asset amortized period 12 years goodwill principally attributable synergies expected arise martin currie acquired intangible assets goodwill deductible uk tax purposes management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows fair value contingent consideration measured using monte carlo simulation various unobservable market data inputs level 3 measurements simulation considered variables including aum growth performance fee levels relevant product performance projected aum performance fees earnout payments discounted appropriate summary various assumption values follows significant future increases decreases projected aum performance fees would result significantly higher lower contingent consideration liability fair value contingent consideration liability established closing acquisition date fair value 75211 using foreign exchange rate october 1 2014 actual payments made may also include amounts certain potential pension obligations accounted separately march 31 2017 fair value contingent consideration liability 12018 decrease 29204 march 31 2016 year ended march 31 2017 reductions projected aum performance fees resulted 25000 reduction estimated contingent consideration liability recorded credit operating expense consolidated statement income loss remaining decrease 4204 attributable changes exchange rate included accumulated comprehensive loss net foreign currency translation adjustment net accretion contingent consideration liability included current contingent consideration consolidated balance sheet march 31 2017 recorded entity british pound functional currency related changes exchange rate impact net income loss martin currie defined benefit pension plan martin currie sponsors retirement death benefits plan defined benefit pension plan assets held separate trusteeadministered fund plan assets measured fair value comprised 65 equities level 1 35 bonds level 2 march 31 2017 60 equities level 1 40 bonds level 2 march 31 2016 assumptions used determine expected return plan assets targets 60 40 equitybond allocation reference 15year ftse uk gilt yield equities uk longdated bond yields bonds plan liabilities measured actuarial basis using projected unit method discounted rate equivalent current rate high quality bond local uk market currency significant concentrations risk plan assets march 31 2017 recent actuarial valuation performed may 31 2013 updated acquisition subsequent balance sheet dates accrual service credit plan ceased october 3 2014 legg mason uses corridor approach account plan corridor approach actuarial gains losses plan assets liabilities deferred reported comprehensive income loss however beginning next fiscal year actuarial gains losses exceed 10 greater fair value plan assets plan benefit obligation excess amortized compensation expense recovery period 15 years resulting net benefit obligation comprised follows included march 31 2017 2016 consolidated balance sheets noncurrent liabilities change benefit obligation summarized change plan assets summarized years ended march 31 2017 2016 net periodic benefit cost 93 92 respectively included compensation benefits expense consolidated statements income loss components net periodic loss gain years ended march 31 2017 2016 follows net actuarial losses 16681 6821 included accumulated comprehensive loss net consolidated balance sheets march 31 2017 2016 respectively march 31 2017 plan expects make benefit payments next 10 fiscal years follows contingent consideration payments may provide funding net plan benefit obligation provision share purchase agreement requiring certain amounts paid plan contingent consideration payments plan based determination plan benefit obligation local technical provisions utilized plan trustees pensions regulator uk regulator reviewing pension plans current structure funding status review still process regulator expressed certain concerns plan transactions effected around acquisition closing detrimental plan martin currie trustees pension plan dispute regulators concerns cooperating regulator revised plan structure likely result certain changes plan structure including additional guarantees potential accelerated funding portion plans benefit obligations absent funding contingent consideration payments requirement regulator additional payments guarantees martin currie expects contribute 1880 plan year ended march 31 2018 contingent consideration provisions share purchase agreement also require designated percentage earnout payments net pension contribution allocated fund incentive plan martin curries management payments employees arrangement made end earnout period estimated payment adjusted quarterly amortized earnout term december 2015 martin currie acquired certain assets pk investment management llp pk investments london based equity manager initial cash payment 4981 estimated contingent payment 2507 due december 31 2017 amount ultimate contingent payment based certain financial metrics initial cash payment funded existing cash resources connection acquisition legg mason recognized indefinitelife intangible fund management contracts goodwill 6619 827 respectively qs investors holdings llc effective may 31 2014 legg mason acquired outstanding equity interests qs investors customized solutions global quantitative equities provider initial purchase price cash payment 11000 funded existing cash august 2016 legg mason paid contingent consideration 6587 second anniversary payment additional contingent consideration 20000 fourth anniversary payment 3400 potential catchup adjustment second anniversary payment shortfall may due july 2018 dependent achievement certain net revenue targets fair value amortizable intangible asset management contracts useful life 10 years acquisition purchase price allocated goodwill expected deductible us tax purposes period 15 years goodwill principally attributable synergies expected arise qs investors management estimated fair values amortizable intangible asset management contracts based upon discounted cash flow analysis contingent consideration expected paid discounted based upon probabilityweighted revenue projections using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows revenues discount rates summarized follows march 31 2017 fair value contingent consideration liability 4841 decrease 8908 march 31 2016 reflects payment discussed offset part accretion addition year ended march 31 2017 reduction projected net revenue resulted 2500 reduction estimated contingent consideration liability recorded credit operating expense consolidated statement income loss contingent consideration liability included noncurrent contingent consideration consolidated balance sheet march 31 2017 legg mason integrated two existing affiliates batterymarch legg mason global asset allocation qs investors capture synergies leverage best capabilities entity connection integration total charges restructuring transition costs 38404 recognized completion plan march 31 2015 includes 35846 year ended march 31 2015 primarily recorded compensation benefits consolidated statements income loss costs primarily comprised charges employee termination benefits including severance retention incentives well real estate related charges additional charges related integration expected material table presents summary changes restructuring transitionrelated liability december 31 2013 march 31 2017 cumulative charges incurred completion plan fiscal 2015 1 includes lease loss reserve 6760 space permanently abandoned 2 includes stockbased compensation expense accelerated fixed asset depreciation financial guard llc august 17 2016 legg mason acquired 82 equity interests financial guard llc financial guard online registered investment advisor technologyenabled wealth management investment advice platform acquisition required initial cash payment funded existing cash resources contingent payment 3000 based certain metrics within first year acquisition connection acquisition legg mason recognized certain business assets goodwill 11995 legg mason also committed contribute 5000 additional working capital financial guard paid two year period following acquisition 1250 paid march 31 2017 year ended march 31 2017 2000 estimated contingent consideration recorded acquisition reduced zero precidian investments llc january 22 2016 legg mason acquired minority equity position precidian investments llc precidian firm specializing creating innovative products solutions solving market structure issues particularly regard exchange traded funds marketplace transaction required cash payment funded existing cash resources terms transaction legg mason acquired series b preferred units precidian entitle legg mason approximately 20 voting economic interests precidian along customary preferred equity protections sole option 48 months following initial investment earlier within nine months secs approval precidians application operate active shares product legg mason may subject satisfaction certain closing conditions upon payment consideration convert preferred units 75 common equity precidian fully diluted basis legg mason accounts investment precidian included assets consolidated balance sheet march 31 2017 2016 equity method accounting fauchier partners management limited march 13 2013 permal acquired outstanding share capital fauchier partners management limited fauchier european based manager fundsofhedge funds initial purchase price cash payment 63433 funded existing cash resources may 2015 legg mason paid contingent consideration 22765 second anniversary payment agreement also provided potential fourth anniversary contingent consideration payment however payment due based relevant financial metrics additional contingent consideration paid connection acquisition dispositions december 23 2016 march 31 2017 legg mason sold ownership interests small equity advisor poland small bostonbased private equity advisor also february 24 2017 legg mason liquidated share small equity advisory joint venture net proceeds transactions 19469 transactions material impact legg masons consolidated financial condition results operations november 7 2014 legg mason completed previously announced sale equity interests legg mason investment counsel trust company na lmic proceeds 47000 stifel financial corporations global wealth management segment sale material impact legg masons consolidated financial condition results operations 3 investments fair values assets liabilities disclosures include details legg masons financial assets financial liabilities measured fair value excluding financial assets financial liabilities civs see note 17 variable interest entities consolidation investment vehicles information related assets liabilities civs measured fair value effective april 1 2016 legg mason adopted updated accounting guidance fair value measurement removed requirement categorize within fair value hierarchy requirement provide related sensitivity disclosures investments fair value measured using nav practical expedient amount investments disclosed separately following tables reconciling item investments included fair value hierarchy investments reported consolidated balance sheets updated guidance adopted retrospective basis therefore investment amounts fair value measured using nav practical expedient removed fair value hierarchy periods presented fair values financial assets liabilities company determined using following categories inputs 1 cash equivalents include highly liquid investments original maturities 90 days less cash investments actively traded money market funds classified level 1 cash investments time deposits measured amortized cost approximates fair value short time purchase instrument expected realization classified level 2 trading investments proprietary fund products trading investments consist approximately 79 21 equity debt securities respectively march 31 2017 approximately 68 32 equity debt securities respectively march 31 2016 3 includes 26854 54392 noncontrolling interests associated consolidated seed investment products march 31 2017 2016 respectively 4 primarily mutual funds minimal market risk company change value primarily offset adjustment compensation expense related deferred compensation liability 5 certain legg masons equity method investments investment companies record underlying investments fair value therefore fair value investments measured using legg masons share investees underlying net income loss predominately representative fair value adjustments investments held equity method investee equity method investments excluded tables 6 excludes 28300 13641 seed capital march 31 2017 2016 respectively related legg masons investments civs see note 17 7 amounts included noncurrent assets consolidated balance sheets periods presented 8 see note 15 9 see note 2 note 8 proprietary fund products include seed capital investments made legg mason fund new investment strategies products legg mason seed capital investments proprietary fund products totaled 305288 368920 march 31 2017 2016 respectively substantially comprised investments 57 funds 63 funds respectively individually greater 1000 together comprise 90 total seed capital investments period end see notes 1 17 information regarding determination whether investments proprietary fund products represent vies consolidation net realized unrealized gain loss investment securities classified trading 44534 27654 10545 years ended march 31 2017 2016 2015 respectively net unrealized gains losses relating trading investments still held reporting dates 32862 35111 10858 years ended march 31 2017 2016 2015 respectively changes financial assets liabilities measured fair value using significant unobservable inputs level 3 years ended march 31 2017 2016 presented tables na applicable na applicable realized unrealized gains losses recorded level 3 investments primarily included nonoperating income expense net consolidated statements income loss change unrealized gains losses level 3 investments liabilities still held reporting date 45099 27056 7479 years ended march 31 2017 2016 2015 respectively significant transfers level 1 level 2 years ended march 31 2017 2016 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 2017 2016 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 liquidation restrictions 1 daily redemption 11 monthly redemption 12 quarterly redemption 76 subject redemption currently redeemable 2 liquidations expected remaining term 3 balance 26 remaining term less one year 74 remaining term 15 years current plans sell investments held march 31 2017 4 fixed assets following table reflects components fixed assets march 31 depreciation amortization expense related fixed assets 54023 55318 52461 years ended march 31 2017 2016 2015 respectively expense includes accelerated depreciation amortization 2688 4147 years ended march 31 2017 2016 respectively primarily related space vacated connection restructuring permal combination entrust 1265 year ended march 31 2015 primarily related integration batterymarch qs investors 5 intangible assets goodwill indefinitelife intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair value assets exceeds book value intangible assets subject amortization considered impairment reporting period fair value less book value legg mason record impairment charge following table reflects components intangible assets 1 march 31 2017 amortizable intangible asset management contracts net trade names include 92844 23100 respectively related acquisition clarion partners 57995 7400 respectively related acquisition entrust see note 2 additional information 2 march 31 2017 includes 262300 related acquisition entrust discussed indefinitelife fundsofhedge funds management contracts asset related legacy permal business combined indefinitelife fundsofhedge funds management contracts asset related entrust march 31 2017 see note 2 additional information regarding entrust acquisition certain legg masons intangible assets denominated currencies us dollar balances related assets fluctuate changes related foreign currency exchange rates nine months ended december 31 2016 revenues related rare infrastructure separate account contracts amortizable asset declined due client withdrawals aum based revised attrition estimates remaining useful life acquired contracts decreased 11 years eight years december 31 2016 result client attrition related decline revenues revised estimate remaining useful life amortized carrying value management contracts asset determined exceed fair value impairment charge 18000 recorded year ended march 31 2017 management estimated fair value asset based upon discounted cash flow analysis using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected aum growthattrition rates 713 discount rate 155 legg mason completed annual impairment testing process goodwill indefinitelife intangible assets december 31 2016 determined carrying value permal trade name indefinitelife asset exceeded fair value resulted impairment charge 17000 impairment charge primarily result decrease revenues reduction royalty rate reflecting decline value permal trade name due change branding decline use separate permal name following combination entrust management estimated fair value permal trade name based upon discounted cash flow analysis using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected annual revenue growth rates 3 9 average 7 royalty rate 15 discount rate 160 projected revenue aum growth rates client attrition dependent client aum flows changes market conditions product investment performance discount rates also influenced changes market conditions well interest rates factors decreases projected revenue aum growth rates andor increases discount rates could result lower fair value measurements potential additional impairments intangible assets impairments indefinitelife intangible assets amortizable management contracts intangible assets goodwill december 31 2016 legg mason also determined triggering events occurred march 31 2017 would require impairment testing december 31 2016 assessed fair value indefinitelife fundsofhedge funds management contracts asset related legacy permal business exceeded carrying value 4 discussed note 2 entrust combined permal form entrustpermal common management shared resources including infrastructure employees processes branding initiatives accordingly completing annual impairment testing process december 31 2016 indefinitelife funds management contracts asset related entrust acquisition combined indefinitelife fundsofhedge funds management contracts asset related legacy permal business legg mason completed qualitative impairment test combined asset impairment indicators noted related carrying values cash flows funds continue aggregated future impairment testing current assessed fair value indefinitelife domestic mutual funds contracts asset related citigroup asset management acquisition exceeds carrying value material amount legg masons annual impairment testing process prior fiscal year determined carrying value legacy permal indefinitelife fundsofhedge funds management contracts intangible asset permal trade name asset exceeded respective fair values assets impaired aggregate amount 371000 impairment charges resulted number current trends factors changes resulted reduction projected cash flows legg masons overall assessment fair value assets fair values permal fundsofhedge funds contracts asset permal trade name declined carrying values accordingly impaired 364000 7000 respectively management estimated fair values assets based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used cash flow analyses included projected revenue growth rates discount rates total revenues related permal fundsofhedge funds contracts assumed annual growth rates ranging 6 average 5 projected cash flows permal fundsofhedge funds contracts discounted 165 march 31 2017 amortizable intangible asset management contracts amortized weightedaverage remaining life 80 years estimated amortization expense next five fiscal years thereafter follows see note 18 regarding aggregate 34000 impairment rare infrastructure amortizable asset management contracts asset trade name indefinitelife intangible asset subsequent march 31 2017 change carrying value goodwill summarized 1 see note 2 additional information legg mason recognizes tax benefit amortization excess tax benefit related cam acquisition accordance accounting guidance income taxes tax benefit recorded reduction goodwill deferred tax liabilities benefit realized 6 shortterm borrowings longterm debt shortterm borrowings december 29 2015 legg mason entered unsecured credit agreement provided 1000000 multicurrency revolving credit facility march 31 2017 unsecured credit agreement amended reduce amount available revolving credit facility 1000000 500000 revolving credit facility may increased aggregate amount 500000 subject approval lenders expires december 2020 repaid time revolving credit facility available fund working capital needs general corporate purposes may 2016 legg mason borrowed 460000 revolving credit facility finance acquisition entrust replenish cash used complete acquisitions clarion partners april 2016 rare infrastructure october 2015 discussed note 2 december 2015 legg mason borrowed 40000 revolving credit facility remained outstanding march 31 2016 proceeds used repay 40000 outstanding borrowings previous revolving credit facility drawn october 2015 partially finance acquisition rare infrastructure previous 500000 revolving credit facility 250000 incremental borrowing facility terminated effective upon repayment discussed august 2016 legg mason issued 500000 545 junior subordinated notes due 2056 545 2056 notes net proceeds together existing cash resources used repay 500000 outstanding borrowings revolving credit facility borrowings outstanding revolving credit facility march 31 2017 revolving credit facility interest rate monthly eurocurrency rate plus 125 basis points annual commitment fee 175 basis points interest payable least quarterly amounts outstanding revolving credit facility interest rate may change future based changes legg masons credit ratings revolving credit facility standard financial covenants include maximum net debt ebitda ratio defined documents modified march 2017 35 1 period january 1 2017 including march 31 2018 30 1 thereafter minimum ebitda interest ratio defined documents 40 1 march 31 2017 legg masons net debt ebitda ratio 26 1 ebitda interest expense ratio 57 1 therefore legg mason maintained compliance applicable covenants march 31 2017 2016 legg mason 500000 960000 respectively undrawn revolving credit facility capacity interest rate swap revolving credit facility april 29 2016 legg mason entered forward starting amortizing interest rate swap agreement financial intermediary designated cash flow hedge interest rate swap used convert outstanding borrowings revolving credit facility floating rate fixed rate debt terms interest rate swap agreement legg mason paid fixed interest rate 23 notional amount 500000 swap 467year term scheduled reductions notional amount expire december 29 2020 august 2016 connection repayment outstanding borrowings revolving credit facility interest rate swap terminated cash payment 3662 result legg mason reclassified loss 2249 net deferred income taxes 1413 representing fair value cash flow hedge accumulated comprehensive loss net nonoperating income expense net prior termination august 2016 swap settled monthly year ended march 31 2017 764 reclassified accumulated comprehensive loss net interest expense swap terminated original terms conditions hedged instruments unchanged swap effective cash flow hedge longterm debt longterm debt net consists following august 2016 legg mason issued 500000 545 2056 notes net proceeds together cash hand used repay total 500000 outstanding borrowings revolving credit facility previously discussed march 2016 legg mason issued 450000 2026 notes 250000 6375 2056 notes legg mason used net proceeds offerings finance acquisitions entrust may 2016 clarion partners april 2016 discussed note 2 june 2014 legg mason issued 250000 27 senior notes due 2019 notes 250000 395 senior notes due 2024 notes additional 150000 existing 5625 senior notes due 2044 notes together 2019 notes 2024 notes july 2014 company used 658769 proceeds sale notes net related fees together cash hand call outstanding 650000 55 senior notes pay related makewhole premium 98418 discussed june 23 2014 legg mason entered reverse treasury rate lock contract financial intermediary notional amount 650000 designated cash flow hedge contract issued connection retirement 55 senior notes company entered reverse treasury rate lock agreement order hedge variability retirement payment entire principal amount debt reverse treasury rate lock contract effectively fixed present value forecasted debt makewhole payment priced july 18 2014 eliminate risk associated changes fiveyear us treasury yield 55 senior notes retired july 23 2014 resulted pretax nonoperating charge 107074 consisting makewhole premium 98418 call 55 senior notes net 638 settlement reverse treasury lock related administrative fees 8656 associated existing deferred charges original issue discount january 2014 legg mason issued 400000 5625 senior notes due january 2044 net proceeds together cash hand used repay 450000 borrowings companys outstanding fiveyear term loan may 2012 legg mason repurchased companys outstanding 25 convertible notes convertible notes terms repurchase included noncash exchange warrants holders convertible notes replicated extended contingent conversion feature convertible notes warrants issued holders convertible notes connection repurchase convertible notes provide purchase aggregate subject adjustment 14205 shares common stock net share settled basis exercise price 88 per share warrants expire july 2017 settled companys election either shares common stock cash accordingly warrants accounted equity 27 senior notes due july 2019 250000 2019 notes sold discount 553 amortized interest expense fiveyear term 2019 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 020 together related accrued unpaid interest june 23 2014 legg mason entered interest rate swap contract financial intermediary notional amount 250000 designated fair value hedge interest rate swap used effectively convert 2019 notes fixed rate debt floating rate debt identical terms underlying debt hedged related hedging gains losses offset one another resulted net income loss impact swap fiveyear term scheduled mature july 15 2019 april 21 2016 fair value hedge swap terminated cash receipt 6500 related fair value hedge adjustment amortized interest expense remaining life debt year ended march 31 2017 1804 amortized recorded interest expense consolidated statements income loss years ended march 31 2016 2015 2137 5462 recorded income gain hedging activity consolidated statements income loss reflects gain hedging activity related fair value adjustment derivative asset also years ended march 31 2016 2015 2137 5462 recorded expense loss hedging activity consolidated statements income loss reflects loss hedging activity related fair value adjustment debt swap payment dates coincided debt payment dates july 15 january 15 related receiptspayments legg mason recorded interest expense consolidated statements income loss swap terminated april 21 2016 original terms conditions hedged instruments unchanged swap effective fair value hedge 395 senior notes due july 2024 250000 2024 notes sold discount 458 amortized interest expense 10year term 2024 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 025 together related accrued unpaid interest 475 senior notes due march 2026 450000 2026 notes sold discount 207 2026 notes redeemed part aggregate greater related principal amount time redemption sum remaining scheduled payments discounted treasury rate defined plus 045 together related accrued unpaid interest 5625 senior notes due january 2044 january 2014 legg mason issued 400000 2044 notes sold discount 6260 amortized interest expense 30year term additional 150000 2044 notes issued june 2014 sold premium 9779 also amortized interest expense 30year term 2044 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 030 together related accrued unpaid interest 6375 junior subordinated notes due march 2056 250000 6375 2056 notes issued 100 principal amount 6375 2056 notes rank junior subordinate right payment legg masons current future senior indebtedness prior march 15 2021 6375 2056 notes redeemed aggregate part 100 principal amount plus accrued unpaid interest called tax event defined 102 principal amount plus accrued unpaid interest called rating agency event defined march 15 2021 6375 2056 notes redeemed aggregate part 100 principal amount plus related accrued unpaid interest 545 junior subordinated notes due september 2056 august 2016 legg mason issued aggregate principal amount 500000 545 2056 notes 545 2056 notes rank junior subordinate right payment legg masons current future senior indebtedness prior september 15 2021 545 2056 notes redeemed aggregate part 100 principal amount plus accrued unpaid interest called tax event defined prospectus supplement 102 principal amount plus accrued unpaid interest called rating agency event defined prospectus supplement september 15 2021 545 2056 notes redeemed aggregate part 100 principal amount plus related accrued unpaid interest march 31 2017 250000 longterm debt matures fiscal 2020 2000000 matures fiscal 2022 7 income taxes components income loss income tax provision follows components income tax expense benefit follows reconciliation difference effective income tax rate statutory federal income tax rate follows 1 state income taxes include changes valuation allowances related change apportionment provision return differences net impact related deferred tax assets 2 effect foreign tax rates fiscal 2017 2016 includes 2890 66780 respectively tax benefit noncash impairment charges related intangible assets permal business discussed note 5 3 see schedule change valuation allowances jurisdiction 4 fiscal 2017 part larger strategic initiative legg mason restructured certain holding company businesses increased amount foreign tax credits available utilization november 2015 uk finance bill 2015 enacted reduced main uk corporate tax rate 20 19 effective april 1 2017 18 effective april 1 2020 september 2016 uk finance act 2016 enacted reduced main uk corporate tax rate effective april 1 2020 17 reductions uk corporate tax rate resulted tax benefits 4055 8383 recognized fiscal 2017 2016 respectively result revaluation deferred tax assets liabilities new rates april 13 2015 reforms new york city’s corporate tax structure enacted included changes calculation net operating loss carryforwards changes way sales revenue sourced revaluation deferred tax assets liabilities new rules resulted recognition onetime income tax benefit 17053 year ended march 31 2016 deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows certain tax benefits associated legg masons employee stock plans recorded directly stockholders equity tax benefit recorded equity fiscal 2016 2015 due cumulative net operating loss position company march 31 2017 related unrecognized tax benefit aggregated 22585 described note 1 upon adoption new accounting standard effective april 1 2018 tax benefit recognized increase deferred tax assets retained earnings consolidated balance sheet legg mason various loss tax credit carryforwards may provide future tax benefits related valuation allowances established accordance accounting guidance income taxes managements opinion likely benefits realized extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals including future increases relating tax amortization goodwill indefinitelife intangible assets well planning strategies measure value realizability deferred tax assets april 13 2016 legg mason acquired majority ownership clarion partners partnership creates basis difference related deferred tax liability 21991 may 2 2016 permal business merged entrust part transaction legg mason paid cash 35 ownership permal business 65 ownership new entrustpermal joint venture result transaction legg mason converted portion permal legacy business partnership decreased related deferred tax liability 4102 substantially legg masons deferred tax assets relate us federal state uk taxing jurisdictions march 31 2017 us federal deferred tax assets aggregated 731636 realization expected require approximately 3700000 future us earnings 811000 must foreign sourced earnings based estimates future taxable income using assumptions consistent used legg masons goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realizable respect deferred tax assets relating foreign tax credit carryforwards likely tax benefits relating utilization approximately 6147 foreign taxes credits realized valuation allowance established companys estimates assumptions contemplate certain possible future changes ownership legg mason stock us internal revenue code could limit utilization net operating loss foreign tax credit benefits limitation would impact timing amount net operating loss foreign tax credit benefits ultimately realized expire march 31 2017 change federal valuation allowances aggregated 11133 decrease federal valuation allowances prior year 10413 relates expiring foreign tax credits reclassified net operating losses offset part additional valuation allowances 1308 related foreign tax credits 601 related martin currie’s operating losses also decrease valuation allowance 2629 related charitable contributions march 31 2017 us state deferred tax assets aggregated approximately 173788 due limitations utilization net operating loss carryforwards taking consideration certain state tax planning strategies related valuation allowance 29075 substantially established prior years state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized foreign jurisdictions net increase valuation allowances 502 fiscal 2017 primarily relates statutory rate changes revised estimates realization deferred tax benefits following deferred tax assets valuation allowances relating carryforwards recorded march 31 2017 2016 respectively 1 currently proposals significantly change us federal income tax rules include proposals reduce tax rates limit deductibility interest expense changes taxation nonus earnings although details yet available changes could impact carrying value legg masons deferred tax assets 2 substantially us state net operating losses carryforward fiscal 2036 3 due potential change factors relating apportionment income various states legg masons effective state tax rates subject fluctuation impact value companys deferred tax assets including net operating losses could material impact future effective tax rate company legg mason total gross unrecognized tax benefits approximately 70787 73873 92344 march 31 2017 2016 2015 respectively totals approximately 50462 49629 62775 respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates fiscal 2017 result net impact effective settlement tax examinations recent developments case law expiration statutes limitation certain jurisdictions previously unrecognized benefits 8611 realized reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 2017 2016 2015 follows although management cannot predict degree certainty timing ultimate resolution matters review various taxing jurisdictions reasonably possible company’s gross unrecognized tax benefits balance may change within next 12 months 15958 result expiration statutes limitations completion tax authorities examinations company accrues interest related unrecognized tax benefits interest expense recognizes penalties operating expense years ended march 31 2017 2016 2015 company recognized approximately 139 4441 1492 respectively substantially interest march 31 2017 2016 2015 legg mason approximately 2155 1900 8570 respectively accrued interest penalties tax contingencies consolidated balance sheets legg masons prior year tax returns subject examination internal revenue service irs majesty’s revenue customs brazilian tax authorities various countries states following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal 2015 us federal fiscal 2015 uk calendar year 2008 brazil fiscal 2012 state california fiscal 2008 state new york fiscal 2013 states connecticut maryland company anticipate making significant cash payments settlement audits excess amounts reserved except noted legg mason intends permanently reinvest overseas substantially cumulative undistributed earnings foreign subsidiaries accordingly additional us federal income taxes provided undistributed earnings extent permanently reinvested legg masons foreign operations however circumstances change legg mason provide pay additional us taxes connection repatriation earnings year ended march 31 2017 legg mason implemented restructure offshore holding company structure resulted repatriation approximately 11600 foreign earnings resulted tax benefit approximately 17000 order increase amount cash available us general corporate purposes legg mason plans utilize approximately 276000 foreign cash next several years 4255 accumulated foreign earnings additional tax provision associated repatriations previously recognized repatriation accumulated prior period foreign earnings currently planned however circumstances change legg mason provide pay applicable additional us taxes connection repatriation offshore funds practical time determine income tax liability would result repatriation accumulated foreign earnings legg mason available domestically cash equivalents approximately 438000 march 31 2017 500000 remaining undrawn capacity revolving credit facility meet domestic liquidity needs subject compliance applicable covenants provide flexibility maximizing cost effective capital deployment without repatriating additional accumulated foreign earnings 8 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2028 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2017 minimum annual aggregate rentals operating leases service agreements follows 1 includes 615651 real estate equipment leases 62325 service maintenance agreements minimum rental commitments shown reduced 126280 minimum sublease rentals received future noncancelable subleases approximately 35 due one counterparty lease reserve liability included table space subleased march 31 2017 2016 28821 31745 respectively subtenant defaults sublease legg mason may incur operating charges adjust existing lease reserve liability reflect expected future sublease rentals reduced amounts dependent commercial real estate market time minimum rental commitments shown also include 20443 commitments related space vacated subleases pursued related lease reserve liability also included table 10867 20495 march 31 2017 2016 respectively remains subject adjustment based circumstances real estate markets may require change assumptions actual terms sublease ultimately secured lease reserve liability takes consideration various assumptions including expected amount time take secure sublease agreement prevailing rental rates applicable real estate markets fiscal 2016 first second quarters fiscal 2017 certain office space permanently vacated connection combination entrust permal described note 2 year ended march 31 2017 lease related portion space terminated resulting reduction lease reserve liability 4495 addition fiscal 2016 certain headquarters space permanently vacated pursue sublease resulting increase lease reserve approximately 7200 year ended march 31 2017 sublease executed vacated headquarters space resulting 2700 reduction lease reserve liability terms favorable estimated activity reflected lease reserve liability table lease reserve liability subleased space vacated space subleases pursued included current liabilities noncurrent liabilities consolidated balance sheets table presents summary changes lease reserve liability 1 included occupancy expense consolidated statements income loss 2 includes 9069 7212 related restructuring permal combination entrust years ended march 31 2017 2016 respectively see note 2 additional information following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes periods provided landlord free rent period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2017 legg mason commitments invest 35525 limited partnerships make private investments commitments expected outstanding funded required end respective investment periods ranging fiscal 2029 also connection acquisition clarion partners legg mason committed provide 100000 seed capital clarion partners products second anniversary transaction closing legg mason also committed contribute 5000 additional working capital financial guard paid two year period following acquisition 1250 paid march 31 2017 march 31 2017 legg mason various commitments pay contingent consideration relating business acquisitions following table presents summary maximum remaining contingent consideration changes contingent consideration liability legg masons recent acquisitions see note 2 additional details regarding significant acquisition 1 using applicable exchange rate march 31 2017 amounts denominated currencies us dollar 2 includes amounts related acquisition financial guard august 17 2016 pk investments december 31 2015 3 using applicable exchange rate date acquisition amounts denominated currencies us dollar see note 18 regarding 11500 reduction estimated contingent consideration liability related acquisition rare infrastructure subsequent march 31 2017 normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications considered financial guarantees relevant accounting guidance legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily asset management securities brokerage investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial normal course business legg mason also received subpoenas currently involved governmental industry selfregulatory agency inquiries investigations time proceedings involving asset management activities accordance guidance accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings probable loss incurred reasonable estimate loss made legg mason cannot estimate reasonably possible loss range loss associated matters litigation proceedings including described customer complaints legal actions inquiries proceedings investigations inability provide reasonably possible amount range losses uncertainty ultimate outcome matter liability damage issues developed point legg mason conclude reasonable possibility loss meaningful amount range possible losses numerous aspects customer complaints legal actions inquiries proceedings investigations prevent legg mason estimating related amount range reasonably possible losses aspects include among things nature matters significant relevant facts known uncertain dispute damages sought specified uncertain unsupportable unexplained addition legal actions discovery may yet started may complete may conclusive meaningful settlement discussions may occurred regulatory matters investigations may run course without clear indication wrongdoing fault conclusion managements opinion adequate accrual made march 31 2017 provide probable losses may arise matters company could reasonably estimate amount legg masons financial condition results operations cash flows could materially affected period matter ultimately resolved addition ultimate costs litigationrelated charges vary significantly periodtoperiod depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement reductions compensation revenue share arrangements march 31 2017 2016 legg masons liability losses contingencies 700 400 respectively fiscal 2017 2016 2015 legg mason incurred charges relating litigation proceedings approximately 1100 250 200 respectively described note 2 legg mason may obligated settle noncontrolling interests related certain affiliates march 31 2017 affiliate noncontrolling interests excluding amounts related management equity plans aggregated 591254 addition march 31 2017 estimated redemption value units affiliate management equity plans aggregated 72298 see notes 11 14 additional information regarding affiliate management equity plans noncontrolling interests respectively 9 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees plans legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation match employee 401k contributions matches range 50 100 employee 401k contributions maximum lesser 6 employee compensation specified amount irs limit corporate profit sharing matching contributions together contributions made subsidiary plans totaled 37249 33152 27888 fiscal 2017 2016 2015 respectively addition employees make voluntary contributions certain plans connection acquisition martin currie october 1 2014 legg mason assumed obligations martin curries defined benefit pension plan fully discussed note 2 10 capital stock march 31 2017 authorized numbers common preferred shares 500000 4000 respectively march 31 2017 2016 4111 6988 shares common stock respectively reserved issuance legg masons equity plans may 2012 legg masons board directors approved share repurchase authorization 1000000 purchases common stock 13515 share repurchases authorization completed march 2015 remaining share repurchases authorization completed april 2015 january 2015 legg masons board directors approved new share repurchase authorization 1000000 additional repurchases common stock expiration attached share repurchase authorization fiscal 2017 2016 2015 legg mason purchased retired 11697 4537 6931 shares common stock respectively 381672 209632 356522 respectively open market purchases remaining balance authorized stock buyback approximately 423000 discussed note 6 warrants issued connection repurchase convertible notes could result issuance maximum 14205 shares legg mason common stock subject adjustment certain conditions met prior expiration july 2017 changes common stock years ended march 31 2017 2016 2015 respectively follows dividends declared per share 088 080 064 fiscal 2017 2016 2015 respectively dividends declared paid march 31 2017 2016 2015 21153 22038 17837 respectively included current liabilities consolidated balance sheets 11 stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units affiliate management equity plans deferred compensation payable stock shares available issuance equity incentive stock plan march 31 2017 3659 options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments four five years expire within eight 10 years date grant discussed components legg masons total stockbased compensation expense years ended march 31 2017 2016 2015 follows stock options stock option transactions legg masons equity incentive plans years ended march 31 2017 2016 2015 summarized total intrinsic value options exercised years ended march 31 2017 2016 2015 2289 5811 14351 respectively march 31 2017 aggregate intrinsic value options outstanding 15135 following information summarizes legg masons stock options outstanding march 31 2017 march 31 2017 2016 2015 options exercisable 2688 2544 2202 shares respectively weightedaverage exercise price 3504 3222 4150 respectively stock options exercisable march 31 2017 weighted average remaining contractual life 39 years march 31 2017 aggregate intrinsic value exercisable shares 11403 following summarizes legg masons stock options exercisable march 31 2017 following information summarizes unvested stock options legg masons equity incentive plans year ended march 31 2017 years ended march 31 2017 2016 2015 income tax benefits related stock options 3178 3730 4681 respectively unamortized compensation cost related unvested options 1905 shares march 31 2017 11727 expected recognized weightedaverage period 15 years cash received exercises stock options legg masons equity incentive plans 8988 9516 22069 years ended march 31 2017 2016 2015 respectively tax benefit expected realized tax deductions option exercises totaled 725 1962 4856 years ended march 31 2017 2016 2015 respectively weightedaverage fair value servicebased stock options granted years ended march 31 2017 2016 2015 excluding granted chief executive officer may 2013 discussed using blackscholes option pricing model 778 1126 1203 per share respectively following weightedaverage assumptions used model grants fiscal 2017 2016 2015 legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values may 2013 legg mason awarded options purchase 500 shares legg mason inc common stock exercise price 3146 equal current market value legg masons common stock chief executive officer included outstanding options table award grant date fair value 5525 subject vesting requirements satisfied may 2015 final 50 award vested end twoyear service period weightedaverage fair value per share awards 1105 estimated grant date using grant price 3146 monte carlo option pricing model following assumptions restricted stock restricted stock restricted stock unit transactions years ended march 31 2017 2016 2015 summarized restricted stock restricted stock unit transactions reflected table noncash transactions years ended march 31 2017 2016 2015 legg mason recognized income tax benefits related restricted stock restricted stock unit awards 21138 20597 18246 respectively unamortized compensation cost related unvested restricted stock restricted stock unit awards 3321 shares yet recognized march 31 2017 74921 expected recognized weightedaverage period 16 years affiliate management equity plans connection acquisition clarion partners april 2016 discussed note 2 legg mason implemented management equity plan management team clarion partners entitles certain key employees participate 15 future growth clarion partners enterprise value subject appropriate discounts subsequent date grant initial grant plan vested immediately related grantdate fair value 15200 determined independent valuation recognized compensation benefits expense consolidated statement income loss reflected consolidated balance sheet redeemable noncontrolling interest future grants plan vest 20 annually five years result recognition additional compensation expense related vesting period subject various conditions including passage time vested plan units put legg mason settlement fair value legg mason also call plan units generally post employment settlement fair value march 31 2017 aggregate redemption amount units plan 18700 effective march 1 2016 legg mason executed agreements management existing whollyowned subsidiary royce regarding employment arrangements royce management revised revenue sharing implementation management equity plan key employees management equity plan minority equity interests equivalent 169 royce entity issued management team march 31 2017 additional minority equity interests plan equivalent 21 royce entity issued management team resulted compensation benefits expense 4600 interests allow holders receive quarterly distributions portion royces pretax income amounts equal percentage ownership represented equity hold subject payment legg masons revenue share reasonable expenses plan permits additional grants plan 38 revenue share points future grants vest immediately upon issuance related grantdate fair value equity units recognized compensation benefits expense consolidated statements income loss reflected consolidated balance sheets nonredeemable noncontrolling interest march 31 2017 estimated aggregate redemption amount units plan 27798 march 31 2014 legg mason implemented management equity plan granted units key employees subsidiary clearbridge investments llc clearbridge entitle participate 15 future growth clearbridge enterprise value subject appropriate discounts subsequent grant date independent valuation determined aggregate cost award approximately 16000 recognized compensation benefits expense consolidated statements income loss related vesting periods march 2019 total compensation expense related clearbridge affiliate management equity plan 3285 3271 3390 years ended march 31 2017 2016 2015 respectively arrangement provides onehalf cost absorbed clearbridge incentive pool vested plan units put legg mason settlement fair value beginning one year holder terminates employment legg mason also call plan units generally post employment settlement fair value changes control legg mason clearbridge impact vesting settlement provisions units however upon sale substantially clearbridge assets vesting units would accelerate participants would receive fair value payment respect interests plan future grants additional plan units dilute participation existing outstanding units 15 future growth respective affiliates enterprise value subsequent related future grant date additional compensation expense would incurred future grants entitle plan participants collectively aggregate 15 future growth clearbridge enterprise value upon vesting grantdate fair value vested plan units reflected consolidated balance sheets redeemable noncontrolling interests adjustment additional paidin capital thereafter redeemable noncontrolling interests continue adjusted ultimate maximum estimated redemption value expected term retained earnings adjustments march 31 2017 estimated aggregate redemption amount vested units clearbridge plan currently redeemable approximately 25800 june 28 2013 legg mason implemented similar management equity plan key employees permal independent valuation determined aggregate cost awards approximately 9000 recognized compensation benefits expense consolidated statements income loss related vesting period december 2017 april 2016 conjunction permal restructuring preparation combination entrust permal management equity plan liquidated payment 7150 participants remaining 3481 unamortized cost expensed year ended march 31 2017 compensation expense related permal affiliate management equity plan 1513 1816 years ended march 31 2016 2015 respectively legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 4500 total share limit plan purchases made payroll deductions legg mason provides 15 contribution towards purchases charged earnings years ended march 31 2017 2016 2015 approximately 164 134 107 shares respectively purchased open market behalf participating employees legg mason also equity plan nonemployee directors current equity plan directors may elect receive shares stock restricted stock units prior july 19 2007 amendment plan directors could also elect receive stock options immediately exercisable price equal market value shares date grant term ten years shares options restricted stock units issuable equity plan limited 625 aggregate 427 384 shares issued march 31 2017 2016 respectively year ended march 31 2015 32 stock options canceled forfeited current equity plan nonemployee directors last outstanding options plan march 31 2017 2016 2015 nonemployee directors held 66 53 45 restricted stock units respectively vest grant date therefore included unvested shares restricted stock restricted stock units table years ended march 31 2017 2016 2015 nonemployee directors granted 11 nine eight restricted stock units respectively years ended march 31 2017 2016 2015 nonemployee directors granted 30 16 23 shares common stock respectively years ended march 31 2017 2016 restricted stock units distributed year ended march 31 2015 27 restricted stock units distributed discussed note 2 upon acquisition clarion partners april 2016 legg mason granted certain key employees clarion partners total 716 performancebased legg mason restricted share units included unvested shares restricted stock restricted stock units table aggregate fair value 11121 included purchase price vest upon clarion partners achieving certain level ebitda defined purchase agreement within designated period closing acquisition may 2016 2015 2014 legg mason granted certain executive officers total 182 107 78 performance share units respectively part fiscal 2016 2015 2014 incentive award aggregate value 3528 4312 3457 respectively vesting performance share units granted may 2016 2015 2014 number shares payable vesting determined based legg mason’s relative total stockholder return threeyear period ending march 31 2019 2018 2017 respectively may 2014 grant performance period ended march 31 2017 resulted payment grant date fair value per unit may 2016 2015 2014 performance share units 1936 4029 4411 respectively estimated grant date using monte carlo pricing model following assumptions fiscal 2012 legg mason established longterm incentive plan ltip equity incentive plan provided additional element compensation based performance determined achievement predefined amount legg mason’s cumulative adjusted earnings per share three year performance period ltip executive officers granted cash value performance units quarter ended september 2012 total targeted amount 1850 september 2012 grant performance period ended march 31 2015 resulted payment amount 1000 settled cash may 31 2015 deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends since january 1 2015 additional contributions plan remaining 254 shares reserved future dividend distributions fiscal 2017 2016 2015 legg mason issued 17 12 44 shares respectively plan weightedaverage fair value per share grant date 2960 4182 4583 respectively undistributed shares issued plan held rabbi trust assets rabbi trust consolidated employer value employers stock held rabbi trust classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plan presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2017 2016 2015 540 583 660 respectively 12 earnings per share basic earnings per share attributable legg mason inc shareholders eps calculated dividing net income loss attributable legg mason inc adjusted removing earnings allocated participating securities weightedaverage number shares outstanding excludes participating securities legg mason issues employees restricted stock restricted stock units deemed participating securities prior vesting related unvested restricted sharesunits entitle holder nonforfeitable dividend rights circumstance accounting guidance requires “twoclass method” eps calculations excludes earnings potentially distributed undistributed allocated participating securities allocate losses participating securities diluted eps similar basic eps effect potential common shares included calculation unless potential common shares antidilutive periods net loss potential common shares participating securities considered antidilutive excluded calculation fiscal 2017 2016 2015 pursuant 1000000 share repurchase authorization discussed note 10 legg mason purchased retired 11697 4537 6931 shares common stock respectively 381672 209632 356522 respectively open market purchases total repurchases reduced weightedaverage shares outstanding 6005 2564 3528 shares years ended march 31 2017 2016 2015 respectively par value shares repurchased charged common stock excess purchase price par first charged additional paidin capital remaining balance charged retained earnings following table presents computations basic diluted eps weightedaverage shares exclude weightedaverage unvested restricted shares deemed participating securities 3335 2831 3065 years ended march 31 2017 2016 2015 respectively diluted eps calculations years ended march 31 2017 2016 2015 exclude potential common shares issuable 14205 warrants issued connection repurchase convertible notes may 2012 market price legg mason common stock exceed exercise price therefore warrants would antidilutive options purchase 3454 1319 years ended march 31 2017 2015 respectively included computation diluted eps presumed proceeds exercising options including related income tax benefits exceed average price common shares period therefore options deemed antidilutive diluted eps calculation year ended march 31 2016 excludes 814 potential common shares antidilutive due net loss year market performancebased awards excluded potential dilution designated market performance condition met unvested restricted shares years ended march 31 2017 2016 2015 antidilutive therefore impact diluted eps 13 accumulated comprehensive loss accumulated comprehensive loss includes cumulative foreign currency translation adjustments gains losses defined benefit pension plans change accumulated translation adjustments fiscal 2017 2016 primarily resulted impact changes british pound brazilian real australian dollar polish zloty singaporean dollar relation us dollar net assets legg masons subsidiaries uk brazil australia poland singapore pound real australian dollar polish zloty singaporean dollar functional currencies respectively summary legg masons accumulated comprehensive loss march 31 2017 2016 follows significant amounts reclassified accumulated comprehensive loss consolidated statements income loss years ended march 31 2017 2016 2015 except 2493 cumulative foreign currency translation related sale legg mason poland 2718 net income tax benefit 1708 realized settlement termination interest rate swap year ended march 31 2017 described note 6 405 net income tax provision 233 realized termination reverse treasury rate lock contract year ended march 31 2015 also described note 6 reclassified nonoperating income expense consolidated statements income loss 14 noncontrolling interests net income loss attributable noncontrolling interests years ended march 31 included following amounts total redeemable nonredeemable noncontrolling interests years ended march 31 included following amounts 1 principally related vie seeded investment products 2 related royce management equity plan 3 includes impact related adoption updated consolidation accounting guidance discussed note 1 redeemable noncontrolling interests affiliate exclusive management equity plans years ended march 31 included following amounts 15 derivatives hedging legg mason uses currency forwards economically hedge risk movements exchange rates primarily us dollar australian dollar british pound euro singapore dollar brazilian real derivative transactions legg mason certain legally enforceable rights setoff governed international swaps derivative association isda master agreements derivative transactions legg mason one isda master agreement significant counterparties covers transactions counterparty respective isda agreements provides settlement netting closeout netting legg mason counterparty legally enforceable rights setoff assets recorded consolidated balance sheets march 31 2017 2016 2718 8650 respectively liabilities recorded consolidated balance sheets march 31 2017 2016 4522 18079 respectively legg mason also uses market hedges certain seed capital investments entering futures contracts sell index funds benchmark hedged seed capital investments discussed note 6 april 2016 legg mason executed 467year amortizing interest rate swap terminated august 2016 also april 2016 legg mason terminated another previously existing interest rate swap exception two interest rate swap contracts discussed note 6 legg mason designated derivatives hedging instruments accounting purposes years ended march 31 2017 2016 2015 march 31 2017 legg mason open currency forward contracts aggregate notional amounts totaling 163366 open futures contracts relating seed capital investments aggregate notional values totaling 134190 amounts representative level nonhedge designation derivative activity throughout fiscal 2017 march 31 2017 weightedaverage remaining contract terms currency forward contracts futures contracts relating seed capital investments three months following table presents derivative assets related offsets march 31 2017 following table presents derivative liabilities related offsets march 31 2017 following table presents derivative assets related offsets march 31 2016 following table presents derivative liabilities related offsets march 31 2016 following table presents gains losses recognized consolidated statements income loss derivative instruments described currency forward contracts futures forward contracts seed capital investments included economic hedges interest rate market risk certain operating investing activities legg mason including foreign exchange risk acquisition contingent consideration gains losses derivative instruments substantially offset gains losses economically hedged items connection entering agreement acquire rare infrastructure august 2015 legg mason executed us dollar australian dollar currency forward contract economically hedge currency changes affecting australian dollar denominated purchase price acquisition completed hedge terminated october 2015 1 relates currency forward executed august 2015 closed october 2015 connection october 2015 acquisition rare infrastructure 16 business segment information legg mason global asset management company provides investment management related services wide array clients company operates one reportable business segment global asset management global asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue global asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks revenues geographic location primarily based geographic location advisor domicile fund families managed legg mason necessarily reflect customer resides currency revenues denominated table reflects revenues longlived assets geographic region march 31 year ended march 31 2017 operating revenues reported united kingdom table exposure single nonus currency excess 20 total uk operating revenues addition march 31 2017 percentage legg masons longterm aum currency exposure aum invested securities denominated british pound euro applicable less 5 british pound euro march 31 2017 legg masons longterm aum country exposure aum invested securities entities domiciled united kingdom eurozone applicable less 5 uk eurozone 17 variable interest entities consolidated investment vehicles discussed notes 1 3 accordance financial accounting standards legg mason consolidates certain sponsored investment products designated civs updated consolidation accounting guidance effective april 1 2016 legg mason adopted updated consolidation guidance modified retrospective basis see note 1 additional information regarding adoption updated guidance adoption updated guidance april 1 2016 resulted certain sponsored investment products reside foreign mutual fund trusts previously accounted vres evaluated vies consolidation nine funds designated civs updated accounting guidance legg mason also concluded primary beneficiary one entrust sponsored investment fund vie consolidated designated civ upon merger entrust permal adoption also resulted deconsolidation 13 14 previously consolidated employeeowned funds legg mason longer variable interest 13 vies march 31 2017 legg mason longer held significant financial interest seven foreign mutual funds therefore concluded longer primary beneficiary result seven funds consolidated march 31 2017 addition year ended march 31 2017 legg mason also concluded primary beneficiary one additional foreign mutual fund consolidated designated civ legg mason also concluded primary beneficiary one sponsored investment fund vie consolidated designated civs march 31 2017 sponsored investment fund also consolidated prior accounting guidance discussed prior consolidation accounting guidance prior consolidation guidance march 31 2016 march 31 2015 legg mason concluded primary beneficiary one sponsored investment fund vie consolidated designated civ march 31 2016 2015 also march 31 2016 2015 legg mason also concluded primary beneficiary 14 17 employeeowned funds respectively sponsors consolidated designated civs discussed effective april 1 2016 new accounting guidance one employeeowned funds longer qualified vies 13 employeeowned funds consolidated march 31 2016 therefore deconsolidated see note 1 additional information regarding adoption new consolidation accounting guidance legg masons investment civs march 31 2017 2016 28300 13641 respectively represents maximum risk loss excluding uncollected advisory fees assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds following tables reflect impact civs consolidated balance sheets march 31 2017 2016 respectively consolidated statements income loss years ended march 31 2017 2016 2015 respectively consolidating balance sheets 1 represents consolidated sponsored investment products vres designated civs consolidating statements income loss 1 represents consolidated sponsored investment products vres designated civs 1 represents consolidated sponsored investment products vres designated civs nonoperating income expense includes interest income interest expense net gains losses investments consolidation civs impact net income loss attributable legg mason inc discussed notes 1 3 effective april 1 2016 legg mason retroactively adopted updated accounting guidance fair value measurement accordance updated guidance investments fair value measured using nav practical expedient disclosed separately following tables reconciling item investments included fair value hierarchy investments reported consolidated balance sheets legg mason financial liabilities civs carried fair value march 31 2017 2016 fair value financial assets civs determined using following categories inputs march 31 2017 2016 transfers level 1 level 2 either years ended march 31 2017 2016 navs used practical expedient civs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 2017 2016 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 redemption restrictions 4 daily redemption 11 monthly redemption 43 quarterly redemption 42 subject three five year lockup side pocket provisions march 31 2017 2016 derivative liabilities civs march 31 2017 2016 vies legg mason holds variable interest primary beneficiary legg masons carrying value maximum risk loss follows 1 amounts related investments proprietary fund products 2 includes equity investments company made required make earned uncollected management fees companys total aum unconsolidated vies 26735285 17170697 march 31 2017 2016 respectively assets vies primarily comprised cash equivalents investment securities liabilities primarily comprised various expense accruals march 31 2016 assets liabilities vies also included clo loans clo debt respectively vies consolidated either 1 legg mason power direct significant economic activities entity rightsobligations associated benefitslosses could significant entity 2 legg mason absorb majority vies expected losses receive majority vies expected residual gains new consolidation guidance effective april 1 2016 clos longer deemed vies 18 subsequent events losses rare infrastructure separate account aum factors including expected withdrawal june 2017 approximately 1500000 institutional client pursuant notification late april 2017 resulted decrease related projected revenues revised estimate remaining useful life rare infrastructure separate account contracts intangible asset related amortized carrying value determined exceed fair value approximately 32000 also due projected decrease revenues carrying value rare infrastructure trade name indefinitelife intangible asset exceeded fair value approximately 2000 aggregate impairments approximately 34000 recorded june 2017 quarter additionally decrease aum projected revenues resulted reduction approximately 11500 estimated contingent consideration liability related rare infrastructure acquisition recorded credit operating expense june 2017 quarter quarterly financial data dollars thousands except per share amounts unless otherwise noted unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results may 18 2017 closing price legg masons common stock 3746 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report independent accountants board directors stockholders legg mason inc audited accompanying consolidated statements financial condition legg mason inc subsidiaries march 31 1995 1994 related consolidated statements earnings changes stockholders equity cash flows three years period ended march 31 1995 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position legg mason inc subsidiaries march 31 1995 1994 consolidated results operations cash flows three years period ended march 31 1995 conformity generally accepted accounting principles scoopers lybrand llp baltimore maryland may 2 1995 consolidated statements earnings dollars thousands except per share amounts consolidated statements changes stockholders equity dollars thousands except share amounts consolidated statements cash flows dollars thousands notes consolidated financial statements dollars thousand except per share amounts 1 summary accounting policies principles consolidation consolidated financial statements include accounts legg mason inc parent whollyowned subsidiaries material intercompany balances transactions eliminated appropriate prior years financial statements reclassified conform 1995 presentation cash equivalents cash equivalents highly liquid investments original maturities less 90 days held sale ordinary course business resale agreements company invests shortterm resale agreements collateralized us government agency securities market value underlying collateral determined daily plus accrued interest thereon must exceed face amount transaction companys policy underlying collateral deposited companys accounts custodian banks resale agreements carried amounts securities subsequently resold specified agreements plus accrued interest securities transactions recorded settlement date basis differ materially trade date basis commission revenues related expenses unsettled transactions recorded trade date basis securities owned companys brokerdealer subsidiaries trading investing valued market resulting unrealized gains losses reflected earnings company adopted provisions statement financial accounting standards sfas 115 accounting certain investments debt equity securities fiscal 1995 accordingly investment securities parent nonbrokerdealer subsidiaries held availableforsale valued market resulting unrealized gains losses reflected stockholders equity depreciation amortization property equipment reported cost net accumulated depreciation amortization 32193 28025 march 31 1995 1994 respectively depreciation amortization determined use straight line method estimated useful life asset remaining life lease maintenance repair costs expensed incurred intangible assets intangible assets consist principally goodwill asset management mortgage servicing contracts attributable business combinations intangibles amortized using straight line accelerated methods periods ranging three forty years accumulated amortization march 31 1995 1994 41794 36714 respectively company periodically reviews accounting goodwill intangible assets considering factors historical profitability projected operating cash flows determine assets realizable amortization periods appropriate investment advisory related fees company earns investment advisory fees assets accounts managed subsidiaries distribution fees assets companysponsored equity bond mutual funds asset based fees various types singlefee brokerage accounts earnings per share primary earnings per share computed dividing net earnings weighted average number shares outstanding dilutive common stock equivalents companys common stock equivalents shares common stock issuable various stock option plans fully diluted earnings per share assumes exercise dilutive common stock equivalents conversion subordinated debentures weighted average number shares follows 2 business combinations january 5 1995 company acquired assets batterymarch financial management batterymarch investment advisory firm manages equity portfolios institutional clients company paid 54141 cash closing supplemental closing payment 5859 due january 1996 batterymarch reaches specified annualized revenue level month calendar 1995 additional payment due early 1998 based batterymarchs achievement specified revenue levels calendar 1997 could increase total consideration 120000 amount 1998 payment exceeds 40000 company may pay portion excess form shares companys common stock acquisition accounted purchase method accounting accordingly total purchase price allocated net assets acquired principally goodwill asset management contracts based estimated fair market values results operations included consolidated financial statements date acquisition company acquired gray seifert co gray seifert fairfield group fairfield april 1994 1993 respectively issuance common stock gray seifert provides investment advisory services individuals endowments foundations fairfield provider mutual fund advisory services banks bank trust departments acquisitions accounted poolings interests material companys results operations financial position accordingly results operations gray seifert fairfield included dates acquisition 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 269825 march 31 1995 261803 march 31 1994 company pays interest certain customer free credit balances held reinvestment purposes 4 securities market securities positions consist following march 31 5 investment securities companys investment securities including type maturity range availableforsale securities follows proceeds debt securities held availableforsale matured sold fiscal 1995 35882 gross realized loss 124 march 311994 prior adoption sfas 115 investment securities carried unamortized cost 29754 market value 30368 6 shortterm borrowings company revolving credit agreement permits borrow 50000 repayable generally five years floating rates terms agreement company required among things maintain consolidated net worth plus subordinated liabilities less 252011 plus 50 consolidated annual net earnings subsequent march 31 1995 together certain subsidiaries company jointly entered revolving credit agreements permit borrow 40000 repayable within 30 days addition subsidiaries company bank lines credit 96000 generally subject termination either partys discretion borrowings outstanding agreements march 31 1995 shortterm borrowings march 31 1994 primarily loans banks totalled 15546 interest payments 17190 1995 12704 1994 10941 1993 7 subordinated liabilities companys subordinated liabilities march 31 1995 1994 follows 525 7 debentures convertible time prior maturity common stock company per share conversion prices 2580 2176 respectively conversion prices subject adjustment certain events company may redeem debentures prior maturity whole part subject certain conditions 525 debentures redeemable 10328 principal may 1 1996 thereafter prices declining annually 100 may 1 2001 march 31 1995 7 debentures redeemable 1014 declining 100 june 15 1996 7 debentures require annual sinking fund payments 1500 beginning june 15 1997 calculated retire 61 debentures prior maturity 8 commitments contingencies company leases office facilities equipment noncancellable operating leases expire varying dates 2005 certain leases provide renewal options contain escalation clauses providing increased rentals march 31 1995 minimum annual aggregate rentals follows total rental expense including cancellable equipment leases 23510 27761 24768 1995 1994 1993 respectively company leased office space partnership company officers stockholders directors combined controlling interest july 1994 time company acquired property 5000 rent expense includes payments 240 1995 811 1994 690 1993 aforementioned partnership company enters whenissued underwriting commitments open transactions relating commitments march 31 1995 closed effect consolidated financial statements company would material company subsidiaries named defendants various legal actions arising primarily securities investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial ultimate resolution actions cannot currently determined opinion management consultation legal counsel actions resolved material adverse effect consolidated financial statements company fiscal 1995 earnings include charge 2000 950 tax relating proposed settlement class action litigation arising taxable municipal bond offerings underwritten 1986 one companys subsidiaries settlement subject final court approval considered hearing scheduled july 1995 item 3 legal proceedings report contains additional information concerning matter 9 employee benefits company subsidiaries maintains various defined contribution plans covering substantially employees discretionary contributions charged operations amounted 3417 7241 6181 1995 1994 1993 respectively addition employees make voluntary contributions certain plans 10 income taxes company subsidiaries file consolidated federal income tax return provision income taxes consists reconciliation difference effective income tax rate statutory federal income tax rate follows components companys deferred tax assets liabilities follows march 31 1995 1994 deferred tax valuation allowance primarily benefits related net operating losses expire 2000 2010 income tax payments 12047 1995 26114 1994 19529 1993 11 capital stock march 31 1995 authorized numbers common preferred shares 20000000 4000000 respectively 4220540 common shares reserved issuance upon conversion companys convertible subordinated debentures addition march 31 1995 1994 2157456 2239870 shares common stock reserved issuance companys stock option plans september 24 1993 company paid 5for4 stock split shareholders record september 8 1993 references consolidated financial statements number common shares per share amounts adjusted retroactively reflect 5for4 stock split except number issued common shares presented consolidated financial statements 12 stock plans options companys employee stock option plans granted prices less 100 fair market value shares date grant options granted generally exercisable cumulative 20 increments five years term ten years date grant transactions plans three years ending march 31 1995 summarized company also adopted legg mason 1988 nonemployee director option plan options granted plan immediately exercisable price equal fair market value shares date grant options issuable plan limited 175000 shares aggregate term ten years date grant march 31 1995 options 69000 shares granted 64000 currently outstanding company makes charge income respect stock option plans company employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject 625000 total share limit plan purchases made payroll deductions company matching 5 employees contributions charges earnings significant respect plan 13 offbalance sheet risk concentration credit normal course business company executes settles finances customer proprietary securities transactions activities expose company offbalance sheet risk event customers parties fail satisfy obligations accordance industry practice securities transactions recorded settlement date generally five business days trade date customer broker fail deliver cash securities agreed company may required purchase sell securities unfavorable market prices company extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include sales securities yet purchased option contracts commodity futures contracts company continually monitors margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose company risk event margin requirements insufficient fully cover customer losses company borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral company deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis company periodically borrows banks collateralized basis utilizing firm customer margin securities compliance securities exchange commission rules counterparty fail return customer securities pledged company subject risk acquiring securities prevailing market prices order satisfy customer obligations company sells securities currently obligated subsequently purchase securities prevailing market prices company exposed risk loss securities prices increase prior closing transactions 14 regulatory requirements companys brokerdealer subsidiaries subject securities exchange commissions uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 1995 brokerdealer subsidiaries aggregate net capital defined 90711 exceeded required net capital 82949 companys principal brokerdealer subsidiary must maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows brokerdealer maintain required amounts cash qualified securities 15 business segment information company subsidiaries operates predominantly single business segmentthe securities industry within segment company primarily engaged securities brokerage investment advisory investment banking activities quarterly financial data dollars thousands except per share amounts unaudited item 9item 8 report page number report independent accountants 27 consolidated statements earnings 28 consolidated statements financial condition 29 consolidated statements changes stockholders equity 30 consolidated statements cash flows 31 notes consolidated financial statements 3240 2 financial statement schedules included pages s1 s6 report independent accountants financial statement schedules schedule condensed financial statements registrant schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitted 3 exhibits 31 articles incorporation company amended incorporated reference form 10q quarter ended september 30 1996 32 bylaws company amended restated april 25 1988 incorporated reference companys annual report form 10k year ended march 31 1988 4 company hereby agrees pursuant item 601b4iiia regulation sk furnish commission upon request copy instrument respect rights holders longterm debt company subsidiaries 101 legg mason inc 1981 incentive stock option plan amended june 2 1988 incorporated reference companys annual report form 10k year ended march 31 1988 102 legg mason inc 1998 stock option plan nonemployee directors incorporated reference companys annual report form 10k year ended march 31 1998 103 form option agreement legg mason inc 1998 stock option plan nonemployee directors incorporated reference form 10q quarter ended june 30 1998 104 legg mason wood walker incorporated deferred compensationphantom stock plan june 1999 amending restatement incorporated reference companys annual report form 10k year ended march 31 1999 105 legg mason inc 1991 omnibus longterm compensation plan incorporated reference exhibit definitive proxy statement companys 1991 annual meeting stockholders 106 form option agreement legg mason inc 1991 omnibus longterm compensation plan incorporated reference companys annual report form 10k year ended march 31 1993 107 legg mason inc executive incentive compensation plan incorporated reference appendix definitive proxy statement companys 2000 annual meeting stockholders 108 legg mason inc 1996 equity incentive plan incorporated reference registration statement 33308721 form s8 109 form option agreement legg mason inc 1996 equity incentive plan incorporated reference companys annual report form 10k year ended march 31 1996 1010 form nonqualified stock option agreement legg mason inc 1996 equity incentive plan incorporated reference form 10q quarter ended september 30 1996 1011 executive convertible debenture purchase loan agreement legg mason inc executive officer legg mason inc dated august 29 1996 incorporated reference form 10q quarter ended december 31 1996 1012 legg mason inc executive convertible subordinated debenture due august 29 2000 issued executive officer legg mason inc incorporated reference form 10q quarter ended december 31 1996 1013 promissory note executive officer legg mason inc dated august 29 1996 incorporated reference form 10q quarter ended december 31 1996 1014 pledge agreement executive officer legg mason inc pledgor legg mason inc pledgee dated august 29 1996 incorporated reference form 10q quarter ended december 31 1996 1015 executive stock purchase loan agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1016 restricted stock agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1017 promissory note executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 1018 pledge agreement legg mason inc executive officer legg mason inc dated december 8 1998 incorporated reference form 10q quarter ended december 31 1998 21 subsidiaries company filed herewith 23 consent independent accountants filed herewith 27 financial data schedule filed herewith exhibits management contracts compensatory plans arrangements b 8k report filed march 10 2000 reporting item 5 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer date june 28 2000 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date raymond mason chairman board june 28 2000 president chief raymond mason executive officer principal executive officer thomas l souders senior vice president june 28 2000 treasurer thomas l souders principal financial accounting officer james w brinkley director june 28 2000 james w brinkley edmund j cashman jr director june 28 2000 edmund j cashman jr charles bacigalupo director june 28 2000 charles bacigalupo harry ford jr director june 28 2000 harry ford jr nicholas j st george director june 28 2000 nicholas j st george richard j himelfarb director june 28 2000 richard j himelfarb james e ukrop director june 28 2000 james e ukrop harold l adams director june 28 2000 harold l adams john e koerner iii director june 28 2000 john e koerner iii roger w schipke director june 28 2000 roger w schipke w curtis livingston director june 28 2000 w curtis livingston edward obrien director june 28 2000 edward obrien peter f omalley director june 28 2000 peter f omalley margaret deb tutwiler director june 28 2000 margaret deb tutwiler william wirth director june 28 2000 william wirth report independent accountants financial statement schedules report consolidated financial statements legg mason inc subsidiaries included page 27 form 10k connection audits financial statements also audited related financial statement schedules listed index page 43 form 10k opinion financial statement schedules referred considered relation basic financial statements taken whole present fairly material respects information required included therein pricewaterhousecoopers llp baltimore maryland may 4 2000 except note 4 date may 26 2000 s1 schedule legg mason inc parent company statements financial condition dollars thousands see notes financial statements s2 schedule legg mason inc parent company statements earnings comprehensive income dollars thousands see notes financial statements s3 schedule legg mason inc parent company statements cash flows dollars thousands interest payments 7481 1998 7371 1999 6832 2000 income tax payments made 1998 1999 2000 see notes financial statements s4 legg mason inc parent company notes financial statements dollars thousands 1 basis presentation parent company financial statements include accounts legg mason inc addition assets liabilities whollyowned subsidiaries presented investments advances subsidiaries notes consolidated financial statements legg mason inc subsidiaries included item 8 report include disclosures respect parent company 2 transactions affiliates parent company interest income 1998 1999 2000 includes 3993 3367 2876 respectively arising promissory note parent company asset management subsidiary company note 28519 march 31 1999 31146 march 31 2000 included investments advances subsidiaries addition interest income 1998 1999 2000 includes 1576 2865 2526 respectively principally arising senior subordinated loans brokerdealer subsidiary company indebtedness 35000 march 31 1999 2000 included investments advances subsidiaries 2000 company issued notes amount 25551 subsidiary company notes included investments advances subsidiaries income tax payments made legg mason wood walker inc wholly owned subsidiary 3 deferred compensation employee stock trust july 1998 emerging issues task force eitf reached consensus eitf issue 9714 accounting deferred compensation arrangements amounts earned held rabbi trust invested eitf 9714 eitf 9714 assets trust must consolidated employer value employers stock held rabbi trust must classified stockholders equity generally accounted manner similar treasury stock certain situations corresponding deferred compensation liability must recorded fair value shares held rabbi trust changes fair value deferred compensation liability september 30 1998 must recognized earnings subsidiary company adopted eitf 9714 account deferred compensation employee stock trust plan effective september 30 1998 fiscal 2000 subsidiary company recorded noncash credit 1063 credit represents change fair value stock held trust april 1 1999 june 2 1999 fiscal 1999 subsidiary company recorded noncash charge earnings 10352 charge represents change fair value stock held trust september 30 1998 march 31 1999 june 2 1999 subsidiary company amended plan limit distributions plan assets shares companys common stock accordance provisions eitf 9714 changes value stock held plan subsequent june 2 1999 longer affect companys earnings addition result plan amendment obligation previously recorded deferred compensation liability reclassified stockholders equity accordingly trust shares 2345667 march 31 2000 corresponding liability presented components stockholders equity march 31 2000 s5item 8 financial statements supplementary data managements discussion responsibility financial reporting management legg mason inc subsidiaries collectively legg mason responsible preparation fair presentation accompanying consolidated financial statements related notes management also responsible fair presentation financial data included annual report believes information accurate consistent consolidated financial statements notes applicable management understands recognizes importance safeguarding legg masons assets connection management believes legg mason maintains system internal controls adequate ensure transactions properly authorized assets safeguarded financial records reliable system internal controls includes limited maintaining risk operational management committees maintaining internal audit legal compliance departments establishing formal written policies procedures segregating key duties functions appropriate due fact operational environment legg mason operates constantly changing management periodically evaluates implements changes improve system internal controls audit committee board directors participates reviewing adequacy system internal controls financial reporting audit committee consists directors independent legg mason meet regularly management internal auditors well independent accountants review scope work findings finally independent accounting firm pricewaterhousecoopers llp performed audit legg masons financial statements part audit management believes made available pricewaterhousecoopers llp financial records related data minutes stockholders directors meetings pricewaterhousecoopers llp believed necessary order render independent audit report part audit pricewaterhousecoopers llp obtains specific representations management legg mason management believes representations made pricewaterhousecoopers llp audit valid accurate copy independent accountants audit report follows raymond mason raymond mason chairman president chief executive officer timothy c scheve timothy c scheve senior executive vice president chief administrative officer charles j daley jr charles j daley jr senior vice president treasurer principal financial officer report independent accountants board directors stockholders legg mason inc opinion accompanying consolidated statements financial condition legg mason inc subsidiaries legg mason related consolidated statements earnings changes stockholders equity comprehensive income cash flows present fairly material respects consolidated financial position legg mason march 31 2002 2001 consolidated results operations cash flows three years period ended march 31 2002 conformity accounting principles generally accepted united states america financial statements responsibility legg masons management responsibility express opinion financial statements based audits conducted audits financial statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 6 notes consolidated financial statements effective april 1 2001 legg mason adopted provisions statements financial accounting standards 141 business combinations 142 goodwill intangible assets pricewaterhousecoopers llp baltimore maryland may 3 2002 consolidated statements earnings dollars thousands except per share amounts see notes consolidated financial statements consolidated statements financial condition dollars thousands see notes consolidated financial statements consolidated statements changes stockholders equity dollars thousands see notes consolidated financial statements consolidated statements comprehensive income dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands see notes consolidated financial statements notes consolidated financial statements dollars thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason principally engaged providing asset management securities brokerage investment banking related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries material intercompany balances transactions eliminated unless otherwise noted per share amounts include common shares legg mason shares issued connection acquisition perigee investment counsel inc perigee exchangeable common shares legg mason oneforone basis time appropriate prior years financial statements reclassified conform current year presentation use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america require management make assumptions estimates affect amounts reported financial statements accompanying notes actual amounts could differ estimates differences could material impact consolidated financial statements cash equivalents cash equivalents highly liquid investments original maturities 90 days less held sale ordinary course business securities purchased agreements resell legg mason invests shortterm securities purchased agreements resell collateralized us government agency securities included cash securities segregated regulatory purposes deposited clearing organizations securities purchased agreements resell accounted collateralized financings policy legg mason obtain possession collateral market value excess principal amount loaned collateral valued daily legg mason may require counterparties deposit additional collateral appropriate securities purchased agreements resell carried amounts securities subsequently resold specified respective agreements plus accrued interest securities transactions customer securities transactions recorded settlement date basis related commission revenues expenses recorded trade date basis receivables payables customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances reflected consolidated financial statements see note 15 discussion offbalance sheet risk securities lending securities borrowed loaned accounted collateralized financings recorded amount collateral advanced received securities borrowed transactions require legg mason deposit cash collateral lender legg mason generally receives collateral form cash securities loaned fee received paid legg mason recorded interest income expense legg mason monitors fair value securities borrowed loaned daily basis additional collateral obtained refunded necessary financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value cash securities segregated regulatory purposes deposited clearing organizations financial instruments owned investment securities investments finance subsidiaries financial instruments sold yet purchased consolidated statements financial condition include forms financial instruments parent nonbrokerdealer subsidiaries hold debt marketable equity investments generally classified availableforsale heldtomaturity debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders equity comprehensive income net applicable income taxes debt securities held legg masons finance subsidiaries positive intent ability hold maturity classified heldtomaturity investments recorded amortized cost amortization discount premium included current period earnings financial instruments used trading activities parents primary brokerdealer subsidiary recorded trade date basis carried fair value unrealized gains losses reflected current period earnings addition investments held one legg masons asset management subsidiaries classified trading securities investments recorded fair value unrealized gains losses included earnings realized gains losses investments included current period earnings fair values generally based upon prices independent sources listed market prices broker dealer price quotations investments illiquid privatelyheld securities readily determinable fair values determination fair value requires management estimate value security based upon available information projected cash flows review financial market conditions underlying company instances security subject transfer restrictions value security based primarily quoted price security without restriction may reduced amount estimated reflect restrictions addition even value security derived independent market price broker dealer quote certain assumptions may required deter mine fair value legg mason generally assumes size positions securities holds would large enough affect quoted price securities sold sale would happen orderly manner however assumptions may incorrect actual value realized upon disposition could different current carrying value legg mason evaluates nontrading securities temporary impairment may exist fair value investment security current value extended period time temporary impairment determined exist difference value investment security recorded financial statements current value recognized charge earnings period impairment determined march 31 2002 legg mason approximately 46 million financial instruments valued solely based upon managements assumptions estimates equipment leasehold improvements equipment leasehold improvements consists primarily furniture communications technology hardware software leasehold improvements equipment leasehold improvements reported cost net accumulated depreciation amortization 78015 71895 march 31 2002 2001 respectively depreciation amortization determined use straightline method equipment depreciated estimated useful life asset leasehold improvements generally amortized term lease maintenance repair costs expensed incurred depreciation amortization expense 25801 23348 19532 2002 2001 2000 respectively intangible assets goodwill intangible assets consist principally asset management contracts trade names legg mason also capitalizes costs incurred acquiring mortgage servicing rights loan origination activities accordance statement financial accounting standards sfas 140 accounting transfers servicing financial assets extinguishments liabilities intangible assets amortized estimated useful lives ranging five twenty years using straightline method unless asset determined indefinite useful life amounts assigned indefinitelife intangible assets primarily represent value contracts manage assets mutual funds foreseeable limit contract period trade names goodwill represents excess cost business acquisition fair value net assets acquired accordance sfas 142 goodwill intangible assets indefinitelife intangible assets goodwill amortized legg mason periodically reviews intangible assets goodwill considering factors projected cash flows revenue multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment occurs intangible assets subject amortization reviewed impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill impaired carrying amount reporting unit exceeds implied fair value reporting unit estimating fair value reporting unit legg mason uses valuation techniques based multiples revenues discounted cash flows similar models employed analyzing purchase price acquisition target substantially legg masons goodwill assigned asset management operating segment legg mason defined asset management reporting units wealth management institutional mutual funds one level operating segment see note 6 additional information regarding intangible assets goodwill translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates statement financial condition date revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income gains losses resulting foreign currency transactions included earnings investment advisory related fees legg mason earns investment advisory fees assets accounts managed subsidiaries distribution fees assets companysponsored mutual funds assetbased fees various types singlefee brokerage accounts addition legg mason earns fees performing certain administrative services funds revenues investment advisory related activities recognized period services performed performance fees recognized end performance period investment banking underwriting revenues fees advisory assignments recorded underlying transaction completed terms engagement expenses related securities offerings legg mason acts principal agent deferred related revenue recognized expense reimbursements related advisory activities recorded reduction related expenses stockbased compensation legg mason accounts stockbased compensation accordance accounting principles board opinion apb 25 accounting stock issued employees permitted sfas 123 accounting stockbased compensation legg masons stockbased compensation plans include stock options restricted awards stock purchase plans deferred compensation payable stock accordance apb 25 compensation expense recognized stock options intrinsic value exercise price less market price date grant pro forma effects sfas 123 net income earnings per share presented note 13 accumulated comprehensive loss accumulated comprehensive loss represents cumulative foreign currency translation adjustments net gains losses investment securities cash flow hedges reflected earnings march 31 2002 2001 legg masons accumulated comprehensive loss consists 10879 10654 respectively foreign currency translation loss adjustments 1155 2997 respectively unrealized gains investment securities 172 0 respectively unrealized losses cash flow hedges earnings per share basic earnings per share eps calculated dividing net earnings weighted average number common shares outstanding diluted eps similar basic eps adjusts effect potential common shares following table presents computations basic diluted eps march 31 2002 2001 2000 options purchase 3680690 shares 1897850 shares 57000 shares respectively included computation diluted earnings per share options exercise prices greater average price common shares period addition march 31 2002 2001 2000 591816 shares 633967 shares 69405 shares respectively held employee stock trust antidilutive therefore excluded computation diluted earnings per share diluted eps include 44 million shares may issued upon conversion zerocoupon contingent convertible senior notes due contingent nature conversion features provides conversion limited circumstances including sale price common stock reaching certain thresholds notes rated specified credit ratings notes called redemption derivative instruments effective april 1 2001 legg mason adopted provisions sfas 133 amended accounting derivative instruments hedging activities sfas 133 requires legg mason report derivative instruments assets liabilities balance sheet measure instruments fair value legg mason generally engage derivative hedging activities except limited tradingrelated activities parents primary brokerdealer subsidiary transaction special purpose entity spe primary brokerdealer subsidiary uses futures contracts means hedging interest rate risk trading activities gains losses transactions included principal transactions consolidated statements earnings addition one parents asset management subsidiaries collateral manager collateralized debt obligation cdo spe legg mason entered forward purchase agreement purchase 1 interest entity value derivatives march 31 2002 material consolidated financial statements special purpose entities spes trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse legg mason utilize spes form financing provide liquidity one parents asset management subsidiaries collateral manager cdo spe cdo established fiscal 2002 vehicle investors issued approximately 383 million debt acquired portfolio consisting primarily high quality assetbacked securities legg mason sell assets cdo services collateral manager legg mason receives senior subordinated management fees approximately 15 million annually legg mason may removed collateral manager certain conditions currently legg mason equity interest cdo however derivative contract entered whereby legg mason may purchase 42 million preference shares approximately 1 entity four years derivative legg mason financial commitments guarantees cdo underlying debt nonrecourse legg mason collateral manager entity consolidated financial accounting standards board fasb undertaken project address accounting spes legg mason continue monitor project determine whether consolidation cdo required future 2 business combinations july 2001 fasb issued sfas 141 business combinations provides business combinations initiated june 30 2001 shall accounted using purchase method purchase method net assets results operations acquired companies included consolidated financial statements date acquisition addition sfas 141 provides cost acquired entity must allocated assets acquired including identifiable intangible assets liabilities assumed based estimated fair values date acquisition excess cost fair value net assets acquired must recognized goodwill october 1 2001 legg mason completed acquisition royce associates inc royce manages small microcap mutual funds date acquisition royce managed assets approximately 47 billion legg mason acquired royce initial cash payment 115000 plus acquisition costs 1059 acquisition royce fits legg masons strategic objective grow asset management business determination purchase price made basis among things revenues profitability growth rates royce summary fair values net assets acquired follows liabilities net 829 fixed assets 1272 trade name 7700 asset management contracts 5700 mutual fund contracts 99200 goodwill 3016 total purchase price 116059 fair value asset management contracts 5700 amortized average life seven years value trade name mutual fund contracts goodwill subject amortizationgoodwill deductible tax purposes attributable asset management segment transaction also includes three contingent payments based royces revenue growth years ending third fourth fifth anniversaries closing aggregate purchase price 215000 legg mason option pay much 50 remaining purchase price common stock additional payments required result contingency allocated goodwill august 1 2001 legg mason completed acquisition private capital management lp affiliated entities pcm cash approximately 682000 plus acquisition costs 1000 pcm leading high net worth investment manager managed assets approximately 86 billion date acquisition pcm fits legg masons strategic objective grow asset management business determination purchase price made basis among things revenues profitability growth rates pcm summary fair values net assets acquired follows current assets net 4228 fixed assets 1903 trade name 47000 asset management contracts 298000 goodwill 331869 total purchase price 683000 fair value asset management contracts 298000 amortized average life eighteen years value trade name goodwill subject amortizationgoodwill deductible tax purposes attributable asset management segment transaction also includes two contingent payments based pcms revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion additional payments required result contingency allocated goodwill following unaudited pro forma consolidated results presented though acquisitions pcm royce occurred beginning period presented years ended march 31 2002 2001 net revenues 1498484 1425568 net earnings 163123 161298 earnings per common share basic 250 253 diluted 239 237 february 5 2001 legg mason acquired approximate 70 ownership interest barrett associates inc barrett high net worth asset manager individuals families endowments foundations legg mason acquired controlling interest approximately 15900 contingent purchase price adjustment acquisition accounted purchase fair value asset management contracts acquired 5747 amortized 15 years excess purchase price fair value assets acquired 8787 recognized goodwill ownership interest owned legg mason recorded minority interest material april 2002 minority shareholders representing 116 outstanding shares barrett notified legg mason intention exercise rights put shares legg mason june 30 2002 purchase price 3116 terms acquisition agreement remaining 184 interest acquired 2006 additional amount 13798 based barretts revenues fifth year may 26 2000 legg mason completed acquisition perigee one canadas leading institutional investment managers april 2001 perigee inc merged operating subsidiary perigee investment counsel inc terms acquisition agreement outstanding share perigee exchanged 0387 exchangeable share legg mason canada holdings subsidiary legg mason holders exchangeable shares dividend voting rights equivalent common stockholders exchangeable shares economic equivalent common shares legg mason may exchanged shares oneforone basis time legg mason issued approximately 52 million exchangeable shares transaction acquisition accounted pooling interests accordingly prior period consolidated financial statements restated include combined results operations financial position cash flows perigee december 1999 legg mason completed acquisition legg mason investors holdings plc legg mason investors formerly johnson fry holdings plc londonbased retail fund management company acquisition accounted purchase total purchase price approximately 72000 including 67000 cash 5000 liabilities excess purchase price tangible net assets acquired consists goodwill approximately 56000 intangible assets approximately 8000 intangible assets represent contracts manage assets investment funds deemed indefinite lives legg mason investors two finance subsidiaries purpose finance companies raise funds issuing secured fixed rate loan securities minimum maturity five years use proceeds invest portfolio bonds issued various financial institutions generally available public tranches small enough retail investor see notes 5 8 september 30 1999 legg mason entered joint venture bingham dana llp bostonbased law firm acquire 50 interest trust administration business 10000 investment joint venture accounted equity method september 2 1999 legg mason acquired assets berkshire asset management inc berkshire 18000 berkshire provides investment management services predominantly domestic equity fixed income accounts high net worth individuals institutions acquisition accounted purchase fair value asset management contracts acquired 7587 amortized 12 years excess purchase price fair value net assets acquired 10033 recognized goodwill 3 receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 3067134 2746055 march 31 2002 2001 respectively legg mason pays interest certain customer free credit balances held investment purposes 4 financial instruments owned fair value securities positions used legg masons trading activities consist following march 31 financial instruments owned 2002 2001 us government agencies 18448 10945 corporate debt 26073 37522 state municipal bonds 77853 73314 equity 11335 5407 total 133709 127188 financial instruments sold yet purchased 2002 2001 us government agencies 30731 34288 corporate debt 5914 2727 state municipal bonds 164 762 equity 1100 1037 total 37909 38814 march 31 2002 2001 legg mason pledged securities owned 300 352 respectively collateral counterparties securities loaned transactions commodities clearing requirements sold repledged 5 investments legg mason two categories investments investment securities investments finance subsidiaries investments generally classified availableforsale heldtomaturity trading described note 1 investment securities consist highly liquid debt equity securities investments finance subsidiaries consist bonds issued various financial institutions proceeds gross realized gains losses sales maturities availableforsale heldtomaturity investments follows years ended march 31 2002 2001 2000 availableforsale proceeds 16760 17525 54034 gross realized gains 1865 621 423 gross realized losses 39 493 heldtomaturity proceeds 19947 111754 investments march 31 2002 2001 follows 2002 2001 investment securities availableforsale 12067 13116 heldtomaturity 784 trading 8605 150 nonqualifying1 7065 total 27737 14050 investments finance subsidiaries availableforsale 97155 96320 heldtomaturity 108 18906 total 97263 115226 1 nonqualifying purposes sfas 115 accounting certain investments debt equity securities contains investments private equity securities readily determinable fair values nontrading securities held parents brokerdealer subsidiaries information regarding legg masons availableforsale heldtomaturity investments categorized maturity date follows 6 intangible assets goodwill july 2001 fasb issued sfas 142 goodwill intangible assets sfas 142 provides goodwill longer amortized value identifiable intangible asset must amortized useful life unless asset determined indefinite useful life goodwill indefinitelife intangible assets must tested impairment least annually legg mason completed testing goodwill indefinitelife intangible assets determined impairment march 31 2002 results fiscal year ended march 31 2002 include effect adopting sfas 142 resulted expense reduction 7785 6737 net tax expense reduction increased basic diluted earnings per share 010 fiscal year ended march 31 2002 pretax reduction intangible amortization expense fiscal year represents amount amortization goodwill indefinitelife intangible assets arose acquisitions prior june 30 2001 longer amortized amounts assigned indefinitelife intangible assets primarily represent value contracts manage assets mutual funds trade names following table reflects consolidated results adjusted adoption sfas 142 occurred beginning fiscal year ended march 31 2001 years ended march 31 2002 2001 net earnings reported 152936 156230 goodwill amortization 4791 indefinitelife intangibles amortization 1039 adjusted 152936 162060 basic earnings per share reported 235 245 goodwill amortization 007 indefinitelife intangibles amortization 002 adjusted 235 254 diluted earnings per share reported 224 230 goodwill amortization 007 indefinitelife intangibles amortization 002 adjusted 224 239 following tables reflect components intangible assets march 31 2002 2001 amortized intangible assets cost asset management contracts 358630 51242 mortgage servicing contracts 8926 7821 total 367556 59063 amortized intangible assets accumulated amortization asset management contracts 29617 12741 mortgage servicing contracts 2655 3708 total 32272 16449 indefinitelife intangible assets fund management contracts 104017 4761 trade names 54700 total 158717 4761 fiscal year 2002 legg mason recorded impairment charge 1164 net tax representing fair value asset management contracts acquired prior business combination terminated period estimated amortization expense next five fiscal years follows 2003 24586 2004 23481 2005 23178 2006 22745 2007 22059 legg masons carrying value goodwill 443422 march 31 2002 primarily attributable asset management reporting segment increase carrying value goodwill since march 31 2001 reflects acquisitions pcm royce pennsylvaniabased investment advisor material legg masons financial statements 7 shortterm borrowings legg mason obtains shortterm financing secured unsecured basis secured financing obtained use securities lending agreements secured bank loans primarily collateralized agency corporate equity securities legg mason committed secured compensating balance line credit allows borrowings 125000 based amount underlying customer escrow funds matures september 15 2002 legg mason intends use facility shortterm investing interest accruing 080 facility collateralized securities purchased funds borrowings outstanding facility march 31 2002 2001 legg mason committed unsecured revolving credit facility 100000 matures june 30 2003 facility restrictive covenants require legg mason among things maintain specified levels net worth debttoequity ratios legg mason intends use facility general corporate purposes including expansion diversification business interest facility based upon federal funds rates prime rates libor borrowings outstanding facility march 31 2002 2001 legg mason committed secured warehouse line credit 50000 matures september 15 2002 legg mason uses facility fund commercial mortgage loans outstanding loan balances 3560 4900 march 31 2002 2001 weighted average interest rates 380 558 respectively legg mason maintained compliance applicable covenants facilities 8 longterm debt legg masons longterm debt march 31 2002 consists 423979 675 senior notes 255667 zerocoupon contingent convertible senior notes 99817 650 senior notes 2002 legg mason issued longterm fixed rate debt fund acquisitions july 2 2001 legg mason issued 425000 principal amount senior notes due july 2 2008 bear interest 675 notes sold discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs june 6 2001 legg mason issued 567000 principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 resulting gross proceeds approximately 250000 convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year upon certain events including sale price legg masons common stock reaching certain thresholds convertible notes rated specified credit ratings convertible notes called redemption note convertible 77062 shares legg masons common stock subject adjustment legg mason may redeem convertible notes cash june 6 2006 accreted value addition legg mason may required repurchase convertible notes accreted value option holders june 6 2003 2005 2007 2011 every five years thereafter 2026 upon change control legg mason repurchases paid cash shares legg masons common stock combination net proceeds offering 244375 payment debt issuance costs debt issuance costs included assets amortized twoyear period date first repurchase option holders approximately 44 million shares common stock reserved issuance upon conversion legg mason also outstanding 100000 principal amount senior notes due february 15 2006 bear interest 650 notes issued discount yield 657 described note 2 legg masons finance subsidiaries issued series secured fixed rate notes minimum maturity five years obligations become due beginning october 2002 march 2003 interest rates ranging 6829 70 march 31 2002 legg mason 75000 available issuance additional debt convertible debt securities pursuant shelf registration statement march 31 2002 aggregate maturities longterm debt based contractual terms follows 2003 100851 2004 2005 2006 100000 2007 thereafter 992000 total 1192851 fair value longterm debt march 31 2002 2001 798942 97480 respectively fair values estimated using current market prices 9 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements data processing services leases service agreements expire varying dates 2013 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2002 minimum annual aggregate rentals follows 2003 61762 2004 47483 2005 34906 2006 26047 2007 21066 thereafter 47336 total 238600 minimum rental commitments shown reduced 17627 minimum sublease rentals received future noncancelable subleases table also include aggregate rental commitments 339 furniture equipment capital leases due 2003 rental expense operating leases service contracts 70024 66945 51935 2002 2001 2000 respectively rental expense net sublease income received material three years march 31 2002 2001 legg mason commitments invest 10252 9778 respectively limited partnerships make private equity investments commitments funded required end respective investment periods ranging 2005 2010 discussed note 2 legg mason contingent payments related acquisitions payments payable fiscal 2007 exceed 818400 legg mason enters whenissued underwriting commitments open transactions relating commitments march 31 2002 closed effect consolidated financial statements legg mason would material legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental self regulatory agency investigations proceedings accordance sfas 5 accounting contingencies legg mason established reserves potential losses may result pending complaints legal actions investigations proceedings ultimate resolution actions cannot currently determined opinion management consultation legal counsel actions expected resolved material adverse effect legg masons financial condition however period potential adverse contingency become probable resolved results operations period could materially affected addition ultimate costs litigationrelated charges vary significantly period depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement 2002 2001 2000 legg mason recorded litigationrelated charges approximately 15100 net recoveries 11100 2400 8300 respectively 10 income taxes components income tax expense follows 2002 2001 2000 federal 83180 85067 81499 foreign 4657 7365 7409 state local 12476 17158 15117 total 100313 109590 104025 current 95955 104631 109232 deferred 4358 4959 5207 total 100313 109590 104025 reconciliation difference effective income tax rate statutory federal income tax rate follows 2002 2001 2000 taxes statutory rates 88637 93061 89053 state income taxes net federal income tax benefit 8109 11153 9985 taxexempt interest income net 937 727 403 goodwill amortization 2017 1851 foreign losses tax benefit 1197 1684 1417 differences tax rates applicable nonus earnings 595 1408 1530 nondeductible expenses 1220 1099 1110 net 1492 105 518 total 100313 109590 104025 components legg masons deferred tax assets liabilities included assets liabilities follows 2002 2001 deferred tax assets accrued compensation benefits 16971 17395 accrued expenses 15820 9440 operating loss carryforwards 4801 6896 amortization 2965 3801 1201 valuation allowance 4697 6875 total 36696 31022 deferred tax liabilities depreciation 1454 931 deferred expenses 631 1003 deferred income 1559 1071 purchased intangibles 7071 amortization 7890 imputed interest 1239 total 19844 3005 march 31 2002 2001 deferred tax valuation allowance primarily benefits related net operating losses operating losses two components domestic state foreign state net operating losses expire 2004 2020 foreign net operating losses continue utilized otherwise expiration date 11 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees addition discretionary contributions legg mason matches 50 employee 401k contributions 6 employee compensation maximum two thousand five hundred dollars per year contributions charged operations amounted 27858 27782 29478 2002 2001 2000 respectively addition employees make voluntary contributions certain plans 12 capital stock march 31 2002 authorized numbers common preferred exchangeable shares 250 million 4 million unlimited number respectively addition march 31 2002 2001 128 million 139 million shares common stock respectively reserved issuance legg masons stock option plans 25 million 28 million common shares respectively reserved exchangeable shares connection perigee transaction see note 2 additionally march 31 2002 legg mason approximately 44 million shares common stock reserved issuance upon conversion zerocoupon contingent convertible senior notes dividends declared paid march 31 2002 2001 2000 6695 5878 4676 respectively fiscal 2002 board directors approved stock repurchase plan legg mason authorized repurchase 3 million shares open market discretion march 31 2002 legg mason repurchased retired 136800 shares cost 7130 13 employee incentive plans march 31 2002 130 million shares authorized issued legg masons active omnibus employee stock plan addition deferred compensation payable shares legg mason common stock granted certain employees mandatory elective plans vesting plans range immediate periods six years dividends reinvested common stock 5 discount limit number shares authorized issued deferred arrangements options legg masons employee stock plans granted prices less 100 fair market value options generally exercisable 20 25 33 13 increments 3 5 years expire within 5 10 years date grant stock option transactions plans three years ended march 31 2002 summarized weighted average number exercise shares price options outstanding march 31 1999 7373135 1849 granted 1613600 3584 exercised 1349288 1075 canceled 193002 2702 options outstanding march 31 2000 7444445 2343 granted 2023310 5171 exercised 1181885 1180 canceled 204501 3172 options outstanding march 31 2001 8081369 3200 granted 2334950 4852 exercised 1117867 1622 canceled 286039 4113 options outstanding march 31 2002 9012413 3795 following information summarizes legg masons stock options outstanding march 31 2002 weighted option average exercise shares exercise remaining life price range outstanding price years 630 2694 1334182 1573 21 2695 3232 2218313 2987 53 3233 4849 1890228 3868 59 4850 5388 3569690 5090 68 march 31 2002 2001 2000 options exercisable 3248279 shares 2972113 shares 2790652 shares respectively weighted average exercise prices 2803 2028 1454 respectively following information summarizes legg masons stock options exercisable march 31 2002 weighted option average exercise shares exercise price range exercisable price 630 2694 1079231 1461 2695 3232 1353626 2966 3233 4849 472008 3600 4850 5388 343414 5287 fiscal 2002 legg mason granted 22448 shares restricted common stock fair value 4664 per share restricted shares granted legg masons employee stock plans vest 33 13 increments three years compensation expense recognized threeyear vesting period restricted stock awards noncash transactions fiscal 2002 2001 2000 legg mason recognized 952 787 674 respectively compensation expense grants made legg masons stock plans addition 7929 4631 6399 recognized compensation expense fiscal 2002 2001 2000 respectively deferred compensation arrangements payable shares common stock following table reflects pro forma results compensation expense associated option grants recognized vesting period 2002 2001 2000 net earnings reported 152936 156230 150413 pro forma 137853 146364 143903 earnings per share reported basic 235 245 243 diluted 224 230 227 pro forma basic 211 229 233 diluted 202 216 217 weighted average fair value stock options granted fiscal 2002 2001 2000 using optionpricing model 1859 2015 1300 per option share respectively following weighted average assumptions used model grants fiscal 2002 2001 2000 2002 2001 2000 expected dividend yield 081 085 110 riskfree interest rate 465 618 602 expected volatility 3558 3215 2768 expected livesin years 566 570 603 legg mason also stock option plan nonemployee directors options granted plan immediately exercisable price equal fair value shares date grant options issuable plan limited 11 million shares aggregate term ten years date grant march 31 2002 options 531920 shares granted 372292 currently outstanding legg mason qualified employee stock purchase plan covering substantially employees shares common stock purchased open market behalf participating employees subject 3 million total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged stockholders equity 14 deferred compensation stock trust accordance emerging issues task force eitf issue 9714 accounting deferred compensation arrangements amounts held rabbi trust invested assets rabbi trusts consolidated employer value employers stock held rabbi trusts classified stockholders equity generally accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held plan march 31 2002 2001 3044413 2855192 respectively 15 offbalance sheet risk concentration credit normal course business legg mason executes settles finances customer proprietary securities transactions activities expose legg mason offbalance sheet risk event customers parties fail satisfy obligations securities transactions generally settle three business days trade date customer broker fail deliver cash securities agreed legg mason may required purchase sell securities unfavorable market prices legg mason extends credit customers collateralized cash securities subject regulatory internal requirements customer margin transactions include purchases securities sales securities yet purchased option contracts legg mason continually monitors margin requirements requests customers deposit additional collateral reduce positions necessary transactions expose legg mason risk event margin requirements insufficient fully cover customer losses legg mason invests shortterm resale agreements collateralized us government agency securities legg mason generally takes possession securities purchased agreements transactions expose legg mason risk event counterparty repurchase securities value collateral held less underlying receivable legg mason monitors value collateral daily requests additional collateral necessary legg mason borrows lends securities finance transactions facilitate settlement process utilizing firm proprietary positions customer margin securities held collateral addition legg mason engages conduit securities borrowing lending activities acts agent facilitate settlement institutions firm conduit transactions legg mason deposits receives cash generally equal 102 market value securities exchanged monitors adequacy collateral levels daily basis legg mason sells securities currently obligated subsequently purchase securities prevailing market prices legg mason exposed risk loss securities prices increase prior closing transactions legg mason periodically borrows banks collateralized basis utilizing firm securities counterparty fail return customer securities pledged legg mason subject risk acquiring securities prevailing market prices order satisfy customer obligations legg masons customer financing securities lending activities require legg mason pledge customer securities collateral various financing sources bank loans securities lending march 31 2002 legg mason approximately 13 billion customer securities customer margin loans available pledged legg mason repledged approximately 18974 securities loan agreements addition legg mason received collateral approximately 312712 securities lending agreements legg mason repledged approximately 258665 legg mason also received collateral approximately 23 billion reverse repurchase agreements customer reserve requirement none repledged 16 regulatory requirements parents brokerdealer subsidiaries subject securities exchange commissions uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 2002 brokerdealer subsidiaries aggregate net capital defined 310644 exceeded required net capital 289361 parents principal brokerdealer subsidiary must maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows brokerdealer maintain required amounts cash qualified securities parents trust subsidiary subject requirements office thrift supervision requires compliance two overlapping sets regulatory capital standards march 31 2002 trust subsidiary met capital adequacy requirements subject 17 business segment information legg mason currently operates four business segments asset management private client capital markets business segments based upon factors services provided distribution channels served certain services legg mason offers provided clients one business segments legg mason allocates certain common income expense items among business segments based upon various methodologies factors asset management segment provides investment advisory services companysponsored investment funds asset management services institutional individual clients investment advisory related fees earned asset management vary based upon factors type underlying investment product amount assets management type services provided addition performance fees may earned certain investment advisory contracts meeting exceeding performance benchmarks private client segment distributes wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities private client consists net interest customers margin loan credit account balances commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds fees earned feebased brokerage managed accounts sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets segment consists legg masons equity fixed income institutional sales trading corporate public finance advisory underwriting activities sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also include realized unrealized gains losses investments acquired connection merchant banking investment banking activities segment consists principally legg masons real estate service business unallocated corporate revenues expenses business segment financial results follows 2002 2001 2000 net revenues asset management 557876 445029 376660 private client 618252 707366 694214 capital markets 242168 174274 157137 33045 34195 37192 total 1451341 1360864 1265203 earnings income tax provision asset management 159171 132260 129536 private client 53345 113304 114215 capital markets 39294 15571 5027 1439 4685 5660 total 253249 265820 254438 legg mason analyze asset information business segments legg mason principally operates united states united kingdom canada revenues expenses geographic purposes generally allocated based location office providing service results geographic region follows 2002 2001 2000 net revenues united states 1376193 1285453 1211200 united kingdom 37312 36422 18894 canada 29006 32544 28720 8830 6445 6389 total 1451341 1360864 1265203 earnings income tax provision united states 242935 257224 246950 united kingdom 3783 8663 5732 canada 11945 15017 15297 2152 2242 2077 total 253249 265820 254438 quarterly financial data dollars thousands except per share amounts unaudited may 28 2002 closing price legg masons common stock 5439 1 excluding 016 per share declared perigee inc prior acquisition quarter ended june 30 2000 item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg mason’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg mason’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg mason’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg mason’s internal control financial reporting march 31 2006 based framework set forth committee sponsoring organizations treadway commission “coso” internal controlintegrated framework based assessment management concluded march 31 2006 legg mason’s internal control financial reporting effective based criteria established coso framework management’s assessment effectiveness legg mason’s internal control financial reporting march 31 2006 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinions management’s assessment effectiveness legg mason’s internal control financial reporting march 31 2006 raymond mason chairman chief executive officer charles j daley jr senior vice president chief financial officer treasurer report independent registered public accounting firm board directors stockholders legg mason inc completed integrated audits legg mason inc subsidiaries’ march 31 2006 march 31 2005 consolidated financial statements internal control financial reporting march 31 2006 audit march 31 2004 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position legg mason inc subsidiaries “company” march 31 2006 march 31 2005 results operations cash flows three years period ended march 31 2006 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included report management internal control financial reporting appearing item 8 company maintained effective internal control financial reporting march 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting march 31 2006 based criteria established internal controlintegrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland june 9 2006 consolidated statements income dollars thousands except per share amounts see notes consolidated financial statements consolidated balance sheets dollars thousands see notes consolidated financial statements consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements consolidated statements comprehensive income dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands 1 revised separately disclose operating investing portions cash flows attributable discontinued operations amounts previously reported aggregate amount fiscal years 2005 2004 financing cash flows discontinued operations see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc “parent” subsidiaries collectively “legg mason” principally engaged providing asset management related financial services individuals institutions corporations municipalities december 1 2005 legg mason acquired substantially citigroup inc’s “citigroup” worldwide asset management business “cam” exchange legg mason’s private client capital markets businesses “pccm” common preferred stock cash also effective november 1 2005 legg mason acquired permal group ltd “permal” see note 2 additional information consolidated financial statements include accounts parent subsidiaries controlling financial interest including cam permal dates acquisition generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity “vie” considered primary beneficiary see discussion special purpose variable interest entities follows discussion vies material intercompany balances transactions eliminated unless otherwise noted per share amounts include common shares legg mason shares issued connection acquisition legg mason canada inc exchangeable common shares legg mason oneforone basis time nonvoting convertible preferred stock convertible upon sale shares legg mason common stock nonvoting convertible preferred shares considered “participating securities” therefore included calculation basic earnings per common share appropriate prior years’ financial statements reflect reclassifications conform current year presentation connection sale legg mason’s pccm businesses described note 3 legg mason reflected assets liabilities businesses assets liabilities discontinued operations held sale consolidated balance sheet march 31 2005 pccm businesses include parent’s primary brokerdealer subsidiary accordingly balance sheets presented classified format assets liabilities designated current noncurrent legg mason also reflected related results operations pccm income discontinued operations consolidated statements income operating investing cash flows discontinued operations shown separately consolidated statements cash flows financing cash flows discontinued operations significant accounting policies summarized reflect legg mason’s continuing operations see note 3 discussion significant accounting policies applicable pccm discontinued operations references fiscal 2006 2005 2004 refer legg mason’s fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america require management make assumptions estimates affect amounts reported financial statements accompanying notes including intangible assets goodwill liabilities losses contingencies stockbased compensation income taxes management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash fiscal 2006 restricted cash 11500 used settle civil copyright lawsuit explained note 10 remaining cash 9158 including approximately 800 interest released us escrow account financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value see note 3 financial instruments related discontinued operations legg mason holds debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders’ equity comprehensive income net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium recorded interest method included interest income certain investment securities classified trading securities investments recorded fair value unrealized gains losses included income continuing operations realized gains losses investments included current period earnings legg mason evaluates nontrading investment securities “other temporary” impairment may exist fair value investment security adjusted cost extended period time “other temporary” impairment determined exist difference value investment security recorded financial statements fair value recognized charge income period impairment determined march 31 2006 2005 amount unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations readily available management must estimate value security based upon available information order determine fair value march 31 2006 2005 legg mason approximately 1503 2492 respectively nontrading financial instruments continuing operations valued based upon management’s assumptions estimates taking consideration available financial information company industry march 31 2006 2005 legg mason approximately 64026 33169 respectively investments partnerships limited liability corporations investments reflected noncurrent assets consolidated balance sheets generally accounted cost equity method addition financial instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents restricted cash shortterm borrowings fair value longterm debt march 31 2006 2005 1277508 1065532 respectively fair values estimated using current market prices fixed assets fixed assets consist equipment software leasehold improvements equipment consists primarily communications technology hardware furniture fixtures software includes purchased software internally developed software fixed assets reported cost net accumulated depreciation amortization depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements amortized initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill intangible assets consist principally asset management contracts manage proprietary funds trade names intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents excess cost business acquisition fair value net assets acquired accordance statement financial accounting standards “sfas” 142 “goodwill intangible assets” indefinitelife intangible assets goodwill amortized legg mason evaluates intangible assets goodwill quarterly basis considering factors projected cash flows revenue multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment determined fair values intangible assets subject amortization reviewed reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level deemed impaired carrying amount reporting unit exceeds implied fair value estimating fair value reporting unit legg mason uses valuation techniques based multiples revenues discounted cash flows similar models employed analyzing purchase price acquisition target legg mason defines reporting units mutual funds managed services institutional wealth management divisions see note 6 additional information regarding intangible assets goodwill translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders’ equity comprehensive income gains losses resulting foreign currency transactions included earnings investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg mason’s clients fees primarily based predetermined percentages market value assets management recognized period services performed may billed advance period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks generally recognized end performance measurement period determined realizable distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution service fee expense accrued amounts owed third parties including finders’ fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges “cdsc” received shareholders funds upon redemption shares cdsc receipts recorded revenue received corresponding expense reduction unamortized balance deferred sales commissions management periodically tests deferred sales commission asset impairment significant assumption utilized estimate fair value deferred asset expected redemption rates estimated fair value compared recorded value deferred commission asset management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2006 2005 2004 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 789 million 65 million march 31 2006 2005 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance management’s opinion likely benefits may realized legg mason’s deferred income taxes principally relate business combinations amortization accrued compensation loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings probable liability incurred amount loss reasonably estimated stockbased compensation legg mason’s stockbased compensation includes stock options employee stock purchase plans restricted stock awards deferred compensation payable stock compensation plans legg mason issues stock options officers key employees nonemployee members board directors legg mason uses fair value method sfas 123 amended sfas 148 “accounting stockbased compensationtransition disclosure” prospectively stock options granted stock purchase plan transactions april 1 2003 using blackscholes optionpricing model exception marketbased performance grants valued monte carlo optionpricing model prospective method allowed sfas 148 compensation expense recognized based fair value stock options granted april 1 2003 applicable vesting period compensation expense recognized stock options granted prior april 1 2003 intrinsic value exercise price less market price date grant therefore expense related stockbased employee compensation included determination net income less would included fair value method applied awards april 1 2003 restricted stock awards recognized expense vesting periods generally 2 4 years following tables reflect pro forma results compensation expense associated option grants regardless grant date stock purchase plan recognized vesting period discussed note 3 connection sale pc cm legg mason accelerated vesting stock option equitybased deferred compensation awards previously granted employees pccm businesses accelerated vesting stock options reduced gain sale 737 million 617 million tax reflecting increase fair value awards vesting date original grant date approximately 431 million charge related incentive stock options tax benefit see note 13 discussion stockbased compensation earnings per share basic earnings per share “eps” calculated dividing net income weighted average number shares outstanding calculation weighted average shares includes common shares exchangeable common stock convertible preferred shares considered participating securities diluted eps similar basic eps adjusts effect potential common shares share per share information retroactively restated reflect september 2004 threefortwo split see note 15 additional discussion earnings per share special purpose variable interest entities special purpose entities “spes” trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse legg mason utilize spes form financing provide liquidity legg mason recognized gains losses sale assets spes accordance financial accounting standards board “fasb” interpretation number “fin” 46 r “consolidation variable interest entitiesan interpretation arb 51” spes must designated either voting interest entity vie vies subject consolidation party deemed primary beneficiary vie entity sufficient equity risk finance activities without additional subordinated financial support equity investors characteristics controlling financial interest primary beneficiary entity absorb majority vie’s expected losses entity receive majority vie’s expected residual returns legg mason’s determination expected residual returns excludes gross fees paid decision maker unlikely legg mason primary beneficiary vies created manage assets clients unless ownership interest including interests related parties vie substantial legg mason may earn significant performance fees vie fin 46 r also requires disclosure vies legg mason considered significant variable interest determining whether variable interest significant legg mason considers factors used determination primary beneficiary determining whether primary beneficiary vies legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees determining primary beneficiary legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit risks assumptions estimates significant bearing determination primary beneficiary legg mason’s assumptions estimates materially incorrect legg mason might required consolidate additional vies consolidation vies would result increase assets corresponding increase minority interests consolidated balance sheets increase revenues corresponding increase minority interests consolidated statements income supplemental cash flow information following noncash activities excluded consolidated statements cash flows described note 8 fiscal 2006 2005 holders 479918 22000 zerocoupon contingent convertible senior notes converted notes 55 million 254 thousand shares common stock respectively described note 2 fiscal 2006 legg mason issued 54 million shares common stock 13346632 shares nonvoting convertible preferred stock citigroup acquisition cam march 2006 citigroup sold thus converted approximately 496 shares nonvoting convertible preferred stock 496 million shares common stock addition 832 million promissory note described note 7 executed result finalizing purchase price also described note 2 fiscal 2006 legg mason issued 19 million shares common stock valued 200 million acquire permal described note 3 fiscal 2006 legg mason recognized gain sale pccm businesses citigroup based value 165 billion businesses portion consideration acquire cam assets liabilities pccm businesses transferred citigroup part transaction approximately 42 billion 37 billion respectively also described note 3 fiscal 2004 connection sale mortgage banking servicing business legg mason real estate services inc “lmres” legg mason received 6909 noninterest bearing note due september 7 2007 net present value 5100 amounts reflected consolidated statements cash flows cash paid income taxes interest represent continuing discontinued operations derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason generally engage derivative hedging activities except hedge interest rate risk described note 8 addition legg mason’s international subsidiaries use currency hedges hedge risk movement exchange rates financial assets denominated us dollars addition one parent’s asset management subsidiaries collateral manager collateralized debt obligation “cdo” entered forward purchase agreement fiscal 2002 cash flow hedge purchase 4200 interest cdo fiscal 2005 fiscal 2004 cash flow hedge sold legg mason recorded realized loss approximately 1036 net tax legg mason applies hedge accounting defined sfas 133 “accounting derivative instruments hedging activities” aforementioned interest rate risk hedging forward purchase agreement transactions adjustments cash flow hedges recorded comprehensive income gain loss derivative instruments designated hedge accounting included income expense consolidated statements income recent accounting developments following relevant accounting pronouncements recently issued variable interest entities emerging issues task force “eitf” reached consensus june 2005 regarding issue 045 “determining whether general partner general partners group controls limited partnership similar entity limited partners certain rights” general partner limited partnership presumed control limited partnership unless limited partners substantive termination rights participating rights july 2005 financial accounting standards board “fasb” issued staff position “fsp” sop 7891 “interaction aicpa statement position 789 eitf issue 045” staff position eliminates concept “important rights” statement 789 replaces concept “kickout rights” “substantive participating rights” defined issue 045 eitf also reached consensus june 2005 issue 9616 “investors accounting investee investor majority voting interest minority shareholder shareholders certain approval veto rights” guidance standards effective general partners new limited partnerships formed existing limited partnerships partnership agreements modified june 29 2005 effective fiscal years beginning december 15 2005 general partners limited partnerships except existing limited partnerships modified june 29 2005 legg mason adopt guidance pronouncements first quarter 2007 fiscal year adoption accounting standards expected material impact consolidated financial statements legg mason sharebased compensation fasb issued sfas 123 r “sharebased payment” december 2004 2005 2006 fasb issued staff positions addressing implementation sfas 123 r fasb also issued staff position fsp eitf 00191 “application eitf issue 0019 freestanding financial instruments originally issued employee compensation” effective upon adoption sfas 123 r sec issued staff accounting bulletin 107 concerning staff positions sharebased payment legg mason intends adopt sfas 123 r first quarter fiscal year 2007 using modified prospective transition method effect fiscal 2007 net income expected approximately 32 million reduction disclosed previously december 2004 fasb issued fsp fas 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” american jobs creation act signed law october 22 2004 provides onetime dividends received deduction repatriation certain foreign earnings us taxpayers legg mason determined repatriation foreign earnings made accordingly effect legg mason’s us income tax provision 2 acquisitions december 1 2005 legg mason completed acquisition cam exchange outstanding stock legg mason subsidiaries constituted pccm businesses see note 3 discussion discontinued operations ii approximately 539 million shares common stock 13346632 shares 10 par value per share nonvoting legg mason convertible preferred stock convertible upon transfer approximately 1335 million shares common stock iii 512 million cash borrowed 700 million fiveyear syndicated term loan facility terms agreement parties agreed postclosing purchase price adjustment may increase price paid legg mason 300 million based retention certain assets management nine months closing legg mason expects fund additional purchase consideration borrowing 300 million fiveyear credit agreement see note 8 discussion longterm debt accordance eitf 9912 “determination measurement date market price acquirer securities issued purchase business combination” common stock convertible preferred stock issued transaction valued average closing price legg mason common stock immediately following announcement transaction june 24 2005 9205 time acquisition cam managed assets approximately 4086 billion excludes certain assets expected retained cam determination purchase price made basis among things revenues profitability growth rates cam acquisition cam fits one legg mason’s strategic objectives become pure global asset management company summary fair values net assets acquired follows amortizable asset management contracts amortized periods ranging six twelve years excluding certain contracts approximately 11 million amortized 16 months value indefinitelife mutual fund contracts subject amortization evaluated quarterly impairment approximately 739 million goodwill deductible tax purposes connection acquisition cam sale pccm businesses legg mason citigroup entered mutual transition services agreements provide certain administrative services investment advisory services provided seller transferred business ordinary course prior date sale services provided agreements primarily technologyrelated also include certain accounting payroll employee benefits facilities’ management agreement respective services provided eighteen months provision additional sixmonth renewal service recipient may terminate services individual basis notice transition services agreement also provides confidentiality information disclosed agreement variety indemnities four months ended march 31 2006 legg mason incurred approximately 149 million costs services provided cam operations citigroup also received 168 million expense reductions cost services provided citigroup support sold businesses net impact costs included operating expenses connection acquisition cam june 23 2005 legg mason entered threeyear global distribution agreement citigroup pursuant legg mason intends distribute asset management products services cam subsidiaries including legg mason funds family mutual funds citigroup’s various distribution businesses include citigroup’s retail securities brokerage retail institutional banks life variable annuity representatives citigroup’s retail securities brokerage exclusive retail distributor legg mason funds managed legg mason capital management subject exceptions term exclusivity three years subject certain conditions purchase price consideration includes approximately 275 million liabilities reductions workforce connection legg mason’s restructuring acquired business restructuring liability reduced 195 million 80 million march 31 2006 reflect implementation restructuring plan remainder planned reductions expected occur end june 2006 legg mason continuing assess additional costs integrating restructuring acquired business would increase restructuring liability addition four months ended march 31 2006 approximately 531 million transactionrelated compensation expenses incurred transactionrelated compensation costs primarily include recognition compensation previously deferred cam employees prior citigroup plans accruals retention compensation transitional cam employees prior acquisition cam smith barney fund management llc “sbfm” one entities acquired citigroup conjunction another citigroup entity completed settlement us securities exchange commission “sec” resolving investigation sec matters relating arrangements certain smith barney mutual funds citigroup affiliated transfer agent unaffiliated subtransfer agent terms settlement sbfm paid 184 million us treasury distributed pursuant distribution plan subject approval sec although transfer agency business included acquisition cam liabilities sbfm assumed acquisition include approximately 184 million amounts paid pursuant plan distribution approved addition assets acquired include receivable approximately 184 million amount returned legg mason us treasury distribution pursuant plan asset balance included receivables related liability included current liabilities march 31 2006 effective november 1 2005 legg mason acquired 80 outstanding equity permal leading global fundsofhedge funds manager concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares resulting legg mason owning 100 outstanding voting common stock permal legg mason right purchase preference shares next four years right exercised holders shares right require legg mason purchase interests general time frame approximately consideration aggregate consideration paid legg mason closing 800 million excluding 85 million acquisitionrelated costs 200 million form approximately 1889 newly issued shares legg mason common stock remainder cash anticipated legg mason acquire remaining 20 ownership interest permal represented preference shares legg mason purchases made two four years initial closing prices based permal’s revenues additional payments treated contingent consideration maximum aggregate price including earn payments related purchase based upon future revenue levels equity interests permal 1386 billion 9695 million minimum price including acquisition costs legg mason may elect deliver 25 future payments form shares common stock payments preference shares including dividends contingent earn outs exceeding 9695 million minimum purchase price recognized additional goodwill 161 million difference minimum price consideration paid closing including acquisition costs included noncurrent liabilities march 31 2006 time acquisition permal managed assets approximately 175 billion excluding approximately 20 billion assets crossinvested among managed funds 27 billion assets permal expect retain acquisition permal fits one legg mason’s strategic objectives expand global asset management business summary fair values net assets acquired follows 1 subsequent acquisition adjustments certain contractual agreements occurred vies longer required consolidated fair value amortizable asset management contracts approximately 100 million amortized periods ranging two nine years values indefinitelife trade name fundsofhedge funds contracts subject amortization evaluated quarterly impairment following unaudited pro forma consolidated results presented though acquisitions cam permal occurred beginning period presented excludes results discontinued operations including gain sale pccm businesses pro forma results include adjustments exclude certain nontransferred cam businesses accordance terms transaction agreement conform accounting policies acquired entities adjust effect acquisition related expenses december 31 2004 legg mason investment counsel llc wholly owned subsidiary legg mason acquired deutsche investment management americas new york city philadelphia cincinnati chicago offices scudder private investment counsel “acquired offices” cash 550 million acquisition offices fits legg mason’s strategic objective grow asset management business transaction included contingent payment based revenues acquired offices first anniversary closing aggregate purchase price 813 million acquired offices 62 billion assets management december 31 2004 allocation purchase price resulted approximately 200 million goodwill 340 million amortizable asset management contracts fair value asset management contracts 340 million amortized estimated life 12 years result acquired offices meeting certain revenue levels specified acquisition agreement contingent payment approximately 163 million made march 2006 recorded additional goodwill 3 discontinued operations december 1 2005 legg mason sold entities comprised pccm businesses citigroup portion consideration purchase citigroup’s global asset management businesses accordance sfas 144 “accounting impairment disposal longlife assets” aftertax results operations pccm reflected income discontinued operations consolidated income statements twelve months ended march 31 2006 2005 2004 addition assets liabilities pccm included assets liabilities discontinued operations held sale consolidated balance sheet march 31 2005 result sale legg mason recognized gain 109 billion net 972 million costs related sale including 787 million accelerated vesting employee stock option deferred compensation awards sale resulted aftertax gain 6413 million results operations discontinued operations summarized follows 1 see note 18 additional information net revenues following summary assets liabilities discontinued operations held sale march 31 2005 trading assets liabilities used pccm businesses trading assets liabilities march 31 2005 consist following march 31 2005 legg mason pledged securities owned 2031 collateral counterparties securities loaned transactions could sold repledged counterparties september 30 2003 legg mason sold certain assets liabilities comprising commercial mortgage banking mortgage servicing operations wholly owned subsidiary lmres sales price net assets approximately 68630 including 63530 cash closing including 40900 used repay outstanding balance secured warehouse line credit 6900 noninterest bearing note due four years closing discounted 8 legg mason recognized pretax gain net transaction costs 10861 6481 net taxes 4380 march 31 2006 legg mason sold remaining operations lmres sales price net assets approximately 8093 received cash subsequent closing legg mason recognized pretax gain net transaction costs 4698 2739 net taxes 1959 gains sales reflected gain sale discontinued operations consolidated statements income sale lmres result legg mason’s longterm strategic objective focus legg mason’s core businesses summary significant accounting policies applicable discontinued operations follows financial instruments financial instruments used trading activities pccm businesses generally recorded trade date basis carried fair value unrealized realized gains losses reflected current period earnings discontinued operations however securities transactions scheduled settle beyond normal settlement date considered forward contracts therefore reflected trading assets liabilities unrealized gains losses securities reflected trading assets trading liabilities current period earnings discontinued operations trading assets trading liabilities fair values equity securities generally determined using prices independent sources external pricing services broker dealer price quotations closing market prices listed instruments available fixed income securities valued using external pricing services thirdparty broker dealer price quotations traders’ estimates based spreads actively traded benchmark debt instruments readily available market prices traders’ estimates compared external pricing services verify material variations either individually aggregate verified comparison actual values realized instances security subject transfer restrictions value security based primarily quoted price security without restriction may reduced amount reflect restrictions addition even value security derived independent market price broker dealer quote certain assumptions may required determine fair value legg mason generally assumed size positions held securities would large enough affect quoted price securities sold sale would happen orderly manner however assumptions may incorrect actual value received upon disposition could different carrying value repurchase agreements pccm businesses invested shortterm securities purchased agreements resell collateralized us government agency securities included cash securities segregated regulatory purposes deposited clearing organizations securities purchased agreements resell securities sold agreements repurchase accounted collateralized financings policy legg mason obtain possession collateral market value excess principal amount loaned collateral valued daily legg mason may required counterparties deposit additional collateral appropriate securities purchased agreements resell securities sold agreements repurchase carried contractual amounts plus accrued interest securities sold agreements repurchase included shortterm borrowings securities transactions customer securities transactions recorded settlement date basis related commission revenues expenses recorded trade date basis receivables payables customers represented balances arising cash margin transactions securities owned customers held collateral receivable balances reflected consolidated financial statements securities lending securities borrowed loaned accounted collateralized financings recorded amount cash collateral advanced received securities borrowed transactions required legg mason deposit cash lender legg mason generally received cash collateral securities loaned fee received paid legg mason recorded interest income expense legg mason monitored fair value securities borrowed loaned daily basis additional collateral obtained refunded necessary receivable payable customers receivable payable customers represent balances arising cash margin transactions securities owned customers held collateral receivable balances included payable customers free credit balances approximately 3191469 march 31 2005 legg mason paid interest certain customer free credit balances held investment purposes investment banking underwriting revenues fees advisory assignments recorded underlying transaction substantially completed terms engagement amounts determined realizable expenses related securities offerings legg mason acted principal agent deferred related revenue recognized offering deemed unlikely expense reimbursements related advisory activities recorded reduction related expenses reimbursable expenses reviewed collectibility reporting date equipment leasehold improvements intangible assets accordance fas 144 “accounting impairment disposal longlife assets” legg mason depreciate amortize equipment leasehold improvements intangible assets discontinued operations identified held sale assets recorded carrying amount approximates fair value less cost sell accumulated depreciation amortization respect assets 54246 march 31 2005 depreciation amortization expense discontinued operations including amounts allocated continuing operations 6685 13432 11524 2006 2005 2004 respectively derivatives primary brokerdealer subsidiary used forwards futures purchased options limited basis means hedging interest rate risk trading activities realized unrealized gains losses transactions included income discontinued operations consolidated statements income legg mason apply hedge accounting defined fasb statement 133 “accounting derivative instruments hedging activities” amended transactions therefore related financial instruments marked market changes fair values reflected earnings regulatory requirements parent’s former primary brokerdealer subsidiaries subject sec’s uniform net capital rule provides equity capital may withdrawn cash dividends paid resulting net capital would fall specified levels march 31 2005 brokerdealer subsidiaries included discontinued operations aggregate net capital defined 3868 million exceeded required net capital 3632 million net capital brokerdealer subsidiary exceeded required net capital parent’s principal brokerdealer subsidiary required maintain separate account exclusive benefit customers accordance securities exchange commission rule 15c33 determined periodic computations rule allows broker dealer maintain required amounts cash qualified securities march 31 2005 amount segregated rule 15c33 25 billion 4 investments legg mason investments debt equity securities generally classified availableforsale heldtomaturity trading described note 1 investments march 31 2006 2005 follows 1 includes assets deferred compensation plans 106170 59809 respectively 2 reflects trading assets vies trading liabilities material included noncurrent liabilities 3 includes investments private equity debt securities readily determinable fair values legg mason uses specific identification method determine cost security sold amount reclassified accumulated comprehensive income earnings proceeds gross realized gains losses sales maturities availableforsale investments follows net unrealized losses investment securities classified trading 8360 2564 4378 2006 2005 2004 respectively information regarding legg mason’s availableforsale heldtomaturity investments categorized maturity date follows 5 fixed assets following table reflects components fixed assets dates shown depreciation amortization expense 35308 19318 14783 fiscal 2006 2005 2004 respectively net 4243 3728 2877 fiscal 2006 2005 2004 respectively excluded continuing operations allocated discontinued operations reflect use certain fixed assets discontinued operations prior sale see note 3 fixed assets related discontinued operations 6 intangible assets goodwill sfas 142 provides goodwill amortized values identifiable intangible assets amortized useful life unless assets determined indefinite useful life goodwill indefinitelife intangible assets analyzed determine fair market value assets exceed book value fair value less book value record impairment charge impairment charges fiscal 2006 2005 2004 following tables reflect components intangible assets continuing operations march 31 march 31 2006 management contracts amortized weightedaverage life 13 years estimated amortization expense next five fiscal years follows increase amortizable indefinitelife intangible assets primarily attributable acquisitions cam permal discussed note 2 increase carrying value goodwill since april 1 2004 summarized increase goodwill due acquisitions fiscal year 2006 attributable cam permal discussed note 2 result private capital management lp “pcm” meeting certain revenue levels contingent payment approximately 300000 accrued additional goodwill march 31 2006 contingent payment due second quarter fiscal 2007 contingent payment approximately 16300 made fiscal 2006 connection acquisition acquired offices recorded additional goodwill increase carrying value goodwill fiscal 2005 due acquisitions relates acquisition acquired offices addition fiscal 2005 result pcm royce associates llc “royce” meeting certain revenue levels specified respective acquisition agreements maximum third year anniversary payment 400000 made former owners pcm contingent payment 100000 made former owners royce represented maximum contingent payment due 7 shortterm borrowings october 14 2005 legg mason entered unsecured 5year 500 million revolving credit agreement legg mason expects use revolving credit facility fund working capital needs general corporate purposes facility replaced legg mason’s previous 100 million revolving credit facility payable full maturity five years borrowings outstanding either facilities march 31 2006 2005 two legg mason’s subsidiaries western asset management company “western asset” permal maintained independent borrowing facilities western asset 50 million 3year revolving credit agreement permal 40 million credit line expires may 2009 facilities general operating purposes borrowings outstanding facilities march 31 2006 legg mason maintained compliance applicable covenants facilities connection acquisition cam legg mason entered two 364day borrowing arrangements one 130 million revolving credit facility interest rate including commitment fees libor plus 27 basis points 832 million promissory note interest rate including commitment fees libor plus 35 basis points average effective interest rate 832 million credit facility 48 period ended march 31 2006 borrowings year 130 million credit facility arrangements crossdefault provisions 5year 3year term loans 5year credit agreement described note 8 longterm debt longterm debt march 31 2006 2005 consists following july 2 2001 legg mason issued 425000 principal amount senior notes due july 2 2008 bear interest 675 notes sold discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs june 6 2001 legg mason issued 567285 principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year legg mason amortizing issue discount interest expense using effective interest method term convertible notes net proceeds offering 244375 payment debt issuance costs quarter ended december 31 2003 price legg mason’s common stock exceeded conversion trigger price requirements result note became convertible 115593 shares legg mason’s common stock subject adjustment commencing january 2 2004 years ended march 31 2006 2005 zerocoupon contingent convertible senior notes aggregating 479918 22000 respectively principal amount maturity converted 55 million 254 thousand shares common stock respectively march 31 2006 outstanding notes may result issuance additional 756 thousand shares legg mason expects redeem convertible notes cash june 6 2006 accreted value however notes may converted prior redemption legg mason repaid 100000 principal amount 65 senior notes matured february 15 2006 year ended march 31 2006 legg mason entered following longterm debt agreements 5year term loan october 14 2005 legg mason entered unsecured term loan agreement amount exceed 700 million legg mason used term loan pay portion purchase price including acquisition related costs acquisition cam term loan facility payable full maturity five years bears interest libor plus 35 basis points march 31 2006 outstanding balance loan facility 700 million 3year term loan connection cam acquisition december 1 2005 legg mason subsidiary chile entered 16 million 3year term loan payable maturity interest including commitment fees paid semiannually floating rate linked bank chile offering rate plus 35 basis points march 31 2006 interest rate 718 maturity date november 30 2008 credit facilities entered connection citigroup transaction contain standard covenants including leverage interest coverage ratios legg mason maintained compliance applicable covenants borrowing facilities term loans western asset entered loan fiscal 2005 finance leasehold improvements outstanding balance march 31 2006 170 million bears interest 419 due october 31 2010 fiscal 2006 western asset entered 128 million term loan agreement commercial bank finance acquisition aircraft loan bears interest 588 secured aircraft maturity date january 1 2016 5year credit agreement november 23 2005 legg mason entered unsecured 5year floatingrate credit agreement amount exceed 300 million legg mason borrowed 100 million agreement fund portion purchase price cam transaction payable outside us borrowing payable full maturity five business days transaction closing date made november 25 2005 repaid december 2 2005 entire amount credit facility including repaid amounts initial loan became available december 2 2005 fund additional purchase price payable cam transaction time legg mason required pay additional purchase price result retaining certain client accounts payable full maturity november 2010 balance outstanding march 31 2006 march 31 2006 aggregate maturities longterm debt current accreted value 1202960 based contractual terms follows march 31 2006 legg mason 125 billion available issuance additional debt equity securities pursuant shelf registration statement interest rate swap effective december 1 2005 legg mason executed 3year amortizing interest rate swap “swap” large financial institution hedge interest rate risk portion 700 million 5year floatingrate term loan terms swap legg mason pay fixed interest rate 49 notional amount 400 million quarterly payments receipts swap matched exactly offset changes floating rate interest payments 400 million principal term loan since terms conditions hedge expected changed long least unamortized balance currently 400 million swap outstanding 5year floatingrate term loan swap continue effective cash flow hedge result changes market value swap recorded component comprehensive income march 31 2006 unrealized gain 1323 market value swap reflected comprehensive income estimated gain included comprehensive income march 31 2006 expected reclassified income within next twelve months 1120 actual amount vary amount result changes market conditions quarterly basis legg mason assesses effectiveness cash flow hedge confirming payments balance liability hedged match swap 9 income taxes components income tax expense continuing operations follows reconciliation difference effective income tax rate statutory federal income tax rate continuing operations follows deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years details legg mason’s deferred tax assets liabilities follows deferred tax assets liabilities classified follows march 31 2006 2005 certain tax benefits associated legg mason’s employee stock plans recorded directly stockholders’ equity stockholders’ equity increased 92376 18342 15831 2006 2005 2004 respectively result tax benefits acquisitions permal certain nonus cam entities stock acquisitions afforded tax basis writeup intangibles exclusive goodwill thereby creating deferred tax liability equal tax effect differences book basis financial reporting purposes related tax cost basis change deferred tax liability related book tax basis differences intangibles acquisitions year ended march 31 2006 primarily relates increase 291300 12522 permal cam respectively march 31 2006 2005 legg mason recorded deferred tax asset 5495 1471 respectively us state net operating loss carryforwards expiring various years march 31 2009 also march 31 2006 2005 legg mason recorded deferred tax asset 21575 7232 respectively nonus net operating loss carryforwards 11621 13201 respectively nonus capital loss carryforwards portions expire various years beginning march 31 2008 us subsidiaries permal file separate federal income tax returns apart legg mason inc’s consolidated federal income tax return due permal acquisition structure separate state income tax returns us subsidiaries permal recorded deferred tax asset 15964 us federal net operating loss carryforwards 5206 us state net operating loss carryforwards expiring 2025 march 31 2006 2005 legg mason recorded valuation allowance deferred tax assets 1751 842 respectively us state net operating loss carryforwards also march 31 2006 2005 legg mason recorded valuation allowance deferred tax assets 23475 8910 respectively relating nonus net operating loss carryforwards 11621 13201 respectively relating nonus capital loss carryforwards valuation allowance established accordance sfas 109 “accounting income taxes” management’s opinion likely benefits may realized march 31 2006 2005 valuation allowance deferred tax assets 36847 22953 respectively change valuation allowance primarily attributable nonus net operating loss carryforwards acquired cam acquisition valuation allowance relating nonus net operating loss carryforwards acquired cam acquisition totaling 14244 reduce goodwill legg mason subsequently recognizes deferred tax asset legg mason intends permanently reinvest cumulative undistributed earnings nonus subsidiaries nonus operations accordingly us federal income taxes provided undistributed earnings extent permanently reinvested legg mason’s nonus operations practical time determine income tax liability would result upon repatriation earnings 10 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2021 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2006 minimum annual aggregate rentals follows minimum rental commitments shown reduced 13529 minimum sublease rentals received future noncancelable subleases table also include aggregate rental commitments 162 furniture equipment capital leases following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes period provided landlord “free rent” period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2006 2005 legg mason commitments invest 42101 9182 respectively limited partnerships make private investments commitments funded required end respective investment periods ranging fiscal 2007 2011 march 31 2006 legg mason contingent payment obligations related acquisitions payments payable fiscal 2012 exceed 1225045 normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency inquiries investigations proceedings citigroup transaction legg mason transferred citigroup subsidiaries constituted private client brokerage capital markets businesses thus transferring entities would primary liability customer complaint litigation regulatory liabilities proceedings arising businesses however part transaction legg mason agreed indemnify citigroup customer complaint litigation regulatory liabilities legg mason’s former private client brokerage capital markets businesses result preclosing events similarly although citigroup transferred legg mason entities would primarily liable customer complaint litigation regulatory liabilities proceedings cam business citigroup agreed indemnify legg mason customer complaint litigation regulatory liabilities cam business result preclosing events accordance sfas 5 “accounting contingencies” legg mason established provisions estimated losses pending complaints legal actions investigations proceedings ultimate resolution matters cannot currently determined opinion management consultation legal counsel legg mason believe resolution actions material adverse effect legg mason’s financial condition however results operations could materially affected period liabilities period differ legg mason’s prior estimates legg mason’s cash flows could materially affected period matters resolved addition ultimate costs litigationrelated charges vary significantly period depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement starting september 2003 legg mason responded inquiries office new york attorney general securities exchange commission relating industrywide mutual fund probes legg mason cooperating two separate investigations undertaken securities exchange commission staff “staff” arose inquiries one investigation ongoing legg mason currently able predict outcome investigation predict effect investigation business results operations respect staff’s investigation legg mason recorded 12 million charge income discontinued operations september 2004 quarter settled investigation 1 million september 2005 october 3 2003 federal district court jury rendered approximately 19700 verdict legg mason civil copyright lawsuit verdict confirmed subsequent judgment case result verdict subsequent judgment fiscal year 2004 legg mason increased provision litigation approximately 19000 legg mason also reclassified 1500 legg mason’s statement earnings fiscal year 2004 expense litigation award charge entire amount charges recorded fiscal year 2004 connection litigation reflected litigation award charge june 9 2005 lawsuit settled payment 11500 remaining cash approximately 9000 including approximately 800 interest released escrow account march 31 2006 2005 legg mason’s liability losses contingencies 4300 27300 respectively significant portion liability march 31 2005 relates civil copyright infringement lawsuit discussed fiscal 2006 2005 2004 legg mason recorded litigationrelated charges continuing operations approximately 100 2500 21100 includes 19000 related civil copyright lawsuit respectively net recoveries 5300 fiscal 2005 fiscal 2006 2005 2004 legg mason recorded litigationrelated charges discontinued operations approximately 5900 5500 6800 respectively net recoveries 800 600 fiscal 2006 2005 2004 respectively periods liability reduced settlement payments approximately 21500 18700 5900 respectively reversal accruals primarily related civil copyright lawsuit 8300 fiscal 2006 11 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees primary outstanding plan legg mason makes discretionary contributions matches 50 employee 401k contributions 6 employee compensation maximum five thousand dollars per year contributions charged continuing operations amounted 22670 11538 9719 fiscal 2006 2005 2004 respectively contributions charged discontinued operations 20295 29629 23376 fiscal 2006 2005 2004 respectively addition employees make voluntary contributions certain plans 12 capital stock march 31 2006 authorized numbers common preferred exchangeable shares 250 million 4 million unlimited number respectively addition march 31 2006 2005 121 million 175 million shares common stock respectively reserved issuance legg mason’s equity plans 23 million 27 million common shares respectively reserved exchangeable shares issued connection acquisition legg mason canada inc exchangeable shares exchangeable time holder oneforone basis shares legg mason’s common stock included basic shares outstanding connection acquisition cam legg mason issued 13346632 shares 10 par value per share nonvoting legg mason convertible preferred stock convertible upon transfer 133 million shares common stock fiscal 2006 legg mason issued approximately 496 million common shares upon conversion approximately 496 shares convertible preferred march 31 2006 approximately 839 shares convertible preferred stock outstanding additionally march 31 2006 legg mason approximately 756 thousand shares common stock reserved issuance upon conversion zerocoupon contingent convertible senior notes changes common stock shares exchangeable common stock three years ended march 31 2006 follows dividends declared per share 0690 0550 0373 fiscal 2006 2005 2004 respectively dividends declared paid march 31 2006 2005 2004 24912 16398 10289 respectively fiscal year ended march 31 2002 board directors approved stock repurchase plan legg mason authorized repurchase 3 million shares open market discretion fiscal year ended march 31 2006 shares repurchased fiscal year ended 2005 2004 legg mason repurchased retired 735 shares 40729 1184 shares 65399 respectively july 20 2004 legg mason declared threefortwo stock split paid dividend september 24 2004 stockholders record september 8 2004 accordingly share per share information retroactively restated reflect stock split except common stock additional paidin capital presented consolidated balance sheets consolidated statements changes stockholders’ equity table december 15 2004 legg mason sold 46 million shares common stock 7030 per share less underwriting fees net proceeds approximately 311000 november 1 2005 connection acquisition permal described note 2 legg mason issued 1889 shares common stock portion consideration paid december 1 2005 connection acquisition cam described note 2 legg mason issued 5394 shares common stock portion purchase price 13 stockbased compensation march 31 2006 24 million shares authorized issued legg mason’s equity incentive stock plans options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments 3 5 years expire within 5 10 years date grant see note 1 discussion stockbased compensation stock option transactions plans three years ended march 31 2006 summarized 1 adjusted reflect stock split appropriate following information summarizes legg mason’s stock options outstanding march 31 2006 march 31 2006 2005 2004 options exercisable 4123 6293 6245 shares respectively weighted average exercise prices 2802 2733 2457 respectively following information summarizes legg mason’s stock options exercisable march 31 2006 legg mason also equity plan nonemployee directors replaced stock option plan nonemployee directors fiscal 2006 equity plan directors may elect receive shares stock options acquire shares stock restricted stock units options granted either plan immediately exercisable price equal fair value shares date grant options issuable equity plan limited 625 shares aggregate term ten years date grant march 31 2006 options 1122 shares granted 452 currently outstanding legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 3 million total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged earnings fiscal year ended march 31 2006 2005 2004 approximately 91 147 209 shares respectively purchased open market behalf participating employees weighted average fair value stock options granted fiscal 2006 2005 2004 using blackscholes option pricing model 4090 2253 1985 per share respectively following weighted average assumptions used model grants fiscal 2006 2005 2004 fiscal 2006 legg mason determined using combination implied historical volatility accurate measure expected volatility calculating blackscholes option values effective stock option grants made quarter ended december 31 2005 legg mason began estimating expected volatility equal weighting implied historical measures change accounting estimate material impact net income october 17 2005 compensation committee legg mason approved grants senior officers options acquire 300 shares legg mason common stock exercise price 10400 per share subject certain conditions grants vest ratably july 17 four years following grant date options exercisable july 17 2009 legg mason common stock closed 12750 per share 30 consecutive trading days march 31 2006 criterion met options expire july 17 2013 weighted average fair value 3719 per share options included pro forma net income shown estimated grant date using monte carlo optionpricing model following assumptions july 19 2005 independent directors legg mason approved grant legg mason’s chairman chief executive officer options acquire 500 shares legg mason common stock exercise price 11153 per share subject certain conditions grant vest ratably four years starting effective grant date july 19 2005 subject continuing legg mason’s chairman chief executive officer least two years continuing provide agreedupon ongoing services legg mason two years thereafter options exercisable within four years grant date legg mason common stock closed 12750 per share 30 consecutive trading days march 31 2006 criterion met options expire eighth anniversary grant date fair value 4233 per share options granted included pro forma net income shown estimated date grant using monte carlo optionpricing model following assumptions monte carlo optionpricing model used value option grants order properly factor impact performance market conditions specified grant fiscal 2006 2005 2004 legg mason granted 547 138 40 shares restricted common stock respectively fair value 11762 6036 3616 respectively per share restricted stock awards noncash transactions fiscal 2006 2005 2004 legg mason recognized 6049 708 754 respectively compensation expense restricted stock awards related continuing operations 3408 2517 529 respectively compensation expense restricted stock awards related discontinued operations increase continuing operations fiscal 2006 primarily relates issuance restricted stock cam employees addition deferred compensation payable shares legg mason common stock granted certain employees mandatory elective plans programs legg mason’s equity incentive plan vesting plans programs ranges immediate periods six years plans programs provide discounts 10 contributions dividends limit number shares authorized issued one remaining active deferred plan plans replaced similar programs legg mason’s equity incentive plan fiscal 2005 fiscal 2006 2005 2004 legg mason recognized 6635 12032 11822 respectively compensation expense principally related discontinued operations deferred compensation arrangements payable shares common stock fiscal 2006 2005 2004 legg mason issued 112 308 399 shares respectively deferred compensation arrangements weightedaverage fair value per share grant date 8369 6803 5083 respectively 14 deferred compensation stock trust legg mason issued shares connection certain deferred compensation plans held rabbi trusts assets rabbi trusts consolidated employer value employer’s stock held rabbi trusts classified stockholders’ equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders’ equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2006 2005 1933 4945 respectively significant decline fiscal 2006 attributable distributions made employees pccm businesses connection sale 15 earnings per share basic earnings per share “eps” calculated dividing net earnings weighted average number shares outstanding calculation weighted average shares includes common shares exchangeable common stock convertible preferred shares considered participating securities diluted eps similar basic eps adjusts effect potential common shares result adoption emerging issues task force “eitf” 048 “the effect contingently convertible instruments diluted earnings per share” diluted earnings per share fiscal year ended march 31 2004 restated include april 1 2003 66 million shares issuable upon conversion legg mason’s zerocoupon contingent convertible senior notes result legg mason’s diluted earnings per share fiscal 2004 reduced 006 previously legg mason’s senior notes included calculation diluted earnings per share beginning quarter ended december 31 2003 senior notes became convertible quarter result acquisition cam quarter ended december 31 2005 legg mason issued 13346632 shares nonvoting convertible preferred stock convert upon transfer aggregate 133 million shares legg mason common stock nonvoting convertible preferred shares considered “participating securities” therefore included calculation weighted average shares outstanding following table presents computations basic diluted eps march 31 2006 2005 2004 options purchase 741 1 4 shares respectively included computation diluted earnings per share options’ exercise prices greater average price common shares period basic diluted earnings per share fiscal years ended march 31 2006 2005 2004 include vested shares phantom stock related legg mason’s deferred compensation plans diluted earnings per share periods also include unvested shares phantom stock related plans unless shares deemed antidilutive march 31 2006 2005 2004 429 464 587 unvested shares phantom stock respectively antidilutive therefore excluded computation diluted earnings per share per share information retroactively restated reflect september 2004 threefortwo stock split 16 accumulated comprehensive income accumulated comprehensive income represents cumulative foreign currency translation adjustments net gain interest rate swap net gains losses investment securities change accumulated translation adjustments fiscal 2006 primarily resulted impact changes british pound brazilian real relation us dollar net assets legg mason’s united kingdom brazilian subsidiaries pound real functional currencies respectively fiscal 2005 change foreign currency translation adjustments result british pound canadian dollar summary legg mason’s accumulated comprehensive income march 31 2006 2005 follows deferred tax benefit unrealized holding losses arising investment securities fiscal years ended 2006 2005 2004 144 53 24 respectively deferred tax provision benefit reclassification adjustments gains losses included net income investment securities fiscal years ended 2006 2005 2004 69 5 40 respectively deferred tax provision unrealized holding gains arising cash flow hedges fiscal years ended 2006 2004 938 282 respectively deferred tax provision reclassification adjustments gains included net income cash flow hedges fiscal year ended 2004 635 17 special purpose variable interest entities normal course business legg mason manager various types investment vehicles considered vies services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees legg mason sell transfer assets vies legg mason’s exposure risk entities generally limited equity investment made required make earned uncollected management fees legg mason issued investment performance guarantees vies investors uncollected management fees vies material march 31 2006 2005 april 2004 provided 1200 subordinated loan unaffiliated entity became sole equity investor vie simultaneously issued 31583 debt instruments thirdparty investors result legg mason’s loan sole equity investor vie legg mason considered primary beneficiary vie legg mason required consolidate entity six months ended september 30 2004 october 2004 subordinated loan repaid result legg mason longer required consolidate vie results operations included discontinued operations consolidated vie material legg mason legg mason required consolidate three investment trusts march 31 2006 two investment trusts march 31 2005 legg mason’s consolidated balance sheet march 31 2006 2005 includes 16506 3814 respectively assets attributable consolidated vie’s includes 16170 3807 respectively investments 6447 3814 respectively liabilities attributable consolidated vie’s includes 6339 3779 respectively minority interests see note 4 investments related consolidated vie’s legg mason’s assets exclusive assets consolidated vies available legg mason’s creditors results operations included continuing operations consolidated vies material legg mason march 31 2006 legg mason significant variable interest primary beneficiary one limited partnership one real estate investment trust march 31 2005 legg mason significant variable interest primary beneficiary two limited partnerships one real estate investment trust march 31 2006 2005 vies total assets 495788 431355 respectively legg mason equity investments entities 14642 19818 respectively future capital commitments 2634 5687 respectively date earliest involvement entities april 1996 results operations entities material legg mason result permal acquisition legg mason acquired significant variable interest primary beneficiary one investment fund total assets 37515 march 31 2006 results operations vie material legg mason 18 business segment information legg mason continues integrate organize ongoing operations following consummation citigroup transaction permal acquisition upon completion efforts legg mason assess appropriate managerial reporting structures business time legg mason managing continuing operations single comprehensive asset management business result transaction citigroup described notes 2 3 private client capital markets segments reported discontinued operations continuing operations asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue asset management investment advisory distribution administrative fees typically calculated percentage assets management vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks distribution fees companysponsored investment funds included asset management along corresponding expense representing fees paid unaffiliated distributors funds including parties related parties prior sale legg mason principally operates united states united kingdom revenues expenses geographical purposes generally allocated based location office providing services results geographic region follows intangible assets net goodwill geographic region follows discontinued operations financial results discontinued operations’ business segments follows 1 represents distribution fees proprietary mutual funds historically reported private client reclassified asset management distribution fee revenue corresponding distribution expense reflect legg mason’s continuing role funds’ distributor fiscal year ended march 31 2006 net revenues net income legg mason’s private client capital markets businesses reflect activity eight months legg mason owned businesses results discontinued operations geographic region follows private client distributed wide range financial products branch distribution network including equity fixed income securities proprietary nonaffiliated mutual funds annuities primary sources net revenues private client commissions principal credits earned equity fixed income transactions customer brokerage accounts distribution fees earned mutual funds feebased account fees net interest customers’ margin loan credit account balances sales credits associated underwritten offerings initiated capital markets segment reported private client sold branch distribution network capital markets consisted legg mason’s equity fixed income institutional sales trading corporate public finance investment banking primary sources revenue equity fixed income institutional sales trading included commissions principal credits transactions corporate municipal products legg mason maintained proprietary fixed income equity securities inventory primarily facilitate customer transactions result recognized trading profits losses legg mason’s proprietary trading activities investment banking revenues included underwriting fees advisory fees private placements mergers acquisitions sales credits associated underwritten offerings reported capital markets sold institutional distribution channels results business segment also included realized unrealized gains losses investments acquired connection merchant investment banking activities quarterly financial data1 dollars thousands except per share amounts unaudited may 19 2006 closing price legg mason’s common stock 9988 1 adjusted reflect september 2004 stock split due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2009 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework based assessment management concluded march 31 2009 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2009 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2009 mark r fetting chairman chief executive officer charles j daley jr senior vice president chief financial officer treasurer report independent registered public accounting firm board directors stockholders legg mason inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position legg mason inc subsidiaries march 31 2009 march 31 2008 results operations cash flows three years period ended march 31 2009 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 29 2009 consolidated statements operations dollars thousands except per share amounts see notes consolidated financial statements consolidated balance sheets dollars thousands see notes consolidated financial statements consolidated statements changes stockholders equity dollars thousands see notes consolidated financial statements consolidated statements comprehensive income loss dollars thousands see notes consolidated financial statements consolidated statements cash flows dollars thousands see notes consolidated financial statements notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1summary significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see discussion variable interest entities follows discussion vies material intercompany balances transactions eliminated unless otherwise noted per share amounts include common shares legg mason shares issued connection acquisition legg mason canada inc exchangeable common shares legg mason oneforone basis time nonvoting convertible preferred stock convertible shares legg mason common stock nonvoting convertible preferred shares considered participating securities therefore included calculation basic earnings per common share convertible preferred stock outstanding march 31 2009 certain amounts prior period financial statements reclassified conform current period presentation including fund support previously reported current liabilities nonoperating expense net purchases trading investments references fiscal 2009 2008 2007 refer legg masons fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america require management make assumptions estimates affect amounts reported financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements cash equivalents cash equivalents highly liquid investments original maturities 90 days less repurchase agreements legg mason invests shortterm securities purchased overnight agreements resell collateralized us government agency securities purchased agreements resell accounted collateralized financings carried contractual amounts plus accrued interest restricted cash restricted cash march 31 2009 41688 primarily represents cash collateral required support arrangements certain liquidity funds subsidiary manages cash available legg mason general corporate use decrease restricted cash march 31 2008 803040 primarily result return restricted cash due termination support arrangements certain liquidity funds held securities issued structured investment vehicles similar conduits sivs see note 17 discussion support arrangements financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except longterm debt legg mason holds debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders equity comprehensive income net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium recorded interest method included interest income certain investment securities classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings equity fixed income securities valued using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices legg mason evaluates nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist difference value investment security recorded financial statements fair value recognized charge income period impairment determined temporary march 31 2009 2008 amount unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations may readily available management estimates value securities using variety methods resources including current available financial information investment industry march 31 2009 2008 legg mason approximately 422 million 1566 million respectively trading nontrading financial instruments valued based upon managements assumptions estimates taking consideration available financial information company industry march 31 2009 2008 legg mason approximately 595 million 817 million respectively investments partnerships limited liability corporations investments reflected concurrent assets consolidated balance sheets accounted cost equity method addition financial instruments described derivative instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents securities purchased agreements resell shortterm borrowings fair value longterm debt march 31 2009 2008 2804262 2264720 respectively fair values estimated using current market prices derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason previously engage derivative hedging activities except described hedge interest rate risk debt described note 7 legg mason also used currency hedges hedge risk movement exchange rates interest rates financial assets limited basis legg mason applies hedge accounting defined sfas 133 accounting derivative instruments hedging activities sfas 133 aforementioned debt interest rate risk hedge adjustment cash flow hedge recorded comprehensive income loss gains losses derivative instruments designated hedge accounting included income expense consolidated statements operations material except described fiscal 2009 fiscal 2008 legg mason entered various credit support arrangements certain liquidity funds managed subsidiary arrangements included letters credit capital support agreements total return swap trs qualify derivative transactions described fully note 17 fair values derivative instruments based expected outcomes derived pricing data underlying securities andor detailed collateral analyses based recent available information fair values derivative assets march 31 2009 2008 zero 457 million respectively included current assets consolidated balance sheet fair values derivative liabilities march 31 2009 2008 206 million 5517 million respectively included fund support consolidated balance sheet none derivative transactions designated hedge accounting defined sfas 133 related gains losses included fund support consolidated statement operations fair value measurements effective april 1 2008 legg mason adopted statement 157 fair value measurements sfas 157 defines fair value establishes framework measuring fair value increases disclosures fair value measurements sfas 157 defines fair value exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date sfas 157 fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance february 2008 fasb staff position fsp fas 1572 effective date fasb statement 157 partially deferred sfas 157 one year nonrecurring fair value measurements nonfinancial assets liabilities acquired intangibles goodwill application sfas 157s measurement framework financial assets liabilities materially impacted legg masons financial position results operations year ended march 31 2009 financial assets liabilities already carried fair value legg mason continuing evaluate adoption deferred provisions sfas 157 nonrecurring fair value measurements expect material impact consolidated financial statements october 2008 fsp fas 1573 estimating fair value financial asset inactive market issued clarify existing standards fair value determinations new guidance required retroactive application previously unissued financial statements including interim periods ended september 30 2008 material impact legg masons consolidated financial statements april 2009 fasb issued three fsps intended provide additional application guidance enhance disclosures regarding fair value measurements impairments securities fsp fas 1574 determining fair value volume level activity asset liability significantly decreased identifying transactions orderly fsp fas 1071 apb 281 interim disclosures fair value financial instruments fsp fas 1152 fas 1242 recognition presentation otherthantemporary impairments fsp fas 1574 relates determining fair values active market price inputs used represent distressed sales reaffirms objective fair value measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically reaffirms need use judgment ascertain formerly active market become inactive determining fair values markets become inactive fsp fas 1071 apb 281 relates fair value disclosures financial instruments currently reflected balance sheet companies fair value prior issuing fsp fair values assets liabilities disclosed year fsp requires disclosures quarterly basis providing qualitative quantitative information fair value estimates financial instruments measured balance sheet fair value fsp fas 1152 fas 1242 relates otherthantemporary impairments intended bring greater consistency timing impairment recognition also intended provide greater clarity investors credit noncredit components impaired debt securities expected sold fsp also requires increased timely disclosures regarding expected cash flows credit losses aging securities unrealized losses fsps effective later june 2009 quarter may early adopted legg mason currently evaluating adoption fsps currently expected material impact legg masons consolidated financial position sfas 157 establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category may include repurchase agreements fixed income securities certain proprietary fund products level 3 financial instruments values based unobservable inputs including little market activity category includes derivative liabilities related fund support arrangements investments partnerships limited liability companies private equity funds previously included derivative assets related fund support arrangements certain owned securities issued sivs category may also include certain proprietary fund products redemption restrictions valuation asset liability may involve inputs one level hierarchy level fair value hierarchy within fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products valued net asset value nav determined respective fund administrator funds typically invested exchangetraded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchangetraded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 legg masons liquidity fund support taken form capital support agreements letters credit trs purchases securities funds fully described note 17 capital support agreements letters credit trs considered derivative assets liabilities accounting purposes representing companys rights obligations support fair value based principally changes value underlying securities substantially underlying securities supported securities purchased liquidity funds issued sivs active market fair value determined based evaluation issuer trust underlying collateral primarily comprised asset mortgage backed securities corporate bonds collateralized debt obligations instruments may financial guaranty insurance total siv securities previously owned legg mason supported liquidity funds 60 underlying trust collateral securities valued based prices well recognized third party pricing services utilize available market data 35 collateral securities valued based spreads benchmark debt instruments available prices less 5 collateral values based broker quotes security prices including prices underlying trust collateral securities whether direct market quotes adjusted comparable security prices broker quotes subject internal analyses considered market observations broker quotes tests substantiate fair values broker quotes used indicative firm tradable bids aggregate fair values underlying trust collateral securities primary input determine fair value supported purchased sivissued securities determination fair values underlying trust collateral securities considered nonperformance risks liquidity risks legg masons credit risk material factor fair value related derivative liabilities among things majority liquidity fund support required cash collateral valuation processes supported purchased sivissued securities inherently required managements judgment therefore related assets liabilities classified level 3 market changes affecting underlying collateral primary contributor changes fair values liquidity fund support assets liabilities related gains losses transfers categories measured beginning period see note 3 additional information regarding fair value measurements legg masons adoption sfas 157 also effective april 1 2008 legg mason adopted statement 159 fair value option financial assets financial liabilities sfas 159 sfas 159 permits companies choose measure certain financial instruments certain items fair value standard requires unrealized gains losses items fair value option elected reported earnings time company elected apply fair value option financial instruments fixed assets fixed assets consist equipment software leasehold improvements capital lease assets equipment consists primarily communications technology hardware furniture fixtures software includes purchased software internally developed software fixed assets reported cost net accumulated depreciation amortization capital lease assets initially reported lesser present value related future minimum lease payments assets current fair value subsequently reduced accumulated depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements capital lease assets amortized depreciated initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill intangible assets consist principally asset management contracts manage proprietary funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife intangible assets goodwill amortized book purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events triggering event occurred company perform detail tests include critical reviews significant assumptions determine intangible assets goodwill impaired minimum company performs detail tests annually december 31 indefinitelife intangible assets goodwill considering factors projected cash flows revenue multiples determine whether value assets impaired amortization periods appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment determined fair values intangible assets subject amortization reviewed reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level deemed impaired carrying amount reporting unit goodwill exceeds implied fair value estimating fair value reporting unit legg mason uses valuation techniques based discounted cash flows similar models employed analyzing purchase price acquisition target goodwill deemed recoverable reporting unit level also operating segment level legg mason defines americas international divisions results fact operating segment managers report chief executive officer manage business division level receive discrete financial information operating results lower level advisory affiliate level prior march 31 2009 legg masons reporting units managed investments institutional wealth management divisions allocations goodwill legg masons divisions management restructures acquisitions dispositions based relative fair values respective businesses restructured added sold divisions see note 5 additional information regarding intangible assets goodwill note 18 additional business segment information translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income gains losses resulting foreign currency transactions included net income investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients fees primarily based predetermined percentages market value assets management aum recognized period services performed may billed advance period earned based aum beginning billing period accordance related advisory contracts revenue associated advance billings deferred included current liabilities consolidated balance sheet recognized period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks recognized end performance measurement period accordingly neither advanced billings performance fees subject reversal legg mason ultimate responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution service fee expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc receipts recorded distribution servicing revenue received reduction unamortized balance deferred sales commissions corresponding expense management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2009 2008 2007 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 189 million 226 million march 31 2009 2008 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforwards business combinations amortization accrued compensation effective april 1 2007 legg mason adopted provisions financial accounting standards board fasb interpretation 48 accounting uncertainty income taxes fin 48 fin 48 clarifies previously issued fasb statement 109 accounting income taxes prescribing recognition threshold measurement attribute financial statements tax positions taken expected taken tax return fin 48 tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information fin 48 also provides guidance derecognition classification interest penalties interim accounting disclosure transition companys accounting policy classify interest related tax matters interest expense related penalties operating expense see note 8 additional information regarding income taxes legg masons adoption fin 48 loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plans restricted stock awards performance shares payable common stock deferred compensation payable stock compensation plans legg mason issues equity awards officers key employees fiscal 2007 legg mason adopted sfas 123 r sharebased payment related pronouncements using modifiedprospective method related transition election method compensation expense years ended march 31 2009 2008 2007 includes costs nonvested sharebased awards grantdate fair value amortized respective vesting periods straightline method legg mason determines fair value stock options using blackscholes option pricing model exception marketbased performance grants valued monte carlo optionpricing model see note 12 additional information regarding stockbased compensation earnings per share basic earnings per share eps calculated dividing net income weighted average number shares outstanding calculation weighted average shares includes common shares exchangeable common stock convertible preferred shares considered participating securities diluted eps similar basic eps adjusts effect potential common shares unless antidilutive periods net loss potential common shares considered antidilutive see note 14 additional discussion eps variable interest entities special purpose entities spes trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse legg mason utilize spes form financing provide liquidity legg mason recognized gains losses sale assets spes accordance fasb interpretation number 46 r consolidation variable interest entities interpretation arb 51 fin 46 r spes designated either voting interest entity vie vies subject consolidation party deemed primary beneficiary vie entity sufficient equity risk finance activities without additional subordinated financial support either contractual implied equity investors characteristics controlling financial interest primary beneficiary entity absorb majority vies expected losses entity receive majority vies expected residual returns accordance fin 46 r legg masons determination expected residual returns excludes gross fees paid decision maker current guidance unlikely legg mason primary beneficiary vies created manage assets clients unless ownership interest including interests related parties vie substantial unless legg mason may earn significant performance fees vie unless legg mason considered material implied variable interest fin 46 r also requires disclosure vies legg mason sponsor considered significant variable interest determining whether variable interest significant legg mason considers factors used determination primary beneficiary determining whether primary beneficiary vies legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees implied relationships determining primary beneficiary legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks assumptions estimates significant bearing determination primary beneficiary legg masons assumptions estimates materially incorrect legg mason might required consolidate additional vies consolidation vies would result increase assets corresponding increase minority interests consolidated balance sheets decrease investment advisory fees increase decrease nonoperating income corresponding offset minority interests consolidated statements operations see note 16 additional discussion variable interests supplemental cash flow information following noncash activities excluded consolidated statements cash flows fiscal 2007 holders 76 million zerocoupon contingent convertible senior notes converted notes 756 thousand shares common stock zerocoupon contingent convertible senior notes outstanding conversion fiscal 2007 fiscal 2008 second anniversary contingent acquisition payments 240 million made former owners permal 208 million paid cash balance shares common stock recent accounting developments following relevant accounting pronouncements recently issued december 2007 fasb issued statement nos 141 revised 2007 business combinations sfas 141 r 160 noncontrolling interests consolidated financial statements amendment arb 51 sfas 160 sfas 141 r significantly change business acquisitions accounted impact financial statements acquisition date subsequent periods sfas 141 r requires acquiring entity business combination recognize assets acquired liabilities assumed transaction including contingent consideration also requires acquisition related costs expensed incurred april 2009 fasb issued fsp fas 141 r1 accounting assets acquired liabilities assumed business combination arise contingencies address application issues arising contingencies business combination sfas 160 change accounting reporting minority interests recharacterized noncontrolling interests classified component equity sfas 141 r related fsp sfas 160 effective fiscal year 2010 sfas 141 r applied prospectively sfas 160 requires retroactive adoption presentation disclosure requirements existing minority interests requirements sfas 160 applied prospectively sfas 141 r related fsp adopted impact legg mason accounts acquisitions future tax uncertainties prior acquisitions legg mason currently evaluating adoption sfas 160 expected material impact legg masons consolidated financial statements march 2008 fasb issued statement 161 disclosures derivatives hedging activities sfas 161 amends sfas 133 requiring expanded disclosures entitys derivative instruments hedging activities increased qualitative quantitative creditrisk factors sfas 161 contains disclosure provisions effective fiscal 2010 impact legg masons accounting derivative transactions april 2008 fasb issued final fsp fas 1423 determination useful life intangible assets amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset fasb statement 142 goodwill intangible assets sfas 142 fsp fas 1423 effective fiscal 2010 expected material impact legg masons consolidated financial statements may 2008 fasb issued fsp apb 141 accounting convertible debt instruments may settled cash upon conversion including partial cash settlement fsp apb 141 fsp requires issuers convertible debt instruments may settled cash upon conversion including partial cash settlement separately account liability equity conversion feature components instruments result interest expense imputed recognized based upon entitys nonconvertible debt borrowing rate result lower net income 25 convertible senior notes issued legg mason january 2008 subject fsp apb 141 prior fsp apb 141 accounting principles board opinion 14 accounting convertible debt issued stock purchase warrants apb 14 provided portion proceeds issuance instrument attributable conversion feature legg mason required retroactively adopt fsp apb 141 fiscal 2010 interest expense fiscal 2008 2009 increased 66 million 323 million addition carrying amount 25 convertible senior notes discounted decreased additional paidin capital increased retained earnings decreased 2332 million 2721 million 389 million respectively march 31 2009 june 2008 fasb issued fsp eitf 0361 determining whether instruments granted sharebased payment transactions participating securities fsp eitf 0361 fsp eitf 0361 requires unvested sharebased payment awards contain nonforfeitable rights dividends dividend equivalents whether paid unpaid participating securities shall included computation eps pursuant twoclass method fsp eitf 0361 effective fiscal 2010 expected material impact legg masons consolidated financial statements also june 2008 fasb ratified eitf 075 determining whether instrument embedded feature indexed entitys stock eitf 075 provide guidance determining whether equitylinked financial instrument embedded feature indexed entitys stock eitf 075 effective legg masons fiscal year 2010 impact accounting either 25 convertible senior notes 56 senior notes fully described note 7 2 acquisitions dispositions february 26 2008 legg mason announced definitive agreement citigroup global markets inc affiliate citigroup inc citigroup would reacquire majority overlay implementation business legg mason private portfolio group lmppg includes managed account trading technology platform undertaking transaction legg mason continued focus core asset management business legg mason originally acquired business citigroup december 2005 acquisition citigroups worldwide asset management business cam net assets held sale march 31 2008 approximately 170 million comprised primarily intangible assets net allocated goodwill included current assets consolidated balance sheet sale closed april 1 2008 cash proceeds approximately 181 million received transaction costs gain sale business approximately 55 million 34 million tax recognized first quarter fiscal 2009 effective november 1 2005 legg mason acquired 80 outstanding equity permal leading global fundsofhedge funds manager concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares resulting legg mason owning 100 outstanding voting common stock permal legg mason right purchase preference shares four years closing right exercised holders shares right require legg mason purchase interests general time frame approximately consideration maximum aggregate price including earnout payments related purchase based upon future operating results equity interests permal 1386 billion excluding acquisition costs dividends fiscal 2008 payments 240 million made former owners permal representing earnout payments based upon permals operating results second anniversary date purchase 375 preference shares 208 million paid cash balance common stock anticipated legg mason acquire remaining 625 preference shares fiscal 2010 amounts based permals operating results time legg mason may required pay 286 million agreements governing permal acquisition final payment transaction sixth anniversary fiscal 2012 60 million 320 million based permals operating results amount fiscal 2010 payment legg mason may elect deliver 25 future payments form shares common stock addition fiscal 2009 2008 2007 legg mason paid aggregate amount approximately 315 million dividends preference shares pay minimum 75 million dividends preference shares fiscal 2010 payments preference shares including dividends recognized additional goodwill august 1 2001 legg mason purchased private capital management pcm cash approximately 682 million excluding acquisition costs transaction included two contingent payments based pcms revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion fiscal 2005 legg mason made maximum third anniversary payment 400 million former owners pcm fiscal 2007 paid available cash maximum fifth anniversary payment 300 million 150 million remained escrow subject certain limited clawback provisions fiscal 2010 fiscal 2009 remaining contingency settled releasing 30 million sellers returning 120 million legg mason recorded reduction goodwill 3 investments fair values assets liabilities legg mason investments debt equity securities generally classified availableforsale trading described note 1 investments march 31 2009 2008 follows 1includes assets deferred compensation plans 128785 207305 respectively fiscal 2008 includes 141509 investments issued structured investment vehicles conduit investments acquired proprietary liquidity funds remainder represents seed investments proprietary products investments vies fiscal 2009 investments issued structured investment vehicles conduit investments acquired proprietary liquidity funds sold 2includes investments private equity securities readily determinable fair values legg mason uses specific identification method determine cost security sold amount reclassified accumulated comprehensive income earnings proceeds gross realized gains losses sales maturities availableforsale investments follows net unrealized realized gain loss investment securities classified trading 1995428 62001 7141 fiscal 2009 2008 2007 respectively realized unrealized losses fiscal 2009 2008 primarily relate losses sivissued securities purchased certain liquidity funds legg masons availableforsale investments consist mortgagebacked securities us government agency securities corporate bonds equity securities gross unrealized gains losses investments classified availableforsale 209 39 respectively march 31 2009 154 82 respectively march 31 2008 legg mason investments classified heldtomaturity march 31 2009 2008 fair values financial assets liabilities company determined using following categories inputs march 31 2009 1primarily mutual funds minimal market risk company change value offset adjustment compensation expense related liability 2primarily mutual funds approximately equally invested equity debt securities includes approximately 166 million related minority interests consolidated investment funds 3see note 2 additional information fair value liquidity fund support table presents summary changes financial assets liabilities measured fair value using significant unobservable inputs level 3 period april 1 2008 march 31 2009 1see note 17 discussion liquidity fund support 2the decrease fund support derivative liability resulted termination fund support agreements upon purchase siv securities funds realized unrealized gains losses recorded level 3 investments included fund support nonoperating income expense consolidated statements operations 4 fixed assets following table reflects components fixed assets march 31 depreciation amortization expense 101957 83812 69442 fiscal 2009 2008 2007 respectively 5 intangible assets goodwill indefinitelife intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair market value assets exceeds book value fair value less book value legg mason record impairment charge following tables reflect components intangible assets march 31 decrease amortizable asset management contracts fiscal 2009 primarily due impairment management contracts related intangible assets acquired acquisition cam pcm 72326 26644 respectively net accumulated amortization 13041 31532 respectively assets management related revenues associated acquired management contracts declined significantly fiscal year 2009 based recent client turnover data estimated lives cam retail separately managed accounts contracts decreased 9 years 5 years march 31 2009 fair value remaining acquired management contracts determined using valuation techniques based discounted cash flows estimated 5year remaining life using riskadjusted discount rate based upon continued significant decline aum legg mason wrote remaining balance pcm management contracts fiscal 2008 amortizable asset management contracts decreased primarily due impairment intangible assets acquired acquisition pcm 151000 net accumulated amortization 88824 transfer 102640 net accumulated amortization 24775 relating pending sale overlay implementation business lmppg current assets held sale acquired management contracts pcm transaction related assets management declined significantly fiscal year 2008 based revised attrition estimates remaining useful lives acquired contracts 1 5 years march 31 2008 march 31 2009 management contracts amortized weightedaverage life 52 years estimated amortization expense next five fiscal years follows change indefinitelife intangible assets primarily attributable impairment pcms trade name impact foreign currency translation result significant declines aum significant changes pcm legg mason recognized impairment pcm trade name asset 47000 fiscal 2009 change carrying value goodwill since april 1 2008 summarized severe market turmoil experienced fiscal 2009 significant impact former wealth management division legg masons former divisions aum decreased 30 division result net client outflows market depreciation result dramatic changes market conditions year legg mason revised growth assumptions downward project contraction next two years applicable discount rate increased 125 147 december quarter based changes interest rates risk factors combined impact factors decreased projected cash flows wealth management division 60 legg masons prior projections result carrying value legg masons wealth management division goodwill impaired 1161900 impairment charge recorded based revenues earnings permal additional contingent consideration 160000 paid fiscal year 2008 corresponding increase goodwill march 31 2008 legg mason transferred 65724 goodwill relating pending sale overlay implementation business lmppg current assets held sale legg mason also recognizes tax benefit amortization excess tax basis related cam acquisition accordance sfas 109 accounting income taxes tax benefit recorded reduction goodwill deferred tax liabilities 6 shortterm borrowings october 14 2005 legg mason entered unsecured 5year 500 million revolving credit agreement november 2007 legg mason borrowed 500 million revolving credit facility general corporate purposes proceeds invested shortterm instruments january 3 2008 revolving credit agreement amended increase maximum amount legg mason may borrow 500 million 1 billion allow draw portion availability form letters credit locs march 30 2009 revolving credit agreement amended decrease maximum amount legg mason may borrow 1 billion 500 million connection amendments revolving credit facility rate increased libor plus 35 basis points libor plus 60 basis points march 31 2008 libor plus 225 basis points march 31 2009 rates may change future based changes legg masons credit ratings march 31 2009 2008 250 million 500 million respectively outstanding facility march 7 2008 legg mason elected procure loc money market fund support 150 million funds holdings certain sivissued securities using capacity revolving credit agreement collateral loc terminated accordance terms upon legg masons purchase underlying securities fund fiscal 2009 legg mason maintains two additional borrowing facilities 100 million 1year revolving credit agreement 40 million credit line facilities general operating purposes borrowings outstanding facilities march 31 2009 2008 revolving credit facility lenders 550 million term loan described longterm debt facilities standard financial covenants revised fiscal 2009 including maximum net debt ebitda ratio 30 previously 25 gross debt minimum ebitda interest ratio 40 march 31 2009 ebitda defined excludes 30 billion previously 275 billion realized losses resulting liquidity fund support see note 17 discussion liquidity fund support march 31 2009 legg masons debt ebitda ratio 18 ebitda interest expense ratio 62 therefore legg mason maintained compliance applicable covenants net income remains current levels declines legg mason spends available cash repay debt may impact ability maintain compliance covenants legg mason determines compliance covenants may pressure number actions may taken including reducing expenses increase ebitda using available cash repay portion 800 million outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt 7 longterm debt accreted value longterm debt consists following 675 senior notes july 2 2001 legg mason issued 425000 principal amount senior notes bear interest 675 notes sold discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs 425 million principal amount 675 senior notes paid july 2 2008 5year term loan october 14 2005 legg mason entered unsecured term loan agreement amount exceed 700 million legg mason used term loan pay portion purchase price including acquisition related costs acquisition cam term loan facility payable full maturity calendar year 2010 currently bears interest libor plus 225 basis points fiscal 2008 2007 legg mason repaid aggregate 150 million outstanding borrowings term loan make payments fiscal 2009 outstanding balance march 31 2009 550 million average interest rate 33 fiscal 2009 term loan contains standard covenants including leverage interest coverage ratios fully described note 6 legg mason maintained compliance applicable covenants borrowing facility 3year term loan connection cam acquisition december 1 2005 legg mason entered 16 million 3year term loan year ended march 31 2008 3year term loan repaid third party distribution financing july 31 2006 legg mason entered fouryear agreement financial institution finance nonrecourse basis 907 million commissions paid financial intermediaries connection sales certain share classes proprietary funds outstanding balance march 31 2009 4 million distribution fee revenues used repay financing based average aum respective funds interest imputed average rate 38 april 2009 legg mason terminated agreement outstanding balance paid normal course operations 25 convertible senior notes related hedge transactions january 14 2008 legg mason sold 125 billion 25 convertible senior notes convertible certain conditions met initial conversion rate 113636 shares legg mason common stock per 1000 principal amount notes equivalent conversion price approximately 8800 per share maximum 142 million shares subject adjustment unconverted notes mature january 2015 upon conversion 1000 principal amount note holder receive cash amount equal 1000 less conversion value note conversion value exceeds principal amount note conversion legg mason also deliver election cash common stock combination cash common stock conversion value excess 1000 agreement governing issuance notes contains certain covenants benefit initial purchaser notes including leverage interest coverage ratio requirements may result notes becoming immediately due payable covenants met leverage covenant waived accommodate equity units issuance may 2008 discussed otherwise legg mason maintained compliance applicable covenants connection sale notes january 14 2008 legg mason entered convertible note hedge transactions respect common stock purchased call options financial institution counterparties hedge providers purchased call options exercisable solely connection conversions notes event market value per share legg mason common stock time exercise greater exercise price purchased call options equal 88 conversion price notes subject adjustment simultaneously separate transactions legg mason also sold hedge providers warrants purchase aggregate subject adjustment 142 million shares common stock net sharesettled basis exercise price 10746 per share common stock purchased call options warrants part terms notes affect holders rights notes hedging transactions net cost 83 million paid proceeds notes recorded reduction additional paidin capital notes converted market price per share legg mason common stock exceeds 88 exercise price purchased call options purchased call options entitle legg mason receive hedge providers shares legg mason common stock cash combination shares common stock cash match shares cash legg mason must deliver terms notes additionally time market price per share legg mason common stock exceeds 10746 exercise price warrants legg mason required deliver hedge providers net shares common stock amount based excess market price per share common stock exercise price warrants transactions effectively increase conversion price notes 10746 per share common stock legg mason contractual rights execution related agreements ability settle obligations conversion feature notes purchased call options warrants legg mason common stock accordingly transactions accounted equity subsequent adjustment changes value obligations discussed note 1 heading recent accounting developments new accounting standards require effective april 1 2009 legg mason revalue notes impute interest based market rate issuance date comparable debt without conversion feature 56 senior notes equity units may 2008 legg mason issued 23 million equity units 115 billion 50 million used pay issuance costs unit consists 5 interest 1000 principal amount 56 senior notes due june 30 2021 detachable contract purchase varying number shares legg masons common stock 50 june 30 2011 notes purchase contracts separate distinct instruments terms structured simulate conversion debt equity potentially remarketed debt approximately three years issuance holders obligations purchase shares legg masons common stock collateralized pledge notes prescribed collateral connection issuance equity units legg mason incurred issuance costs 362 million 276 million allocated equity component equity units recorded reduction additional paidin capital commitment purchase shares legg masons common stock holders also receive quarterly payments referred contract adjustment payments cap fixed annual rate 14 commitment amount threeyear contract term upon issuance equity units legg mason recognized 458 million liability fair value obligation based upon discounted cash flows pay unitholders quarterly contract adjustment payment amount also represented fair value legg masons commitment contract issue shares common stock future designated prices recorded reduction additional paidin capital cap obligation liability accreted approximate three year contract term charges interest expense based constant rate calculation subsequent contract adjustment payments reduce cap obligation liability march 31 2009 318 million included liabilities consolidated balance sheet purchase contract obligates legg mason sell number newly issued shares common stock based settlement rate determined legg masons stock price purchase date settlement rate adjusts price legg mason stock way intended maintain original investment value legg masons common stock priced 5630 6756 per share settlement rate 07401 shares legg mason common stock subject adjustment equity unit market value legg mason common stock 6756 settlement rate 08881 shares legg mason common stock subject adjustment equity unit market value legg mason common stock 5630 market value legg mason common stock 5630 6756 settlement rate number shares legg mason common stock equal 50 divided market value maximum number shares may issued subject adjustment 204 million purchase contracts deemed equity upon issuance legg mason incur gain loss settlement shares legg masons common stock issuable equity unit purchase contracts currently antidilutive treasury stock method market price legg mason common stock less 6756 per share event probability successful remarketing equity unit notes becomes remote amount shares issuable purchase contracts must included diluted earnings per share would determined ifconverted method legg mason option remarket notes beginning december 27 2010 required attempt remarket notes june 30 2011 upon successful remarketing interest rate maturity date senior notes reset notes may remain outstanding time exercise purchase contracts related issuance legg mason common shares remarketing successful period note holders put notes par legg mason upon settlement purchase contracts notes redeemed remarketed june 30 2013 called par legg mason term loans legg mason entered loan fiscal 2005 finance leasehold improvements outstanding balance march 31 2009 62 million bears interest 42 due october 31 2010 fiscal 2006 legg mason entered 128 million term loan agreement finance acquisition aircraft loan bears interest 59 secured aircraft maturity date january 1 2016 outstanding balance march 31 2009 108 million march 31 2009 aggregate maturities longterm debt current accreted value 2973392 based contractual terms follows interest rate swap effective december 1 2005 legg mason executed 3year amortizing interest rate swap large financial institution hedge interest rate risk portion 700 million 5year term loan terms swap legg mason paid fixed interest rate 49 notional amount 400 million march 2007 quarter swap began unwind 50 million per quarter quarterly payments receipts swap exactly offset changes floating rate interest payments 400 million principal term loan since terms conditions hedge expected changed long least unamortized balance swap outstanding 5year term loan swap continued effective cash flow hedge result changes market value swap recorded component comprehensive income swap matured december 1 2008 estimated unrealized loss previously included comprehensive income 157 realized nonoperating income expense maturity date amount offset lower interest expense hedged debt 8 income taxes components income loss continuing operations income tax provision benefit minority interests follows components income tax benefit expense continuing operations follows march 31 2009 legg mason refundable income taxes approximately 603668 comprised 546473 federal net operating loss capital loss carryback claims 57195 refunds due prior year return filings reconciliation difference effective income tax rate statutory federal income tax rate continuing operations follows deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows certain tax benefits associated legg masons employee stock plans recorded directly stockholders equity stockholders equity increased 35587 14466 2008 2007 respectively result tax benefits tax benefit recorded equity 2009 due net operating loss position company connection sale notes january 2008 legg mason entered purchase call options hedge providers see note 7 2975 million cost call options reflected financial statements reduction additional paidin capital income tax purposes call options notes considered part single integrated transaction cost call options therefore tax deductible term notes accordingly legg mason related future tax benefits 1139 million period seven year term notes benefit deferred tax asset recorded increase additional paidin capital therefore reduce future tax provisions balance deferred tax asset march 31 2009 923 million legg mason various loss carryforwards may provide future tax benefits related valuation allowances established accordance sfas 109 accounting income taxes managements opinion likely benefits realized substantially legg masons deferred tax assets relate us united kingdom uk taxing jurisdictions march 31 2009 gross us deferred tax assets accumulated 13 billion realization expected require approximately 57 billion future us earnings based estimates future taxable income using assumptions used legg masons goodwill impairment testing likely current tax benefits realizable valuation allowance necessary time extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals tax planning may enhance legg masons tax positions realization current tax benefits dependent significant tax strategies march 31 2009 uk deferred tax assets material following deferred tax assets valuation allowances relating loss carryforwards recorded march 31 2009 2008 respectively 1us subsidiaries permal file separate federal income tax returns apart legg mason incs consolidated federal income tax return due permal acquisition structure separate state income tax returns 2substantially us state net operating losses carryforward fiscal year 2029 result adoption fin 48 effective april 1 2007 company recorded decrease beginning retained earnings increase liability unrecognized tax benefits approximately 36 million net federal benefit state tax liabilities amount recognized would reduce future income tax provisions favorably impact effective tax rates legg mason total gross unrecognized tax benefits approximately 437 million 293 million march 31 2009 march 31 2008 respectively totals 343 million 211 million respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 2009 2008 follows march 31 2009 management anticipate material increases decreases amounts unrecognized tax benefits next twelve months company recognizes interest accrued related unrecognized tax benefits interest expense penalties operating expense years ended march 31 2009 2008 company recognized approximately 54 million 12 million respectively substantially interest march 31 2009 2008 legg mason approximately 50 million 29 million respectively accrued interest penalties tax contingencies consolidated balance sheets legg mason examination internal revenue service tax authorities various states following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal year 2002 us federal fiscal year 2005 united kingdom fiscal year 2002 state connecticut fiscal year 2003 states california new york fiscal year 2005 state maryland states legg mason subject income tax company expects close certain state audits within next twelve months anticipate making significant cash payments related audits quarter ended september 30 2007 united kingdom enacted finance act 2007 reduced corporate tax rate 30 28 tax periods ending april 1 2008 impact deferred tax liabilities fiscal 2007 time change fiscal 2008 onetime tax benefit approximating 185 million fiscal 2008 legg mason initiated plans repatriate earnings certain foreign subsidiaries 225 million used contingent acquisition payments former owners permal discussed note 9 fiscal 2008 36 million repatriated plan additional income tax provision approximately 184 million net foreign tax credits previously recognized repatriation beyond 225 million foreign earnings contemplated except noted legg mason intends permanently reinvest cumulative undistributed earnings nonus subsidiaries nonus operations accordingly us federal income taxes provided undistributed earnings extent permanently reinvested legg masons nonus operations practical time determine income tax liability would result upon repatriation earnings 9 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2025 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2009 minimum annual aggregate rentals operating leases servicing agreements follows quarter ended september 30 2008 subsidiary executed lease facilities obligating legg mason aggregate payments 103 million 2024 included legg mason also entered agreement lease new office space baltimore replacement current headquarters current lease expires fiscal 2010 new lease annual base rent approximately 119 million included initial lease term expire april 2024 two renewal options 10 five years table include aggregate rental commitments 356 million property equipment capital leases one lease amended fiscal 2008 include putpurchase option agreement owner land building agreement fixed price 290 million executed seller put option december 2012 beginning november 2011 buyer purchase option becomes exercisable 4 million escrow deposit made connection putpurchase option agreement minimum rental commitments table reduced 1007 million minimum sublease rentals received future noncancelable subleases approximately 90 due one counterparty subtenant defaults sublease legg mason may incur operating charges reflect expected future sublease rentals reduced amounts result current commercial real estate market included table 928 million commitments related office space vacated sublease pursued lease liability established fiscal 2009 present value excess existing lease obligations estimated sublease income related costs lease liability takes consideration various assumptions including amount time take secure sublease agreement prevailing rental rates applicable real estate markets assumptions based upon input commercial real estate consultants march 31 2009 liability aggregated 637 million subject adjustment based circumstances real estate markets may require change assumptions actual terms sublease ultimately secured liability march 31 2009 principally related bankrupt subtenant defaulted sublease legg mason fiscal 2009 related costs incurred fiscal 2009 aggregated 790 million noted fiscal 2010 legg mason relocate new corporate headquarters legg mason currently pursuing subtenants certain floors lease unoccupied result headcount reductions given current commercial real estate market time sublease secured space deemed permanently abandoned charge recognized present value amount commitment lease exceeds amount due expected sublease terms following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes period provided landlord free rent period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2009 2008 legg mason commitments invest approximately 29466 50585 respectively limited partnerships make private investments commitments funded required end respective investment periods ranging fiscal 2011 fiscal 2008 legg mason recorded contingent payment obligations 160 million related permal acquisition addition 161 million previously recorded obligation fiscal year 2008 payments 240 million made former owners permal 208 million paid cash balance common stock fiscal 2010 legg mason may required pay 286 million agreements governing permal acquisition amount payment determined based permals operating results final payment transaction sixth anniversary fiscal 2012 60 million 320 million based permals revenues amount fiscal 2010 payment see note 2 acquisitions dispositions additional information related permal acquisition see note 17 liquidity fund support additional information related legg masons commitments normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications legg masons maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency inquiries investigations proceedings citigroup transaction legg mason transferred citigroup subsidiaries constituted private clientcapital markets pccm businesses thus transferring entities would primary liability customer complaint litigation regulatory liabilities proceedings arising businesses however part transaction legg mason agreed indemnify citigroup customer complaint litigation regulatory liabilities legg masons former pccm businesses result preclosing events ultimate resolution matters cannot currently determined based current information consultation legal counsel management believes accrual range reasonably possible losses march 31 2009 2008 material similarly although citigroup transferred legg mason entities would primarily liable customer complaint litigation regulatory liabilities proceedings cam business citigroup agreed indemnify legg mason customer complaint litigation regulatory liabilities cam business result preclosing events accordance sfas 5 accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings consultation legal counsel legg mason believe resolution actions material adverse effect legg masons financial condition however results operations could materially affected period liabilities period differ legg masons prior estimates legg masons cash flows could materially affected period matters resolved addition ultimate costs litigationrelated charges vary significantly period depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement legg mason current former officer together underwriter public offering named defendants consolidated legal action alleges defendants violated securities exchange act 1934 securities act 1933 making misleading statements public omitting certain material facts respect acquisition cam business public statements prospectus used secondary stock offering order artificially inflate price legg mason common stock action sought certification class shareholders purchased legg mason common stock either february 1 2006 october 10 2006 secondary public offering march 9 2006 seeks unspecified damages legg mason intends defend action vigorously march 17 2008 action dismissed prejudice however plaintiffs appealed dismissal complaint securities act dismissal claims exchange act behalf proposed claim purchases february 1 2006 october 10 2006 appealed final legg mason cannot accurately predict eventual outcome appeal point whether action material adverse effect legg mason march 31 2009 2008 legg masons liability losses contingencies 1800 1700 respectively fiscal 2009 2008 2007 legg mason recorded litigationrelated charges approximately 600 1100 100 respectively net recoveries 100 fiscal 2008 fiscal 2009 2008 2007 liability reduced settlement payments approximately 500 2100 1800 respectively 10 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees primary plan legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation 50 match employee 401k contributions 6 employee compensation maximum five thousand dollars per year match contributions amounted 14366 39446 40686 fiscal 2009 2008 2007 respectively legg mason elected make profit sharing contribution fiscal 2009 addition employees make voluntary contributions certain plans 11 capital stock march 31 2009 authorized numbers common preferred exchangeable shares 500 million 4 million unlimited number respectively addition march 31 2009 2008 109 million 138 million shares common stock respectively reserved issuance legg masons equity plans 12 million 20 million common shares respectively reserved exchangeable shares issued connection acquisition legg mason canada inc exchangeable shares exchangeable time holder oneforone basis shares legg masons common stock included basic shares outstanding connection acquisition cam legg mason issued 1335 shares 10 par value per share nonvoting legg mason convertible preferred stock convertible upon transfer 1335 million shares common stock fiscal 2009 2008 legg mason issued approximately 036 million 553 million common shares respectively upon conversion approximately 036 553 respectively nonvoting convertible preferred stock also fiscal 2008 legg mason repurchased 25 shares nonvoting convertible preferred stock using proceeds 25 convertible senior notes march 31 2009 outstanding shares nonvoting convertible preferred stock discussed note 7 may 2008 legg mason issued 115 billion equity units unit consisting 5 interest 1000 principal amount senior notes due june 30 2021 purchase contract committing holder purchase shares legg masons common stock june 30 2011 maximum amount shares may issued reserved issuance approximately 204 million subject adjustment also discussed note 7 january 2008 legg mason issued 125 billion 25 contingent convertible senior notes certain conditions met could result issuance maximum 142 million shares legg mason common stock subject adjustment changes common stock shares exchangeable common stock three years ended march 31 2009 2008 2007 follows dividends declared per share 096 081 fiscal 2009 2008 2007 respectively dividends declared paid march 31 2009 2008 2007 34043 33103 29430 respectively included current liabilities july 19 2007 legg mason announced board directors authorized purchase 50 million shares legg mason common stock openmarket purchases authorization replaced prior board directors authorization purchase 30 million shares legg mason common stock expiration date attached new authorization fiscal years ended march 31 2009 2007 shares repurchased fiscal year ended march 31 2008 11 million shares repurchased authorization 97945 fiscal 2008 legg mason issued 392 common shares connection contingent acquisition payment made former owners permal discussed note 2 12 stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plans restricted stock awards performance shares payable common stock deferred compensation payable stock effective july 19 2007 number shares authorized issued legg masons active equity incentive stock plan increased 5 million 29 million however legg mason agreed issue final 1 million shares without additional stockholder approval shares available issuance march 31 2009 43 million options legg masons employee stock plans granted prices less 100 fair market value options generally exercisable equal increments three five years expire within five ten years date grant see note 1 discussion stockbased compensation expense continuing operations relating stock options stock purchase plan deferred compensation payable stock years ended march 31 2009 2008 2007 24364 25188 23817 respectively related income tax benefit years ended march 31 2009 2008 2007 9385 9724 8452 respectively stock option transactions legg masons equity incentive plans three years ended march 31 2009 summarized total intrinsic value options exercised years ended march 31 2009 2008 2007 10456 109626 55046 respectively march 31 2009 options outstanding aggregate intrinsic value current market price legg mason stock less exercise prices options outstanding following information summarizes legg masons stock options outstanding march 31 2009 march 31 2009 2008 2007 options exercisable 2455 3197 4156 shares respectively weighted average exercise prices 6705 4554 3388 respectively stock options exercisable march 31 2009 weightedaverage remaining contractual life 30 years march 31 2009 aggregate intrinsic value options exercisable following information summarizes legg masons stock options exercisable march 31 2009 following information summarizes unvested stock options legg masons equity incentive plans year ended march 31 2009 1generally vesting occurs july year unamortized compensation cost related unvested options march 31 2009 46023 expected recognized weightedaverage period 21 years legg mason also equity plan nonemployee directors replaced stock option plan nonemployee directors fiscal 2006 equity plan directors may elect receive shares stock restricted stock units prior july 19 2007 amendment plan directors could also elect receive stock options granted either plan immediately exercisable price equal market value shares date grant term ten years shares options restricted stock units issuable equity plan limited 625 shares aggregate 126 shares issued plan march 31 2009 march 31 2009 355 stock options 39 restricted stock units outstanding plans cash received exercises stock options legg masons equity incentive plans 25463 30944 20690 years ended march 31 2009 2008 2007 respectively tax benefit expected realized tax deductions option exercises totaled 3853 41189 13965 years ended march 31 2009 2008 2007 respectively weighted average fair value stock options granted fiscal 2009 2008 2007 using blackscholes option pricing model 1336 3176 3317 per share respectively following weighted average assumptions used model grants fiscal 2009 2008 2007 legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 45 million total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged earnings fiscal years ended march 31 2009 2008 2007 approximately 188 59 43 shares respectively purchased open market behalf participating employees january 28 2008 compensation committee legg mason approved grants senior officers 120 performance shares upon vesting subject certain conditions distributed shares common stock grants vest ratably january 28 five years following grant date upon attaining service criteria stock price hurdles beginning 7797 year one ending 11415 year five weighted average fair value per share awards 1181 estimated grant date using grant price 7088 monte carlo optionpricing model following assumptions connection termination one senior officers fiscal 2009 20 performance shares voluntarily forfeited resulting charge 550 representing acceleration expense associated unvested portion award restricted stock transactions twelve months ended march 31 2009 2008 2007 respectively summarized restricted stock awards noncash transactions fiscal 2009 2008 2007 legg mason recognized 32629 25015 17039 respectively compensation expense restricted stock awards tax benefit expected realized tax deductions restricted stock totaled 2870 4771 5320 years ended march 31 2009 2008 2007 respectively unamortized compensation cost related unvested restricted stock awards 1341 shares yet recognized march 31 2009 47014 expected recognized weightedaverage period 31 years deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends limit number shares authorized issued plan fiscal 2009 2008 2007 legg mason recognized 322 254 247 respectively compensation expense fiscal 2009 2008 2007 legg mason issued 125 48 46 shares respectively plan weightedaverage fair value per share grant date 3962 8411 8726 respectively 13 deferred compensation stock trust legg mason issued shares connection certain deferred compensation plans held rabbi trusts assets rabbi trusts consolidated employer value employers stock held rabbi trusts classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2009 2008 2003 1190 respectively 14 earnings per share basic earnings per share eps calculated dividing net income loss weighted average number shares outstanding calculation weighted average shares includes common shares exchangeable common stock convertible preferred shares considered participating securities diluted eps similar basic eps adjusts effect potential common shares except inclusion antidilutive situations net loss reported inclusion potentially issuable common shares decrease net loss per share since would antidilutive shares excluded calculation basic diluted earnings per share fiscal year ended march 31 2009 include vested shares restricted stock related legg masons deferred compensation plans december 1 2005 legg mason issued 13346632 shares nonvoting convertible preferred stock connection acquisition cam nonvoting convertible preferred shares entitled receive dividends asconverted basis paid common stock convert automatically upon transfer entity affiliate citigroup aggregate 133 million shares common stock march 31 2009 2008 zero 036 shares nonvoting convertible preferred stock outstanding respectively following table presents computations basic diluted eps diluted eps calculation fiscal year ended march 31 2009 excludes 6629 potential common shares antidilutive due net loss fiscal year options purchase 2780 shares fiscal year ended march 31 2008 1086 shares fiscal year ended march 31 2007 included computation diluted earnings per share presumed proceeds exercising options including related income tax benefits exceed average price common shares fiscal year therefore options deemed antidilutive diluted earnings per share fiscal years ended march 31 2008 2007 also include unvested shares restricted stock except 707 526 shares respectively deemed antidilutive also march 31 2009 2008 warrants issued connection convertible note hedge transactions described note 7 excluded calculation diluted earnings per share effect would antidilutive may 2008 legg mason issued 23 million equity units include purchase warrants providing issuance 170 204 million shares legg mason common stock june 2011 fully described note 7 currently purchase warrants antidilutive market price legg mason stock less maximum conversion price 6756 15 accumulated comprehensive income loss accumulated comprehensive income includes cumulative foreign currency translation adjustments net tax gains losses interest rate swap net tax gains losses investment securities change accumulated translation adjustments fiscal 2009 2008 primarily resulted impact changes brazilian real british pound polish zloty australian dollar japanese yen relation us dollar net assets legg masons subsidiaries brazil united kingdom poland australia japan real pound zloty dollar yen functional currencies respectively summary legg masons accumulated comprehensive income loss march 31 2009 2008 follows 16 variable interest entities normal course business legg mason sponsors manager various types investment vehicles considered vies services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees legg mason sell transfer assets vies legg masons exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees vies material march 31 2009 2008 legg mason issued investment performance guarantees vies investors fiscal 2009 2008 legg mason variable interests certain liquidity funds provided various forms credit capital support described note 17 evaluating contractual implied variable interests funds years ended march 31 2009 2008 determined legg mason primary beneficiary funds march 31 2009 legg mason primary beneficiary one sponsored investment fund vie due high corporate ownership level resulted consolidation vie total assets total equity 482 million march 31 2009 legg masons investment vie 263 million represents maximum risk loss assets vie primarily comprised investments march 31 2008 legg mason required consolidate vies material consolidated financial statements march 31 2009 2008 vies legg mason holds significant variable interest sponsor holds variable interest primary beneficiary legg masons carrying value related vies assets liabilities maximum risk loss follows includes capital support liquidity funds equity interests company made required make earned uncollected management fees assets vies primarily comprised cash equivalents investments liabilities primarily comprised various expense accruals 17 liquidity fund support due continued stress liquidity markets certain asset backed securities previously held liquidity funds legg mason subsidiary manages default restructured default although company required provide support funds legg mason elected maintain confidence clients maintain reputation marketplace certain cases support aaaaaa credit ratings funds clients lose confidence company could potentially withdraw funds favor investments offered competitors resulting reduction legg masons assets management investment advisory fees fiscal 2009 2008 legg mason entered amended various arrangements provide support certain liquidity funds fiscal 2009 legg mason sold funds sold securities issued sivs held money market funds balance sheet supported trs major bank par value support amounts collateral income statement impact fiscal years ended march 31 2009 2008 support remained outstanding end period sale transactions occurred period follows nm meaningful 1included restricted cash consolidated balance sheet 2pre tax charges include reductions value underlying securities addition 181183 relating reimbursements two funds portion losses incurred selling siv securities 2863 principally relating transaction costs substantially offset gain foreign exchange forward contract interest payments received underlying securities included fund support nonoperating income expense consolidated statements operations 3after tax giving effect operating expense adjustments 4securities issued sivs 5support amount securities purchased funds reflects amount paid fund less subsequent principal repayments following table provides summary changes millions liquidity fund support including securities purchased funds legg mason fiscal years ended march 31 2009 2008 1includes principal interest payments received related purchased securities subject trs addition currency gains losses canadian conduit securities letter credit fiscal 2008 legg mason provided support three liquidity funds form locs issued two third party banks aggregate amount approximately 485 million support investments asset backed commercial paper issued two sivs fiscal 2009 legg mason provided additional support liquidity funds form two locs issued third party bank aggregate amount approximately 257 million support investments asset backed commercial paper issued two sivs terms loc agreements locs could drawn certain circumstances including upon funds realizing loss disposition restructuring position upon agreements termination unpaid amounts remained certain funds sivissued securities certain circumstances upon ratings downgrades issuing bank part loc arrangements legg mason agreed reimburse banks amounts drawn locs date locs issued legg mason established derivative liability fair value guarantee reimburse banks amounts drawn locs due sale securities issued sivs held liquidity funds fiscal 2009 locs terminated accordance terms amounts drawn thereunder derivative liability reported march 31 2009 march 31 2008 legg mason reported derivative liabilities 2355 million locs capital support agreements asset backed securities fiscal 2008 legg mason entered six csas two liquidity funds support investments asset backed securities issued sivs terms one csas company agreed provide 15 million contributions fund recognized loss certain investments continued hold underlying securities expiration oneyear term agreement applicable time funds net asset value less specified threshold terms five csas company agreed provide 400 million contributions fund recognized loss sale certain events relating securities issued two sivs contributions made company csas result legg mason acquiring ownership interest fund fiscal 2009 legg mason amended five csas entered fiscal 2008 increase maximum contributions company would make thereunder 525 million 400 million 925 million fiscal 2009 legg mason also entered seven new csas aggregating 395 million four liquidity funds support investments asset backed securities issued four sivs one csas amended year provide 110 million additional support amended terms six csas original terms one csas company agreed provide maximum contribution amount funds recognized loss sale certain events relating securities issued four sivs due maturities supported securities sale securities issued sivs held liquidity funds fiscal 2009 csas supported asset backed securities issued sivs terminated accordance terms contributions made thereunder derivative liability reported march 31 2009 march 31 2008 legg mason reported derivative liability 3162 million related csas capital support agreements nonasset backed securities year ended march 31 2009 legg mason also entered four csas aggregating 27 million support investments nonasset backed securities held four liquidity funds two csas amended year provide 15 million additional support amended terms two csas original terms two csas legg mason agreed provide maximum contribution amount funds recognize loss investments certain nonasset backed securities continue hold underlying securities expiration oneyear terms agreements applicable time funds net asset value less specified threshold four csas include recovery clause funds required reimburse legg mason contributions made upon expiration csa extent funds subsequently receive payments issuer underlying securities upon sale disposition thereof exceed amortized cost underlying securities march 31 2009 legg mason reported derivative liability 206 million related csas total return swap fiscal year 2008 legg mason entered trs arrangement major bank pursuant bank purchased securities issued three sivs dublindomiciled liquidity fund managed subsidiary legg mason 890 million securities face amount commercial paper purchased bank cash aggregate amount 832 million represented estimate value determined collateral purposes addition legg mason reimbursed fund 595 million difference funds carrying value including accrued interest amount paid securities market value 886 million march 31 2008 expected financing costs exceeded amount paid bank 457 million difference accounted derivative asset included current assets consolidated balance sheet march 31 2008 represented amount legg mason expected recover bank upon maturity sale underlying securities trs legg mason agreed pay bank losses including losses incurred sale securities principal repaid maturity bank incurs ownership securities return purchase price paid securities equal onemonth libor rate plus 1 bank agreed pay legg mason principal interest received securities excess price paid securities fiscal year 2009 440 million securities supported trs matured paid full 95 million principal amount securities supported trs paid trs arrangement terminated november 2008 legg mason amended trs extend expiration november 2009 due maturities principal payments underlying securities decrease total amount securities covered trs 890 million 355 million trs terminated fiscal 2009 upon sale underlying securities nonbank sponsored siv fiscal 2008 legg mason purchased cash aggregate 132 million principal amount nonbank sponsored siv securities liquidity fund january 2008 may 2008 approximately 50 million 82 million respectively principal amount securities matured paid full canadian conduit securities fiscal 2008 legg mason acquired cash aggregate 98 million principal amount conduit securities issued canadian asset backed commercial paper issuers fund managed legg mason subsidiary securities sold fiscal 2009 described fiscal 2009 legg mason purchased 29 billion cash including 24 million accrued interest 30 billion principal amount nonbank sponsored siv securities six liquidity funds previously supported twelve csas seven locs upon purchase securities twelve csas aggregating 14 billion seven locs aggregating 742 million terminated accordance terms company subsequently sold 30 billion purchased securities along 355 million securities previously supported trs 76 million canadian conduit securities held balance sheet third parties 655 million excluding transaction costs legg mason also paid 1812 million reimburse two funds portion losses incurred selling unsupported siv securities result sale reimbursement funds completely eliminated companys exposure securities issued sivs company incurred realized loss 23 billion 14 billion net taxes operating expense adjustments fiscal 2009 18 business segment information legg mason global asset management company provides investment management related services wide array clients operate one reportable business segment asset management asset management provides investment advisory services institutional individual clients company sponsored investment funds primary sources revenue asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks connection changes executive management fiscal 2009 desire expand multichannel distribution capabilities better align resources access new growth opportunities realigned management responsibilities result replaced three former operating segments divisions managed investments institutional wealth management based primary products offered clients served asset managers two new divisions americas international primarily based geographic location advisor domicile fund families manage americas division consists usdomiciled fund families separate account businesses usbased investment affiliates domestic distribution organization similarly international division consists fund complexes distribution teams investment affiliates located outside us primarily united kingdom believe structure provide greater focus allow us maximize distribution efforts efficiently take advantage growth opportunities locally abroad presentation previously reported amounts conformed new management structure table reflects revenues longlived assets geographic region thousands march 31 2009 quarterly financial data dollars thousands except per share amounts unaudited 1due rounding quarterly results total amounts fiscal year may differ immaterially annual results 2the quarters ending march 31 2009 december 31 2008 include 82870 1225100 respectively impairment charge related intangibles assets 3the quarters ending march 31 2009 december 31 2008 september 30 2008 june 30 2008 include 606426 1085296 324639 266875 respectively charges resulting providing support liquidity funds may 20 2009 closing price legg masons common stock 1878 quarterly financial data continued dollars thousands except per share amounts unaudited 1due rounding quarterly results total amounts fiscal year may differ immaterially annual results 2the quarter ending march 31 2008 includes 151000 impairment charge related acquired asset management contracts 3the quarters ending march 31 2008 december 31 2007 include 516193 91083 respectively charges resulting providing support liquidity funds item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2010 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework based assessment management concluded march 31 2010 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2010 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2010 mark r fetting chairman chief executive officer charles j daley jr executive vice president chief financial officer treasurer report independent registered public accounting firm board directors stockholders legg mason inc opinion accompanying consolidated balance sheets related consolidated statements operations comprehensive income loss changes stockholders equity cash flows present fairly material respects financial position legg mason inc subsidiaries march 31 2010 march 31 2009 results operations cash flows three years period ended march 31 2010 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 28 2010 legg mason inc subsidiaries consolidated balance sheets dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements operations dollars thousands except per share amounts see notes consolidated financial statements legg mason inc subsidiaries consolidated statements changes stockholders equity dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements comprehensive income loss dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements cash flows dollars thousands legg mason inc subsidiaries consolidated statements cash flows continued dollars thousands see notes consolidated financial statements legg mason inc subsidiaries notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted 1 summary significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see discussion consolidation follows discussion vies material intercompany balances transactions eliminated unless otherwise noted per share amounts include common shares legg mason shares issued connection acquisition legg mason canada inc exchangeable common shares legg mason oneforone basis time nonvoting convertible preferred stock convertible shares legg mason common stock nonvoting convertible preferred shares considered participating securities therefore included calculation basic earnings per common share fiscal 2010 legg mason announced plan terminate exchangeable share arrangement accordance terms may 2010 outstanding exchangeable shares exchanged shares legg mason common stock references fiscal 2010 2009 2008 refer legg masons fiscal year ended march 31 year use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america require management make assumptions estimates affect amounts reported financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes consolidation management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash restricted cash march 31 2010 2185 primarily represents cash collateral required market hedge arrangements cash available legg mason general corporate use fiscal 2010 restricted cash 41500 represented cash collateral required support arrangements expired certain liquidity funds subsidiary manages released financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except longterm debt legg mason holds debt marketable equity investments classified availableforsale heldtomaturity trading debt marketable equity securities classified availableforsale reported fair value resulting unrealized gains losses reflected stockholders equity noncontrolling interests comprehensive income net applicable income taxes debt securities positive intent ability hold maturity classified heldtomaturity recorded amortized cost amortization discount premium recorded interest method included interest income certain investment securities classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings equity fixed income securities valued using closing market prices listed instruments broker dealer price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices legg mason evaluates nontrading investment securities temporary impairment may exist fair value investment security adjusted cost extended period time temporary impairment determined exist amount impairment relates credit losses recognized charge income march 31 2010 2009 amount temporary unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations may readily available management estimates value securities using variety methods resources including current available financial information investment industry march 31 2010 2009 legg mason approximately 484 million 422 million respectively trading nontrading financial instruments valued based upon managements assumptions estimates taking consideration available financial information company industry march 31 2010 2009 legg mason approximately 1365 million 595 million respectively investments partnerships limited liability corporations investments reflected noncurrent assets consolidated balance sheets accounted cost equity method exception 557 million investments march 31 2010 related legg masons involvement us treasurys publicprivate investment program ppip recorded fair value addition financial instruments described derivative instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair value longterm debt march 31 2010 2009 1265418 2804262 respectively fair values estimated using current market prices derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason used foreign exchange forwards interest rate swaps hedge risk movement exchange rates interest rates financial assets limited basis also recently legg mason used futures contracts index funds hedge market risk certain seed capital investments legg mason applied hedge accounting defined accounting literature debt interest rate risk hedge matured fiscal 2009 adjustment cash flow hedge recorded comprehensive income loss matured time realized nonoperating income expense gains losses derivative instruments designated hedge accounting included income expense nonoperating income expense consolidated statements operations except described fiscal 2009 fiscal 2008 legg mason entered various credit support arrangements certain liquidity funds managed subsidiary arrangements included letters credit capital support agreements total return swap trs qualified derivative transactions described fully note 17 fair values derivative instruments based expected outcomes derived pricing data underlying securities andor detailed collateral analyses based recent available information related derivative assets march 31 2010 2009 related derivative liabilities march 31 2010 fair value related derivative liabilities march 31 2009 206 million included fund support consolidated balance sheet none derivative transactions designated hedge accounting defined accounting guidance related gains losses included fund support consolidated statement operations fair value measurements accounting guidance fair value measurements defines fair value establishes framework measuring fair value fair value defined exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date accounting guidance fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance february 2008 financial accounting standards board fasb partially deferred accounting guidance one year nonrecurring fair value measurements nonfinancial assets liabilities acquired intangible assets goodwill application deferred provisions accounting guidance nonrecurring fair value measurements effective april 1 2009 material impact legg masons consolidated financial statements april 2009 fasb issued various accounting guidance intended provide additional application guidance enhance disclosures regarding fair value measurements impairments securities accounting guidance relates determining fair values active market price inputs used represent distressed sales reaffirms objective fair value measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically reaffirms need use judgment ascertain formerly active market become inactive determining fair values markets become inactive accounting guidance also relates otherthan temporary impairments intended bring greater consistency timing impairment recognition also intended provide greater clarity investors credit noncredit components impaired debt securities expected sold guidance also requires increased timely disclosures regarding expected cash flows credit losses aging securities unrealized losses accounting guidance became effective june 2009 quarter material impact legg masons consolidated financial position fair value accounting guidance also establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value classified disclosed one following categories level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category may include repurchase agreements fixed income securities certain proprietary fund products level 3 financial instruments values based unobservable inputs including little market activity category includes derivative liabilities related fund support arrangements investments partnerships limited liability companies private equity funds previously included derivative assets related fund support arrangements certain owned securities issued structured investment vehicles sivs category may also include certain proprietary fund products redemption restrictions valuation asset liability may involve inputs one level hierarchy level fair value hierarchy fair value measurement entirety falls determined based lowest level input significant fair value measurement entirety proprietary fund products valued net asset value nav determined applicable fund administrator funds typically invested exchangetraded investments observable market prices valuations may classified level 1 level 2 level 3 based whether fund exchangetraded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments reporting date transfers categories measured beginning period see note 3 additional information regarding fair value measurements legg mason also adopted accounting guidance permits companies choose measure certain financial instruments certain items fair value standard requires unrealized gains losses items fair value option elected reported earnings time company elected apply fair value option financial instruments fixed assets fixed assets consist equipment software leasehold improvements capital lease assets equipment consists primarily communications technology hardware furniture fixtures software includes purchased software internally developed software fixed assets reported cost net accumulated depreciation amortization capital lease assets initially reported lesser present value related future minimum lease payments assets current fair value subsequently reduced accumulated depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three years leasehold improvements capital lease assets amortized depreciated initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill intangible assets consist principally asset management contracts manage proprietary funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents excess cost business acquisition fair value net assets acquired indefinitelife intangible assets goodwill amortized book purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events triggering event occurred company perform tests include critical reviews significant assumptions determine intangible assets goodwill impaired minimum company performs tests annually december 31 indefinitelife intangible assets goodwill considering factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected financial statements current fair value recognized expense period impairment determined fair values intangible assets subject amortization reviewed reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined based anticipated discounted cash flows goodwill evaluated reporting unit level deemed impaired carrying amount reporting unit exceeds implied fair value estimating fair value reporting unit legg mason uses valuation techniques principally based discounted cash flows similar models employed analyzing purchase price acquisition target goodwill deemed recoverable reporting unit level also operating segment level legg mason defines americas international divisions results fact operating segment management reports chief executive officer manage business division level regularly receive discrete financial information operating results lower level advisory affiliate level prior march 31 2009 legg masons reporting units managed investments institutional wealth management divisions allocations goodwill legg masons divisions management restructures acquisitions dispositions based relative fair values respective businesses restructured added sold divisions see note 5 additional information regarding intangible assets goodwill note 19 additional business segment information translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income gains losses resulting foreign currency transactions included net income investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients fees primarily based predetermined percentages market value assets management aum recognized period services performed may billed advance period earned based aum beginning billing period accordance related advisory contracts revenue associated advance billings deferred included current liabilities consolidated balance sheets recognized period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks recognized end performance measurement period accordingly neither advanced billings performance fees subject reversal legg mason responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution service fee expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc receipts recorded distribution servicing revenue received reduction unamortized balance deferred sales commissions corresponding expense management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2010 2009 2008 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 153 million 189 million march 31 2010 2009 respectively income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforwards business combinations amortization accrued compensation applicable accounting guidance tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information companys accounting policy classify interest related tax matters interest expense related penalties operating expense see note 8 additional information regarding income taxes loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plans restricted stock awards marketbased performance shares payable common stock deferred compensation payable stock compensation plans legg mason issues equity awards directors officers key employees accordance applicable accounting guidance compensation expense includes costs nonvested sharebased awards grant date fair value amortized respective vesting periods straightline method legg mason determines fair value stock options using blackscholes option pricing model exception marketbased performance grants valued monte carlo optionpricing model see note 12 additional information regarding stockbased compensation earnings per share basic earnings per share attributable legg mason inc common shareholders eps calculated dividing net income attributable legg mason inc weightedaverage number shares outstanding calculation weightedaverage shares includes common shares exchangeable common stock convertible preferred shares considered participating securities diluted eps similar basic eps adjusts effect potential common shares unless antidilutive periods net loss potential common shares considered antidilutive see note 14 additional discussion eps consolidation special purpose entities spes trusts partnerships corporations vehicles established limited business purpose spes generally involve transfer assets liabilities transferor may continued involvement derive continued benefit exhibit control recourse legg mason utilize spes form financing provide liquidity legg mason recognized gains losses sale assets spes accordance accounting guidance consolidation variable interest entities vies spes designated either voting interest entity vie vies subject consolidation party deemed primary beneficiary vie entity sufficient equity risk finance activities without additional subordinated financial support either contractual implied equity investors characteristics controlling financial interest primary beneficiary entity absorb majority vies expected losses entity receive majority vies expected residual returns accordance accounting guidance legg masons determination expected residual returns excludes gross fees paid decision maker current guidance unlikely legg mason primary beneficiary vies created manage assets clients unless ownership interest including interests related parties vie substantial unless legg mason may earn significant performance fees vie unless legg mason considered material implied variable interest accounting guidance also requires disclosure vies legg mason sponsor considered significant variable interest determining whether variable interest significant legg mason considers factors used determination primary beneficiary determining whether primary beneficiary vies legg mason considers qualitative quantitative factors voting rights equity holders including rights remove decision maker economic participation parties including fees earned paid legg mason related party ownership guarantees implied relationships determining primary beneficiary legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks assumptions estimates significant bearing determination primary beneficiary legg masons assumptions estimates materially incorrect legg mason might required consolidate additional vies consolidation vies would result increase assets corresponding increase noncontrolling interests liabilities consolidated balance sheets decrease investment advisory fees increase decrease nonoperating income expense corresponding offset noncontrolling interests consolidated statements operations impact net income attributable legg mason inc june 2009 fasb issued amendments relating consolidation vies effective legg mason fiscal 2011 amendments include new approach determining consolidate vie changes necessary reassess consolidate vie changes assessment entities vies new approach determining consolidate vie requires analysis whether variable interest gives enterprise controlling financial interest vie power direct activities significantly impact vies economic performance obligation absorb losses right benefits could potentially significant vie amendments would replace quantitative approach previously required determine whether vie consolidated qualitative analysis amendments also require removal rights effective must vested one party rather simple majority parties prior guidance new guidance increases likelihood consolidation certain products legg mason manages february 2010 fasb amended new consolidation guidance defer application certain investment funds including money market funds fasb international accounting standards board develop consistent guidance certain aspects respective consolidation standards legg mason continuing evaluate impact original amendments currently believes without deferral legg mason would required consolidate certain sponsored funds particularly performance fees significant relatedparty ownership implicit variable interests fund support material balance sheet revenues expenses impact net income attributable legg mason inc legg mason continues evaluate deferral provisions certain sponsored funds primarily collateralized debt loan obligation investment vehicles cdosclos qualify deferral may require consolidation would also material balance sheet revenues expenses still impact net income attributable legg mason inc legg mason currently manages 12 cdosclos approximately 35 billion aum legg mason equity interest vehicles may contractually eligible earn subordinate fees andor incentive fees legg mason expect receive performance fees vehicles eligible based evaluation performed date legg mason believes may consolidate one cdos approximately 300 million aum due potentially significant economic interest created subordinate fees legg mason one subsidiaries one eight managers involved us treasurys ppip qualifies investment fund deferral new vie accounting guidance companys subsidiary general partner within legg mason ppip structure performs routine activities investment management contracts principal entity within legg masons ppip structure voting entity provides substantive rights allow general partner removed simple majority unrelated limited partner investors therefore require consolidation legg mason feeder funds within legg masons ppip structure vies however legg mason required consolidate see note 16 information cdosclos vies noncontrolling interests noncontrolling interests related consolidated investment funds classified redeemable noncontrolling interests investors funds may request withdrawals time redeemable noncontrolling interests march 31 2010 2009 29577 31020 changes years ended follows recent accounting developments following relevant accounting pronouncement recently issued january 2010 fasb issued amendment require new disclosures recurring nonrecurring fair value measurements new disclosures include significant transfers level 1 2 measurements change current disclosure requirement level 3 measurement activity net basis gross basis amendment also clarifies existing disclosure guidance level disaggregation inputs valuation techniques new revised disclosures effective legg mason fiscal 2011 except revised disclosures level 3 measurement activity effective legg mason fiscal 2012 expected material impact legg masons consolidated financial statements 2 acquisitions dispositions february 26 2008 legg mason announced definitive agreement citigroup global markets inc affiliate citigroup inc citigroup would reacquire majority overlay implementation business legg mason private portfolio group lmppg includes managed account trading technology platform undertaking transaction legg mason continued focus core asset management business legg mason originally acquired business citigroup december 2005 acquisition citigroups worldwide asset management business cam sale closed april 1 2008 cash proceeds approximately 181 million received transaction costs gain sale business approximately 55 million 34 million tax recognized nonoperating income expense fiscal 2009 effective november 1 2005 legg mason acquired 80 outstanding equity permal leading global fundsofhedge funds manager concurrent acquisition permal completed reorganization residual 20 outstanding equity converted preference shares resulting legg mason owning 100 outstanding voting common stock permal legg mason right purchase preference shares four years closing right exercised holders shares right require legg mason purchase interests general time frame approximately consideration maximum aggregate price including earnout payments related purchase based upon future operating results equity interests permal 1386 billion excluding acquisition costs dividends fiscal 2008 payments 240 million made former owners permal representing earnout payments based upon permals operating results second anniversary date purchase 375 preference shares 208 million paid cash balance common stock fiscal 2010 legg mason paid aggregate 171 million cash acquire remaining 625 outstanding preference shares company also elected purchase 9 million rights sellers preference shares receive earnout payment 149 million two years result transaction payments permal acquisition addition fiscal 2010 2009 2008 legg mason paid aggregate amount 270 million dividends preference shares payments preference shares including dividends recognized additional goodwill august 1 2001 legg mason purchased private capital management pcm cash approximately 682 million excluding acquisition costs transaction included two contingent payments based pcms revenue growth years ending third fifth anniversaries closing aggregate purchase price 1382 billion fiscal 2005 legg mason made maximum third anniversary payment 400 million former owners pcm fiscal 2007 paid available cash maximum fifth anniversary payment 300 million 150 million remained escrow subject certain limited clawback provisions fiscal 2010 fiscal 2009 remaining contingency settled releasing 30 million sellers returning 120 million legg mason recorded reduction goodwill 3 investments fair values assets liabilities legg mason investments debt equity securities generally classified availableforsale trading described note 1 investments march 31 2010 2009 follows 1includes assets deferred compensation plans 167127 128785 respectively remainder represents seed investments proprietary fund products investments vies 2includes investments private equity securities readily determinable fair values legg mason uses specific identification method determine cost security sold amount reclassified accumulated comprehensive income earnings proceeds gross realized gains losses sales maturities availableforsale investments follows net unrealized realized gain loss investment securities classified trading 141633 1995428 62001 fiscal 2010 2009 2008 respectively realized unrealized losses fiscal 2009 2008 primarily relate losses sivissued securities purchased certain liquidity funds legg masons availableforsale investments consist mortgage backed securities us government agency securities equity securities gross unrealized gains losses investments classified availableforsale 172 33 respectively march 31 2010 209 39 respectively march 31 2009 legg mason investments classified heldtomaturity march 31 2010 2009 fair values financial assets liabilities company determined using following categories inputs march 31 2010 2009 1primarily mutual funds minimal market risk company change value offset adjustment compensation expense related liability 2total proprietary fund products investments represent primarily mutual funds invested approximately 58 42 equity debt securities march 31 2010 respectively approximately equally invested equity debt securities march 31 2009 total also includes approximately 222 million 166 million related noncontrolling interests consolidated investment funds march 31 2010 2009 respectively 3see note 1 additional information fair value liquidity fund support table presents summary changes financial assets liabilities measured fair value using significant unobservable inputs level 3 periods march 31 2009 march 31 2010 april 1 2008 march 31 2009 1see note 17 discussion liquidity fund support 2the decrease fund support derivative liability resulted termination fund support agreements upon purchase siv securities funds realized unrealized gains losses recorded level 3 investments included fund support income expense consolidated statements operations total net gains losses level 3 investments 154 million 493 million years ended march 31 2010 2009 respectively attributable change unrealized gains losses relating assets liabilities still held reporting date practical expedient legg mason relies net asset value certain investments fair value net asset values provided investees derived fair values underlying investments reporting date following table summarizes march 31 2010 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 123 monthly redemption 77 quarterly redemption 18 subject 2year lockup 232 monthly redemption 28 quarterly redemption 9 annual redemption 31 subject 3 5year lockup side pocket provisions 3liquidations expected remaining term 484 3year remaining term 16 21year remaining term current plans sell investments 4 fixed assets fixed assets consist equipment software leasehold improvements capital lease assets equipment consists primarily communications technology hardware furniture fixtures software includes purchased software internally developed software fixed assets reported cost net accumulated depreciation amortization following table reflects components fixed assets march 31 depreciation amortization expense 91309 101957 83812 fiscal 2010 2009 2008 respectively 5 intangible assets goodwill indefinitelife intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair value assets exceeds book value intangible assets subject amortization considered impairment reporting period fair value less book value legg mason record impairment charge following tables reflect components intangible assets march 31 fiscal 2010 impairments amortizable indefinitelife intangible assets fiscal 2009 legg mason recognized impairment management contracts related intangible assets acquired acquisitions cam pcm 72326 26644 respectively assets management related revenues associated acquired management contracts declined significantly fiscal year 2009 based client turnover data estimated lives cam retail separately managed accounts contracts decreased 9 years 5 years march 31 2009 fair value remaining acquired management contracts determined using valuation techniques based discounted cash flows estimated 5year remaining life using riskadjusted discount rate based upon continued significant decline aum legg mason wrote remaining balance pcm management contracts fiscal 2009 march 31 2010 management contracts amortized weightedaverage life 43 years estimated amortization expense next five fiscal years follows change indefinitelife intangible assets attributable impact foreign currency translation legg mason completed recent annual impairment tests indefinitelife intangible assets december 31 2009 determined impairment value assets fiscal 2010 legg mason also determined triggering events occurred march 31 2010 would require impairment testing fiscal 2009 result significant declines aum significant changes pcm legg mason recognized impairment pcm trade name asset 47000 change carrying value goodwill summarized 1in fiscal 2009 legg mason replaced three former operating segments divisions managed accounts institutional wealth management two new divisions americas international legg mason completed recent annual impairment test goodwill december 31 2009 determined impairment value assets fiscal 2010 legg mason also determined triggering events occurred march 31 2010 would require impairment testing effective march 31 2010 legg mason acquired contracts manage approximately 175 million assets total purchase price fair value 52 million management contracts valued 13 million remaining 39 million fair value purchase price recorded goodwill based earnings permal november 2009 legg mason paid 171 million 81 million accrued fiscal 2008 fourth anniversary payment purchase contract acquisition remaining preference shares issued permal recognized corresponding increase goodwill addition december 2009 legg mason elected purchase 9 million rights sellers preference shares receive earnout payment sixth anniversary november 2011 149 million purchase amount 9 million represents fair value obligation also resulted increase goodwill result transaction payments permal acquisition severe market turmoil experienced fiscal 2009 significant impact former wealth management division legg masons former divisions aum decreased 30 division result net client outflows market depreciation result dramatic changes market conditions fiscal 2009 legg mason revised growth assumptions downward project contraction next two years applicable discount rate increased 125 147 december quarter based changes interest rates risk factors combined impact factors decreased projected cash flows wealth management division 60 legg masons prior projections result carrying value legg masons wealth management division goodwill considered impaired 1161900 impairment charge recorded fiscal 2009 legg mason also recognizes tax benefit amortization excess tax basis related cam acquisition accordance accounting guidance income taxes tax benefit recorded reduction goodwill deferred tax liabilities benefit realized 6 shortterm borrowings october 14 2005 legg mason entered unsecured 5year 500 million revolving credit agreement november 2007 legg mason borrowed 500 million revolving credit facility general corporate purposes proceeds invested shortterm instruments january 3 2008 revolving credit agreement amended increase maximum amount legg mason may borrow 1 billion allow draw portion availability form letters credit locs march 2009 legg mason repaid 250 million outstanding borrowings credit facility revolving credit agreement amended decrease maximum amount legg mason may borrow 1 billion 500 million february 11 2010 revolving credit agreement amended extend expiration commitments maturity date loans outstanding february 2013 revolving credit facility rate libor plus 2625 basis points libor plus 225 basis points march 31 2010 2009 respectively effective interest rate revolving credit agreement 29 28 march 31 2010 2009 respectively rates may change future based changes legg masons credit ratings march 31 2010 2009 250 million outstanding facility march 7 2008 legg mason elected procure loc money market fund support 150 million funds holdings certain sivissued securities using capacity revolving credit agreement collateral loc terminated accordance terms upon legg masons purchase underlying securities fund fiscal 2009 companys revolving credit facility lenders 550 million 5year term loan repaid full fiscal 2010 described note 7 facility standard financial covenants revised fiscal 2010 including maximum net debt ebitda ratio 25 previously 30 gross debt minimum ebitda interest ratio 40 march 31 2010 legg masons debt ebitda ratio 09 ebitda interest expense ratio 74 legg mason maintained compliance applicable covenants determined compliance covenants may pressure number actions may taken including reducing expenses increase ebitda using available cash repay portion 250 million outstanding debt subject covenants seeking negotiate lenders modify terms restructure debt subsidiary legg mason maintains credit line general operating purposes may 2009 maximum amount may borrowed credit line decreased 40 million 12 million borrowings outstanding facility march 31 2010 2009 another subsidiary legg mason 100 million oneyear revolving credit agreement general operating purposes expired september 2009 borrowings outstanding 7 longterm debt accreted value longterm debt consists following 5year term loan october 14 2005 legg mason entered unsecured term loan agreement amount exceed 700 million legg mason used term loan pay portion purchase price including acquisition related costs acquisition cam fiscal 2008 2007 legg mason repaid aggregate 150 million outstanding borrowings term loan make payments fiscal 2009 january 2010 legg mason repaid full 550 million remaining outstanding borrowings term loan thirdparty distribution financing july 31 2006 subsidiary legg mason entered fouryear agreement financial institution finance nonrecourse basis 907 million commissions paid financial intermediaries connection sales certain share classes proprietary funds outstanding balance march 31 2010 16 million distribution fee revenues used repay financing based average aum respective funds interest imputed average rate 27 april 2009 legg mason terminated agreement outstanding balance paid normal course operations 25 convertible senior notes related hedge transactions january 14 2008 legg mason sold 125 billion 25 convertible senior notes bear interest 25 payable semiannually cash legg mason accreting carrying value principal amount maturity using imputed interest rate 65 effective borrowing rate nonconvertible debt time issuance expected life seven years resulting additional interest expense fiscal 2010 2009 approximately 344 million 323 million respectively notes convertible certain conditions met initial conversion rate 113636 shares legg mason common stock per 1000 principal amount notes equivalent conversion price approximately 8800 per share maximum 142 million shares subject adjustment unconverted notes mature january 2015 upon conversion 1000 principal amount note holder receive cash amount equal 1000 less conversion value note conversion value exceeds principal amount note conversion legg mason also deliver election cash common stock combination cash common stock conversion value excess 1000 amount accreted value notes exceeds ifconverted value march 31 2010 representing potential loss approximately 958 million using current interest rate 435 agreement governing issuance notes contains certain covenants benefit initial purchaser notes including leverage interest coverage ratio requirements may result notes becoming immediately due payable covenants met leverage covenant waived accommodate equity units issuance may 2008 discussed otherwise legg mason maintained compliance applicable covenants connection sale notes january 14 2008 legg mason entered convertible note hedge transactions respect common stock purchased call options financial institution counterparties hedge providers purchased call options exercisable solely connection conversions notes event market value per share legg mason common stock time exercise greater exercise price purchased call options equal 88 conversion price notes subject adjustment simultaneously separate transactions legg mason also sold hedge providers warrants purchase aggregate subject adjustment 142 million shares common stock net sharesettled basis exercise price 10746 per share common stock purchased call options warrants part terms notes affect holders rights notes hedging transactions net cost 83 million paid proceeds notes recorded reduction additional paidin capital notes converted market price per share legg mason common stock exceeds 88 exercise price purchased call options purchased call options entitle legg mason receive hedge providers shares legg mason common stock cash combination shares common stock cash match shares cash legg mason must deliver terms notes additionally time market price per share legg mason common stock exceeds 10746 exercise price warrants legg mason required deliver hedge providers net shares common stock amount based excess market price per share common stock exercise price warrants transactions effectively increase conversion price notes 10746 per share common stock legg mason contractual rights execution related agreements ability settle obligations conversion feature notes purchased call options warrants legg mason common stock accordingly transactions accounted equity subsequent adjustment changes value obligations 56 senior notes equity units may 2008 legg mason issued 23 million equity units 115 billion 50 million used pay issuance costs unit consists 5 interest 1000 principal amount 56 senior notes due june 30 2021 detachable contract purchase varying number shares legg masons common stock 50 june 30 2011 notes purchase contracts separate distinct instruments terms structured simulate conversion debt equity potentially remarketed debt approximately three years issuance holders obligations purchase shares legg masons common stock collateralized pledge notes prescribed collateral connection issuance equity units legg mason incurred issuance costs 362 million 276 million allocated equity component equity units recorded reduction additional paidin capital notes considered mandatorily convertible commitment purchase shares legg masons common stock holders also receive quarterly payments referred contract adjustment payments cap fixed annual rate 14 commitment amount threeyear contract term upon issuance equity units legg mason recognized 458 million liability fair value obligation based upon discounted cash flows pay unitholders quarterly contract adjustment payment amount also represented fair value legg masons commitment contract issue shares common stock future designated prices recorded reduction additional paidin capital cap obligation liability accreted approximate 3year contract term charges interest expense based constant rate calculation subsequent contract adjustment payments reduce cap obligation liability march 31 2010 2009 16 million 318 million respectively included liabilities consolidated balance sheets decrease cap obligation liability primarily due equity unit extinguishment discussed purchase contract obligates legg mason sell number newly issued shares common stock based settlement rate determined legg masons stock price purchase date settlement rate adjusts price legg mason stock way intended maintain original investment value legg masons common stock priced 5630 6756 per share settlement rate 07401 shares legg mason common stock subject adjustment equity unit market value legg mason common stock 6756 settlement rate 08881 shares legg mason common stock subject adjustment equity unit market value legg mason common stock 5630 market value legg mason common stock 5630 6756 settlement rate number shares legg mason common stock equal 50 divided market value september 2009 quarter legg mason completed tender offer retired 91 outstanding equity units 209 million units including extinguishment 105 billion outstanding 56 senior notes termination related purchase contracts exchange issuance 186 million shares legg mason common stock payment 1309 million cash payment allocated liability equity components equity units based relative fair values resulting loss debt extinguishment 220 million including noncash charge 63 million accelerated expense deferred issue costs decrease additional paidin capital 1152 million maximum number shares may issued remaining equity units subject adjustment 18 million purchase contracts deemed equity upon issuance legg mason incur gain loss outstanding equity units settled accordance original terms shares legg masons common stock issuable equity unit purchase contracts currently antidilutive treasury stock method market price legg mason common stock less 6756 per share event probability successful remarketing equity unit notes becomes remote amount shares issuable purchase contracts must included diluted earnings per share would determined ifconverted method legg mason option remarket remaining notes beginning december 27 2010 required attempt remarket notes june 30 2011 upon successful remarketing interest rate maturity date senior notes reset notes may remain outstanding time exercise purchase contracts related issuance legg mason common shares remarketing successful period note holders put notes par legg mason upon settlement purchase contracts notes redeemed remarketed june 30 2013 called par legg mason term loans subsidiary legg mason entered loan fiscal 2005 finance leasehold improvements outstanding balance march 31 2010 23 million bears interest 42 due october 31 2010 fiscal 2006 subsidiary legg mason entered 128 million term loan agreement finance acquisition aircraft loan bears interest 59 secured aircraft maturity date january 1 2016 outstanding balance march 31 2010 101 million march 31 2010 aggregate maturities longterm debt current accreted value 1369091 based contractual terms follows interest rate swap effective december 1 2005 legg mason executed 3year amortizing interest rate swap large financial institution hedge interest rate risk portion 700 million 5year term loan terms swap legg mason paid fixed interest rate 49 notional amount 400 million march 2007 quarter swap began unwind 50 million per quarter quarterly payments receipts swap exactly offset changes floating rate interest payments 400 million principal term loan since terms conditions hedge expected changed long least unamortized balance swap outstanding 5year term loan swap continued effective cash flow hedge result changes market value swap recorded component comprehensive income swap matured december 1 2008 estimated unrealized loss previously included comprehensive income 157 realized nonoperating income expense maturity date amount offset lower interest expense hedged debt 8 income taxes components income loss income tax provision benefit follows components income tax expense benefit follows legg mason received approximately 580 million tax refunds june 2009 quarter primarily attributable utilization 16 billion realized losses incurred fiscal 2009 sale securities issued sivs federal legislation enacted november 2009 temporarily extend net operating loss carryback period two five years enabled legg mason utilize additional 13 billion net operating loss deductions result additional 459 million tax refunds received january 2010 reconciliation difference effective income tax rate statutory federal income tax rate follows 1certain prior year amounts reclassified conform current year presentation 2state income taxes include changes valuation allowances net impact deferred tax assets changes state apportionment factors planning strategies effect foreign tax rates also includes changes valuation allowances deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows 1certain prior year deferred tax assets related accrued compensation benefits unrealized losses loss carryforwards reclassified conform current year presentation certain tax benefits associated legg masons employee stock plans recorded directly stockholders equity tax benefit recorded equity 2010 2009 due net operating loss position company march 31 2010 additional 39 million net operating loss recognized increase stockholders equity ultimately realized connection sale notes january 2008 legg mason entered purchase call options hedge providers see note 7 income tax purposes call options notes considered part single integrated transaction 2975 million cost call options therefore tax deductible term notes financial statements purposes 272 million established debt discount amortized interest expense 7year term notes accordingly legg mason generate future net tax benefits 97 million period 7year term notes benefit deferred tax asset recorded increase additional paidin capital therefore reduce future tax provisions march 31 2010 gross deferred tax asset related call options 2182 million gross deferred tax liability related debt discount 1987 million net balance march 31 2010 deferred tax asset 76 million benefits partially offset temporary differences associated equity units legg mason various loss carryforwards may provide future tax benefits related valuation allowances established accordance accounting guidance income taxes managements opinion likely benefits realized substantially legg masons deferred tax assets relate us united kingdom uk taxing jurisdictions march 31 2010 us federal deferred tax assets aggregated 611 million realization expected require approximately 40 billion future us earnings approximately 116 million must form foreign source income based estimates future taxable income using assumptions used legg masons goodwill impairment testing likely current federal tax benefits realizable valuation allowance necessary time extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals tax planning may enhance legg masons tax positions realization current tax benefits dependent significant tax strategies march 31 2010 us state deferred tax assets aggregated 212 million due limitations net operating loss capital loss carryforwards taking consideration certain state tax planning strategies valuation allowance established state capital loss net operating loss benefits certain jurisdictions amount 492 million fiscal year 2010 due uncertainty future state apportionment factors future effective state tax rates value state net operating loss benefits ultimately realized may vary march 31 2010 uk deferred tax assets net valuation allowances material additional valuation allowance 29 million recorded foreign deferred tax assets relating various jurisdictions following deferred tax assets valuation allowances relating carryforwards recorded march 31 2010 2009 respectively 1due permal acquisition structure periods prior december 1 2009 us subsidiaries permal filed separate federal income tax returns apart legg mason incs consolidated federal income tax return separate state income tax returns 2substantially us state net operating losses carryforward fiscal year 2029 3due volatility factors relating apportionment income various states companys effective state tax rates subject fluctuation impact value companys deferred tax assets including net operating losses could material impact future effective tax rate company legg mason total gross unrecognized tax benefits approximately 510 million 437 million 293 million march 31 2010 2009 2008 respectively totals 421 million 343 million 211 million respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 2010 2009 2008 follows march 31 2010 management anticipate material increases decreases amounts unrecognized tax benefits next twelve months company accrues interest related unrecognized tax benefits interest expense recognizes penalties operating expense years ended march 31 2010 2009 2008 company recognized approximately 22 million 54 million 12 million respectively substantially interest march 31 2010 2009 2008 legg mason approximately 60 million 50 million 29 million respectively accrued interest penalties tax contingencies consolidated balance sheets legg mason examination internal revenue service tax authorities various states following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal year 2005 us federal fiscal year 2005 united kingdom fiscal year 2002 state connecticut fiscal year 2003 state california fiscal year 2005 state new york fiscal year 2006 state maryland company anticipate making significant cash payments settlement audits quarter ended september 30 2007 united kingdom enacted finance act 2007 reduced corporate tax rate 30 28 tax periods ending april 1 2008 impact prior deferred tax liabilities time change fiscal 2008 onetime tax benefit approximating 185 million fiscal 2008 legg mason initiated plans repatriate earnings certain foreign subsidiaries 225 million anticipated earnings would used contingent acquisition payments former owners permal discussed note 9 fiscal 2008 36 million repatriated plan additional income tax provision approximately 184 million net foreign tax credits previously recognized although permal payments made therefore original premise establishing deferred tax liability longer applicable legg mason still intends repatriate earnings create foreign source income order utilize foreign tax credits may otherwise expire unutilized repatriation beyond original 225 million foreign earnings contemplated except noted legg mason intends permanently reinvest cumulative undistributed earnings nonus subsidiaries nonus operations accordingly us federal income taxes provided undistributed earnings extent permanently reinvested legg masons nonus operations practical time determine income tax liability would result upon repatriation earnings 9 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2025 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2010 minimum annual aggregate rentals operating leases servicing agreements follows table include aggregate obligations 337 million property equipment capital leases one lease amended fiscal 2008 include putpurchase option agreement owner land building agreement fixed price 290 million executed seller put option december 2012 beginning november 2011 buyer purchase option becomes exercisable 4 million escrow deposit made connection putpurchase option agreement minimum rental commitments table reduced 1537 million minimum sublease rentals received future non cancelable subleases approximately 57 due one counterparty subtenant defaults sublease legg mason may incur operating charges reflect expected future sublease rentals reduced amounts result current commercial real estate market minimum rental commitments includes 10 billion real estate leases equipment leases 923 million service maintenance agreements included table 161 million commitments related office space vacated sublease pursued lease liability adjusted fiscal 2010 reflect present value excess existing lease obligations estimated sublease income related costs lease liability takes consideration various assumptions including amount time take secure sublease agreement prevailing rental rates applicable real estate markets related costs incurred fiscal 2010 aggregated 193 million following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes period provided landlord free rent period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2010 2009 legg mason commitments invest approximately 45697 29466 respectively limited partnerships make private investments commitments funded required end respective investment periods ranging fiscal 2018 fiscal 2008 legg mason recorded contingent payment obligations 160 million related permal acquisition addition 161 million previously recorded obligation fiscal year 2008 payments 240 million made former owners permal 208 million paid cash balance common stock fiscal 2010 legg mason paid 171 million cash former owners permal fourth anniversary payment purchase contract acquisition remaining preference shares issued permal addition december 2009 legg mason elected purchase 9 million rights sellers preference shares receive earnout payment sixth anniversary november 2011 149 million result transaction payments permal acquisition see note 2 acquisitions dispositions additional information related permal acquisition see note 17 liquidity fund support additional information related legg masons commitments normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications legg masons maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily securities brokerage asset management investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial legg mason also involved governmental selfregulatory agency inquiries investigations proceedings citigroup transaction legg mason transferred citigroup subsidiaries constituted private clientcapital markets pccm businesses thus transferring entities would primary liability customer complaint litigation regulatory liabilities proceedings arising businesses however part transaction legg mason agreed indemnify citigroup customer complaint litigation regulatory liabilities legg masons former pccm businesses result preclosing events ultimate resolution matters cannot currently determined based current information consultation legal counsel management believes accrual range reasonably possible losses march 31 2010 2009 material similarly although citigroup transferred legg mason entities would primarily liable customer complaint litigation regulatory liabilities proceedings cam business citigroup agreed indemnify legg mason customer complaint litigation regulatory liabilities cam business result preclosing events accordance guidance accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings consultation legal counsel legg mason believe resolution actions material adverse effect legg masons financial condition however results operations could materially affected period liabilities period differ legg masons prior estimates legg masons cash flows could materially affected period matters resolved addition ultimate costs litigation related charges vary significantly period depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement legg mason current former officer together underwriter public offering named defendants consolidated legal action alleged defendants violated securities act 1933 omitting certain material facts respect acquisition citigroups worldwide asset management business prospectus used secondary stock offering order artificially inflate price legg mason common stock march 17 2008 action dismissed prejudice september 30 2009 dismissal upheld appeal plaintiffs avenue appeal dismissal proceeding concluded march 31 2010 2009 legg masons liability losses contingencies 21500 1800 respectively fiscal 2010 2009 2008 legg mason recorded litigationrelated charges approximately 21200 600 1100 respectively net recoveries 100 fiscal 2008 charge fiscal 2010 primarily represents 19 million reserve affiliate investor settlement settled subsequent march 31 2010 fiscal 2010 2009 2008 liability reduced settlement payments approximately 1500 500 2100 respectively 10 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees primary plan legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation 50 match employee 401k contributions 6 employee compensation maximum five thousand dollars per year profit sharing matching contributions amounted 18199 39446 fiscal 2010 2008 respectively matching contributions amounted 14366 fiscal 2009 legg mason elected make profit sharing contribution fiscal 2009 addition employees make voluntary contributions certain plans 11 capital stock march 31 2010 authorized numbers common preferred exchangeable shares 500 million 4 million unlimited number respectively addition march 31 2010 2009 164 million 109 million shares common stock respectively reserved issuance legg masons equity plans 11 million 12 million common shares respectively reserved exchangeable shares issued connection acquisition legg mason canada inc exchangeable shares exchangeable time holder oneforone basis shares legg masons common stock included basic shares outstanding fiscal 2010 legg mason announced plan terminate exchangeable share arrangement accordance terms may 2010 outstanding exchangeable shares converted shares legg mason common stock connection acquisition cam legg mason issued 1335 shares 10 par value per share nonvoting legg mason convertible preferred stock convertible upon transfer 1335 million shares common stock fiscal 2009 legg mason issued approximately 036 million common shares upon conversion approximately 036 nonvoting convertible preferred stock also fiscal 2008 legg mason repurchased 25 shares nonvoting convertible preferred stock using proceeds 25 convertible senior notes march 31 2010 2009 outstanding shares nonvoting convertible preferred stock discussed note 7 may 2008 legg mason issued 115 billion equity units unit consisting 5 interest 1000 principal amount senior notes due june 30 2021 purchase contract committing holder purchase shares legg masons common stock june 30 2011 fiscal 2010 legg mason issued 186 million shares equity unit tender offer exchange 91 outstanding equity units march 31 2010 maximum amount shares could issued reserved issuance approximately 18 million subject adjustment also discussed note 7 january 2008 legg mason issued 125 billion 25 contingent convertible senior notes certain conditions met could result issuance maximum 142 million shares legg mason common stock subject adjustment changes common stock shares exchangeable common stock three years ended march 31 2010 2009 2008 follows dividends declared per share 012 096 fiscal 2010 2009 2008 respectively dividends declared paid march 31 2010 2009 2008 4844 34043 33103 respectively included current liabilities may 10 2010 legg mason announced board directors replaced existing stock buyback authority purchase 1 billion worth legg mason common stock expiration date attached new authorization may 24 2010 legg mason entered separate accelerated share repurchase agreements asr agreement two financial institutions counterparty repurchase aggregate 300 million legg mason common stock legg masons repurchases asr agreements part 1 billion share repurchase program announced may 10 2010 asr agreements legg mason pay 300 million counterparties available cash hand repurchase outstanding shares common stock receive substantial majority shares delivered agreements june 21 2010 specific number shares ultimately repurchased agreements based generally volumeweighted average share price legg masons common stock term agreements subject provisions establish minimum maximum numbers shares counterparties expected purchase shares legg mason common stock open market connection accelerated share buyback asr agreements contemplate final settlement may occur august september 2010 time selected counterparty discretion although earlier later settlement possible certain circumstances settlement legg mason may entitled receive additional shares common stock cash certain limited circumstances may obligation counterparties settled legg masons discretion making payment delivering common stock counterparties repurchased shares retired legg mason currently intends use portion available cash purchase additional 100 million legg mason common stock end fiscal 2011 fiscal years ended march 31 2010 2009 shares repurchased fiscal year ended march 31 2008 11 million shares repurchased prior authorization 97945 fiscal 2008 legg mason issued 392 common shares connection contingent acquisition payment made former owners permal discussed note 2 12 stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plans restricted stock awards units performance shares payable common stock deferred compensation payable stock effective july 28 2009 number shares authorized issued legg masons active equity incentive stock plan increased 6 million 35 million shares available issuance march 31 2010 approximately 10 million options legg masons employee stock plans granted prices less 100 fair market value options generally exercisable equal increments three five years expire within five ten years date grant compensation expense relating stock options stock purchase plan deferred compensation payable stock years ended march 31 2010 2009 2008 17770 22964 24588 respectively related income tax benefit years ended march 31 2010 2009 2008 6285 8837 9486 respectively stock option transactions legg masons equity incentive plans years ended march 31 2010 2009 2008 respectively summarized total intrinsic value options exercised years ended march 31 2010 2009 2008 160 10456 109626 respectively march 31 2010 aggregate intrinsic value options outstanding 8368 following information summarizes legg masons stock options outstanding march 31 2010 march 31 2010 2009 2008 options exercisable 2522 2455 3197 shares respectively weightedaverage exercise prices 7608 6705 4554 respectively stock options exercisable march 31 2010 weightedaverage remaining contractual life 33 years march 31 2010 aggregate intrinsic value options exercisable 1863 following information summarizes legg masons stock options exercisable march 31 2010 following information summarizes unvested stock options legg masons equity incentive plans year ended march 31 2010 1generally vesting occurs july year stock options granted fiscal 2011 annual vesting occurs may year unamortized compensation cost related unvested options march 31 2010 43452 expected recognized weightedaverage period 20 years cash received exercises stock options legg masons equity incentive plans 1829 25463 30944 years ended march 31 2010 2009 2008 respectively tax benefit expected realized tax deductions option exercises totaled 15 3853 41189 years ended march 31 2010 2009 2008 respectively weightedaverage fair value stock options granted fiscal 2010 2009 2008 using blackscholes option pricing model 1209 1336 3176 per share respectively following weightedaverage assumptions used model grants fiscal 2010 2009 2008 legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 45 million total share limit plan purchases made payroll deductions legg mason provides 10 contribution towards purchases charged earnings fiscal years ended march 31 2010 2009 2008 approximately 147 188 59 shares respectively purchased open market behalf participating employees january 28 2008 compensation committee legg mason approved grants senior officers 120 marketbased performance shares upon vesting subject certain conditions distributed shares common stock grants vest ratably january 28 five years following grant date upon attaining service criteria stock price hurdles beginning 7797 year one ending 11415 year five weightedaverage fair value per share awards 1181 estimated grant date using grant price 7088 monte carlo optionpricing model following assumptions connection termination one senior officers fiscal 2009 20 performance shares voluntarily forfeited resulting charge 550 representing acceleration expense associated unvested portion award restricted stock transactions years ended march 31 2010 2009 2008 respectively summarized restricted stock awards noncash transactions fiscal 2010 2009 2008 legg mason recognized 26104 32412 25015 respectively compensation expense restricted stock awards tax benefit expected realized tax deductions restricted stock totaled 3621 2870 4771 years ended march 31 2010 2009 2008 respectively unamortized compensation cost related unvested restricted stock awards 1496 shares yet recognized march 31 2010 32321 expected recognized weightedaverage period 15 years restricted stock unit transactions years ended march 31 2010 2009 respectively summarized restricted stock unit awards noncash transactions fiscal 2010 2009 legg mason recognized 1129 217 respectively compensation expense restricted stock unit awards unamortized compensation cost related unvested restricted stock unit awards 109 shares yet recognized march 31 2010 2042 expected recognized weightedaverage period 19 years addition legg mason also equity plan nonemployee directors equity plan directors may elect receive shares stock restricted stock units prior july 19 2007 amendment plan directors could also elect receive stock options granted either plan immediately exercisable price equal market value shares date grant term ten years fiscal 2010 2009 2008 legg mason recognized expense 1575 1400 1475 respectively awards plan shares options restricted stock units issuable equity plan limited 625 shares aggregate 184 shares issued plan march 31 2010 march 31 2010 288 stock options 53 restricted stock units outstanding nonemployee director plan 27 stock options exercised 5 restricted stock units distributed fiscal 2010 19 restricted stock units granted fiscal 2010 41 stock options restricted stock units cancelled forfeited fiscal 2010 deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends limit number shares authorized issued plan fiscal 2010 2009 2008 legg mason recognized 176 322 254 respectively compensation expense related plan fiscal 2010 2009 2008 legg mason issued 128 125 48 shares respectively plan weightedaverage fair value per share grant date 2253 3962 8411 respectively 13 deferred compensation stock trust legg mason issued shares connection certain deferred compensation plans held rabbi trusts assets rabbi trusts consolidated employer value employers stock held rabbi trusts classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2010 2009 2205 2003 respectively 14 earnings per share basic earnings per share calculated dividing net income loss attributable legg mason inc weightedaverage number shares outstanding calculation weightedaverage shares includes common shares exchangeable common stock convertible preferred shares considered participating securities diluted eps similar basic eps adjusts effect potential common shares except inclusion antidilutive situations net loss reported inclusion potentially issuable common shares decrease net loss per share since would antidilutive shares excluded calculation basic diluted earnings per share fiscal years ended march 31 2010 2009 include vested shares restricted stock related legg masons deferred compensation plans fiscal 2010 legg mason issued 18596 shares common stock equity units tender offer 11565 shares included weightedaverage shares outstanding year ended march 31 2010 following table presents computations basic diluted eps diluted eps calculations years ended march 31 2010 2009 exclude potential common shares issuable convertible 25 senior notes convertible equity units market price legg mason common stock exceeded price conversion either instrument would dilutive using treasury stock method also diluted eps calculation fiscal year ended march 31 2009 excludes 6629 potential common shares antidilutive due net loss fiscal year options purchase 5130 shares 2780 shares fiscal years ended march 31 2010 2008 respectively included computation diluted earnings per share presumed proceeds exercising options including related income tax benefits exceed average price common shares fiscal year therefore options deemed antidilutive diluted earnings per share fiscal years ended march 31 2010 2008 include unvested shares restricted stock except 1041 shares 707 shares respectively deemed antidilutive also march 31 2010 2009 2008 warrants issued connection convertible note hedge transactions described note 7 excluded calculation diluted earnings per share effect would antidilutive march 31 2010 21 million 230 million equity units issued may 2008 include purchase warrants providing issuance 15 18 million shares legg mason common stock june 2011 remain outstanding fully described note 7 15 accumulated comprehensive income loss accumulated comprehensive income includes cumulative foreign currency translation adjustments net tax gains losses interest rate swap net tax gains losses investment securities change accumulated translation adjustments fiscal 2010 2009 primarily resulted impact changes brazilian real polish zloty british pound australian dollar canadian dollar relation us dollar net assets legg masons subsidiaries brazil poland united kingdom australia canada real zloty pound australian canadian dollar functional currencies respectively summary legg masons accumulated comprehensive income loss march 31 2010 2009 follows 16 variable interest entities normal course business legg mason sponsors manager various types investment vehicles clients considered vies services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinate management fees incentive fees legg mason sell transfer assets vies legg masons exposure risk entities generally limited equity investment made required make earned uncollected management fees uncollected management fees vies material march 31 2010 2009 legg mason issued investment performance guarantees vies investors legg mason concludes primary beneficiary vie absorbs majority vies expected losses receive majority vies expected residual returns legg masons determination expected residual returns excludes gross fees paid decision maker current accounting guidance unlikely legg mason primary beneficiary vies created manage assets clients unless ownership interest including interests related parties vie substantial unless legg mason may earn significant performance fees vie unless legg mason considered material implied variable interest determining whether primary beneficiary vie legg mason considers qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees implied relationships determining primary beneficiary legg mason must make assumptions estimates among things future performance underlying assets held vie including investment returns cash flows credit interest rate risks determining whether vie significant legg mason considers factors used determination primary beneficiary fiscal 2010 2009 2008 legg mason variable interests certain liquidity funds provided various forms credit capital support described note 17 evaluating contractual implied variable interests funds years ended march 31 2010 2009 determined legg mason primary beneficiary funds march 31 2010 2009 legg mason primary beneficiary one sponsored investment fund vie resulted consolidation vie total assets total equity 527 million march 31 2010 482 million march 31 2009 legg masons investment vie 275 million 263 million march 31 2010 2009 respectively represents maximum risk loss creditors vie recourse general credit legg mason assets vie primarily comprised investments march 31 2010 2009 2008 legg mason required consolidate vies material consolidated financial statements march 31 2010 2009 vies legg mason holds significant variable interest sponsor holds variable interest primary beneficiary legg masons carrying value related vies assets liabilities maximum risk loss follows includes capital support liquidity funds equity interests company made required make earned uncollected management fees assets vies primarily comprised cash equivalents investments liabilities primarily comprised debt various expense accruals 17 liquidity fund support due prior years stress liquidity markets certain asset backed securities previously held liquidity funds legg mason subsidiary manages default restructured default although company required provide support funds legg mason elected maintain confidence clients maintain reputation marketplace certain cases support aaaaaa credit ratings funds clients lose confidence company could potentially withdraw funds favor investments offered competitors resulting reduction legg masons assets management investment advisory fees fiscal 2009 2008 legg mason entered amended various arrangements provide support certain liquidity funds fiscal 2009 legg mason sold funds sold securities issued sivs held money market funds balance sheet supported trs major bank march 31 2010 previously existing support arrangements expired terminated accordance terms par value support amounts collateral impact consolidated statements operations fiscal years ended march 31 2010 2009 2008 support remained outstanding end period sale transactions occurred period follows nm meaningful 1included restricted cash consolidated balance sheet 2pretax charges include reductions value underlying securities addition gain 2540 primarily related foreign exchange forward contracts interest payments received year ended march 31 2010 losses 181183 relating reimbursements two funds portion losses incurred selling siv securities 2863 principally relating transaction costs substantially offset gain foreign exchange forward contract interest payments received underlying securities year ended march 31 2009 included fund support nonoperating income expense consolidated statements operations 3after tax giving effect operating expense adjustments 4securities issued sivs 5support amount securities purchased funds reflects amount paid fund less subsequent principal repayments following table provides summary changes millions liquidity fund support including securities purchased funds legg mason fiscal years ended march 31 1includes principal interest payments received related purchased securities subject trs addition currency gains losses canadian conduit securities letter credit fiscal 2008 legg mason provided support three liquidity funds form locs issued two thirdparty banks aggregate amount approximately 485 million support investments asset backed commercial paper issued two sivs fiscal 2009 legg mason provided additional support liquidity funds form two locs issued thirdparty bank aggregate amount approximately 257 million support investments asset backed commercial paper issued two sivs terms loc agreements locs could drawn certain circumstances including upon funds realizing loss disposition restructuring position upon agreements termination unpaid amounts remained certain funds sivissued securities certain circumstances upon ratings downgrades issuing bank part loc arrangements legg mason agreed reimburse banks amounts drawn locs date locs issued legg mason established derivative liability fair value guarantee reimburse banks amounts drawn locs due sale securities issued sivs held liquidity funds fiscal 2009 locs terminated accordance terms amounts drawn thereunder derivative liability reported march 31 2009 march 31 2008 legg mason reported derivative liabilities 2355 million locs capital support agreements asset backed securities fiscal 2008 legg mason entered six csas two liquidity funds support investments asset backed securities issued sivs terms one csas company agreed provide 15 million contributions fund recognized loss certain investments continued hold underlying securities expiration oneyear term agreement applicable time funds net asset value less specified threshold terms five csas company agreed provide 400 million contributions fund recognized loss sale certain events relating securities issued two sivs contributions made company csas would result legg mason acquiring ownership interest fund fiscal 2009 legg mason amended five csas entered fiscal 2008 increase maximum contributions company would make thereunder 525 million 400 million 925 million fiscal 2009 legg mason also entered seven new csas aggregating 395 million four liquidity funds support investments asset backed securities issued four sivs one csas amended year provide 110 million additional support amended terms six csas original terms one csas company agreed provide maximum contribution amount funds recognized loss sale certain events relating securities issued four sivs due maturities supported securities sale securities issued sivs held liquidity funds fiscal 2009 csas supported asset backed securities issued sivs terminated accordance terms contributions made thereunder derivative liability reported march 31 2009 march 31 2008 legg mason reported derivative liability 3162 million related csas capital support agreements nonasset backed securities year ended march 31 2009 legg mason also entered four csas aggregating 27 million support investments nonasset backed securities held four liquidity funds two csas amended year provide 15 million additional support amended terms two csas original terms two csas legg mason agreed provide maximum contribution amount funds recognized loss investments certain nonasset backed securities continued hold underlying securities expiration oneyear terms agreements applicable time funds net asset value less specified threshold four csas included recovery clause funds required reimburse legg mason contributions made upon expiration csa extent funds subsequently received payments issuer underlying securities upon sale disposition thereof exceeded amortized cost underlying securities march 31 2009 legg mason reported derivative liability 206 million related csas fiscal 2010 legg mason terminated two csas provide 14 million contributions two funds also one csa provide 5 million contributions fund expired accordance terms amounts drawn thereunder finally legg mason amended one csa provide 225 million contributions fund reduce maximum contribution company would make fund thereunder 5 million csa expired accordance terms march 2010 amounts drawn thereunder march 31 2010 csas remain outstanding total return swap fiscal year 2008 legg mason entered trs arrangement major bank pursuant bank purchased securities issued three sivs dublindomiciled liquidity fund managed subsidiary legg mason 890 million securities face amount commercial paper purchased bank cash aggregate amount 832 million represented estimate value determined collateral purposes addition legg mason reimbursed fund 595 million difference funds carrying value including accrued interest amount paid securities market value 886 million march 31 2008 expected financing costs exceeded amount paid bank 457 million difference accounted derivative asset included current assets consolidated balance sheet march 31 2008 represented amount legg mason expected recover bank upon maturity sale underlying securities trs legg mason agreed pay bank losses including losses incurred sale securities principal repaid maturity bank incurred ownership securities return purchase price paid securities equal onemonth libor rate plus 1 bank agreed pay legg mason principal interest received securities excess price paid securities fiscal year 2009 440 million securities supported trs matured paid full 95 million principal amount securities supported trs paid trs arrangement terminated november 2008 legg mason amended trs extend expiration november 2009 due maturities principal payments underlying securities decrease total amount securities covered trs 890 million 355 million trs terminated fiscal 2009 upon sale underlying securities nonbank sponsored siv fiscal 2008 legg mason purchased cash aggregate 132 million principal amount non bank sponsored siv securities liquidity fund january 2008 may 2008 approximately 50 million 82 million respectively principal amount securities matured paid full canadian conduit securities fiscal 2008 legg mason acquired cash aggregate 98 million principal amount conduit securities issued canadian asset backed commercial paper issuers fund managed legg mason subsidiary securities sold fiscal 2009 described fiscal 2009 legg mason purchased 29 billion cash including 24 million accrued interest 30 billion principal amount nonbank sponsored siv securities six liquidity funds previously supported twelve csas seven locs upon purchase securities twelve csas aggregating 14 billion seven locs aggregating 742 million terminated accordance terms company subsequently sold 30 billion purchased securities along 355 million securities previously supported trs 76 million canadian conduit securities held balance sheet third parties 655 million excluding transaction costs legg mason also paid 1812 million reimburse two funds portion losses incurred selling unsupported siv securities result sale reimbursement funds completely eliminated companys exposure securities issued sivs company incurred realized loss 23 billion 14 billion net taxes operating expense adjustments fiscal 2009 18 derivatives hedging legg mason continues use currency forwards economically hedge risk movements exchange rates primarily us dollar euro great britain pound canadian dollar australian dollar march 31 2010 legg mason open currency forward contracts aggregate gross fair values 671 255 classified assets liabilities respectively consolidated balance sheets legg mason nets fair value certain foreign currency forwards executed counterparty legg mason legal right intent settle contracts net basis year ended march 31 2010 legg mason recognized gains losses 5669 11092 respectively included expense foreign exchange hedges associated operating activities 269 19 respectively included nonoperating income expense foreign exchange hedges associated seed capital investments year ended march 31 2010 legg mason also initiated market hedges certain seed capital investments entering futures contracts sell index funds benchmark hedged seed capital investments march 31 2010 legg mason open futures contracts aggregate gross fair values 26 230 classified assets liabilities requiring cash collateral 2185 year ended march 31 2010 legg mason recognized gains losses 26 1081 included nonoperating income expense relating futures contracts intended offset movements value seed capital investments derivatives associated fund support discussed note 17 19 business segment information legg mason global asset management company provides investment management related services wide array clients operate one reportable business segment asset management asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks legg mason operates though two operating segments divisions americas international primarily based geographic location advisor domicile fund families manage americas division consists usdomiciled fund families separate account businesses us based investment affiliates domestic distribution organization similarly international division consists fund complexes distribution teams investment affiliates located outside us primarily united kingdom table reflects revenues longlived assets geographic region thousands march 31 20 subsequent event may 2010 legg mason announced plan streamline business model drive increased profitability growth includes 1 transitioning certain shared services investment affiliates closer actual client relationships delivered greater effectiveness 2 americas distribution group sharing revenue retailbased aum growth plan involves headcount reductions operations technology administrative areas corporate location may partially offset headcount increases affiliates ultimately enable legg mason eliminate portion corporate office space dedicated operations technology employees legg mason expects initiative result cost savings excess costs execute initiative projected involve restructuring transitionrelated costs primarily include transition payments affiliates primarily compensation temporarily offset cost absorbing services charges severance retention incentives may also include costs early contract terminations asset disposals quarterly financial data dollars thousands except per share amounts unaudited 1due rounding quarterly results total amounts fiscal year may differ immaterially annual results may 20 2010 closing price legg masons common stock 2953 quarterly financial data continued dollars thousands except per share amounts unaudited 1due rounding quarterly results total amounts fiscal year may differ immaterially annual results 2the quarters ending march 31 2009 december 31 2008 include 82870 1225100 respectively impairment charges related intangibles assets 3the quarters ending march 31 2009 december 31 2008 september 30 2008 june 30 2008 include 606426 1085296 324639 266875 respectively charges resulting providing support liquidity funds item 9item 8 financial statements supplementary data report management internal control financial reporting management legg mason inc responsible establishing maintaining adequate internal control financial reporting legg masons internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance accounting principles generally accepted united states america legg masons internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets legg mason ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance accounting principles generally accepted united states america receipts expenditures legg mason made accordance authorizations management directors legg mason iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition legg masons assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness legg masons internal control financial reporting march 31 2018 based framework set forth committee sponsoring organizations treadway commission coso internal control integrated framework 2013 based assessment management concluded march 31 2018 legg masons internal control financial reporting effective based criteria established coso framework effectiveness legg masons internal control financial reporting march 31 2018 audited pricewaterhousecoopers llp independent registered public accounting firm stated report appearing herein expresses unqualified opinion effectiveness legg masons internal control financial reporting march 31 2018 joseph sullivan chairman chief executive officer peter h nachtwey senior executive vice president chief financial officer report independent registered public accounting firm board directors stockholders legg mason inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets legg mason inc subsidiaries “the company” march 31 2018 march 31 2017 related consolidated statements income loss comprehensive income loss changes stockholders’ equity cash flows three years period ended march 31 2018 including related notes collectively referred “consolidated financial statements” also audited companys internal control financial reporting march 31 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company march 31 2018 march 31 2017 results operations cash flows three years period ended march 31 2018 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting march 31 2018 based criteria established internal control integrated framework 2013 issued coso basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying report management internal control financial reporting responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions report independent registered public accounting firm continued definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate baltimore maryland may 30 2018 served company’s auditor since least 1983 company became subject sec reporting requirements determined specific year began serving auditor company legg mason inc subsidiaries consolidated balance sheets dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements income loss dollars thousands except per share amounts see notes consolidated financial statements legg mason inc subsidiaries consolidated statements comprehensive income loss dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements changes stockholders’ equity dollars thousands see notes consolidated financial statements legg mason inc subsidiaries consolidated statements cash flows dollars thousands legg mason inc subsidiaries consolidated statements cash flows continued dollars thousands see notes consolidated financial statements legg mason inc subsidiaries notes consolidated financial statements amounts thousands except per share amounts unless otherwise noted march 31 2018 1 significant accounting policies basis presentation legg mason inc parent subsidiaries collectively legg mason principally engaged providing asset management related financial services individuals institutions corporations municipalities consolidated financial statements include accounts parent subsidiaries controlling financial interest generally entity considered controlling financial interest owns majority voting interest entity legg mason also required consolidate variable interest entity vie considered primary beneficiary see consolidation note 17 discussion vies material intercompany balances transactions eliminated certain amounts prior year financial statements reclassified conform current year presentation including amounts contingent consideration fair value adjustments consolidated statements income loss references fiscal 2018 2017 2016 refer legg masons fiscal year ended march 31 year terms us company refer legg mason use estimates consolidated financial statements prepared accordance accounting principles generally accepted united states america applicable rules regulations securities exchange commission sec require management make assumptions estimates affect amounts reported consolidated financial statements accompanying notes including revenue recognition valuation financial instruments intangible assets goodwill stockbased compensation income taxes management believes estimates used reasonable although actual amounts could differ estimates differences could material impact consolidated financial statements consolidation normal course business legg mason sponsors manages various types investment products services legg mason entitled receive management fees may eligible certain circumstances receive additional subordinated management fees incentive fees legg masons exposure risk entities except total return swap arrangements executed discussed generally limited equity investment made required make earned uncollected management fees legg mason sell transfer investment assets investment products accordance financial accounting standards legg mason consolidates certain sponsored investment products designated reported consolidated investment vehicles “civs” consolidation sponsored investment products including designated civs impact net income loss attributable legg mason inc material impact legg masons consolidated operating results change value consolidated sponsored investment products recorded nonoperating income expense reflected net income loss attributable noncontrolling interests financial information certain consolidated civs included companys consolidated financial statements threemonth lag based upon availability fund financial information certain investment products legg mason sponsors manages considered vies described others considered voting rights entities “vres” subject traditional consolidation concepts based ownership rights legg mason may fund initial cash investment certain vre investment products generate investment performance track record order attract thirdparty investors product legg masons initial investment new product typically represents 100 ownership product discussed note 3 products “seed capital investments” consolidated long legg mason maintains controlling financial interest product designated civs legg mason unless investment longerterm march 31 2018 2017 2016 consolidated vres designated civs vie entity adequate equity finance activities without additional subordinated financial support equity investors group normal characteristics equity investors potential controlling financial interest legg mason must consolidate vie deemed primary beneficiary updated consolidation accounting guidance effective april 1 2016 legg mason adopted updated consolidation accounting guidance modified retrospective basis updated guidance limited partners similar equity holders sponsored investment vehicle structured limited partnership similar entity either substantive investor rights replace manager kickout rights substantive participation rights general partner entities vies sponsor manager investment vehicle legg mason may deemed decision maker accounting guidance fees paid decision maker marketbased fees considered variable interests vie marketbased fees customary commensurate level effort required services provided additionally employee interests sponsored investment vehicle made circumvent consolidation guidance financed sponsor included variable interests assessment included primary beneficiary determination decision maker deemed primary beneficiary vie power direct activities significantly impact economic performance vie obligation absorb losses receive benefits variable interests could significant vie determining whether primary beneficiary vie legg mason considers qualitative quantitative factors voting rights equity holders guarantees implied relationships fee paid decision maker marketbased considered primary beneficiary determination adoption accounting guidance april 1 2016 resulted certain sponsored investment products reside foreign mutual fund trusts previously accounted vres evaluated vies march 31 2018 2017 legg mason concluded updated accounting guidance primary beneficiary certain vies consolidated designated civs held significant financial interests funds addition year ended march 31 2018 legg mason entered various total return swap arrangements financial intermediaries respect two legg mason sponsored exchange traded funds etfs terms total return swaps legg mason absorbs gains losses underlying etf investments financial intermediaries therefore variable interests two related funds deemed primary beneficiary legg mason consolidates two etfs designated civs prior consolidation accounting guidance prior accounting guidance sponsored investment fund vies deemed investment companies including money market funds legg mason determined primary beneficiary vie absorbed majority vies expected losses received majority vies expected residual returns legg masons determination expected residual returns excluded gross fees paid decision maker certain criteria relating fees met determining whether primary beneficiary vie legg mason considered qualitative quantitative factors voting rights equity holders economic participation parties including fees earned paid legg mason related party ownership guarantees implied relationships sponsored investment funds meet investment company criteria legg mason determined primary beneficiary vie power direct activities vie significantly impacted entitys economic performance obligation absorb losses right receive benefits could significant vie march 31 2016 legg mason concluded prior consolidation accounting guidance primary beneficiary certain vies consolidated designated civs see notes 3 17 additional information related vies civs note 15 additional information regarding total return swaps cash equivalents cash equivalents highly liquid investments original maturities 90 days less restricted cash restricted cash represents cash collateral required market hedge arrangements total return swap arrangements cash available legg mason general corporate use financial instruments substantially financial instruments reflected financial statements fair value amounts approximate fair value except legg masons longterm debt discussed consolidation proprietary fund products seed capital investments initially consolidated individual securities within portfolio accounted trading investments legg mason consolidates products long holds controlling financial interest product upon deconsolidation typically occurs several years legg mason accounts investments proprietary fund products equity method investments described ownership 20 50 otherwise ability significantly influence financial operating policies investee partnerships llcs thirdparty investors may less ability influence operations equity method accounting considered legg masons ownership greater 3 changes fair value proprietary fund products classified trading equity method investments recognized nonoperating income expense net consolidated statements income loss legg mason generally redeems investments proprietary fund products related product establishes sufficient track record thirdparty investments related product sufficient sustain strategy decision made longer pursue strategy length time legg mason holds majority interest product varies based number factors market demand market conditions investment performance see notes 3 17 additional information regarding legg masons seed capital investments determination whether investments proprietary fund products represent vies respectively equity investments legg mason control investee primary beneficiary vie exert significant influence financial operating policies investee legg mason follows equity method accounting evaluation whether legg mason exert control significant influence financial operational policies investee requires significant judgment based facts circumstances surrounding individual investment factors considered evaluations may include investor voting rights influence legg mason may governing board investee legal rights investors entity pursuant funds operating documents relationship legg mason investors entity legg masons equity method investees investment companies record underlying investments fair value therefore equity method accounting legg masons share investees underlying net income loss predominantly represents fair value adjustments investments held equity method investee legg masons share investees net income loss based current information available recorded net gain loss investments within nonoperating income expense net portion earnings losses attributable legg masons equity method investments offsetting compensation expense adjustments revenue sharing arrangements deferred compensation arrangements therefore fluctuations market value investments offsets material impact net income loss attributable legg mason inc legg mason also holds debt marketable equity investments classified trading certain investment securities including held civs also classified trading securities investments recorded fair value unrealized gains losses included current period earnings realized gains losses investments included current period earnings equity fixed income securities classified trading valued using closing market prices listed instruments broker price quotations available fixed income securities may also valued using valuation models estimates based spreads actively traded benchmark debt instruments readily available market prices legg mason evaluates nontrading investment securities otherthantemporary impairment may exist fair value investment security adjusted cost extended period time otherthantemporary impairment determined exist amount impairment relates credit losses recognized charge income march 31 2018 2017 2016 amount temporary unrealized losses investment securities recognized income material investments illiquid privatelyheld securities market prices quotations may readily available management estimates value securities using variety methods resources including current available financial information investment industry addition financial instruments described derivative instruments described financial instruments carried fair value amounts approximate fair value include cash equivalents shortterm borrowings fair value longterm debt march 31 2018 2017 aggregated 2316154 2264867 respectively fair values estimated using publicly quoted market prices classified level 2 fair value hierarchy described derivative instruments fair values derivative instruments recorded assets liabilities consolidated balance sheets legg mason used foreign exchange forwards interest rate swaps hedge risk movement exchange rates interest rates financial assets liabilities limited basis also legg mason used futures contracts index funds hedge market risk certain seed capital investments discussed year ended march 31 2018 legg mason entered various total return swap arrangements financial intermediaries respect two legg mason sponsored etfs initial aggregate notional amounts totaling 48639 resulted investments etfs financial intermediaries march 31 2018 aggregate notional amounts related total return swap arrangements totaled 50071 total return swap arrangements qualify derivative instruments designated hedge accounting connection arrangements legg mason also executed futures contracts partially hedge market risk related total return swap arrangements exception interest rate swaps discussed note 6 legg mason designated financial instruments hedge accounting defined accounting literature periods presented gains losses derivative instruments designated hedge accounting included operating income expense nonoperating income expense net consolidated statements income loss depending strategy see note 15 additional information regarding derivatives hedging fair value measurements accounting guidance fair value measurements defines fair value establishes framework measuring fair value fair value defined exchange price would received asset paid transfer liability principal advantageous market asset liability orderly transaction market participants measurement date accounting guidance fair value measurement reflect assumptions market participants would use pricing asset liability including assumptions risk inherent particular valuation technique effect restriction sale use asset risk nonperformance objective fair value accounting measurements reflect date financial statements much asset would sold orderly transaction opposed distressed forced transaction current market conditions specifically requires use judgment ascertain formerly active market become inactive determining fair values markets become inactive accounting guidance also relates otherthantemporary impairments intended bring greater consistency timing impairment recognition also intended provide greater clarity investors credit noncredit components impaired debt securities expected sold guidance also requires timely disclosures regarding expected cash flows credit losses aging securities unrealized losses fair value accounting guidance also establishes hierarchy prioritizes inputs valuation techniques used measure fair value fair value hierarchy gives highest priority quoted prices active markets identical assets liabilities lowest priority unobservable inputs legg masons financial instruments measured reported fair value except longterm debt classified disclosed one following categories fair value hierarchy level 1 financial instruments prices quoted active markets legg mason include investments publicly traded mutual funds quoted market prices equities listed active markets certain derivative instruments level 2 financial instruments prices quoted similar assets liabilities active markets prices quoted identical similar assets inactive markets prices based observable inputs quoted prices models valuation methodologies legg mason category may include fixed income securities certain proprietary fund products certain longterm debt level 3 financial instruments values based unobservable inputs including little market activity category includes investments partnerships limited liability companies private equity funds real estate funds category may also include certain proprietary fund products redemption restrictions contingent consideration valuation asset liability may involve inputs one level hierarchy level fair value hierarchy fair value measurement falls entirety determined based lowest level input significant fair value measurement entirety certain proprietary fund products investments held civs valued net asset value nav determined applicable fund administrator funds typically invested exchange traded investments observable market prices valuations may classified level 1 level 2 level 3 nav practical expedient discussed based whether fund exchange traded frequency related nav determinations impact redemption restrictions investments illiquid privatelyheld securities private equity investment partnerships market prices quotations may readily available management must estimate value securities using variety methods resources including current available financial information investment industry applies order determine fair value valuation processes illiquid privatelyheld securities inherently require managements judgment therefore classified level 3 futures contracts valued last settlement price end day exchange upon traded classified level 1 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments reporting date investments fair value measured using nav practical expedient required categorized within fair value hierarchy transfers categories measured beginning period legg mason holds investments real estate funds structured partnerships limited liability companies classified level 3 fair values investments real estate funds prepared giving consideration income cost sales comparison approaches estimating property value income approach estimates income stream property discounts income plus reversion presumed sale present value risk adjusted rate yield rates growth assumptions utilized approach derived market transactions well financial industry data discount rate exit capitalization rate significant inputs valuations rates based location type nature property current anticipated market conditions cost approach estimates replacement cost building less physical depreciation plus land value sales comparison approach compares recent transactions appraised property adjustments made dissimilarities typically provide range value many factors also considered determination fair value including limited operating cash flows financial performance properties property types geographic locations physical condition asset prevailing market capitalization rates prevailing market discount rates general economic conditions economic conditions specific market assets located specific rights terms associated investment inherent uncertainties valuation values may materially differ values would determined negotiations held parties sale transaction see note 3 additional information regarding fair value measurements fixed assets fixed assets primarily consist equipment software leasehold improvements equipment consists primarily communications technology hardware furniture fixtures capitalized software includes purchased software internally developed software cost software used service contract legg mason control software expensed term contract fixed assets reported cost net accumulated depreciation amortization depreciation amortization determined use straightline method equipment depreciated estimated useful lives assets generally ranging three eight years software amortized estimated useful lives assets generally three five years leasehold improvements amortized depreciated initial term lease unless options extend likely exercised maintenance repair costs expensed incurred internally developed software reviewed periodically determine change useful life impairment value may exist impairment deemed exist asset written fair value written asset determined longer value intangible assets goodwill legg masons identifiable intangible assets consist principally asset management contracts manage proprietary mutual funds fundsofhedge funds trade names resulting acquisitions intangible assets amortized estimated useful lives using straightline method unless asset determined indefinite useful life asset management contracts amortizable intangible assets capitalized acquisition amortized expected life contract value contracts manage assets proprietary funds fundsofhedge funds value trade names classified indefinitelife intangible assets assignment indefinite lives proprietary fund contracts based upon assumption foreseeable limit contract period manage proprietary funds due likelihood continued renewal little cost assignment indefinite lives trade names based assumption expected generate cash flows indefinitely goodwill represents residual amount acquisition cost excess identified tangible intangible assets assumed liabilities indefinitelife intangible assets goodwill amortized financial statement purposes given relative significance intangible assets goodwill companys consolidated financial statements quarterly basis legg mason considers triggering events occurred may indicate fair values declined respective carrying amounts triggering events may include significant adverse changes companys business legal regulatory environment loss key personnel significant business dispositions events including changes economic arrangements affiliates impact future operating results triggering event occurred company perform quantitative tests include critical reviews significant factors assumptions determine intangible assets goodwill impaired legg mason considers factors projected cash flows revenue multiples determine whether value assets impaired indefinitelife assumptions appropriate asset impaired difference value asset reflected consolidated financial statements current fair value recognized expense period impairment determined triggering event occurred company performs quantitative tests annually december 31 indefinitelife intangible assets goodwill unless company qualitatively conclude likely respective fair values exceed related carrying values fair values intangible assets subject amortization considered impairment reporting period using undiscounted cash flow analysis intangible assets indefinite lives fair value determined market participants perspective based projected discounted cash flows take consideration estimates future fees profit margins growth rates taxes discount rates proprietary fund contracts managed operated single unit meet criteria may aggregated impairment testing goodwill evaluated reporting unit level considered impairment carrying value reporting unit exceeds implied fair value reporting unit estimating implied fair value reporting unit legg mason uses valuation techniques principally based discounted projected cash flows ebitda multiples similar techniques employed analyzing purchase price acquisition goodwill deemed recoverable reporting unit level also operating segment level legg mason defines global asset management segment results fact chief operating decision maker legg masons chief executive officer regularly receives discrete financial information consolidated global asset management business level regularly receive discrete financial information operating results lower level asset management affiliate level allocations goodwill management restructures acquisitions dispositions based relative fair values respective businesses restructured acquired divested see note 5 additional information regarding intangible assets goodwill note 16 additional business segment information debt longterm debt recorded amortized cost unamortized premiums discounts debt issuance costs fair value hedge adjustments related longterm debt presented balance sheet direct adjustments carrying value associated longterm debt liability amortized interest expense legal term associated debt contingent consideration liabilities connection business acquisitions legg mason may required pay additional future consideration based achievement certain designated financial metrics legg mason estimates fair value potential future obligations time business combination consummated records contingent consideration liability consolidated balance sheet legg mason accretes contingent consideration liabilities expected payment amounts related earnout terms obligations ultimately paid resulting interest expense consolidated statements income loss expected payment amounts subsequently change contingent consideration liabilities reduced increased current period resulting gain loss reflected within contingent consideration fair value adjustments consolidated statements income loss payments amounts equal less acquisition date fair value reflected cash flows financing activities consolidated statements cash flows payments amounts excess acquisition date fair value reflected cash flows operating activities consolidated statements cash flows see notes 2 8 additional information regarding contingent consideration liabilities translation foreign currencies assets liabilities foreign subsidiaries denominated nonus dollar functional currencies translated exchange rates consolidated balance sheet dates revenues expenses translated average exchange rates period gains losses resulting translating foreign currency financial statements us dollars included stockholders equity comprehensive income loss gains losses resulting foreign currency transactions included net income loss investment advisory fees legg mason earns investment advisory fees assets separately managed accounts investment funds products managed legg masons clients fees primarily based predetermined percentages market value assets management aum recognized period services performed may billed advance period earned based aum beginning billing period accordance related advisory contracts revenue associated advance billings deferred included current liabilities consolidated balance sheets recognized period earned performance fees may earned certain investment advisory contracts exceeding performance benchmarks hurdle rates depending product recognized end performance measurement period accordingly neither advanced billings performance fees subject reversal largest portion performance fees earned based 12month performance periods end differing quarters year portion also based quarterly performance periods legg mason also earns performance fees alternative products lock end varying investment periods multipleyear intervals per terms certain recent acquisitions performance fees earned preclose aum acquired entities fully passed compensation expense therefore impact net income loss attributable legg mason inc legg mason responsibility valuation aum substantially based observable market data independent pricing services fund accounting agents custodians brokers distribution service fees revenue expense distribution service fees represent fees earned funds reimburse distributor costs marketing selling fund shares servicing proprietary funds generally determined percentage client assets reported amounts also include fees earned providing client shareholder servicing including record keeping administrative services proprietary funds nondiscretionary advisory services assets advisement distribution fees earned companysponsored investment funds reported revenue legg mason enters arrangements brokerdealers third parties sell market proprietary fund shares distribution servicing expense accrued amounts owed third parties including finders fees referral fees paid unaffiliated brokerdealers introducing parties distribution servicing expense also includes payments third parties certain shareholder administrative services subadvisory fees paid unaffiliated asset managers deferred sales commissions paid financial intermediaries connection sales certain classes companysponsored mutual funds capitalized deferred sales commissions asset amortized periods exceeding six years represent periods commissions generally recovered distribution service fee revenues contingent deferred sales charges cdsc received shareholders funds upon redemption shares cdsc receipts recorded distribution service fee revenue received reduction unamortized balance deferred sales commissions corresponding expense management periodically tests deferred sales commission asset impairment reviewing changes value related shares relevant market conditions events circumstances may indicate impairment value occurred factors indicate impairment value management compares carrying value estimated undiscounted cash flows expected generated asset remaining life management determines deferred sales commission asset fully recoverable asset deemed impaired loss recorded amount recorded amount asset exceeds estimated fair value years ended march 31 2018 2017 2016 impairment charges recorded deferred sales commissions included noncurrent assets consolidated balance sheets 4047 4891 march 31 2018 2017 respectively discussed recent accounting developments effective april 1 2018 legg mason adopted updated accounting guidance revenue recognition modified retrospective basis updated guidance certain separate account commissions expensed paid prior guidance meet criteria capitalization amortization change require recognition deferred commissions cost asset materially impact amount commission expense recognized absent significant change volume commissions income taxes deferred income taxes provided effects temporary differences tax basis asset liability reported amount financial statements deferred income tax assets subject valuation allowance managements opinion likely benefits realized legg masons deferred income taxes principally relate net operating loss carryforward benefits business combinations amortization intangible assets accrued compensation discussed note 7 december 22 2017 hr 1 act provide reconciliation pursuant titles ii v concurrent resolution budget fiscal year 2018 tax law enacted tax law complex materially changes us corporate income tax rate 35 21 includes various changes impact legg mason reduction us corporate tax rate resulted noncash provisional tax benefit 220935 year ended march 31 2018 due remeasurement certain existing deferred tax assets liabilities new income tax rate legg mason’s remeasurement deferred tax assets liabilities subject adjustments oneyear measurement period due complexity determining net deferred tax liability enactment date applicable accounting guidance tax benefit recognized likely position sustained based technical merits tax position meets threshold measured largest amount benefit greater 50 likelihood realized upon settlement appropriate taxing authority full knowledge relevant information companys accounting policy classify interest related tax matters interest expense related penalties operating expense see note 7 additional information regarding income taxes loss contingencies legg mason accrues estimates loss contingencies related legal actions investigations proceedings exclusive legal fees probable liability incurred amount loss reasonably estimated estimates losses matters exist reporting date may adjusted prior related financial statement issuance changes likelihood outcome estimable amounts related insurance recoveries recorded separately underwriter confirmed coverage specific claim amount see note 8 additional information stockbased compensation legg masons stockbased compensation includes stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units management equity plans certain affiliates deferred compensation payable stock compensation plans legg mason issues equity awards directors officers key employees accordance applicable accounting guidance compensation expense includes costs nonvested sharebased awards classified equity grant date fair value amortized respective vesting periods may reduced retirementeligible recipients straightline method grantdate fair value equityclassified sharebased awards immediate vesting also included compensation benefits expense effective april 1 2017 legg mason adopted updated accounting guidance stockbased compensation accounting updated guidance simplifies several aspects accounting stockbased compensation including income tax consequences clarifies classification criteria awards either equity liabilities classification related amounts statements cash flows updated guidance requires excess tax benefits deficiencies associated stockbased compensation recognized discrete items income tax provision benefit consolidated statements income loss reporting period occur thereby increasing volatility income tax provision benefit result fluctuations legg masons stock price legg mason adopted amendment modified retrospective basis recorded cumulativeeffect adjustment 24327 increase deferred tax assets retained earnings consolidated balance sheet april 1 2017 tax benefits previously recognized due legg masons cumulative tax loss position addition legg mason recorded related discrete income tax expense 796 year ended march 31 2018 vested stock awards grant date exercise price higher related vesting date stock price aspect guidance adopted prospective basis upon adoption updated guidance legg mason elected prospectively account forfeitures occur material impact consolidated financial statements also cash flows related income tax deductions excess less related stockbased compensation expense classified cash flows operating activities consolidated statements cash flows legg mason determines fair value stock options using blackscholes optionpricing model exception marketbased performance grants valued monte carlo optionpricing model legg mason also determines fair value optionlike affiliate management equity plan grants using blackscholes optionpricing model subject postvesting illiquidity discounts see note 11 additional information regarding stockbased compensation earnings per share basic earnings per share attributable legg mason inc shareholders eps calculated dividing net income loss attributable legg mason inc adjusted removing earnings allocated participating securities weightedaverage number shares outstanding excludes participating securities legg mason issued employees restricted stock restricted stock units deemed participating securities prior vesting related unvested restricted sharesunits entitle holder nonforfeitable dividend rights circumstance accounting guidance requires “twoclass method” eps calculations excludes earnings potentially distributed undistributed allocated participating securities allocate losses participating securities diluted eps similar basic eps effect potential common shares included calculation unless potential common shares antidilutive periods net loss potential common shares participating securities considered antidilutive excluded calculation see note 12 additional discussion eps restructuring costs discussed note 2 legg mason restructured permal group ltd permal combination entrust capital entrust costs associated restructuring primarily related employee termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statements income loss charges consolidating leased office space recorded occupancy consolidated statement income loss noncontrolling interests noncontrolling interests include affiliate minority interests thirdparty investor equity consolidated sponsored investment products vested affiliate management equity plan interests civs consolidated sponsored investment products thirdparty investors related noncontrolling interests classified redeemable noncontrolling interests investors funds may request withdrawals time also included redeemable noncontrolling interests vested affiliate management equity plan affiliate minority interests holder may point request settlement interests redeemable noncontrolling interests reported consolidated balance sheets estimated settlement values changes expected settlement values recognized settlement period adjustments retained earnings nonredeemable noncontrolling interests include vested affiliate management equity plan interests permit holder request settlement interests nonredeemable noncontrolling interests reported consolidated balance sheets issuance value together undistributed net income allocated noncontrolling interests legg mason estimates settlement value noncontrolling interests fair value consolidated sponsored investment products investor may request withdrawal time fair value based market quotes underlying securities held investment products affiliate noncontrolling interests management equity plan interests fair value reflects related total business enterprise value appropriate discounts lack marketability control may also features equity interests dividend subordination contemplated valuations fair value optionlike management equity plan interests also relies blackscholes option pricing model calculations affiliate noncontrolling interests subsequent acquisition business enterprise values derived using various methods including discounted cash flows guideline public company guideline public transaction methods legg mason may engage thirdparty valuation experts perform independent determinations fair value review internally prepared valuations appropriate based relative significance related amounts related contractual provisions changes valuation inputs net income loss attributable noncontrolling interests consolidated statements income loss includes share net income loss respective subsidiary allocated minority interest holders see note 14 additional information regarding noncontrolling interests related parties services sponsored investment funds legg mason earns management fees incentive fees distribution service fees revenue incurs distribution servicing expenses disclosed consolidated statements income loss sponsored investment funds deemed affiliated entities related party definition relevant accounting guidance recent accounting developments august 2017 financial accounting standards board fasb updated guidance accounting derivative hedging updated guidance closely aligns results cash flow fair value hedging designations risk management activities changes designation measurement guidance qualifying hedging relationships presentation hedge results financial statements new guidance also simplifies application hedge accounting updated guidance effective legg mason fiscal 2020 unless adopted earlier legg mason uses accounting hedge designation timetotime would potentially impacted derivative transactions designated hedging january 2017 fasb updated guidance simplify test goodwill impairment updated guidance still requires entities perform annual goodwill impairment tests comparing fair value reporting unit related carrying amount eliminates requirement potentially calculate implied fair value goodwill determine amount impairment new guidance entity recognize impairment charge reporting units carrying amount exceeds reporting unit’s fair value amount excess guidance effective fiscal 2020 legg mason evaluating adoption august november 2016 fasb updated guidance classification certain cash receipts cash payments restricted cash statement cash flows updated guidance addresses reporting classification several specific cash flow items including restricted cash debt prepayment extinguishment costs contingent consideration payments distributions received equity method investees objective reducing diversity practice specific guidance exists current guidance unclear updated guidance effective fiscal 2019 legg mason expect adoption material impact consolidated statement cash flows february 2016 fasb updated guidance accounting leases updated guidance requires lessee shall recognize assets liabilities arise lease transactions lessee recognize rightofuse asset use underlying asset liability representing lease payments updated guidance also requires evaluation inception service contract determine whether contract contains lease guidance effective legg mason fiscal 2020 legg mason expects recognize right use assets liabilities upon adoption new standard continuing evaluate full impact adoption may 2014 fasb updated guidance revenue recognition updated guidance provides single comprehensive revenue recognition model contracts customers improves comparability removes inconsistencies revenue recognition practices across entities industries jurisdictions capital markets guidance also requires comprehensive disclosures nature timing uncertainty revenue cash flows arising contracts customers including significant judgments made applying guidance march april 2016 fasb updated revenue guidance determining whether report revenue gross versus net basis clarified identification revenue performance obligations legg mason reviewed revenue contracts monitoring relevant implementation guidance legg mason anticipate significant changes current revenue recognition practices except discussed legg mason may required recognize longerterm performance incentive fees subject clawback reasonably possible earlier current revenue recognition process defers recognition contingencies resolved additionally certain separate account commissions currently expensed paid meet criteria capitalization amortization change require recognition deferred commissions cost asset materially impact amount commission expense recognized post adoption legg mason also evaluated whether revenuerelated costs currently presented gross basis recorded net vice versa legg masons revenuerelated costs continue recorded gross basis certain fund reimbursements paid begin recorded contra revenue net new guidance legg mason adopt guidance modified retrospective basis effective date april 1 2018 timing revenue recognition change materially 2 acquisitions dispositions acquisitions following table presents summary acquisitiondate fair values assets acquired liabilities assumed legg masons significant recent acquisitions 1 post combination entrustpermal noncontrolling interest 403200 also included fair value reclassification 15500 retained earnings time acquisition entrust capital may 2 2016 legg mason acquired entrust combined permal legg masons existing hedge fund platform form entrustpermal entrust alternative asset management firm headquartered new york 9600000 assets management aum approximately 2000000 assets advisement committed capital closing largely complementary investment strategies investor base business mix permal transaction included cash payment 400000 funded borrowings legg masons revolving credit facility well portion proceeds issuance 450000 475 senior notes due 2026 notes 250000 6375 junior subordinated notes due 2056 6375 2056 notes march 2016 result combination legg mason owns 65 new entity entrustpermal remaining 35 owned entrusts cofounder managing partner noncontrolling interests put holder called legg mason settlement fair value subject various conditions including passage time fair value noncontrolling interests consolidated balance sheet reflects total business enterprise value combined entity appropriate discounts lack marketability control fair value acquired amortizable intangible asset management contracts useful life approximately eight years acquisition purchase price allocated intangible assets goodwill expected deductible us tax purposes period 15 years goodwill principally attributable synergies expected arise entrust management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows completion annual impairment testing process fiscal 2017 indefinitelife funds management contracts asset related entrust acquisition combined indefinitelife fundsofhedge funds management contracts asset related legacy permal business connection legg masons annual impairment testing process fiscal 2018 combined entrustpermal indefinitelife funds management contracts asset impaired 195000 see note 5 additional information costs incurred connection acquisition entrust 7046 3492 years ended march 31 2017 2016 respectively financial results entrust included legg masons consolidated financial results year ended march 31 2017 included revenues 115327 material impact net income loss attributable legg mason inc connection combination entrust permal legg mason incurred total charges restructuring transition costs 92130 march 31 2018 includes 7049 41785 43296 recognized years ended march 31 2018 2017 2016 respectively costs primarily comprised charges employee termination benefits including severance retention incentives recorded transitionrelated compensation consolidated statements income loss real estate related charges recorded occupancy consolidated statements income loss combination substantially complete legg mason expects incur additional costs totaling 1000 2000 fiscal 2019 table presents summary changes restructuring transitionrelated liability december 31 2015 march 31 2018 cumulative charges incurred date 1 includes lease loss reserve space permanently abandoned 9069 year ended march 31 2017 7212 year ended march 31 2016 2 includes stockbased compensation expense accelerated fixed asset depreciation clarion partners april 13 2016 legg mason acquired majority equity interest clarion partners diversified real estate asset management firm headquartered new york clarion partners managed approximately 41500000 aum date acquisition legg mason acquired 82 ownership interest clarion partners cash payment 631476 including payment cash delivered 36772 coinvestments 16210 funded portion proceeds issuance 2026 notes 6375 2056 notes march 2016 clarion partners management team retained 18 outstanding equity clarion partners clarion partners management team also retained rights full amount performance fee revenues earned historic aum place closing acquisition performance fees earned historic aum fully passed employees compensation per terms acquisition agreement recorded compensation expense legg mason expects full pass performance fees phase approximately five years postclosing firms previous majority owner sold entire ownership interest transaction noncontrolling interests held management team put holders called legg mason settlement fair value subject various conditions including passage time fair value noncontrolling interests reflects total business enterprise value appropriate discounts lack marketability control upon acquisition legg mason also granted certain key employees clarion partners total 716 performancebased legg mason restricted share units aggregate fair value 11121 vest upon clarion partners achieving certain level ebitda defined award agreements within designated period closing acquisition aggregate value award included purchase price determined grant date using monte carlo pricing model following assumptions connection transaction legg mason also implemented affiliate management equity plan management team clarion partners resulted noncash charge 15200 three months ended june 30 2016 see note 11 additional information related clarion partners management equity plan fair value acquired amortizable intangible asset management contracts average useful life approximately 10 years acquisition approximately 86 purchase price allocated intangible assets goodwill expected deductible us tax purposes period 15 years goodwill principally attributable synergies expected arise clarion partners management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows addition previously discussed charge 15200 incurred connection implementation clarion partners management equity plan years ended march 31 2017 2016 10757 2807 respectively costs incurred connection acquisition clarion partners financial results clarion partners included legg masons consolidated financial results year ended march 31 2017 included revenues 249468 material impact net income loss attributable legg mason inc pro forma financial information following unaudited pro forma financial information presents combined financial results legg mason clarion partners entrust initial period acquisitions acquisition occurred april 1 2015 unaudited pro forma financial information reflects certain adjustments amortization expense related fair value acquired intangible assets acquisition transitionrelated costs interest expense related debt incurred finance acquisitions income tax impact pro forma adjustments unaudited pro forma financial information informational purposes excludes projected cost savings necessarily indicative financial results would achieved acquisitions actually occurred beginning first period presented rare infrastructure limited october 21 2015 legg mason acquired majority equity interest rare infrastructure limited rare infrastructure rare infrastructure specializes global listed infrastructure security investing headquartered sydney australia approximately 6800000 aum closing transaction terms related transaction agreements legg mason acquired 75 ownership interest firm firms management team retained 15 equity interest continuing corporate minority owner retained 10 acquisition required initial cash payment 213739 using foreign exchange rate october 21 2015 296000 australian dollar payment funded approximately 40000 net borrowings companys previous revolving credit facility well existing cash resources august 2015 legg mason executed currency forward contract economically hedge risk movement exchange rate us dollar australian dollar initial cash payment denominated currency forward contract closed october 2015 transaction also provided potential contingent consideration payments march 31 2018 2017 however payments due based relevant net revenue targets contingent consideration catchup adjustment payments 81465 using foreign exchange rate march 31 2018 maximum 106000 australian dollar amount per related agreements may due march 31 2019 dependent achievement certain net revenue targets however march 31 2018 payments expected due noncontrolling interests put holders called legg mason settlement fair value except nonmanagement portion noncontrolling interests callable preagreed formula specified agreements fair value noncontrolling interests reflects total business enterprise value rare infrastructure appropriate discounts lack marketability control fair value acquired amortizable intangible asset management contracts useful life 12 years acquisition purchase price allocated intangible assets goodwill deductible australian tax purposes goodwill principally attributable synergies expected arise rare infrastructure management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows year ended march 31 2018 amortizable intangible asset management contracts asset trade name indefinitelife intangible asset impaired 32000 2000 respectively year ended march 31 2017 amortizable intangible asset management contracts asset impaired 18000 see note 5 additional information fair value contingent consideration estimated using monte carlo simulation riskneutral framework various observable inputs well various unobservable data inputs level 3 measurements simulation considered variables including aum growth performance fee levels consistent riskneutral framework projected aum performance fees dampened measure risk referred market price risk account market risk systematic risk calculating earnout payments earnout payments discounted commensurate timing summary various assumption values follows significant increases decreases projected aum performance fees would result significantly higher lower contingent consideration liability fair value contingent consideration liability established closing acquisition date fair value 25000 using foreign exchange rate october 21 2015 march 31 2018 contingent consideration liability included consolidated balance sheet additional contingent consideration expected due march 31 2017 contingent consideration liability totaled 17444 7791 included current contingent consideration consolidated balance sheet remaining 9653 included noncurrent contingent consideration year ended march 31 2018 reductions projected aum revenues attributable part large outflow june 2017 quarter resulted 17413 reduction estimated contingent consideration liability recorded credit contingent consideration fair value adjustments consolidated statement income loss remaining decrease year ended march 31 2018 attributable changes exchange rate included accumulated comprehensive loss net foreign currency translation adjustment net accretion contingent consideration liability recorded entity australian dollar functional currency related changes exchange rate impact net income loss company presented pro forma combined results operations acquisition results operations reported accompanying consolidated statements income loss would materially different financial results rare infrastructure included legg masons consolidated financial results year ended march 31 2016 included revenues 18420 material impact net income loss attributable legg mason inc martin currie holdings limited october 1 2014 legg mason acquired outstanding equity interests martin currie holdings limited martin currie international equity specialist based united kingdom acquisition required initial payment 202577 using foreign exchange rate october 1 2014 £125000 contract amount funded existing cash agreement also provided potential first second third anniversary contingent payments due march 31 2016 2017 2018 respectively however payments due based relevant financial metrics fair value amortizable intangible asset management contracts asset amortized period 12 years goodwill principally attributable synergies expected arise martin currie acquired intangible assets goodwill deductible uk tax purposes management estimated fair values indefinitelife intangible fund management contracts indefinitelife trade name amortizable intangible asset management contracts based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows projected aum growth rates discount rates summarized follows fair value contingent consideration measured using monte carlo simulation various unobservable market data inputs level 3 measurements simulation considered variables including aum growth performance fee levels relevant product performance projected aum performance fees earnout payments discounted appropriate summary various assumption values follows significant future increases decreases projected aum performance fees would result significantly higher lower contingent consideration liability fair value contingent consideration liability established closing acquisition date fair value 75211 using foreign exchange rate october 1 2014 march 31 2018 contingent consideration liability included consolidated balance sheet contingent consideration due based relevant financial metrics contingent consideration liability included consolidated balance sheet march 31 2017 12018 year ended march 31 2018 reductions projected aum performance fees resulted 13355 reduction contingent consideration liability recorded credit contingent consideration fair value adjustments consolidated statements income loss reduction offset part increase 1337 attributable changes exchange rate included accumulated comprehensive loss net foreign currency translation adjustment provision share purchase agreement requires certain amounts contingent consideration due paid pension plan fund portion net plan benefit obligation funding occur contingent payments due martin currie defined benefit pension plan martin currie sponsors retirement death benefits plan defined benefit pension plan assets held separate trusteeadministered fund plan assets measured fair value comprised 64 equities level 1 35 bonds level 2 1 cash level 1 march 31 2018 65 equities level 1 35 bonds level 2 march 31 2017 assumptions used determine expected return plan assets targets 60 40 equitybond allocation reference 15year ftse uk gilt yield equities uk longdated bond yields bonds plan liabilities measured actuarial basis using projected unit method discounted rate equivalent current rate highquality bond local uk market currency significant concentrations risk plan assets march 31 2018 2017 recent actuarial valuation performed may 31 2016 updated subsequent balance sheet dates march 31 2018 accrual service credit plan ceased october 3 2014 legg mason uses corridor approach account plan corridor approach actuarial gains losses plan assets liabilities deferred reported comprehensive income loss except actuarial gains losses exceed 10 greater fair value plan assets plan benefit obligation excess amortized compensation benefits expense recovery period 15 years year ended march 31 2018 492 previously unrecognized losses expensed corridor approach resulting net benefit obligation comprised follows included march 31 2018 2017 consolidated balance sheets noncurrent liabilities change benefit obligation summarized change plan assets summarized years ended march 31 2018 2017 2016 net periodic benefit cost 389 93 92 respectively included compensation benefits expense consolidated statements income loss components net periodic loss gain years ended march 31 2018 2017 2016 follows net actuarial losses 13635 16681 included accumulated comprehensive loss net consolidated balance sheets march 31 2018 2017 respectively march 31 2018 plan expects make benefit payments next 10 fiscal years follows previously discussed provision share purchase agreement requires certain amounts contingent consideration due paid pension plan fund portion net plan benefit obligation funding occur contingent consideration payments due connection review pensions regulator uk regulator pension plans current structure funding status martin currie trustees pension regulator agreed revised plan structure including redomiciliation plan uk additional guarantees martin currie entities provisions accelerated funding portion benefit obligation certain circumstances martin currie agreed plan trustees contribute 3256 using exchange rate march 31 2018 £2320 annual committed contribution amount plan annual basis beginning fiscal 2019 continuing may 2024 final payment 2050 using exchange rate march 31 2018 £1461 final payment amount due november 2024 contingent consideration provisions share purchase agreement also required designated percentage earnout payments net pension contribution allocated fund incentive plan martin curries management estimated payment adjusted quarterly amortized earnout term contingent consideration due payments due employees arrangement related compensation expense reversed year ended march 31 2018 december 2015 martin currie acquired certain assets pk investment management llp pk investments london based equity manager initial cash payment 4981 year ended march 31 2018 legg mason paid contingent consideration due 3242 cash payments funded existing cash resources contingent consideration liability march 31 2017 2507 connection acquisition legg mason recognized indefinitelife intangible fund management contracts goodwill 6619 827 respectively qs investors holdings llc effective may 31 2014 legg mason acquired outstanding equity interests qs investors customized solutions global quantitative equities provider initial purchase price cash payment 11000 funded existing cash august 2016 legg mason paid contingent consideration 6587 second anniversary payment additional contingent consideration 20000 fourth anniversary payment 3400 potential catchup adjustment second anniversary payment shortfall may due july 2018 dependent achievement certain net revenue targets fair value amortizable intangible asset management contracts useful life 10 years acquisition purchase price allocated goodwill expected deductible us tax purposes period 15 years goodwill principally attributable synergies expected arise qs investors management estimated fair values amortizable intangible asset management contracts based upon discounted cash flow analysis contingent consideration expected paid discounted based upon probabilityweighted revenue projections using unobservable market data inputs level 3 measurements significant assumptions used analyses acquisition including projected annual cash flows revenues discount rates summarized follows march 31 2018 fair value contingent consideration liability 3707 decrease 1134 march 31 2017 year ended march 31 2018 reduction projected net revenue resulted 1300 reduction estimated contingent consideration liability recorded credit contingent consideration fair value adjustments consolidated statement income loss reduction offset part increase 166 attributable accretion contingent consideration liability included current contingent consideration consolidated balance sheet march 31 2018 financial guard llc august 17 2016 legg mason acquired 82 equity interests financial guard llc financial guard online registered investment advisor technologyenabled wealth management investment advice platform acquisition required initial cash payment funded existing cash resources potential contingent payment 3000 based certain metrics within first year acquisition contingent payment due based relevant metrics connection acquisition legg mason recognized certain business assets goodwill 11995 legg mason also committed contribute 5000 additional working capital financial guard paid twoyear period following acquisition 2500 paid march 31 2018 march 31 2017 contingent consideration liability recorded consolidated balance sheet precidian investments llc january 22 2016 legg mason acquired minority equity position precidian investments llc precidian firm specializing creating innovative products solutions solving market structure issues particularly regard etf marketplace transaction required cash payment funded existing cash resources terms transaction legg mason acquired series b preferred units precidian entitle legg mason approximately 20 voting economic interests precidian along customary preferred equity protections sole option 48 months following initial investment earlier within nine months secs approval precidians application operate active shares product legg mason may subject satisfaction certain closing conditions upon payment consideration convert preferred units 75 common equity precidian fully diluted basis legg mason accounts investment precidian included assets consolidated balance sheets march 31 2018 2017 equity method accounting fauchier partners management limited march 13 2013 permal acquired outstanding share capital fauchier partners management limited fauchier european based manager fundsofhedge funds initial purchase price cash payment 63433 funded existing cash resources may 2015 legg mason paid contingent consideration 22765 second anniversary payment agreement also provided potential fourth anniversary contingent consideration payment however payment due based relevant financial metrics additional contingent consideration paid connection acquisition december 2017 legg mason completed two small acquisitions required initial cash payment 700 funded existing cash resources potential contingent consideration 1900 dispositions december 23 2016 march 31 2017 legg mason sold ownership interests small equity advisor poland small bostonbased private equity advisor also february 24 2017 legg mason liquidated share small equity advisory joint venture net proceeds transactions received year ended march 31 2017 19469 transactions material impact legg masons consolidated financial condition results operations year ended march 31 2018 legg mason received additional contingent proceeds 3462 3 investments fair values assets liabilities disclosures include details legg masons financial assets financial liabilities measured fair value nav excluding financial assets financial liabilities civs see note 17 variable interest entities consolidation investment vehicles information related assets liabilities civs measured fair value fair values financial assets liabilities company determined using following categories inputs 1 cash equivalents include highly liquid investments original maturities 90 days less cash investments actively traded money market funds classified level 1 cash investments time deposits measured amortized cost approximates fair value short time purchase instrument expected realization classified level 2 trading investments proprietary fund products trading investments consist approximately 81 19 equity debt securities respectively march 31 2018 approximately 79 21 equity debt securities respectively march 31 2017 3 includes 15452 26854 noncontrolling interests associated consolidated seed investment products march 31 2018 2017 respectively 4 primarily mutual funds minimal market risk company change value primarily offset adjustment compensation expense related deferred compensation liability 5 certain legg masons equity method investments investment companies record underlying investments fair value therefore fair value investments measured using legg masons share investees underlying net income loss predominately representative fair value adjustments investments held equity method investee equity method investments measured fair value recurring basis excluded tables 6 excludes 43854 28300 seed capital march 31 2018 2017 respectively related legg masons investments civs see note 17 7 amounts included noncurrent assets consolidated balance sheets periods presented 8 see note 15 9 see notes 2 8 proprietary fund products include seed capital investments made legg mason fund new investment strategies products legg mason seed capital investments proprietary fund products totaled 268268 305288 march 31 2018 2017 respectively substantially comprised investments 59 funds 57 funds respectively individually greater 1000 together comprise 90 total seed capital investments period end discussed notes 1 15 17 year ended march 31 2018 legg mason entered various total return swap arrangements financial intermediaries respect two legg mason sponsored etfs initial aggregate notional amounts totaling 48639 resulted investment two etfs financial intermediaries terms total return swap arrangements legg mason receives investment gains losses underlying investments therefore required consolidate sponsored investment funds designated civs see notes 1 17 information regarding determination whether investments proprietary fund products represent vies consolidation net realized unrealized gain loss investment securities classified trading 31012 44534 27654 years ended march 31 2018 2017 2016 respectively net unrealized gains losses relating trading investments still held reporting dates 7045 32862 35111 years ended march 31 2018 2017 2016 respectively changes financial assets liabilities measured fair value using significant unobservable inputs level 3 years ended march 31 2018 2017 presented tables na applicable na applicable realized unrealized gains losses recorded level 3 investments primarily included nonoperating income expense net consolidated statements income loss change unrealized gains losses level 3 investments liabilities still held reporting date 927 45099 27056 years ended march 31 2018 2017 2016 respectively significant transfers level 1 level 2 years ended march 31 2018 2017 practical expedient legg mason relies nav certain investments fair value navs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 2018 2017 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 liquidation restrictions 1 daily redemption 20 monthly redemption 7 quarterly redemption 72 subject redemption currently redeemable 2 liquidations expected remaining term 3 balance 26 remaining term less one year 74 remaining term 14 years current plans sell investments held march 31 2018 4 fixed assets following table reflects components fixed assets depreciation amortization expense related fixed assets 48382 54023 55318 year ended march 31 2018 2017 2016 respectively expense includes accelerated depreciation amortization 2688 4147 years ended march 31 2017 2016 respectively primarily related space vacated connection restructuring permal combination entrust 5 intangible assets goodwill indefinitelife intangible assets amortized values identifiable intangible assets amortized useful lives unless assets determined indefinite useful lives goodwill indefinitelife intangible assets analyzed determine fair value assets exceeds book value intangible assets subject amortization considered impairment reporting period fair value less book value legg mason record impairment charge following table reflects components intangible assets certain legg masons intangible assets denominated currencies us dollar balances related assets fluctuate changes related foreign currency exchange rates indefinitelife intangible assets goodwill legg mason completed annual impairment testing process goodwill indefinitelife intangible assets december 31 2017 determined carrying value entrustpermal indefinitelife fund management contracts intangible asset exceeded fair value resulted impairment 195000 impairment charge primarily result net client outflows legacy high net worth fund products including transfers client funds products entrustpermal separate accounts related decline revenues management estimated fair value asset based upon discounted cash flow analysis using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected revenue growth rates discount rates base revenues related entrustpermal fund contracts assumed annual growth contraction rates ranging 13 6 average 5 projected cash flows entrustpermal fund contracts discounted 15 projected revenue growth rates asset dependent client aum flows market conditions product investment performance discount rates also influenced market conditions well interest rates factors decreases projected revenue growth rates andor increases discount rate could result lower fair value measurements potential additional impairments entrustpermal indefinitelife fund management contracts intangible asset could significant impairments indefinitelife intangible assets goodwill december 31 2017 legg mason also determined triggering events occurred march 31 2018 would require impairment testing result uncertainty regarding future market conditions economic results assessing fair value reporting unit intangible assets requires significant judgment december 31 2017 assessed fair value combined entrustpermal trade names exceeded carrying value 28500 1 market performance andor aum levels entrustpermal decrease near term cash flow projections deviate current projections reasonably possible assets could become impaired impairment could significant amount december 31 2017 assessed fair value rare infrastructure indefinitelife fund management contracts intangible asset exceeded carrying value 132780 using exchange rate december 31 2017 approximately 3 assessed fair value rare infrastructure trade name indefinitelife intangible asset exceeded carrying value 3054 using exchange rate december 31 2017 approximately 19 market performance andor related aum levels decrease near term cash flow projections deviate current projections reasonably possible either assets could become impaired impairment could material amount december 31 2017 assessed fair value indefinitelife domestic mutual funds contracts asset related citigroup asset management cam acquisition exceeds carrying value material amount result aum losses factors three months ended june 30 2017 legg mason tested rare infrastructure indefinitelife fund management contracts intangible asset trade name indefinitelife intangible asset impairment three months ended june 30 2017 assessed fair value rare infrastructure indefinitelife fund management contracts intangible asset exceeded carrying value june 30 2017 7 therefore impaired carrying value trade name exceeded fair value 3057 june 30 2017 resulted impairment charge 2000 management estimated fair value rare infrastructure trade name june 30 2017 based upon relief royalty approach discounted cash flow method using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected annual revenue growth rates 5 18 average 8 royalty rate 10 discount rate 165 projected revenue aum growth rates asset dependent client aum flows market conditions product investment performance discount rates also influenced market conditions well interest rates factors decreases projected revenue aum growth rates andor increases discount rate could result lower fair value measurements potential additional impairments rare infrastructure trade name intangible asset legg masons annual impairment testing process fiscal 2017 determined carrying value permal trade name indefinitelife asset exceeded fair value 21100 resulted impairment charge 17000 impairment charge primarily result decrease revenues reduction royalty rate reflecting decline value permal trade name due change branding decline use separate permal name following combination entrust management estimated fair value permal trade name based upon discounted cash flow analysis using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected annual revenue growth rates 3 9 average 7 royalty rate 15 discount rate 160 legg masons annual impairment testing process fiscal 2016 determined carrying value legacy permal indefinitelife fundsofhedge funds management contracts intangible asset permal trade name asset exceeded respective fair values assets impaired aggregate amount 371000 impairment charges resulted number current trends factors changes resulted reduction projected cash flows legg masons overall assessment fair value assets fair values legacy permal fundsofhedge funds contracts asset permal trade name declined carrying values accordingly impaired 364000 7000 respectively management estimated fair values assets based upon discounted cash flow analyses using unobservable market data inputs level 3 measurements significant assumptions used cash flow analyses included projected revenue growth rates discount rates total revenues related legacy permal fundsofhedge funds contracts assumed annual growth rates ranging 6 average 5 projected cash flows permal fundsofhedge funds contracts discounted 165 change carrying value goodwill summarized 1 see note 2 additional information legg mason recognizes tax benefit amortization excess tax benefit related cam acquisition accordance accounting guidance income taxes tax benefit recorded reduction goodwill deferred tax liabilities benefit realized amortizable intangible asset management contracts three months ended june 30 2017 projected revenues related rare infrastructure separate account contracts amortizable asset declined due losses separate account aum factors including withdrawal approximately 1500000 institutional client june 2017 based revised attrition estimates remaining useful life acquired contracts decreased eight years five years june 30 2017 result decline projected revenues revised estimate remaining useful life amortized carrying value determined exceed fair value impairment charge 32000 recorded three months ended june 30 2017 management estimated 11180 fair value asset june 30 2017 based upon discounted cash flow analysis using unobservable market inputs level 3 measurements significant assumptions used cash flow analysis included projected aum growth rates 7 attrition rates 20 discount rate 165 projected revenue aum growth rates client attrition dependent client aum flows market conditions product investment performance discount rates also influenced market conditions well interest rates factors decreases projected revenue aum growth rates andor increases discount rate could result lower fair value measurements potential additional impairments rare infrastructure separate account contracts amortizable asset impairments amortizable management contract intangible assets year ended march 31 2018 march 31 2018 clarion entrust separate account contracts amortizable assets net carrying values 82158 49807 respectively comprise 80 legg masons total amortizable intangible asset management contracts aggregate carrying value march 31 2018 cumulative undiscounted cash flows related separate account contracts amortizable assets exceeded respective carrying values material amount assurance future client attrition asset outflows market uncertainty factors produce impairment either assets nine months ended december 31 2016 revenues related rare infrastructure separate account contracts asset declined based revised attrition estimates remaining useful life acquired contracts decreased 11 years eight years december 31 2016 result client attrition related decline revenues revised estimate remaining useful life amortized carrying value management contracts asset determined exceed fair value impairment charge 18000 recorded three months ended december 31 2016 management estimated fair value asset based upon discounted cash flow analysis using unobservable market data inputs level 3 measurements significant assumptions used cash flow analysis included projected aum growth rates 7 attrition rates 13 discount rate 155 march 31 2018 amortizable intangible asset management contracts amortized weightedaverage remaining life 69 years estimated amortization expense next five fiscal years thereafter follows 6 shortterm borrowings longterm debt shortterm borrowings december 29 2015 legg mason entered unsecured credit agreement amended time credit agreement provided 1000000 multicurrency revolving credit facility credit agreement amended march 31 2017 reduce amount available borrowing 1000000 500000 revolving credit facility may increased aggregate amount 500000 subject approval lenders expires december 2020 repaid time revolving credit facility available fund working capital needs general corporate purposes discussed note 12 december 22 2017 legg mason borrowed 225500 credit agreement purchase 5568 shares legg mason common stock shanda asset management investment limited shanda march 2018 legg mason repaid 100000 borrowings march 31 2018 125500 borrowings outstanding credit agreement borrowings outstanding credit agreement march 31 2017 discussed august 2016 legg mason issued 500000 545 junior subordinated notes due 2056 545 2056 notes net proceeds together existing cash resources used repay 500000 outstanding borrowings credit agreement discussed may 2016 legg mason borrowed 460000 credit agreement finance acquisition entrust replenish cash used complete acquisitions clarion partners april 2016 rare infrastructure october 2015 discussed note 2 december 2015 legg mason borrowed 40000 credit agreement proceeds used repay 40000 outstanding borrowings previous revolving credit facility drawn october 2015 partially finance acquisition rare infrastructure revolving credit facility interest rate threemonth eurocurrency rate plus 125 basis points annual commitment fee 175 basis points interest payable least quarterly amounts outstanding credit agreement interest rate may change future based changes legg masons credit ratings effective interest rate borrowings credit agreement 295 year ended march 31 2018 credit agreement includes standard financial covenants include maximum net debt ebitda ratio defined documents modified march 2017 35 1 period january 1 2017 including march 31 2018 30 1 thereafter minimum ebitda interest ratio defined documents 40 1 march 31 2018 legg masons net debt ebitda ratio 25 1 ebitda interest expense ratio 62 1 therefore legg mason maintained compliance applicable covenants june 2 2017 credit agreement amended include legg mason inc parent entity among entities permitted incur liens secure obligations including related cash collateral provisions hedging agreements aggregate amount exceed 200000 one time prior amendment certain subsidiaries legg mason permitted incur liens cash collateral provided legg mason inc connection certain hedging agreements considered lien assets purposes lien covenant result legg mason compliance terms credit agreement times amendment provides waiver defaults credit agreement may arisen prior date amendment resulting provision cash collateral march 31 2018 2017 legg mason 374500 500000 respectively undrawn revolving credit facility capacity interest rate swap credit agreement april 29 2016 legg mason entered forward starting amortizing interest rate swap agreement financial intermediary designated cash flow hedge interest rate swap used convert outstanding borrowings credit agreement floating rate fixed rate debt terms interest rate swap agreement legg mason paid fixed interest rate 23 notional amount 500000 swap 467year term scheduled reductions notional amount expire december 29 2020 august 2016 connection repayment outstanding borrowings revolving credit facility interest rate swap terminated cash payment 3662 result legg mason reclassified loss 2249 net deferred income taxes 1413 representing fair value cash flow hedge accumulated comprehensive loss net nonoperating income expense net prior termination august 2016 swap settled monthly year ended march 31 2017 764 reclassified accumulated comprehensive loss net interest expense swap terminated original terms conditions hedged instruments unchanged swap effective cash flow hedge longterm debt longterm debt net consists following august 2016 legg mason issued 500000 545 2056 notes net proceeds together cash hand used repay total 500000 outstanding borrowings credit agreement previously discussed march 2016 legg mason issued 450000 2026 notes 250000 6375 2056 notes legg mason used net proceeds offerings finance acquisitions entrust may 2016 clarion partners april 2016 discussed note 2 may 2012 legg mason repurchased companys outstanding 25 convertible notes convertible notes terms repurchase included noncash exchange warrants holders convertible notes replicated extended contingent conversion feature convertible notes warrants issued holders convertible notes connection repurchase convertible notes provided purchase aggregate subject adjustment 14205 shares common stock net share settled basis exercise price 88 per share warrants expired unexercised july 2017 27 senior notes due july 2019 june 2014 legg mason issued 250000 27 senior notes due july 2019 notes 2019 notes sold discount 553 amortized interest expense fiveyear term 2019 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 020 together related accrued unpaid interest june 23 2014 legg mason entered interest rate swap contract financial intermediary notional amount 250000 designated fair value hedge interest rate swap used effectively convert 2019 notes fixed rate debt floating rate debt identical terms underlying debt hedged related hedging gains losses offset one another resulted net income loss impact swap fiveyear term scheduled mature july 15 2019 april 21 2016 fair value hedge swap terminated cash receipt 6500 related fair value hedge adjustment amortized interest expense remaining life debt years ended march 31 2018 2017 1804 amortized recorded interest expense consolidated statements income loss year ended march 31 2016 2137 recorded income gain hedging activity consolidated statements income loss reflects gain hedging activity related fair value adjustment derivative asset also year ended march 31 2016 2137 recorded expense loss hedging activity consolidated statements income loss reflects loss hedging activity related fair value adjustment debt swap payment dates coincided debt payment dates july 15 january 15 related receiptspayments legg mason recorded interest expense consolidated statements income loss swap terminated april 21 2016 original terms conditions hedged instruments unchanged swap effective fair value hedge 395 senior notes due july 2024 june 2014 legg mason issued 250000 395 senior notes due july 2024 notes 2024 notes sold discount 458 amortized interest expense 10year term 2024 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 025 together related accrued unpaid interest 475 senior notes due march 2026 march 2016 legg mason issued 450000 2026 notes 2026 notes sold discount 207 2026 notes redeemed part aggregate greater related principal amount time redemption sum remaining scheduled payments discounted treasury rate defined plus 045 together related accrued unpaid interest 5625 senior notes due january 2044 january 2014 legg mason issued 400000 5625 senior notes due january 2044 notes sold discount 6260 amortized interest expense 30year term additional 150000 2044 notes issued june 2014 sold premium 9779 also amortized interest expense 30year term 2044 notes redeemed time prior scheduled maturity part aggregate greater related principal amount time sum remaining scheduled payments discounted treasury rate defined plus 030 together related accrued unpaid interest 6375 junior subordinated notes due march 2056 march 2016 legg mason issued 250000 6375 2056 notes 6375 2056 notes issued 100 principal amount 6375 2056 notes rank junior subordinate right payment legg masons current future senior indebtedness prior march 15 2021 6375 2056 notes redeemed aggregate part 100 principal amount plus accrued unpaid interest called tax event defined 102 principal amount plus accrued unpaid interest called rating agency event defined march 15 2021 6375 2056 notes redeemed aggregate part 100 principal amount plus related accrued unpaid interest 545 junior subordinated notes due september 2056 august 2016 legg mason issued aggregate principal amount 500000 545 2056 notes 545 2056 notes rank junior subordinate right payment legg masons current future senior indebtedness prior september 15 2021 545 2056 notes redeemed aggregate part 100 principal amount plus accrued unpaid interest called tax event defined prospectus supplement 102 principal amount plus accrued unpaid interest called rating agency event defined prospectus supplement september 15 2021 545 2056 notes redeemed aggregate part 100 principal amount plus related accrued unpaid interest march 31 2018 250000 legg masons longterm debt matures fiscal 2020 2000000 matures fiscal 2023 7 income taxes components income loss income tax provision follows components income tax expense benefit follows reconciliation difference effective income tax rate statutory federal income tax rate follows 1 state income taxes include changes valuation allowances related change apportionment provision return differences net impact related deferred tax assets 2 includes impact deferred tax assets liabilities effects unremitted foreign earnings aspects tax law 3 effect foreign tax rates fiscal 2018 2017 2016 includes 33150 2890 66780 tax benefit respectively noncash impairment charges related intangible assets entrustpermal legacy permal businesses discussed note 5 4 see schedule change valuation allowances jurisdiction 5 fiscal 2018 includes 90 federal impact 97 including state impact nondeductible charge regulatory matter discussed subsequent event note 18 6 fiscal 2017 part larger strategic initiative legg mason restructured certain holding company businesses increased amount foreign tax credits available utilization december 22 2017 tax law enacted tax law complex materially changes us corporate income tax rate 35 21 includes various changes impact legg mason reduction us corporate tax rate resulted onetime noncash provisional tax benefit 220935 recognized quarter ended december 31 2017 due remeasurement certain existing deferred tax assets liabilities new income tax rate addition noncash tax charge 7260 provisionally provided quarter ended december 31 2017 effects unremitted foreign earnings aspects tax law legg mason’s remeasurement deferred tax assets liabilities subject adjustments measurement period due complexity determining net deferred tax liability enactment date legg masons accounting tax unremitted foreign earnings incomplete due complexity determining various components calculation including relevant level legg masons foreign earnings profits amount earnings held cash specified assets additional adjustments provisional items may made subsequent periods detailed information guidance obtained analyzed tax law also created new taxes international operations including global intangible lowtaxed income gilti provision accounting guidance relevant gilti provision provides company elect measurement period either account tax expense period incurred factor measurement deferred taxes legg mason requires additional time evaluate provision accounting implications yet elected related accounting policy november 2015 uk finance bill 2015 enacted reduced main uk corporate tax rate 20 19 effective april 1 2017 18 effective april 1 2020 september 2016 uk finance act 2016 enacted reduced main uk corporate tax rate effective april 1 2020 17 reductions uk corporate tax rate resulted tax benefits 4055 8383 recognized fiscal 2017 2016 respectively result revaluation deferred tax assets liabilities new rates april 13 2015 reforms new york city’s corporate tax structure enacted included changes calculation net operating loss carryforwards changes way sales revenue sourced revaluation deferred tax assets liabilities new rules resulted recognition onetime income tax benefit 17053 year ended march 31 2016 deferred income taxes provided effects temporary differences tax basis asset liability reported amount consolidated balance sheets temporary differences result taxable deductible amounts future years summary legg masons deferred tax assets liabilities follows discussed note 1 effective april 1 2017 legg mason adopted updated guidance stockbased compensation accounting guidance adopted modified retrospective basis tax asset 24327 recognized increase deferred tax assets retained earnings consolidated balance sheet april 1 2017 tax benefits previously recognized due legg masons cumulative tax loss position addition legg mason recorded related discrete income tax expense 796 year ended march 31 2018 vested stock awards grant date exercise price higher related vesting date stock price aspect guidance adopted prospective basis legg mason various loss tax credit carryforwards may provide future tax benefits related valuation allowances established accordance accounting guidance income taxes managements opinion likely benefits realized extent analysis realization deferred tax assets relies deferred tax liabilities legg mason considered timing nature jurisdiction reversals including future increases relating tax amortization goodwill indefinitelife intangible assets well planning strategies measure value realizability deferred tax assets april 13 2016 legg mason acquired majority ownership clarion partners deferred tax liability 18680 21991 march 31 2018 2017 respectively established difference basis clarion partners us tax purposes financial statement purposes may 2 2016 permal business merged entrust part transaction legg mason paid cash 35 ownership permal business 65 ownership new entrustpermal joint venture result transaction legg mason converted portion permal legacy business partnership decreased related deferred tax liability 4102 offsetting change tax basis differences amount 4730 march 31 2017 deferred tax liability related basis difference partnership investments march 31 2018 1510 substantially legg masons deferred tax assets relate us federal state uk taxing jurisdictions march 31 2018 us federal deferred tax assets aggregated 550916 realization expected require approximately 3835507 us earnings next 10 years 1324435 must foreign sourced earnings based estimates future taxable income using assumptions consistent used legg masons goodwill impairment testing likely substantially current federal tax benefits relating net operating losses realized respect deferred tax assets relating foreign tax credit carryforwards likely tax benefits relating utilization approximately 1589 foreign taxes credits realized valuation allowance established companys estimates assumptions contemplate changes ownership legg mason stock could certain circumstances limit utilization net operating loss foreign tax credit benefits limitation would impact timing amount net operating loss foreign tax credit benefits ultimately realized expire year ended march 31 2018 federal valuation allowances decreased 6378 compared march 31 2017 primarily result impact tax law ability utilize carryforward foreign tax credits march 31 2018 us state deferred tax assets aggregated approximately 220152 offset valuation allowance 92116 primarily related state net operating loss benefits generated certain jurisdictions cases likely benefits ultimately realized year ended march 31 2018 changes pennsylvania law liberalized annual limitation use net operating losses resulted 62397 increase state deferred tax assets offset valuation allowance 57484 foreign jurisdictions net decrease valuation allowances 1113 fiscal 2018 primarily relates revised estimates realization deferred tax benefits following deferred tax assets valuation allowances relating carryforwards recorded march 31 2018 2017 respectively 1 tax law enacted december 2017 reduced value deferred tax assets related federal net operating loss carryforwards approximately 31787 additionally deferred tax assets related federal net operating loss carryforwards increased 13551 result adoption updated stockbased compensation accounting guidance see note 1 additional information 2 substantially us state net operating losses carryforward fiscal 2036 3 due potential change factors relating apportionment income various states legg masons effective state tax rates subject fluctuation impact value companys deferred tax assets including net operating losses could material impact future effective tax rate company legg mason total gross unrecognized tax benefits approximately 62728 70787 73873 march 31 2018 2017 2016 respectively totals approximately 52772 50462 49629 respectively net federal benefit state tax liabilities amounts unrecognized benefits recognized would favorably impact future income tax provisions effective tax rates fiscal 2018 net impact effective settlement tax examinations recent developments case law expiration statutes limitation certain jurisdictions resulted 16796 previously unrecognized benefits realized reconciliation beginning ending amount unrecognized gross tax benefits years ended march 31 2018 2017 2016 follows although management cannot predict degree certainty timing ultimate resolution matters review various taxing jurisdictions reasonably possible company’s gross unrecognized tax benefits balance may change within next 12 months 2874 result expiration statutes limitations completion tax authorities examinations company accrues interest related unrecognized tax benefits interest expense recognizes penalties operating expense years ended march 31 2018 2017 2016 company reduced interest accruals respect unrecognized tax benefits approximately 3 139 4441 respectively result favorable settlements expiration statutes limitations recalculations march 31 2018 2017 2016 legg mason approximately 1937 2155 1900 respectively accrued interest penalties tax contingencies consolidated balance sheets legg masons prior year tax returns subject examination taxing authorities us uk brazil various jurisdictions following tax years remain open income tax examination significant jurisdictions legg mason subject income taxes fiscal 2016 us federal fiscal 2016 uk calendar year 2008 brazil fiscal 2013 state california fiscal 2008 state new york fiscal 2014 states connecticut maryland company anticipate making significant cash payments settlement audits excess amounts reserved year ended march 31 2017 legg mason implemented restructure offshore holding company structure resulted repatriation approximately 11600 foreign earnings resulted tax benefit approximately 17000 tax law imposed onetime tax foreign earnings unremitted time enactment previously recognized tax provision associated earnings adjusted reflect impact tax law despite tax law changes except noted legg masons continuing intention permanently reinvest substantially accumulated future earnings foreign subsidiaries overseas march 31 2018 legg mason available domestic cash equivalents approximately 88000 374500 remaining undrawn capacity credit agreement meet domestic liquidity needs subject compliance applicable covenants legg mason plans utilize approximately 24000 foreign cash annually next several years supplement amounts anticipates approximately 12000 amount consist debt service payments foreign affiliates remainder provided distribution forecasted future earnings repatriation foreign earnings currently planned accordingly additional us federal income taxes withholding taxes provided however circumstances change legg mason provide pay applicable additional us taxes connection repatriation offshore funds practical time determine income tax liability would result repatriation accumulated foreign earnings 8 commitments contingencies legg mason leases office facilities equipment noncancelable operating leases also multiyear agreements certain services leases service agreements expire varying dates fiscal 2029 certain leases provide renewal options contain escalation clauses providing increased rentals based upon maintenance utility tax increases march 31 2018 minimum annual aggregate rentals operating leases service agreements follows 1 includes 550574 real estate equipment leases 82621 service maintenance agreements minimum rental commitments shown reduced 112507 minimum sublease rentals received future noncancelable subleases approximately 35 due one counterparty lease reserve liability included table space subleased march 31 2018 2017 24188 28821 respectively subtenant defaults sublease legg mason may incur operating charges adjust existing lease reserve liability reflect expected future sublease rentals reduced amounts dependent commercial real estate market time minimum rental commitments shown also include 8716 commitments related space vacated subleases pursued related lease reserve liability also included table 5061 10867 march 31 2018 2017 respectively remains subject adjustment based circumstances real estate markets may require change assumptions actual terms sublease ultimately secured lease reserve liability takes consideration various assumptions including expected amount time take secure sublease agreement prevailing rental rates applicable real estate markets fiscal 2016 fiscal 2017 certain office space permanently vacated connection combination entrust permal fiscal 2017 lease related portion space terminated resulting reductions lease reserve liability totaling 4495 also fiscal 2017 sublease executed headquarters space vacated fiscal 2016 resulting 2700 reduction lease reserve liability terms favorable estimated activity reflected lease reserve liability table lease reserve liability subleased space vacated space subleases pursued included current liabilities noncurrent liabilities consolidated balance sheets table presents summary changes lease reserve liability 1 included occupancy expense consolidated statements income loss 2 includes 9069 related restructuring permal combination entrust year ended march 1 2017 see note 2 additional information following table reflects rental expense operating leases servicing agreements legg mason recognizes rent expense ratably lease period based upon aggregate lease payments lease period determined original lease term without renewals unless exercise lease renewal options reasonably assured also includes periods provided landlord free rent period aggregate lease payments include rental payments specified contract including contractual rent increases reduced lease incentives received landlord including used tenant improvements march 31 2018 legg mason commitments invest 44846 limited partnerships make private investments commitments expected outstanding funded required end respective investment periods ranging fiscal 2030 also connection acquisition clarion partners legg mason committed provide 100000 seed capital clarion partners products legg mason also committed contribute 5000 additional working capital financial guard paid twoyear period following acquisition 2500 paid march 31 2018 march 31 2018 legg mason various commitments pay contingent consideration relating business acquisitions following table presents summary maximum remaining contingent consideration changes contingent consideration liability legg masons recent acquisitions see note 2 additional details regarding significant acquisition 1 using applicable exchange rate march 31 2018 amounts denominated currencies us dollar 2 includes amounts related two small acquisitions completed december 2017 acquisition pk investments december 31 2015 normal course business legg mason enters contracts contain variety representations warranties provide general indemnifications considered financial guarantees relevant accounting guidance legg mason’s maximum exposure arrangements unknown would involve future claims may made legg mason yet occurred legg mason subject customer complaints also named defendant various legal actions arising primarily asset management securities brokerage investment banking activities including certain class actions primarily allege violations securities laws seek unspecified damages could substantial normal course business legg mason also received subpoenas currently involved governmental industry selfregulatory agency inquiries investigations time proceedings involving asset management activities accordance guidance accounting contingencies legg mason established provisions estimated losses pending complaints legal actions investigations proceedings probable loss incurred reasonable estimate loss made legg mason cannot estimate reasonably possible loss range loss associated matters litigation proceedings including described customer complaints legal actions inquiries proceedings investigations inability provide reasonably possible amount range losses uncertainty ultimate outcome matter liability damage issues developed point legg mason conclude reasonable possibility loss meaningful amount range possible losses numerous aspects customer complaints legal actions inquiries proceedings investigations prevent legg mason estimating related amount range reasonably possible losses aspects include among things nature matters significant relevant facts known uncertain dispute damages sought specified uncertain unsupportable unexplained addition legal actions discovery may yet started may complete may conclusive meaningful settlement discussions may occurred regulatory matters investigations may run course without clear indication wrongdoing fault conclusion managements opinion adequate accrual made march 31 2018 provide probable losses may arise matters company could reasonably estimate amount legg masons financial condition results operations cash flows could materially affected period probable losses become apparent matter ultimately resolved addition ultimate costs litigationrelated charges vary significantly periodtoperiod depending factors market conditions size volume customer complaints claims including class action suits recoveries indemnification contribution insurance reimbursement reductions compensation revenue share arrangements see note 18 subsequent event discussion regulatory matter fiscal 2018 legg mason accrued current liability 67000 operating charge related probable loss march 31 2018 2017 legg masons liability losses contingencies 67225 700 respectively fiscal 2018 2017 2016 legg mason incurred charges relating litigation proceedings approximately 67500 1100 250 respectively described note 2 legg mason may obligated settle noncontrolling interests related certain affiliates march 31 2018 affiliate noncontrolling interests excluding amounts related management equity plans aggregated 573950 addition march 31 2018 estimated redemption value units affiliate management equity plans aggregated 89428 see notes 11 14 additional information regarding affiliate management equity plans noncontrolling interests respectively 9 employee benefits legg mason subsidiaries maintains various defined contribution plans covering substantially employees plans legg mason make two types discretionary contributions one profit sharing contribution eligible plan participants based percentage qualified compensation match employee 401k contributions matches range 50 100 employee 401k contributions maximum lesser 6 employee compensation specified amount internal revenue service limit corporate profit sharing matching contributions together contributions made subsidiary plans totaled 38278 37249 33152 fiscal 2018 2017 2016 respectively addition employees make voluntary contributions certain plans connection acquisition martin currie october 1 2014 legg mason assumed obligations martin curries defined benefit pension plan fully discussed note 2 10 capital stock march 31 2018 authorized numbers common preferred shares 500000 4000 respectively march 31 2018 2017 8854 4111 shares common stock respectively reserved issuance legg masons equity plans january 2015 legg masons board directors approved share repurchase authorization 1000000 additional repurchases legg mason common stock previously discussed december 22 2017 legg mason purchased retired 5568 shares legg mason common stock shanda aggregate purchase price 225490 legg masons board directors approved purchase shares utilizing remaining 169019 legg mason common stock previously authorized purchase january 2015 authorization authorizing purchase additional 56471 legg mason common stock complete transaction march 31 2018 purchases legg mason common stock authorized addition fiscal 2018 2017 2016 legg mason purchased retired 6636 11697 4537 shares common stock respectively 253649 381672 209632 respectively open market purchases retired 348 370 412 shares respectively common stock 13233 12139 21637 respectively net share settlements deferred compensation award vesting changes common stock years ended march 31 2018 2017 2016 respectively follows dividends declared per share 112 088 080 fiscal 2018 2017 2016 respectively dividends declared paid march 31 2018 2017 2016 23623 21153 22038 respectively included current liabilities consolidated balance sheets 11 stockbased compensation see note 1 regarding updated stockbased compensation accounting guidance effective april 1 2017 legg masons stockbased compensation includes stock options employee stock purchase plan marketbased performance shares payable common stock restricted stock awards units affiliate management equity plans deferred compensation payable stock effective august 1 2017 legg masons stockholders approved new equity incentive plan total 6500 shares plus shares remaining prior plan available issuance shares available issuance equity incentive stock plan march 31 2018 8448 options legg mason’s employee stock plans granted prices less 100 fair market value options generally exercisable equal increments four five years expire within eight 10 years date grant discussed components legg masons total stockbased compensation expense years ended march 31 2018 2017 2016 follows stock options stock option transactions legg masons equity incentive plans years ended march 31 2018 2017 summarized total intrinsic value options exercised years ended march 31 2018 2017 2016 4647 2289 5811 respectively march 31 2018 aggregate intrinsic value options outstanding 24536 following information summarizes legg masons stock options outstanding march 31 2018 march 31 2018 2017 2016 options exercisable 2867 2688 2544 shares respectively weightedaverage exercise price 3764 3504 3222 respectively stock options exercisable march 31 2018 weighted average remaining contractual life 36 years march 31 2018 aggregate intrinsic value exercisable shares 18124 following summarizes legg masons stock options exercisable march 31 2018 following information summarizes unvested stock options legg masons equity incentive plan year ended march 31 2018 years ended march 31 2018 2017 2016 income tax benefits related stock options 2715 3178 3730 respectively unamortized compensation cost related unvested options 1570 shares march 31 2018 7618 expected recognized weightedaverage period 13 years cash received exercises stock options legg masons equity incentive plans 14072 8988 9516 years ended march 31 2018 2017 2016 respectively tax benefit expected realized tax deductions option exercises totaled 1408 725 1962 years ended march 31 2018 2017 2016 respectively weightedaverage fair value servicebased stock options granted years ended march 31 2018 2017 2016 using blackscholes option pricing model 841 778 1126 per share respectively following weightedaverage assumptions used model grants years ended march 31 2018 2017 2016 legg mason uses equally weighted combination implied historical volatility measure expected volatility calculating blackscholes option values restricted stock restricted stock restricted stock unit transactions years ended march 31 2018 2017 2016 summarized restricted stock restricted stock unit transactions reflected table noncash transactions years ended march 31 2018 2017 2016 legg mason recognized income tax benefits related restricted stock restricted stock unit awards 20972 21138 20597 respectively unamortized compensation cost related unvested restricted stock restricted stock unit awards 3299 shares march 31 2018 72187 expected recognized weightedaverage period 16 years affiliate management equity plans connection acquisition clarion partners april 2016 discussed note 2 legg mason implemented management equity plan management team clarion partners entitles certain key employees participate 15 future growth clarion partners enterprise value subject appropriate discounts subsequent date grant initial grant plan vested immediately related grantdate fair value 15200 determined independent valuation recognized compensation benefits expense consolidated statement income loss reflected consolidated balance sheet redeemable noncontrolling interest three months ended june 30 2016 future grants plan vest 20 annually five years result recognition additional compensation expense related vesting period subject various conditions including passage time vested plan units put legg mason settlement fair value legg mason also call plan units generally post employment settlement fair value march 31 2018 estimated aggregate redemption amount units plan currently redeemable 13800 effective march 1 2016 legg mason executed agreements management existing whollyowned subsidiary royce regarding employment arrangements royce management revised revenue sharing implementation management equity plan royces key employees management equity plan minority equity interests equivalent 19 interest royce entity issued management team interests allow holders receive quarterly distributions portion royces pretax income amounts equal percentage ownership represented equity hold subject payment legg masons revenue share reasonable expenses plan permits additional grants plan 33 percentage points revenue future grants vest immediately upon issuance related grantdate fair value equity units recognized compensation benefits expense consolidated statements income loss reflected consolidated balance sheets nonredeemable noncontrolling interest march 31 2018 estimated aggregate redemption amount units plan currently redeemable 27731 march 31 2014 legg mason implemented management equity plan granted units key employees subsidiary clearbridge investments llc clearbridge entitle participate 15 future growth clearbridge enterprise value subject appropriate discounts subsequent grant date independent valuation determined aggregate cost award approximately 16000 recognized compensation benefits expense consolidated statements income loss related vesting periods march 2019 total compensation expense related clearbridge affiliate management equity plan 3103 3285 3271 years ended march 31 2018 2017 2016 respectively arrangement provides onehalf cost absorbed clearbridge incentive pool vested plan units put legg mason settlement fair value beginning one year holder terminates employment legg mason also call plan units generally post employment settlement fair value changes control legg mason clearbridge impact vesting settlement provisions units however upon sale substantially clearbridge assets vesting units would accelerate participants would receive fair value payment respect interests plan future grants additional plan units dilute participation existing outstanding units 15 future growth respective affiliates enterprise value subsequent related future grant date additional compensation expense would incurred future grants entitle plan participants collectively aggregate 15 future growth clearbridge enterprise value upon vesting grantdate fair value vested plan units reflected consolidated balance sheets redeemable noncontrolling interests adjustment additional paidin capital thereafter redeemable noncontrolling interests continue adjusted ultimate maximum estimated redemption value expected term retained earnings adjustments march 31 2018 estimated aggregate redemption amount vested units clearbridge plan currently redeemable approximately 47897 june 28 2013 legg mason implemented similar management equity plan key employees permal independent valuation determined aggregate cost awards approximately 9000 recognized compensation benefits expense consolidated statements income loss related vesting period december 2017 april 2016 conjunction permal restructuring preparation combination entrust permal management equity plan liquidated payment 7150 participants remaining 3481 unamortized cost expensed year ended march 31 2017 compensation expense related permal affiliate management equity plan 1513 year ended march 31 2016 legg mason qualified employee stock purchase plan covering substantially us employees shares common stock purchased open market behalf participating employees subject 4500 total share limit plan purchases made payroll deductions legg mason provides 15 contribution towards purchases recorded compensation benefits consolidated statements income loss years ended march 31 2018 2017 2016 approximately 128 164 134 shares respectively purchased open market behalf participating employees legg mason also equity plan nonemployee directors current equity plan directors may elect receive shares stock restricted stock units shares restricted stock units issuable equity plan limited 625 aggregate 460 427 shares issued march 31 2018 2017 respectively march 31 2018 2017 2016 nonemployee directors held 80 66 53 restricted stock units respectively vest grant date therefore included unvested shares restricted stock restricted stock units table years ended march 31 2018 2017 2016 nonemployee directors granted 12 11 9 restricted stock units respectively 19 30 16 shares common stock respectively discussed note 2 upon acquisition clarion partners april 2016 legg mason granted certain key employees clarion partners total 716 performancebased legg mason restricted share units included unvested shares restricted stock restricted stock units table aggregate fair value 11121 included purchase price restricted share units vest upon clarion partners achieving certain level ebitda defined purchase agreement within designated period closing acquisition may 2017 2016 legg mason granted certain executive officers total 111 182 performance share units respectively part fiscal 2017 fiscal 2016 incentive awards aggregate value 3503 3528 respectively vesting performance share units granted may 2017 2016 number shares payable vesting determined based legg mason’s relative total stockholder return threeyear period ending march 31 2020 2019 respectively grant date fair value per unit may 2017 2016 performance share units 3142 1936 respectively estimated grant date using monte carlo pricing model following assumptions fiscal 2012 legg mason established longterm incentive plan ltip equity incentive plan provided additional element compensation based performance determined achievement predefined amount legg mason’s cumulative adjusted earnings per share three year performance period ltip executive officers granted cash value performance units quarter ended september 2012 total targeted amount 1850 september 2012 grant performance period ended march 31 2015 resulted payment amount 1000 settled cash may 31 2015 deferred compensation payable shares legg mason common stock granted certain employees elective plan vesting plan immediate plan provides discounts 10 contributions dividends since january 1 2015 additional contributions plan remaining 241 shares reserved future dividend distributions fiscal 2018 2017 2016 legg mason issued 14 17 12 shares respectively plan weightedaverage fair value per share grant date 3763 2960 4182 respectively undistributed shares issued plan held rabbi trust assets rabbi trust consolidated employer value employers stock held rabbi trust classified stockholders equity accounted manner similar treasury stock therefore shares legg mason issued rabbi trust corresponding liability related deferred compensation plan presented components stockholders equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2018 2017 2016 462 540 583 respectively 12 earnings per share basic eps calculated dividing net income loss attributable legg mason inc adjusted removing earnings allocated participating securities weightedaverage number shares outstanding excludes participating securities legg mason issues employees restricted stock restricted stock units deemed participating securities prior vesting related unvested restricted sharesunits entitle holder nonforfeitable dividend rights circumstance accounting guidance requires “twoclass method” eps calculations excludes earnings potentially distributed undistributed allocated participating securities allocate losses participating securities diluted eps similar basic eps effect potential common shares included calculation unless potential common shares antidilutive periods net loss potential common shares participating securities considered antidilutive excluded calculation discussed note10 fiscal 2018 2017 2016 legg mason purchased retired 6636 11697 4537 shares common stock respectively open market purchases fiscal 2018 also purchased retired 5568 shares common stock shanda addition fiscal 2018 2017 2016 legg mason retired 348 370 412 shares common stock net share settlements deferred compensation award vesting total retired shares reduced weightedaverage shares outstanding 6050 6335 2934 shares years ended march 31 2018 2017 2016 respectively par value shares repurchased charged common stock excess purchase price par first charged additional paidin capital remaining balance charged retained earnings following table presents computations basic diluted eps weightedaverage shares exclude weightedaverage unvested restricted shares deemed participating securities 3327 3335 2831 years ended march 31 2018 2017 2016 respectively diluted eps calculations years ended march 31 2018 2017 2016 exclude potential common shares issuable 14205 warrants issued connection repurchase convertible notes may 2012 market price legg mason common stock exceed exercise price therefore warrants would antidilutive warrants expired unexercised july 2017 options purchase 1952 3454 shares years ended march 31 2018 2017 respectively included computation diluted eps presumed proceeds exercising options including related income tax benefits exceed average price common shares period therefore options deemed antidilutive diluted eps calculation year ended march 31 2016 excludes 814 potential common shares antidilutive due net loss year market performancebased awards excluded potential dilution designated market performance condition met unvested restricted shares years ended march 31 2018 2017 2016 antidilutive therefore impact diluted eps 13 accumulated comprehensive loss accumulated comprehensive loss includes cumulative foreign currency translation adjustments gains losses defined benefit pension plans change accumulated translation adjustments fiscal 2018 2017 primarily resulted impact changes british pound singaporean dollar brazilian real japanese yen relation us dollar net assets legg masons subsidiaries uk singapore brazil japan pound singaporean dollar real yen functional currencies respectively summary legg masons accumulated comprehensive loss march 31 2018 2017 follows significant amounts reclassified accumulated comprehensive loss consolidated statements income loss years ended march 31 2018 2017 2016 except follows discussed note 2 year ended march 31 2018 492 previously unrecognized losses defined benefit pension plan reclassified compensation benefits consolidated statements income loss year ended march 31 2017 2493 cumulative foreign currency translation related sale legg mason poland 2718 net income tax benefit 1708 realized settlement termination interest rate swap described note 6 reclassified nonoperating income expense consolidated statements income loss year ended march 31 2016 405 net income tax provision 233 realized termination reverse treasury rate lock contract also described note 6 reclassified nonoperating income expense consolidated statements income loss 14 noncontrolling interests net income loss attributable noncontrolling interests years ended march 31 included following amounts total redeemable nonredeemable noncontrolling interests years ended march 31 2018 2017 2016 included following amounts 1 principally related vie seeded investment products 2 related royce management equity plan 3 includes impact related adoption updated consolidation accounting guidance discussed note 1 redeemable noncontrolling interests affiliate exclusive management equity plans years ended march 31 2018 2017 included following amounts 15 derivatives hedging legg mason uses currency forwards economically hedge risk movements exchange rates primarily us dollar british pound australian dollar singapore dollar japanese yen euro derivative transactions legg mason certain legally enforceable rights setoff governed international swaps derivative association isda master agreements derivative transactions legg mason one isda master agreement significant counterparties covers transactions counterparty respective isda agreements provides settlement netting closeout netting legg mason counterparty legally enforceable rights setoff assets recorded consolidated balance sheets march 31 2018 2017 4904 2718 respectively liabilities recorded consolidated balance sheets march 31 2018 2017 6446 4522 respectively legg mason also uses market hedges certain seed capital investments entering futures contracts sell index funds benchmark hedged seed capital investments year ended march 31 2018 legg mason entered various total return swap arrangements financial intermediaries respect two legg mason sponsored etfs resulted investments financial intermediaries respective etf terms total return swap arrangements legg mason receives related investment gains losses underlying shares etf pays floating rate value underlying shares total return swap arrangements allows either party terminate part arrangement provides automatic termination upon occurrence certain events financial intermediary counterparty may hedge total return swap position investment etf financial intermediaries purchased interests respective legg mason etf date transactions terms total return swap arrangements aggregate counterparty investment related etf date transaction aggregate notional amount march 31 2018 follows discussed notes 1 17 total return swap arrangements create variable interests underlying funds legg mason deemed primary beneficiary accordingly legg mason consolidates etf products connection arrangements legg mason executed futures contracts notional amounts totaling 49175 partially hedge gains losses recognized total return swaps discussed note 6 april 2016 legg mason executed 467year amortizing interest rate swap terminated august 2016 also april 2016 legg mason terminated another previously existing interest rate swap exception two interest rate swap contracts discussed note 6 legg mason designated derivatives hedging instruments accounting purposes periods ended march 31 2018 2017 2016 addition total return swap arrangements related futures contracts discussed march 31 2018 legg mason open currency forward contracts aggregate notional amounts totaling 285665 open futures contracts relating seed capital investments aggregate notional amounts totaling 140375 exception total return swap arrangements related futures contracts amounts representative level nonhedge designation derivative activity throughout years ended march 31 2018 2017 march 31 2018 weightedaverage remaining contract terms currency forward contracts four months futures contracts relating seed capital investments three months following table presents derivative assets related offsets march 31 2018 following table presents derivative liabilities related offsets march 31 2018 following table presents derivative assets related offsets march 31 2017 following table presents derivative liabilities related offsets march 31 2017 following table presents gains losses recognized consolidated statements income loss derivative instruments described currency forward contracts futures forward contracts seed capital investments included economic hedges interest rate market risk certain operating investing activities legg mason including foreign exchange risk acquisition contingent consideration gains losses derivative instruments substantially offset gains losses economically hedged items 1 relates currency forward executed august 2015 closed october 2015 connection october 2015 acquisition rare infrastructure 16 business segment information legg mason global asset management company provides investment management related services wide array clients company operates one reportable business segment global asset management global asset management provides investment advisory services institutional individual clients companysponsored investment funds primary sources revenue global asset management investment advisory distribution administrative fees typically calculated percentage aum vary based upon factors type underlying investment product type services provided addition performance fees may earned certain investment advisory contracts exceeding performance benchmarks revenues geographic location primarily based geographic location advisor domicile fund families managed legg mason necessarily reflect customer resides currency revenues denominated table reflects revenues longlived assets geographic region march 31 year ended march 31 2018 operating revenues reported united kingdom table exposure single nonus currency excess 30 total uk operating revenues addition march 31 2018 percentage legg masons longterm aum currency exposure aum invested securities denominated british pound euro applicable less 5 british pound euro march 31 2018 legg masons longterm aum country exposure aum invested securities entities domiciled united kingdom eurozone applicable less 5 uk approximately 5 eurozone 17 variable interest entities consolidated investment vehicles accordance financial accounting standards legg mason consolidates certain sponsored investment products designated civs presented table march 31 2018 2017 2016 legg mason concluded primary beneficiary certain vies held significant financial interests funds addition year ended march 31 2018 legg mason entered various total return swap arrangements financial intermediaries respect two legg mason sponsored etfs terms total return swaps legg mason absorbs gains losses underlying etf investments financial intermediaries therefore variable interests two etfs deemed primary beneficiary etf determined primary beneficiary vies legg mason consolidated designated following funds civs consolidated balance sheets march 31 2018 2017 2016 na applicable 1 represents legg masons maximum risk loss excluding uncollected advisory fees 2 foreign mutual fund trusts accounted vres consolidation guidance effective prior april 1 2016 see note 1 additional information 3 adoption updated consolidation guidance resulted deconsolidation 13 employeeowned funds april 1 2016 legg mason longer variable interest 13 funds see note 1 additional information 4 total return swap arrangements legg mason receives related investment gains losses investments two legg masons etfs notional amounts totaling 50071 see note 15 additional information regarding total return swaps assets civs primarily comprised investment securities investors creditors civs recourse general credit assets legg mason beyond investment funds legg mason also consolidates certain vre products seed capital investments legg mason maintains controlling financial interest product see notes 1 3 additional information regarding vies vres consolidation investment products following tables reflect impact civs consolidated sponsored investment products consolidated balance sheets march 31 2018 2017 consolidated statements income loss years ended march 31 2018 2017 2016 consolidating balance sheets 1 represents consolidated sponsored investment products vres designated civs consolidating statements income loss 1 represents consolidated sponsored investment products vres designated civs 1 represents consolidated sponsored investment products vres designated civs 1 represents consolidated sponsored investment products vres designated civs nonoperating income expense includes interest income interest expense net gains losses investments consolidation civs impact net income loss attributable legg mason inc march 31 2018 2017 financial assets civs carried fair value totaling 128397 33991 respectively valued using level 1 inputs totaling 20692 24734 respectively valued using nav practical expedient legg mason financial liabilities civs carried fair value march 31 2018 2017 transfers level 1 level 2 either years ended march 31 2018 2017 navs used practical expedient civs provided investees derived fair values underlying investments respective reporting dates following table summarizes march 31 2018 2017 nature investments related liquidation restrictions factors may impact ultimate value realized na applicable 1 redemption restrictions 6 daily redemption 8 monthly redemption 50 quarterly redemption 36 subject three fiveyear lockup side pocket provisions march 31 2018 2017 vies legg mason holds variable interest primary beneficiary legg masons carrying value maximum risk loss follows 1 amounts related investments proprietary fund products 2 includes equity investments company made required make earned uncollected management fees companys total aum unconsolidated vies 31809837 26735285 march 31 2018 2017 respectively assets vies primarily comprised cash equivalents investment securities liabilities primarily comprised various expense accruals vies consolidated legg mason power direct significant economic activities entity rightsobligations associated benefitslosses could significant entity 18 subsequent event legg mason expects shortly complete negotiations us department justice “doj” sec staff resolve foreign corrupt practices act investigation concerning activities former permal business connection managing assets libyan governmental entities structures established thirdparty financial institution investments made calendar years 2005 2007 terminated later 2012 matter relate current business activities client relationships legg mason affiliates focused actions former employees permal left firm four years ago based discussions date legg mason believes resolution matter result restrictions ongoing business activities affiliates legg mason accrued 67000 charge earnings matter year ended march 31 2018 representing legg mason’s current estimated liability settlement matter accrual based part net revenues approximately 31000 earned former permal business managing assets libyan governmental entities resolution including actual amount payments required ultimately settle matter uncertain may higher amounts legg mason currently accrued subject final review approval doj sec commissioners legg mason’s board directors quarterly financial data dollars thousands except per share amounts unless otherwise noted unaudited 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results may 25 2018 closing price legg masons common stock 3877 1 due rounding quarterly results total amounts fiscal year may differ immaterially annual results item 9 nannannannannannanitem 15 exhibits financial statement schedules reports form 8k documents filed part report 1 following consolidated financial statements included item 8 report schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements b reports form 8k filed quarter ended march 31 2003 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer date june 18 2003 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated certification raymond mason certify 1 reviewed annual report form 10k legg mason inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weakness internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weakness date june 18 2003 raymond mason raymond mason chairman board president chief executive officer principal executive officer certification charles j daley jr certify 1 reviewed annual report form 10k legg mason inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weakness internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weakness date june 18 2003 charles j daley jr charles j daley jr senior vice president treasurer principal financial accounting officer report independent accountants financial statement schedules report consolidated financial statements legg mason inc subsidiaries included page 47 form 10k connection audits financial statements also audited related financial statement schedules listed index page 72 form 10k opinion financial statement schedules referred considered relation basic financial statements taken whole present fairly material respects information required included therein pricewaterhousecoopers llp baltimore maryland may 1 2003 s1 schedule legg mason inc parent company statements financial condition dollars thousands see notes financial statements s2 schedule legg mason inc parent company statements earnings comprehensive income dollars thousands see notes financial statements s3 schedule legg mason inc parent company statements cash flows dollars thousands supplement cash disclosures interest payments 35188 2003 20844 2002 6500 2001 income tax payments made 2003 2002 2001 see notes financial statements s4 legg mason inc parent company notes financial statements amounts thousands 1 basis presentation parent company financial statements include accounts legg mason inc “parent company” addition assets liabilities subsidiaries presented investments advances subsidiaries notes consolidated financial statements legg mason inc subsidiaries included item 8 report include disclosures respect parent company 2 transactions affiliates parent company interest income 2003 2002 2001 includes 3131 6890 10324 respectively arising promissory notes payable parent company subsidiaries promissory notes 38511 march 31 2003 76027 march 31 2002 included investments advances subsidiaries promissory notes payable march 31 2003 consisted 36265 note interest rate 655 due april 1 2015 2246 note interest rate 525 due january 6 2004 parent company interest expense 2003 2002 includes 25 256 respectively arising promissory notes payable parent company subsidiaries notes 1000 march 31 2003 2002 included investments advances subsidiaries parent company issued shares legg mason wood walker “lmww” wholly owned subsidiary connection deferred compensation plans value shares issued lmww fiscal 2003 2002 2001 14172 5570 23280 respectively income tax payments made lmww 3 firm investments firm investments include investments marketable private equity securities limited partnerships make private equity investments unrealized gains losses marketable equity securities included accumulated comprehensive loss unless “other temporary” impairment determined exist case unrealized loss charged earnings realized unrealized gains losses private equity securities included revenue parent company shares ratably income expenses investments limited partnerships records interest equity method 4 intangible assets goodwill april 2001 parent company adopted sfas 142 “goodwill intangible assets” sfas 142 provides goodwill longer amortized value identifiable intangible asset must amortized useful life goodwill intangible assets tested impairment quarterly parent company completed testing goodwill intangible assets determined impairment march 31 2003 2002 intangible assets consisting asset management contracts reported cost net accumulated amortization 1706 1073 march 31 2003 2002 respectively estimated amortization expense five years subsequent march 31 2003 633 per year carrying value goodwill 12221 9200 march 31 2003 2002 respectively attributable asset management reporting segment 5 longterm debt parent company’s longterm debt march 31 2003 consisted 424143 675 senior notes 262746 zerocoupon contingent convertible senior notes 99864 650 senior notes parent company issued longterm debt fund asset management acquisitions july 2 2001 parent company issued 425000 principal amount senior notes due july 2 2008 bear interest 675 notes issued discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs june 6 2001 parent company issued 567000 principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 resulting gross proceeds approximately 250000 convertible notes issued private placement qualified institutional buyers s5 initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year upon certain events including sale price parent company’s common stock reaching certain thresholds convertible notes rated specified credit ratings convertible notes called redemption note convertible 77062 shares parent company’s common stock subject adjustment parent company may redeem convertible notes cash june 6 2006 accreted value addition parent company may required repurchase convertible notes accreted value option holders june 6 2005 2007 2011 every five years thereafter 2026 upon change control parent company occurs june 6 2006 repurchases paid cash shares parent company’s common stock combination net proceeds offering 244375 payment debt issuance costs debt issuance costs included assets amortized twoyear period date first repurchase option holders approximately 44 million shares common stock reserved issuance upon conversion parent company also outstanding 100000 principal amount senior notes due february 15 2006 bear interest 650 notes issued discount yield 657 march 31 2003 parent company 575000 available issuance additional debt equity securities pursuant shelf registration statement march 31 2003 aggregate maturities longterm debt based contractual terms follows 6 deferred compensation stock trust accordance emerging issues task force issue 9714 “accounting deferred compensation arrangements amounts held rabbi trust invested” assets rabbi trusts consolidated employer value employer’s stock held rabbi trusts classified stockholders’ equity generally accounted manner similar treasury stock therefore shares parent company issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders’ equity employee stock trust deferred compensation employee stock trust respectively shares held plan march 31 2003 2002 3370 3044 respectively 7 stock repurchase fiscal year ended march 31 2002 board directors approved stock repurchase plan parent company authorized repurchase 3 million shares open market discretion fiscal years ended march 31 2003 2002 parent company repurchased retired 885 shares 41963 137 shares 7130 respectively 8 commitments contingencies guarantees march 31 2003 parent company contingent obligations 807797 related business acquisitions payable march 31 2007 financial accounting standards board interpretation number 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” “fin 45” expands disclosure requirements made guarantor interim annual financial statements regarding obligations certain guarantees issued guarantees issued modified december 31 2002 fin 45 also requires certain circumstances recognition inception guarantee liability fair value obligation result issuing guarantee guarantees entity’s future performance within scope fin 45 normal course business parent company enters contracts contain variety representations warranties provide general indemnifications parent company’s maximum exposure arrangements unknown would involve future claims may made parent company yet occurred s6 parent company guarantor various agreements entered subsidiaries unconsolidated joint venture lease office facilities equipment aggregate commitment noncancelable lease agreements expire varying dates 2014 97019 parent company required make payment guaranty unconsolidated joint venture eligible seek partial recovery 3500 party joint venture parent company guarantees secured warehouse line credit used subsidiary fund commercial mortgage loans escrow deposits collateralize warehouse line credit march 31 2003 24770 outstanding borrowings facility parent company capital commitments investment partnerships limited partner march 31 2003 27500 capital commitments range fiscal 2004 2011 insurance policy certain subsidiaries parent company guarantees reimburse insurance carrier claims incurred policy’s limit 1225 march 31 2003 parent company recorded liability obligations guarantees described s7item 15 exhibits financial statement schedules reports form 8k documents filed part report 1 following consolidated financial statements included item 8 report 2 financial statement schedule included pages s1 s7 report schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements b reports form 8k filed quarter ended march 31 2004 however report form 8k reporting item 12 furnished securities exchange commission january 21 2004 report contained consolidated statements earnings quarters nine months ended december 31 2003 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer date june 4 2004 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm financial statement schedule report consolidated financial statements legg mason inc subsidiaries included page 54 form 10k connection audits financial statements also audited related financial statement schedule listed index page 80 form 10k opinion financial statement schedule referred considered relation basic financial statements taken whole present fairly material respects information required included therein pricewaterhousecoopers llp baltimore maryland may 27 2004 s1 schedule legg mason inc parent company condensed statements financial condition dollars thousands see notes condensed financial statements s2 schedule legg mason inc parent company condensed statements earnings comprehensive income dollars thousands see notes condensed financial statements s3 schedule legg mason inc parent company condensed statements cash flows dollars thousands see notes condensed financial statements s4 legg mason inc parent company condensed notes financial statements amounts thousands 1 basis presentation parent company condensed financial statements include accounts legg mason inc “parent company” addition assets liabilities subsidiaries presented investments advances subsidiaries notes consolidated financial statements legg mason inc subsidiaries included item 8 report include disclosures respect parent company 2 transactions affiliates parent company interest income 2004 2003 2002 includes 1457 3131 6890 respectively arising promissory notes receivable promissory notes 2198 march 31 2004 38511 march 31 2003 included investments advances subsidiaries promissory note payable subsidiary 36265 settled november 2003 issuance preferred stock parent company march 31 2004 outstanding promissory note payable interest rate 485 parent company interest expense 2004 2003 includes 25 respectively arising promissory notes payable parent company subsidiaries notes 1000 march 31 2004 2003 included investments advances subsidiaries parent company issued shares legg mason wood walker “lmww” wholly owned subsidiary connection deferred compensation plans value shares issued lmww fiscal 2004 2003 2002 8466 14172 5570 respectively income tax payments made lmww 3 firm investments firm investments include investments marketable private equity securities limited partnerships make private investments unrealized gains losses marketable equity securities included accumulated comprehensive income loss unless “otherthantemporary” impairment determined exist case unrealized loss charged earnings realized gains losses marketable equity securities realized unrealized gains losses private equity securities included revenue parent company shares ratably income expenses investments limited partnerships records interest equity method 4 intangible assets goodwill statement financial accounting standards 142 “goodwill intangible assets” provides goodwill longer amortized value identifiable intangible asset must amortized useful life goodwill intangible assets tested impairment quarterly based upon analysis performed march 31 2004 2003 impairment charges required intangible assets consisting asset management contracts reported cost net accumulated amortization 2340 1706 march 31 2004 2003 respectively estimated amortization expense five years subsequent march 31 2004 633 per year s5 carrying value goodwill 14136 12221 march 31 2004 2003 respectively attributable asset management subsidiaries change carrying value goodwill related purchase increased ownership interest barrett associates inc 5 longterm debt parent company’s longterm debt march 31 2004 consisted 424306 675 senior notes 270021 zerocoupon contingent convertible senior notes 99911 650 senior notes parent company issued longterm debt fund asset management acquisitions july 2 2001 parent company issued 425000 principal amount senior notes due july 2 2008 bear interest 675 notes issued discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs june 6 2001 parent company issued 567000 principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 resulting gross proceeds approximately 250000 convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year quarter ended december 31 2003 price parent company’s common stock exceeded conversion trigger price 7315 least 20 trading days last 30 trading days quarter result note became convertible 77062 shares parent company’s common stock subject adjustment commencing january 2 2004 may result issuance additional 44 million shares parent company may redeem convertible notes cash june 6 2006 accreted value addition parent company may required repurchase convertible notes accreted value option holders june 6 2005 2007 2011 every five years thereafter 2026 upon change control parent company occurs june 6 2006 repurchases paid cash shares parent company’s common stock combination net proceeds offering 244375 payment debt issuance costs debt issuance costs included assets amortized twoyear period ended june 6 2003 parent company also outstanding 100000 principal amount senior notes due february 15 2006 bear interest 650 notes issued discount yield 657 march 31 2004 parent company 575000 available issuance additional debt equity securities pursuant shelf registration statement march 31 2004 aggregate maturities longterm debt based contractual terms follows 6 deferred compensation stock trust accordance emerging issues task force issue 9714 “accounting deferred compensation arrangements amounts held rabbi trust invested” assets rabbi trusts s6 consolidated employer value employer’s stock held rabbi trusts classified stockholders’ equity generally accounted manner similar treasury stock therefore shares parent company issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders’ equity employee stock trust deferred compensation employee stock trust respectively shares held plan march 31 2004 2003 3394 3370 respectively 7 stock repurchase fiscal year ended march 31 2002 board directors approved stock repurchase plan parent company authorized repurchase 3 million shares open market discretion fiscal years ended march 31 2004 2003 2002 parent company repurchased retired 789 shares 65399 885 shares 41963 137 shares 7130 respectively 8 commitments contingencies guarantees march 31 2004 parent company contingent obligations 806400 related business acquisitions payable march 31 2007 financial accounting standards board interpretation number 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” “fin 45” expands disclosure requirements made guarantor regarding obligations certain guarantees issued fin 45 requires certain circumstances recognition inception guarantee liability fair value obligation result issuing guarantee guarantees entity’s future performance within scope fin 45 parent company required record liability guarantees subsidiaries’ obligations normal course business connection sale certain assets legg mason real estate services inc parent company enters contracts contain variety representations warranties provide general indemnifications parent company’s maximum exposure arrangements unknown would involve future claims may made parent company yet occurred parent company guarantor various agreements entered subsidiaries unconsolidated joint venture lease office facilities equipment aggregate commitment noncancelable lease agreements expire varying dates 2014 119897 parent company required make payment guaranty unconsolidated joint venture eligible seek partial recovery 3077 party joint venture insurance policy certain subsidiaries parent company guarantees reimburse insurance carrier claims incurred policy’s limit 1225 subsidiary parent company investor captive insurance company provide excess securities investors protection corporation coverage parent company provided guarantee event claim incurred subsidiary cannot pay march 31 2004 parent company recorded liability obligations guarantees described parent company became guarantor april 2004 20000 loan facility used one subsidiaries finance tenant improvements real property tenant improvements purchased loan facility pledged collateral outstanding balance parent company capital commitments investment partnerships limited partner march 31 2004 18055 capital commitments range fiscal 2005 2011 s7item 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated statements earnings consolidated statements financial condition consolidated statements changes stockholders’ equity consolidated statements comprehensive income consolidated statements cash flows notes consolidated financial statements 2 financial statement schedule included pages s1 s8 report independent registered public accounting firm financial statement schedule condensed financial statements registrant schedules consolidated financial statements provision made accounting regulations securities exchange commission applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer date june 2 2005 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm financial statement schedule board directors legg mason inc audits consolidated financial statements management’s assessment effectiveness internal control financial reporting effectiveness internal control financial reporting referred report dated june 2 2005 appearing form 10k legg mason inc also included audit financial statement schedule listed item 15a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements baltimore maryland june 2 2005 s1 schedule legg mason inc parent company condensed statements financial condition dollars thousands see notes condensed financial statements s2 schedule legg mason inc parent company condensed statements earnings comprehensive income dollars thousands see notes condensed financial statements s3 schedule legg mason inc parent company condensed statements cash flows dollars thousands supplement cash disclosures interest payments 35188 fiscal years 2005 2004 2003 income tax payments made fiscal 2005 2004 2003 see notes condensed financial statements s4 legg mason inc parent company condensed notes financial statements amounts thousands 1 basis presentation parent company financial statements include accounts legg mason inc “parent company” addition assets liabilities subsidiaries presented investments advances subsidiaries notes consolidated financial statements legg mason inc subsidiaries included item 8 report include disclosures respect parent company 2 transactions affiliates related parties parent company interest income fiscal 2005 2004 2003 includes 258 1457 3131 respectively arising promissory notes receivable promissory notes 6527 march 31 2005 2198 march 31 2004 included advances subsidiaries promissory note payable subsidiary 36265 settled november 2003 issuance preferred stock parent company fiscal 2005 officer note receivable 895 related stock purchase transaction repaid parent company interest expense fiscal 2005 2004 includes 25 arising promissory notes payable parent company subsidiaries notes 1000 march 31 2005 2004 included advances subsidiaries parent company issued shares legg mason wood walker “lmww” wholly owned subsidiary connection deferred compensation plans value shares issued lmww fiscal 2005 2004 2003 7619 8467 14171 respectively parent company ownership several entities treated tax purposes passthrough entities results tax expense parent company tax expense included equity net earnings subsidiaries condensed statements earnings comprehensive income condensed statements cash flows income tax payments made lmww 3 restricted cash restricted cash march 31 2005 20658 represents cash escrow account connection appeal civil copyright lawsuit cash available legg mason general corporate use 4 investments include firm investments marketable private equity securities limited partnerships make private investments unrealized gains losses marketable equity securities included accumulated comprehensive income loss unless “other temporary” impairment determined exist case unrealized loss charged earnings realized gains losses marketable equity securities realized unrealized gains losses private equity securities included revenue parent company shares ratably income expenses investments limited partnerships records interest equity method s5 legg mason inc parent company condensed notes financial statements continued amounts thousands 5 intangible assets goodwill sfas 142 “goodwill intangible assets” provides goodwill amortized value identifiable intangible asset must amortized useful life unless asset determined indefinite useful life fair values goodwill intangible assets analyzed quarterly based upon analysis performed fiscal 2005 2004 impairment charges required following table reflects components intangible assets march 31 estimated amortization expense five years subsequent march 31 2005 250 per year march 2005 parent company’s goodwill 14136 certain asset management contracts totaling 4150 transferred wholly owned asset management subsidiary noncash transaction 6 longterm debt parent company’s longterm debt march 31 2005 consisted 424469 675 senior notes 266736 zerocoupon contingent convertible senior notes 99959 650 senior notes unamortized discounts 531 675 senior notes 41 650 senior notes 278549 zerocoupon contingent convertible senior notes march 31 2005 parent company issued longterm fixed rate debt primarily fund asset management acquisitions july 2 2001 parent company issued 425000 principal amount senior notes due july 2 2008 bear interest 675 notes sold discount yield 680 net proceeds notes approximately 421000 payment debt issuance costs june 6 2001 parent company issued 567285 principal amount maturity zerocoupon contingent convertible senior notes due june 6 2031 convertible notes issued private placement qualified institutional buyers initial offering price 44070 per 1000 principal amount maturity discounted price reflects yield maturity 275 per year parent company amortizing issue discount interest expense using effective interest methods term convertible notes net proceeds offering 244375 payment debt issuance costs quarter ended december 31 2003 price parent company’s common stock exceeded conversion trigger price result note became convertible 115593 shares parent company’s common stock subject adjustment commencing january 2 2004 february 2005 notes aggregating 22000 principal amount maturity converted 254 shares reduced principal amount maturity 545285 march 31 2005 outstanding notes may result issuance additional 63 million shares parent company may redeem convertible notes cash june 6 2006 accreted value however notes may converted prior redemption addition parent company may required repurchase convertible notes accreted value option holders june 6 2005 2007 2011 every five years thereafter 2026 upon change control parent company s6 legg mason inc parent company condensed notes financial statements continued amounts thousands occurs june 6 2006 repurchases paid cash shares parent company’s stock combination based upon parent company’s current stock price unlikely convertible notes tendered repurchase june 6 2005 however notes tendered parent company elected pay cash parent company also outstanding 100000 principal amount senior notes due february 15 2006 bear interest 650 notes issued discount yield 657 parent company maintained compliance applicable covenants facilities march 31 2005 parent company 125 billion available issuance additional debt equity securities pursuant shelf registration statement march 31 2005 aggregate maturities longterm debt current accreted value 791164 based contractual terms follows 7 deferred compensation stock trust accordance eitf issue 9714 “accounting deferred compensation arrangements amounts held rabbi trust invested” assets rabbi trusts consolidated employer value employer’s stock held rabbi trusts classified stockholders’ equity generally accounted manner similar treasury stock therefore shares parent company issued rabbi trust corresponding liability related deferred compensation plans presented components stockholders’ equity employee stock trust deferred compensation employee stock trust respectively shares held trust march 31 2005 2004 4945 5091 respectively 8 capital stock fiscal 2002 board directors approved stock repurchase plan parent company authorized repurchase 45 million shares open market discretion fiscal 2005 2004 2003 parent company repurchased retired 735 shares 40729 1184 shares 65399 1327 shares 41963 respectively july 20 2004 parent company declared threefortwo stock split paid dividend september 24 2004 stockholders record september 8 2004 accordingly share information retroactively restated reflect stock split except common stock additional paidin capital presented condensed statements financial condition s7 legg mason inc parent company condensed notes financial statements continued amounts thousands december 15 2004 parent company sold 46 million shares common stock 7030 per share less underwriting fees net proceeds approximately 311000 9 commitments contingencies guarantees march 31 2005 parent company contingent obligations related business acquisitions may payable either parent company one subsidiaries exceed 326300 contingent payments payable fiscal 2007 financial accounting standards board interpretation number 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” “fin 45” expands disclosure requirements made guarantor regarding obligations certain guarantees issued fin 45 requires certain circumstances recognition inception guarantee liability fair value obligation result issuing guarantee guarantees entity’s future performance within scope fin 45 parent company required record liability guarantees subsidiaries’ obligations normal course business parent company enters contracts contain variety representations warranties provide general indemnifications parent company’s maximum exposure arrangements unknown would involve future claims may made parent company yet occurred parent company guarantor various agreements entered subsidiaries unconsolidated joint venture lease office facilities equipment aggregate guaranteed commitment noncancelable lease agreements expire varying dates fiscal 2015 91567 parent company required make payment guaranty unconsolidated joint venture eligible seek partial recovery 2660 party joint venture april 2004 parent company became guarantor agreement entered one subsidiaries lease office facilities aggregate commitment noncancelable lease agreement expires 2015 10394 parent company became guarantor april 2004 20000 loan facility used one subsidiaries finance tenant improvements real property tenant improvements purchased loan facility pledged collateral outstanding balance insurance policy certain subsidiaries parent company guarantees reimburse insurance carrier claims incurred policy’s limit 1500 subsidiary parent company investor captive insurance company provide excess securities investors protection corporation coverage parent company provided guarantee event claim incurred subsidiary cannot pay march 31 2005 parent company recorded liability obligations guarantees described parent company capital commitments investment partnerships limited partner march 31 2005 9182 capital commitments range fiscal 2006 2011 s8item 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1the following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated balance sheets consolidated statements income loss consolidated statements changes stockholders equity consolidated statements comprehensive income loss consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3exhibits 31 articles incorporation legg mason amended incorporated reference legg masons quarterly report form 10q quarter ended june 30 2006 32 bylaws legg mason amended restated january 22 2010 incorporated reference legg masons current report form 8k event january 22 2010 41 indenture dated january 31 2008 legg mason bank new york trustee respect legg mason 25 senior notes due january 15 2015 incorporated reference legg masons current report form 8k event january 31 2008 42 indenture dated may 12 2008 legg mason bank new york trustee respect legg mason 560 senior notes due june 30 2021 incorporated reference legg masons registration statement form s3 filed may 6 2008 43 first supplemental indenture dated may 12 2008 legg mason bank new york trustee respect legg mason 560 senior notes due june 30 2021 incorporated reference legg masons current report form 8k event may 6 2008 44 purchase contract pledge agreement dated may 12 2008 legg mason bank new york stock purchase contract agent bank new york collateral agent custodial agent securities intermediary incorporated reference legg masons current report form 8k event may 6 2008 45 legg mason hereby agrees pursuant item 601b4iiia regulation sk furnish sec upon request copy instrument respect rights holders longterm debt legg mason subsidiaries 101 legg mason inc nonemployee director equity plan amended incorporated reference legg masons quarterly report form 10q quarter ended september 30 2008 102 form common stock grant award letter legg mason inc nonemployee director equity plan incorporated reference legg masons quarterly report form 10q quarter ended september 30 2005 103 form restricted stock unit grant award letter legg mason inc nonemployee director equity plan incorporated reference legg masons quarterly report form 10q quarter ended september 30 2005 104 legg mason co llc deferred compensationphantom stock plan amended incorporated reference legg masons quarterly report form 10q quarter ended june 30 2009 105 legg mason inc executive incentive compensation plan incorporated reference appendix definitive proxy statement legg masons 2010 annual meeting stockholders 106 legg mason inc 1996 equity incentive plan amended incorporated reference appendix definitive proxy statement legg masons 2009 annual meeting stockholders 107 form nonqualified stock option agreement legg mason inc 1996 equity incentive plan filed herewith 108 form restricted stock agreement legg mason inc 1996 equity incentive plan filed herewith 109 form restricted stock unit agreement legg mason inc 1996 equity incentive plan filed herewith 1010 registration rights agreement dated january 31 2008 legg mason kkr il limited credit suisse international hsbc bank usa national association incorporated reference legg masons current report form 8k event january 31 2008 1011 amended restated global distribution agreement dated october 3 2005 legg mason citigroup inc incorporated reference legg masons quarterly report form 10q quarter ended september 30 2005 1012 lease agreement dated august 16 2006 legg mason fc eighth ave llc incorporated reference legg masons quarterly report form 10q quarter ended september 30 2006 1013 agreement dated october 25 2009 among legg mason inc trian fund management lp funds managed certain affiliates incorporated reference legg masons current report form 8k event october 25 2009 1014 5year revolving credit agreement dated october 14 2005 amended restated amendment agreement dated february 11 2010 among legg mason inc borrower citibank na administrative agent banks party thereto incorporated reference legg masons current report form 8k event february 11 2010 1015 note purchase agreement dated january 14 2008 note purchase agreement legg mason purchasers named therein limited purposes kohlberg kravis roberts co lp incorporated reference legg masons current report form 8k event january 14 2008 1016 standstill agreement dated january 14 2008 legg mason kohlberg kravis roberts co lp incorporated reference legg masons current report form 8k event january 14 2008 1017 call option transaction confirmation dated january 14 2008 legg mason jpmorgan chase bank national association incorporated reference legg masons current report form 8k event january 14 2008 1018 call option transaction confirmation dated january 14 2008 legg mason merrill lynch financial markets inc incorporated reference legg masons current report form 8k event january 14 2008 1019 call option transaction confirmation dated january 14 2008 legg mason goldman sachs co incorporated reference legg masons current report form 8k event january 14 2008 1020 call option transaction confirmation dated january 14 2008 legg mason bank america na incorporated reference legg masons current report form 8k event january 14 2008 1021 issuer warrant transaction confirmation dated january 14 2008 legg mason jpmorgan chase bank national association incorporated reference legg masons current report form 8k event january 14 2008 1022 issuer warrant transaction confirmation dated january 14 2008 legg mason merrill lynch financial markets inc incorporated reference legg masons current report form 8k event january 14 2008 1023 issuer warrant transaction confirmation dated january 14 2008 legg mason goldman sachs co incorporated reference legg masons current report form 8k event january 14 2008 1024 issuer warrant transaction confirmation dated january 14 2008 legg mason bank america na incorporated reference legg masons current report form 8k event january 14 2008 1025 amendment note purchase agreement dated may 5 2008 legg mason purchasers named therein limited purposes kohlberg kravis roberts co lp incorporated reference legg masons current report form 8k event may 6 2008 1026 offer letter dated december 13 2010 incorporated reference legg masons current report form 8k event december 13 2010 1027 severance release claims letter dated december 17 2010 incorporated reference legg masons current report form 8k event december 17 2010 computation consolidated ratios earnings fixed charges filed herewith subsidiaries company filed herewith consent independent registered public accounting firm filed herewith 311 certification chief executive officer filed herewith 312 certification principal financial officer filed herewith 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 322 certification principal financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith financial statements annual report form 10k legg mason inc year ended march 31 2011 filed may 27 2011 formatted xbrl consolidated balance sheets ii consolidated statements income loss iii consolidated statements changes stockholders equity iv consolidated statements comprehensive income loss v consolidated statements cash flows vi notes consolidated financial statements tagged detail exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated balance sheets consolidated statements income consolidated statements comprehensive income consolidated statements changes stockholders equity consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc mark r fetting mark r fetting president chief executive officer chairman board date may 25 2012 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated balance sheets consolidated statements income consolidated statements comprehensive income consolidated statements changes stockholders equity consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits financial statements annual report form 10k legg mason inc year ended march 31 2013 filed may 24 2013 formatted xbrl consolidated balance sheets ii consolidated statements income iii consolidated statements comprehensive income iv consolidated statements changes stockholders equity v consolidated statements cash flows vi notes consolidated financial statements tagged detail exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc joseph sullivan joseph sullivan president chief executive officer date may 24 2013 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated balance sheets consolidated statements income loss consolidated statements comprehensive income loss consolidated statements changes stockholders equity consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc joseph sullivan joseph sullivan chairman president chief executive officer date may 23 2016 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated balance sheets consolidated statements income loss consolidated statements comprehensive income loss consolidated statements changes stockholders equity consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc joseph sullivan joseph sullivan chairman president chief executive officer date may 24 2019 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated balance sheets consolidated statements income loss consolidated statements comprehensive income loss consolidated statements changes stockholders equity consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc joseph sullivan joseph sullivan chairman president chief executive officer date may 28 2020 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated balance sheets consolidated statements income loss consolidated statements comprehensive income loss consolidated statements changes stockholders equity consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc joseph sullivan joseph sullivan president chief executive officer date may 23 2014 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated balance sheets consolidated statements income loss consolidated statements comprehensive income loss consolidated statements changes stockholders equity consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc joseph sullivan joseph sullivan chairman president chief executive officer date may 22 2015 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated balance sheets consolidated statements income loss consolidated statements comprehensive income loss consolidated statements changes stockholders equity consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc joseph sullivan joseph sullivan chairman president chief executive officer date may 24 2017 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicatednannannanitem 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc raymond mason raymond mason chairman board chief executive officer date june 9 2006 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1the following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated statements operations consolidated balance sheets consolidated statements changes stockholders equity consolidated statements comprehensive income loss consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3exhibits 31 articles incorporation legg mason amended incorporated reference legg masons quarterly report form 10q quarter ended june 30 2006 32 bylaws legg mason amended restated january 23 2007 incorporated reference legg masons current report form 8k event january 23 2007 41 indenture dated january 31 2008 legg mason bank new york trustee respect legg mason 25 senior notes due january 15 2015 incorporated reference legg masons current report form 8k event january 31 2008 42 indenture dated may 12 2008 legg mason bank new york trustee respect legg mason 560 senior notes due june 30 2021 incorporated reference legg masons registration statement form s3 filed may 6 2008 43 first supplemental indenture dated may 12 2008 legg mason bank new york trustee respect legg mason 560 senior notes due june 30 2021 incorporated reference legg masons current report form 8k event may 6 2008 44 purchase contract pledge agreement dated may 12 2008 legg mason bank new york stock purchase contract agent bank new york collateral agent custodial agent securities intermediary incorporated reference legg masons current report form 8k event may 6 2008 45 legg mason hereby agrees pursuant item 601b4iiia regulation sk furnish sec upon request copy instrument respect rights holders longterm debt legg mason subsidiaries 101 legg mason inc nonemployee director equity plan amended incorporated reference legg masons quarterly report form 10q quarter ended september 30 2008 102 form common stock grant award letter legg mason inc nonemployee director equity plan incorporated reference legg masons quarterly report form 10q quarter ended september 30 2005 103 form restricted stock unit grant award letter legg mason inc nonemployee director equity plan incorporated reference legg masons quarterly report form 10q quarter ended september 30 2005 104 legg mason co llc deferred compensationphantom stock plan amended filed herewith 105 legg mason inc executive incentive compensation plan incorporated reference appendix definitive proxy statement legg masons 2005 annual meeting stockholders 106 legg mason inc 1996 equity incentive plan amended incorporated reference legg masons quarterly report form 10q quarter ended september 30 2008 107 form nonqualified stock option agreement legg mason inc 1996 equity incentive plan incorporated reference legg masons annual report form 10k year ended march 31 2004 108 form restricted stock agreement legg mason inc 1996 equity incentive plan filed herewith 109 form restricted stock agreement pursuant legg mason stock accumulation program legg mason inc 1996 equity incentive plan incorporated reference legg masons current report form 8k event january 31 2006 1010 registration rights agreement dated january 31 2008 legg mason kkr il limited credit suisse international hsbc bank usa national association incorporated reference legg masons current report form 8k event january 31 2008 1011 amended restated global distribution agreement dated october 3 2005 legg mason citigroup inc incorporated reference legg masons quarterly report form 10q quarter ended september 30 2005 1012 lease agreement dated august 16 2006 legg mason fc eighth ave llc incorporated reference legg masons quarterly report form 10q quarter ended september 30 2006 1013 term loan agreement dated october 14 2005 term loan agreement legg mason borrower citibank na administrative agent citigroup global markets inc lead arranger book manager bank america na jpmorgan chase bank na bank new york deutsche bank ag new york branch cosyndication agents banks party thereto incorporated reference legg masons current report form 8k event october 14 2005 1014 5year revolving credit agreement dated october 14 2005 5year revolving credit agreement legg mason borrower citibank na administrative agent citigroup global markets inc lead arranger book manager bank america na jpmorgan chase bank na bank new york deutsche bank ag new york branch cosyndication agents banks party thereto incorporated reference legg masons current report form 8k event october 14 2005 1015 note purchase agreement dated january 14 2008 note purchase agreement legg mason purchasers named therein limited purposes kohlberg kravis roberts co lp incorporated reference legg masons current report form 8k event january 14 2008 1016 standstill agreement dated january 14 2008 legg mason kohlberg kravis roberts co lp incorporated reference legg masons current report form 8k event january 14 2008 1017 call option transaction confirmation dated january 14 2008 legg mason jpmorgan chase bank national association incorporated reference legg masons current report form 8k event january 14 2008 1018 call option transaction confirmation dated january 14 2008 legg mason merrill lynch financial markets inc incorporated reference legg masons current report form 8k event january 14 2008 1019 call option transaction confirmation dated january 14 2008 legg mason goldman sachs co incorporated reference legg masons current report form 8k event january 14 2008 1020 call option transaction confirmation dated january 14 2008 legg mason bank america na incorporated reference legg masons current report form 8k event january 14 2008 1021 issuer warrant transaction confirmation dated january 14 2008 legg mason jpmorgan chase bank national association incorporated reference legg masons current report form 8k event january 14 2008 1022 issuer warrant transaction confirmation dated january 14 2008 legg mason merrill lynch financial markets inc incorporated reference legg masons current report form 8k event january 14 2008 1023 issuer warrant transaction confirmation dated january 14 2008 legg mason goldman sachs co incorporated reference legg masons current report form 8k event january 14 2008 1024 issuer warrant transaction confirmation dated january 14 2008 legg mason bank america na incorporated reference legg masons current report form 8k event january 14 2008 1025 amendment 1 term loan agreement dated january 3 2008 legg mason borrower citibank na administrative agent banks thereto incorporated reference legg masons current report form 8k event january 3 2008 1026 amendment 2 term loan agreement dated april 9 2008 legg mason borrower citibank na administrative agent banks thereto incorporated reference legg masons current report form 8k event may 6 2008 1027 amendment 3 term loan agreement dated may 7 2008 legg mason borrower citibank na administrative agent banks thereto incorporated reference legg masons current report form 8k event may 6 2008 1028 amendment 4 term loan agreement dated november 21 2008 legg mason inc borrower citibank na administrative agent banks thereto incorporated reference legg masons current report form 8k event november 21 2008 1029 amendment 5 term loan agreement dated november 21 2008 legg mason inc borrower citibank na administrative agent banks thereto incorporated reference legg masons current report form 8k event march 30 2009 1030 amendment 1 5year revolving credit agreement dated january 3 2008 legg mason borrower citibank na administrative agent banks thereto incorporated reference legg masons current report form 8k event january 3 2008 1031 amendment 2 5year revolving credit agreement dated january 3 2008 legg mason borrower citibank na administrative agent banks thereto incorporated reference legg masons current report form 8k event january 3 2008 1032 amendment 3 5year revolving credit agreement dated april 9 2008 legg mason borrower citibank na administrative agent banks thereto incorporated reference legg masons current report form 8k event may 6 2008 1033 amendment 4 5year revolving credit agreement dated may 7 2008 legg mason borrower citibank na administrative agent banks thereto incorporated reference legg masons current report form 8k event may 6 2008 1034 amendment 5 5year revolving credit agreement dated november 21 2008 legg mason inc borrower citibank na administrative agent banks thereto incorporated reference legg masons current report form 8k event november 21 2008 1035 amendment 6 5year revolving credit agreement dated march 30 2009 legg mason inc borrower citibank na administrative agent banks thereto incorporated reference legg masons current report form 8k event march 30 2009 1036 amendment note purchase agreement dated may 5 2008 legg mason purchasers named therein limited purposes kohlberg kravis roberts co lp incorporated reference legg masons current report form 8k event may 6 2008 1037 master amendment 1 capital support agreements dated september 18 2008 legg mason inc lm capital company llc lm capital support llc lm capital support ii llc lm capital support iii llc lm capital support iv llc liquid reserves portfolio series master portfolio trust incorporated reference legg masons quarterly report form 10q quarter ended september 30 2008 1038 master amendment 2 capital support agreements dated december 1 2008 legg mason inc lm capital company llc lm capital support llc lm capital support ii llc lm capital support iii llc lm capital support iv llc liquid reserves portfolio series master portfolio trust incorporated reference legg masons current report form 8k event november 21 2008 1039 125 million capital support agreement dated june 30 2008 among legg mason inc lm capital support v llc western asset money market fund series legg mason partners money market trust incorporated reference legg masons current report form 8k event june 30 2008 1040 55 million capital support agreement dated june 30 2008 among legg mason inc lm capital support v llc western asset money market fund series legg mason partners money market trust incorporated reference legg masons current report form 8k event june 30 2008 1041 20 million capital support agreement dated june 30 2008 among legg mason inc lm capital support v llc western asset money market fund series legg mason partners money market trust incorporated reference legg masons current report form 8k event november 21 2008 1042 20 million capital support agreement dated june 30 2008 among legg mason inc lm capital support v llc western asset institutional money market fund series legg mason partners institutional trust incorporated reference legg masons current report form 8k event november 21 2008 1043 20 million capital support agreement dated september 18 2008 among legg mason inc lm capital company llc western asset institutional money market fund series legg mason partners institutional trust incorporated reference legg masons quarterly report form 10q quarter ended september 30 2008 1044 agreement standby letters credit dated september 18 2008 among lm capital support v llc legg mason inc citibank na incorporated reference legg masons quarterly report form 10q quarter ended september 30 2008 1045 letter agreement dated september 23 2008 among legg mason inc lm capital support v llc citi institutional liquidity fund plc incorporated reference legg masons quarterly report form 10q quarter ended september 30 2008 1046 letter agreement dated september 23 2008 among legg mason inc lm capital support v llc citi institutional liquidity fund plc incorporated reference legg masons quarterly report form 10q quarter ended september 30 2008 1047 amended restated total return swap transactions agreement dated november 20 2008 legg mason inc barclays bank plc incorporated reference legg masons current report form 8k event november 21 2008 1048 supplemental agreement dated november 25 2008 among company carnes capital corporation private capital management lp bruce sherman gregg j powers incorporated reference legg masons quarterly report form 10q quarter ended december 31 2008 1049 135 million capital support agreement dated december 1 2008 among legg mason inc lm capital company llc liquid reserves portfolio series master portfolio trust incorporated reference legg masons current report form 8k event november 21 2008 1050 master amendment 1 capital support agreements dated december 1 2008 legg mason inc lm capital support v llc western asset money market fund series legg mason partners money market trust incorporated reference legg masons current report form 8k event november 21 2008 1051 master amendment 1 capital support agreements dated december 1 2008 legg mason inc lm capital company llc lm capital support v llc western asset institutional money market fund series legg mason partners institutional trust filed herewith incorporated reference legg masons current report form 8k event november 21 2008 1052 amended restated 25 million capital support agreement dated december 1 2008 among legg mason inc lm capital support v llc legg mason global funds plc incorporated reference legg masons current report form 8k event november 21 2008 computation consolidated ratios earnings fixed charges filed herewith subsidiaries company filed herewith consent independent registered public accounting firm filed herewith 311 certification chief executive officer filed herewith 312 certification principal financial officer filed herewith 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 322 certification principal financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1the following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements changes stockholders equity consolidated statements comprehensive income loss consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3exhibits 31 articles incorporation legg mason amended incorporated reference legg masons quarterly report form 10q quarter ended june 30 2006 32 bylaws legg mason amended restated january 22 2010 incorporated reference legg masons current report form 8k event january 22 2010 41 indenture dated january 31 2008 legg mason bank new york trustee respect legg mason 25 senior notes due january 15 2015 incorporated reference legg masons current report form 8k event january 31 2008 42 indenture dated may 12 2008 legg mason bank new york trustee respect legg mason 560 senior notes due june 30 2021 incorporated reference legg masons registration statement form s3 filed may 6 2008 43 first supplemental indenture dated may 12 2008 legg mason bank new york trustee respect legg mason 560 senior notes due june 30 2021 incorporated reference legg masons current report form 8k event may 6 2008 44 purchase contract pledge agreement dated may 12 2008 legg mason bank new york stock purchase contract agent bank new york collateral agent custodial agent securities intermediary incorporated reference legg masons current report form 8k event may 6 2008 45 legg mason hereby agrees pursuant item 601b4iiia regulation sk furnish sec upon request copy instrument respect rights holders longterm debt legg mason subsidiaries 101 legg mason inc nonemployee director equity plan amended incorporated reference legg masons quarterly report form 10q quarter ended september 30 2008 102 form common stock grant award letter legg mason inc nonemployee director equity plan incorporated reference legg masons quarterly report form 10q quarter ended september 30 2005 103 form restricted stock unit grant award letter legg mason inc nonemployee director equity plan incorporated reference legg masons quarterly report form 10q quarter ended september 30 2005 104 legg mason co llc deferred compensationphantom stock plan amended incorporated reference legg masons quarterly report form 10q quarter ended june 30 2009 105 legg mason inc executive incentive compensation plan incorporated reference appendix definitive proxy statement legg masons 2005 annual meeting stockholders 106 legg mason inc 1996 equity incentive plan amended incorporated reference appendix definitive proxy statement legg masons 2009 annual meeting stockholders 107 form nonqualified stock option agreement legg mason inc 1996 equity incentive plan filed herewith 108 form restricted stock agreement legg mason inc 1996 equity incentive plan filed herewith 109 form restricted stock unit agreement legg mason inc 1996 equity incentive plan filed herewith 1010 registration rights agreement dated january 31 2008 legg mason kkr il limited credit suisse international hsbc bank usa national association incorporated reference legg masons current report form 8k event january 31 2008 1011 amended restated global distribution agreement dated october 3 2005 legg mason citigroup inc incorporated reference legg masons quarterly report form 10q quarter ended september 30 2005 1012 lease agreement dated august 16 2006 legg mason fc eighth ave llc incorporated reference legg masons quarterly report form 10q quarter ended september 30 2006 1013 agreement dated october 25 2009 among legg mason inc trian fund management lp funds managed certain affiliates incorporated reference legg masons current report form 8k event october 25 2009 1014 5year revolving credit agreement dated october 14 2005 amended restated amendment agreement dated february 11 2010 among legg mason inc borrower citibank na administrative agent banks party thereto incorporated reference legg masons current report form 8k event february 11 2010 1015 note purchase agreement dated january 14 2008 note purchase agreement legg mason purchasers named therein limited purposes kohlberg kravis roberts co lp incorporated reference legg masons current report form 8k event january 14 2008 1016 standstill agreement dated january 14 2008 legg mason kohlberg kravis roberts co lp incorporated reference legg masons current report form 8k event january 14 2008 1017 call option transaction confirmation dated january 14 2008 legg mason jpmorgan chase bank national association incorporated reference legg masons current report form 8k event january 14 2008 1018 call option transaction confirmation dated january 14 2008 legg mason merrill lynch financial markets inc incorporated reference legg masons current report form 8k event january 14 2008 1019 call option transaction confirmation dated january 14 2008 legg mason goldman sachs co incorporated reference legg masons current report form 8k event january 14 2008 1020 call option transaction confirmation dated january 14 2008 legg mason bank america na incorporated reference legg masons current report form 8k event january 14 2008 1021 issuer warrant transaction confirmation dated january 14 2008 legg mason jpmorgan chase bank national association incorporated reference legg masons current report form 8k event january 14 2008 1022 issuer warrant transaction confirmation dated january 14 2008 legg mason merrill lynch financial markets inc incorporated reference legg masons current report form 8k event january 14 2008 1023 issuer warrant transaction confirmation dated january 14 2008 legg mason goldman sachs co incorporated reference legg masons current report form 8k event january 14 2008 1024 issuer warrant transaction confirmation dated january 14 2008 legg mason bank america na incorporated reference legg masons current report form 8k event january 14 2008 1025 employment letter dated august 29 2008 legg mason inc david r odenath incorporated reference legg masons quarterly report form 10q quarter ended june 30 2009 1026 supplemental agreement dated december 13 2009 among legg mason inc permal group ltd sellers named therein incorporated reference legg masons quarterly report 10q quarter ended december 31 2009 1027 amendment note purchase agreement dated may 5 2008 legg mason purchasers named therein limited purposes kohlberg kravis roberts co lp incorporated reference legg masons current report form 8k event may 6 2008 computation consolidated ratios earnings fixed charges filed herewith subsidiaries company filed herewith consent independent registered public accounting firm filed herewith 311 certification chief executive officer filed herewith 312 certification principal financial officer filed herewith 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 322 certification principal financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith financial statements annual report form 10k legg mason inc year ended march 31 2010 filed may 28 2010 formatted xbrl consolidated balance sheets ii consolidated statements operations iii consolidated statements changes stockholders equity iv consolidated statements comprehensive income loss v consolidated statements cash flows vi notes consolidated financial statements tagged blocks text exhibits management contracts compensatory plans arrangements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules documents filed part report 1 following consolidated financial statements included item 8 report page number report independent registered public accounting firm consolidated balance sheets consolidated statements income loss consolidated statements comprehensive income loss consolidated statements changes stockholders equity consolidated statements cash flows notes consolidated financial statements schedules consolidated financial statements provision made accounting regulations sec applicable required therefore omitted 3 exhibits management contracts compensatory plans arrangements item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized legg mason inc joseph sullivan joseph sullivan chairman president chief executive officer date may 30 2018 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated