Legg Mason Inc.
Annual Report 2016

Plain-text annual report

AR2016 DESIGNED FOR WHAT YOU IMAGINESM A tapestry is not formed from a single thread. Nor is it formed from many threads. It is formed by combining those threads, uniquely and distinctly, into something greater than its parts. KEY HIGHLIGHTS FINANCIAL HIGHLIGHTS Assets under management as of March 31, 2016 By asset class Fixed Income Liquidity Operating revenues Equity By asset class Financial Highlights (Dollars in thousands, except per-share amounts) Operating results Operating revenues Operating income (loss) Years ended March 31, 2016 2015 2014 2013 2012 $ 2,660,844 2,819,106 2,741,757 2,612,650 2,662,574 50,831 498,219 430,893 (434,499) 338,753 Income (loss) from continuing operations before income tax provision (benefit) (25,218) 367,993 419,641 (510,607) 303,083 Net income (loss) attributable to Legg Mason, Inc. (25,032) 237,080 284,784 (353,327) 220,817 Adjusted income(1) Per share Net income (loss), diluted Adjusted income, diluted 1 Dividends declared Book value Financial condition Total assets 370,271 378,751 417,805 347,169 397,030 $ (0.25) 3.36 0.80 2.04 3.26 0.64 2.33 3.41 0.52 (2.65) 2.61 0.44 1.54 2.77 0.32 39.37 40.23 40.32 38.44 40.59 $ 7,520,446 7,064,834 7,103,203 7,264,582 8,547,381 Total stockholders’ equity attributable to Legg Mason, Inc. 4,213,563 4,484,901 4,724,724 4,818,351 5,677,291 1 Adjusted income per diluted share represents a performance measure that is based on a methodology other than generally accepted accounting principles (“non-GAAP”). For more information regarding this non-GAAP financial measure, see Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report. Total Return Performance (Dollars) Fixed Income Equity Alternatives Liquidity Index Legg Mason, Inc. SNL Asset Manager Index S&P 500 By client domicile U.S. Elsewhere 200 150 100 50 0 MAR 11 MAR 12 MAR 13 MAR 14 MAR 15 MAR 16 Years ended March 31, 2011 2012 2013 2014 2015 2016 $ 100.00 100.00 100.00 78.30 97.75 108.54 91.64 125.54 123.69 141.72 158.02 150.73 161.53 172.30 169.92 103.51 142.66 172.95 The graph to the left compares the cumulative total stockholder return on Legg Mason’s common stock for the last five fiscal years to the cumulative total return of the S&P 500 Stock Index and the SNL Asset Manager Index over the same period (assuming the investment of $100 in each on March 31, 2011). The SNL Asset Manager Index consists of 44 asset management firms. Source: © 2016 SNL Financial LC, Charlottesville, VA (www.snl.com) 41%46%9%4%56%17%27%37%63%Joseph A. Sullivan, Chairman & Chief Executive Officer DEAR CLIENTS AND FELLOW SHAREHOLDERS, Legg Mason’s fiscal year 2016 was a year of significant accomplishment, as we continue to strategically build a better Legg Mason. We believe that the actions we have undertaken this year, and over the past few years, will benefit Legg Mason’s clients, shareholders, communities and employees, as we accept the challenge to evolve and change as our clients expect. With the addition of RARE Infrastructure and our minority investment in Precidian Investments and the announcement of two additional transactions in Clarion Partners and the combination of EnTrust Capital with Permal, we made substantive progress executing against our strategy of providing global investors with more diversified choices of investment strategies, products, vehicles and access. While we are pleased with this essential repositioning during a time of meaningful industry pressure and change, we clearly recognize the need now to convert the opportunity we have created into sustained growth: we need to deliver the results that you and our other stakeholders expect. Legg Mason AR2016 | 3 1899Founded in3000+Employees40LocationsworldwideHeadquartered in Baltimore, MarylandExecuting our long-term strategy in fiscal year 2016 was challenging, as we navigated our legacy business through short-term market turbulence. Market volatility, concerns over global growth and interest rates, as well as geopolitical instability pressured client flows, our AUM, revenues and operating margins. This difficult environment certainly reinforced our ongoing commitment to carefully calibrate our costs in line with revenues. And while we are disappointed with our financial results for the fiscal year, we are pleased to have been able to continue returning capital to shareholders through our share repurchase program and our dividend, a 10% increase in which we just announced. Ours is an industry that is in the early stages of significant disruption. This disruption means that change, for Legg Mason and for the industry, is not an option, but a necessity. The greatest risk we face is the implication of doing nothing and perpetuating the status quo. We are not willing to take that risk. Asset management industry at an inflection point Powerful forces are driving significant industry change. The globalization of markets, persistently anemic global growth and low interest rates (and expectations for more of the same!), massive shifts in demographics, significant increases in regulation across jurisdictions, and the relentless push from innovation and technology all serve to alter the landscape of our industry. Being “global,” in mind and capability, has never been more important. Investing solely in one’s home country neither effectively diversifies risk nor appropriately capitalizes on the opportunities that are abundant globally. Investors need to expand their investment world, and our own research indicates a willingness on their part to do so. Exposure to global and unconstrained fixed income and equity, real estate, infrastructure, and alternatives, on the one hand, as well as volatility-mitigation strategies on the other, can help investors achieve their desired investment goals. We are now well-positioned to offer this. But investing globally naturally results in more complexity for investors and requires more from the industry. Asset managers who can simultaneously offer global investment capabilities, while providing local client engagement, will be best positioned for success. We are among them. New investors in the emerging middle class around the world have very different investment requirements than those in mature economies who have invested for decades. These demographically diverging investment needs, driven in particular by retirement regimes that are in a dramatic phase of evolution, are creating a massive opportunity for those firms with scale, a broad investment capability and a global footprint. We have established just such a footprint. Regulation across the globe is increasing significantly. While designed to protect investors and rebuild confidence in the integrity of markets, this dramatic expansion of regulatory reach and compliance requirements clearly adds to the industry complexity. The costs associated with regulatory compliance requirements across multiple geographic regimes necessitates that firms be of an appropriate size and scale. Embracing regulatory client protection is entirely consistent with our core values and mission. Lastly, innovation, driven significantly by technology advancement, has created the ability to serve investors in more and better ways. Be it the ongoing evolution of ETFs, the extension of classic active investment capabilities into “next generation” products, or as technology-enabled advice gains acceptance, innovation is transforming the investment opportunities for our clients and redefining consumer expectations for capabilities, access and service. Innovation is central to our corporate DNA. Client-driven diversification Clients want and expect greater choice in all aspects of their lives, and that is no less true in our business. Higher client expectations and shifting investor preferences, combined with the profound forces of change noted above, create both challenges and opportunities for our industry. Consequently, we expect to see more industry combinations and consolidations, and there will clearly be fewer winners in this increasingly competitive market. The greatest risk we face is the implication of doing nothing and perpetuating the status quo. We are not willing to take that risk. 4 | Legg Mason AR2016 We intend to be one of them. With our eyes focused on the future, Legg Mason has diversified our investment capabilities and our product and vehicle options over the past three years, efforts that significantly intensified this year. And while we expect to continue to add unique and differentiated investment capabilities, products and vehicles, we also expect to diversify the access to this expanded lineup of offerings through multiple distribution portals. We believe that thoughtful diversification expands client choice and drives growth. That growth, in turn, should benefit the investors and other stakeholders in Legg Mason. New investment capabilities With the evolution of the industry in mind, we continued this past year to pursue an aggressive strategic M&A agenda to reposition Legg Mason. We added investment capability in equity liquid alternatives with the October 2015 acquisition of a 75% majority equity interest in RARE Infrastructure, a pioneer in global listedinfrastructure investing. We see significant long-term growth ahead for infrastructure investing. We are encouraged by the interest this relatively new asset class has drawn and in our ability to bring RARE to market globally. In April 2016, we purchased an 82% majority equity interest in Clarion Partners, a leading real estate investment management firm, concluding a long search to add world class real estate investing to our broader capabilities. With diverse offerings in private equity real estate, Clarion Partners has a long history of delivering attractive risk- adjusted returns for clients, and it will help to diversify and stabilize our revenue and earnings stream. And again, we believe that we can bring Clarion Partners' investment capabilities to clients in the retail market to address their needs for income and growth in a broader way. Executive Committee (Left to right) Pete Nachtwey, Chief Financial Officer; Ursula Schliessler, Chief Administrative Officer; Tom Hoops, Head of Business Development; Joseph A. Sullivan, Chairman & Chief Executive Officer; Tom Merchant, General Counsel; Terry Johnson, Head of Global Distribution Our investment strategies may be utilized as single investment threads or woven together, to deliver the investment tapestry imagined by our clients. The transaction to combine EnTrust Capital with The Permal Group to create one of the largest global alternative investment managers closed in May 2016, with Legg Mason retaining a 65% stake in the newly-combined firm. The new EnTrustPermal invests with over 180 individual hedge fund managers, on behalf of 730 institutional investors around the world, while also managing several direct lending, opportunistic, co-investment and other differentiated standalone strategies. EnTrustPermal is one of the most highly diversified global players in the alternatives and hedge fund space, and we are excited about their growth prospects. And finally, we continued to commercialize new and existing strategies with Martin Currie and QS Investors, the two firms that we acquired in the previous fiscal year. Our new acquisitions have been structured with a management-retained component of affiliate-level equity to maximize alignment with Legg Mason. In pursuit of similar alignment with our legacy affiliates, we have continued to introduce new Management Equity Plans, including one for Royce & Associates this year. To fund our acquisitions and investments, we are pleased to have efficiently deployed a combination of cash and debt, successfully issuing $700 million in public bonds during the year, at what remain historically low rates. New products and vehicles In December 2015, we launched our first exchange-traded fund (ETF) vehicles with four smart beta strategies managed by QS Investors, that leverage long institutional track records and should deliver attractive, diversified results within a systematic style of investing. The initial performance of these ETFs, launched in a very volatile market, has been strong. We’re also pleased with a minority interest investment we made in Precidian Investments in January 2016, bringing a product innovation capability to help us create more diverse investment vehicle choices for investors. The team at Precidian specializes in solving market structure issues for ETFs, which is consistent with our intention, not just to enter the ETF market, but to be an innovation leader. 6 | Legg Mason AR2016 We expect to work with our affiliates to launch additional differentiated product offerings in the ETF wrapper throughout the coming year. We have also continued to reshape and evolve our product lineup, with one-third of our strategies now classified as next generation active, including outcome-oriented, volatility- managed, multi-asset class, unconstrained and alternative products managed by our investment affiliates. Increased client access During an extremely difficult period for the retail distribution business, our global retail platform had nearly flat net sales for the fiscal year on gross sales of just over $70 billion. In the midst of such a challenging market, we're pleased to have expanded our market share in the U.S. retail, insurance and RIA channels, and in our-cross border fund ranges across several geographies. But this performance reinforces the importance of continuing to diversify our retail business by investment product, asset class, channel and geography, with both new and existing affiliates, positioning us to win long-term and over market cycles. We also announced a modest investment in iVEZT to expand retirement product access to employees of small businesses, and we continue to pursue creating more choice by exploring opportunities in digital distribution to provide our partners with technology-enabled advice. Guided by a consequential mission We aspire to be a great global company that, through investing, meaningfully impacts the lives of all the constituents with whom we interact. And we believe that building a better, more consequential company for our clients is the foundation for building the best possible company for each of our stakeholders. Investing to Improve LivesSM is our mission, our internal compass, reinforced by a culture of doing the right thing, always. This culture has been protected, passionately and without compromise, throughout many challenging market environments in our history, and it remains so today. We recognize that this mission is meaningful only if we deliver on our strategy, and we embrace the accountability necessary to succeed. Designed for What You Imagine Legg Mason has always been a company designed with our clients in mind, and that client-focused creation continues today. Providing choices today that weave the fabric of solutions for our clients’ future needs, we are laying the foundation for a successful and enduring asset management firm. Thoughtfully and intentionally constructed, it is incumbent on us to deliver what our clients want, and how they want it, in order to help them achieve what they imagine. Our design combines nine independent investment managers, with a diversity of perspectives and specialized expertise across asset classes, with a centralized global distribution and shared services platform. Our investment strategies may be utilized as single investment threads or woven together, to deliver the investment tapestry imagined by our clients. Our design provides our investment capabilities through varied products and vehicles and via multiple points of access: the choices necessary to satisfy changing client preferences, and which are necessary for growth. We believe deeply that by providing investors with more choice, we can become their firm of choice, and in the process, create greater long-term shareholder value. Choice for our clients, Growth for our shareholders, and Investing to improve the lives of our many constituents. We are designed for what you imagine. We thank you for joining us on this journey, and we look forward to continuing to earn your trust and confidence, every day. Joseph A. Sullivan, Chairman & Chief Executive Officer Global value investing As it nears its 30-year anniversary, Brandywine Global celebrates a history of success and dedication to value investing. Acting with conviction and challenging conventional ways of thinking are hallmarks of its approach. Assets by strategy (%) 78 Fixed Income 14 Diversified Equity 7 Large Cap Equity 1 Small/Mid Cap Equity Brandywine Global’s assets under management grew for the seventh consecutive fiscal year, to $70.2 billion as of March 31, 2016. With approximately half of AUM now originating from over 50 countries outside of the U.S. and more than 75% being managed in global mandates, the firm’s globally diversified reach and experience are well established. Additionally, the firm has received several awards from leading industry publications recognizing its strong long-term performance. Even through the volatility of the past year, Brandywine Global continued to provide clients with attractive returns over the long term, with 90% of client accounts outperforming their respective benchmarks over the last five years. Brandywine Global consistently seeks to bring value to all its relationships, including finding ways to more effectively reach and service clients around the world. The firm expanded operations in London and welcomed 33 new associates globally. Adding to its steady stream of thought leadership and research, the firm launched its blog, Around the Curve.2 The blog, featuring regular topical essays and opinions from senior investment personnel, demonstrates the firm’s commitment to bringing real-time ideas to an increasingly global client base. 2 The contents of this blog are not incorporated into this annual report. Legg Mason AR2016 | 7 Real estate investment specialists Clarion Partners is a leading real estate investment manager that has invested for over 34 years, successfully executing through market cycles both in private and public equity and debt. Clarion invests in the Americas across a broad range of properties focusing on consistently generating strong performance for clients. Distinguished by its research-driven investment approach, long-term organizational stability, and strong partnership culture, Clarion Partners provides innovative long-term real estate solutions for its clients. Established in 1982, the firm is headquartered in New York, with seven offices across the United States, as well as offices in London and São Paulo. Clarion joined the Legg Mason group of affiliates on April 13, 2016. Legg Mason owns 82% of Clarion Partners. A 2015 achievement for Clarion Partners was the $3.2 billion recapitalization of the Clarion Gables Multifamily Trust. Clarion converted Gables Residential, a market-leading, vertically-integrated multifamily real estate company into a perpetual life, open-end fund vehicle. With strong real estate performance, Clarion continued its year-over-year growth in assets under management, topping $41 billion as of April 30, 2016. Assets by product type (%) 56 Core 31 Core Plus 12 Value 1 Opportunistic DIVERSIFICATION BY INVESTMENT CAPABILITY AND STRATEGY Globalization of markets has both created more correlation and more complexity for investors to navigate. This also creates opportunity for globally focused managers to provide investors access to new asset classes and strategies from outside their home markets. The ability to be local while being global is essential for future success. Traditional fixed income strategies are challenged by persistently low interest rates. Traditional equity strategies are challenged both by the low-return environment and increasing volatility. New investment strategies are needed to bridge those gaps. Global bond, unconstrained and alternative credit product categories can add returns in both a low and rising interest rate environment. Real estate and infrastructure add 8 | Legg Mason AR2016 diversification. And, for those investors that want to manage volatility or invest outside their home equity markets, there are global equity, managed volatility, unconstrained and long- short alternative equity strategies. Over the past three years, we have embarked on a strategic M&A agenda and added: • A multi-asset class solutions capability with QS Investors • An international equity capability with Martin Currie • A liquid alternatives expertise with RARE Infrastructure • A leading real estate investment firm in Clarion Partners • A new alternatives manager with greater scale and broader investment capability with the merger of EnTrust Capital with Permal Quality-focused equity ClearBridge Investments is a leading global equity manager that draws on more than 50 years of experience to deliver long-term results through active management across strategies focused on income, high active share and low- volatility objectives. ClearBridge Investments is committed to delivering long-term results through active management. It has over a half century of experience in investment solutions driven by fundamental research that emphasize differentiated stock selection to move our clients forward. Consistently strong investment performance and superior client service enabled ClearBridge to extend its market presence across its platform of high active share, income and low-volatility strategies, highlighted by institutional mandate wins in multiple asset classes. During the fiscal year, ClearBridge’s Large Cap Growth Strategy won numerous country awards, and the firm continued to bring innovative solutions to investors with the launch of the ClearBridge Sustainability Leaders Fund, its first ESG-focused mutual fund. In addition, ClearBridge was named one of Pensions & Investments “Best Places to Work in Money Management” for the fourth year in a row. Assets by product type (%) 61 High Active Share 21 Income Solutions 18 Low Volatility DIVERSIFICATION BY PRODUCT AND VEHICLE We believe the needs of retirees in mature economies are different than those of younger investors and those in emerging economies. Defined contribution programs have largely replaced defined benefit plans in the United States, and retirement regimes all over the world are in a dramatic phase of evolution. In the U.S., we expect the Department of Labor fiduciary standard for retirement plans to accelerate the move by investors toward different products and vehicles, especially exchange-traded funds (ETFs), separately managed accounts (SMAs), collective investment trusts (CITs) and other strategies. We believe all of these trends signify both that individuals throughout the world will need to assume more control over their investments and that they will require more choice for a variety of investment needs. And, technology and innovation have created opportunities to offer those investors more transparency and customization in increasingly cost- effective vehicles. Innovation, whether that is the ongoing evolution of ETFs, development of alternatives and outcome-oriented strategies, or extension of active investment capabilities into what we call “next generation" products, is changing the face of our industry. At Legg Mason, we have been expanding our offering of “next generation" products, now 34% of our total retail product offerings. In December, we entered the solutions-oriented ETF market with four smart beta ETFs. In January, Legg Mason made a strategic minority investment in Precidian Investments. Precidian specializes in creating innovative products and solutions and solving market structure issues, particularly with regard to the ETF marketplace. We expect them to enhance our ability to create more diverse investment vehicle choices for investors. Legg Mason AR2016 | 9  DIVERSIFICATION BY DISTRIBUTION CHANNEL Thanks to technological advances, the average investor has unprecedented access to information, unimagined by previous generations. This is driving profound changes in consumer buying behavior. Access to information and an increasing comfort with technology by investors of all ages suggests that new choices for client engagement are a necessity. Legg Mason is looking at ways to be more innovative in distributing our strategies globally, including diversification of distribution partners and how we work with them. We are engaging a wider range of advisors across new channels and using a combination of people and technology to service them better. In the U.S., over the past 20 months since we began an initiative to further engage advisors, we've generated approximately $6.2 billion in sales from nearly 15,000 advisors with whom we had done less than $25,000 in sales each over the previous two years. Finally, there is technology-enabled advice: the next generation of distribution. We have set a dedicated Alternative Distribution Strategies team, to develop and evolve our distribution model further. One such initiative is Legg Mason’s minority investment in iVEZT. The initiative will leverage technology to provide small businesses without employer-sponsored retirement programs with the back-office operations necessary to provide their employees the opportunity to participate in iVEZT’s payroll deduction IRAs. Forty million Americans are currently without a retirement program, and this venture could serve many of them. We expect to have more to report on all of our technology initiatives in the new fiscal year. Global alternative funds-of-funds EnTrustPermal is a leading global alternative asset manager providing investment solutions to pension funds, foundations, endowments, sovereign wealth funds, insurance companies, private banks, family offices and individuals. With 11 offices globally, EnTrustPermal offers investment solutions through customized portfolios, co-investments, direct investments and established funds across alternative strategies including diversified, strategy-focused and opportunistic. At the core of the firm's culture is a strong emphasis on personal service, a high level of communication, extensive due diligence and proprietary risk management. In the fiscal year, EnTrust and Legg Mason announced a transaction to combine EnTrust with The Permal Group to create one of the world’s largest alternatives managers. The combination was closed on May 2, 2016. Legg Mason owns 65% of the newly combined company, EnTrustPermal. The new company shares an entrepreneurial mindset, investment-led culture, and client-centric philosophy. In addition to an expanded investment team that can source opportunities from a broader range of managers in terms of strategy, geography and assets, it has created an expanded operational due diligence and compliance platform. Today, EnTrustPermal invests with over 180 managers, on behalf of 730 institutional investors around the world, and is committed to being ahead of the curve in evolving investment offerings to serve investors. Multi-manager funds’ assets by strategy (%) 32 Opportunistic 24 Event Driven, Multi- Strategy and Arbitrage 20 Activist Long/ Short Equity 15 Credit and Special Situations 7 Long/Short Equity 2 Tail Risk 10 | Legg Mason AR2016  DESIGNED FOR WHAT YOU IMAGINE Global investors’ expectations of their investment managers are evolving in significant ways. These investors expect a diverse set of investment solutions to help them achieve their financial goals. They expect those solutions to consistently deliver compelling investment performance. And they want them to be available in cost-efficient vehicles and to be able to access them where and how they want. No longer satisfied to simply take what the industry offers, the global investor is demanding that investment managers respond to these shifting preferences ... or risk losing their business. The Legg Mason operating model is intentionally designed to respond to shifting client preferences. It is thoughtfully designed for what our clients imagine. Our strategy is straightforward and focused to help our clients meet their goals: Legg Mason aims to provide global investors with more diversified choices of investment strategies, products, vehicles and access. We believe thoughtful diversification across all of those categories will expand client choice, offer greater investment opportunities, and ultimately drive growth to the benefit of the Company's stakeholders. Our design combines nine independent investment managers that bring together a diversity of perspectives and expertise across equities, fixed income and alternatives with a world class global distribution platform that offers broad choice in accessing the many different strategies of our managers. This client-centric design allows each part of the organization to focus on what it does best, be that investing, product or vehicle development, or distribution access. Designed for what you imagine: it is what our clients rightfully expect. It is what we deliver. Active equity specialists Martin Currie is an active global equity specialist that builds high-conviction, stock- driven portfolios based on fundamental research. The firm is dedicated to delivering optimum investment outcomes and superior client relationships. Assets by strategy (%) 34 High Active Share 31 Equity Income 27 Absolute Return 8 Passive Headquartered in Edinburgh, Martin Currie manages money for a wide range of global, institutional and retail clients. The firm offers high-conviction investment strategies built around three main pillars, each delivering distinct client outcomes: high active share; income; and absolute return. Over the past year, the firm has enhanced its three product offerings in terms of expertise and innovation. In high active share, there has been realignment of investment resources, focusing research teams on client outcomes. The income pillar has been strengthened by the recruitment of a new Head of Global Income in Edinburgh and broadening of the Martin Currie Australia suite with the launch of new products and new hires. And absolute return saw the launch of the Global Long-Term Unconstrained strategy and the hire of an experienced team to lead the Japan long/short capability. At a broader level, the firm was awarded an A+ rating by UNPRI, recognizing how governance and sustainability is embedded across the investment proposition. Now in its second year as a Legg Mason affiliate, the firm has benefited from initiatives such as merging existing pooled funds into the Legg Mason platform and launching the firm’s first two 1940 Act funds in the U.S. Legg Mason AR2016 | 11 Quantitative equity and multi- asset manager QS Investors applies a diversified, systematic and adaptive approach to its investment discipline to provide consistent, repeatable and risk-managed returns across multiple market environments. QS Investors partners with clients to create innovative solutions within a quantitative framework. Taking a consultative approach to global asset management, it applies a diversified, systematic and adaptive approach to managing portfolios with a repeatable, risk-aware process. Strategies include global equities, liquid alternatives, multi-asset and customized solutions. QS Investors' long-term goal is to provide investors with innovative investment options directly aligned to each investor’s individual objectives and risk tolerances. To that end, fiscal year 2016 was a landmark year. Legg Mason's strong distribution capabilities allowed QS to bring long-standing institutional investment strategies to retail investors. QS launched its first alternative equity fund that directly addresses market risk and an investor's need for growth. It launched four smart beta equity ETFs to target specific investment outcomes in a cost-effective format. Tying it all together, the multi-asset business continued to expand the business across target date, lifestyle and other outcome-oriented strategies. Success was realized with strong growth in both the multi-asset and equity businesses. Total AUM by product (%) 58 Customized Solutions 22 Global Equities 20 U.S. Equities ETF LAUNCH On December 29, 2015, Legg Mason launched four new outcome-oriented index-based ETF funds on the Nasdaq Stock Market® in partnership with QS Investors. Increasing concerns about macroeconomic risks, equity volatility, and the continuing search for stable income are pressuring investors to look beyond traditional market cap weighted indices. Leveraging QS Investors’ proprietary strategies with a long institutional track record, these smart beta products are positioned to deliver on their investment objectives in a very crowded field, and the initial performance of these strategies in volatile equity markets is very encouraging. Legg Mason’s distribution and product teams are working with authorized participants and advisors, particularly in the RIA segment, to expand the commercialization of these strategies. 12 | Legg Mason AR2016 Listed infrastructure equity RARE Infrastructure is dedicated to global listed infrastructure investments. Established in 2006, RARE has grown to become one of the largest listed infrastructure managers globally. RARE's experienced team of infrastructure investment specialists invest in companies that own and develop major infrastructure, assets such as airports; gas, electricity, and water systems; roads; ports; and communication towers in both developed and emerging economies. Excellence in research and managing risk is at the heart of RARE’s investment process. Assets by product type (%) 84 Value Infrastructure 11 Tailored Portfolio Infrastructure 4 Emerging Markets Infrastructure 1 Yield Infrastructure In October 2015, RARE officially joined the Legg Mason group of affiliates, with Legg Mason acquiring a 75% equity holding. This partnership has provided opportunities to expand RARE’s UCITS product into an additional nine new markets across Europe and Asia. Additionally, RARE has recently expanded into the U.S. retail market through the launch of a 40 Act Fund and is planning further expansion into the UK through the launch of a Yield Strategy. RARE’s head office is located in Sydney, Australia, with offices in London, Chicago and Melbourne. As of March 31, 2016, RARE managed over $6.3 billion on behalf of clients located in the UK, Europe, the United States and Australia. These clients include government, corporate and industry pension funds, sovereign wealth funds, and retail investors in Australia and Canada. ESG INVESTING Environmental, Social and Governance (ESG) investing has evolved over the past several decades, as companies and investment teams increasingly understand that positive ESG attributes can lead to better performance over time. Sustainability is just that: whether it’s better resource utilization, product safety, labor relations, reporting transparency, or adherence to regulatory or health and safety standards, strong practices in this regard are hallmarks of sustainable business models for the future. As of April 2016, six of our investment Affiliates are signatories of the Principles for Responsible Investment (PRI), demonstrating their commitment to incorporate environmental, social and governance factors into investment decisions. Our affiliates believe that consideration of those factors can have a positive impact on managing risk and generating sustainable long-term returns. A critical part of our strategy to serve our many stakeholders is a culture that values diversity and inclusion. Diverse teams and multiple perspectives throughout the organization can yield stronger results and are supported by the management team. Formal programs have been in place for more than a decade, and we have evolved this work to include seven Employee Resource Groups (ERGs), including a Veterans group that was most recently added. In 2016, we also launched a global Executive Diversity Council, sponsored by a member of Executive Management, reflecting the firm’s commitment to diversity and inclusion. Legg Mason AR2016 | 13 Creating choice starts with understanding investors' views Millennials: More conservative as investors Most investors over 40 say the glass is half-full % Optimistic about investing in 2016 78% of millennials are more conservative/ risk averse than a year ago 68% of adults 40+ Allocation of investment assets by asset class (%) 19% 17% 24% 18% Equities Fixed Income Cash Real estate 28% 26% 13% 15% 9% Nontraditional 6% Global U.S. MOST OPTIMISTIC 75% 81% Europe LEAST OPTIMISTIC 64% Source: Legg Mason Global Investment Survey 2016 — Trending Conversations. Royce & Associates, investment advisor to The Royce Funds, is a small-cap equity specialist offering portfolios with distinctive investment approaches to address specific investment goals. An asset class pioneer, the firm has been managing micro-cap, small- cap and small/mid-cap portfolios for more than 40 years. Throughout the fiscal year, Royce continued its efforts to create more meaningful differentiation among its portfolios. In doing this, Royce aligned its portfolio managers with the strategy that works best with their expertise. The firm also rationalized its portfolio lineup as part of this initiative. In addition, Royce added more dedicated research analysts and quantitative resources to improve and refine its advantages — a notably experienced team of small-cap portfolio managers with an average tenure of more than 10 years (compared to less than seven for small-cap portfolios tracked by Morningstar) and extensive access to company managements (more than 1,200 company meetings in the last fiscal year). These changes paved the way for many of its funds to respond positively to changes since the small-cap Russell 2000 Index peaked on June 23, 2015. From that date through the end of the fiscal year, more than 80 percent of Royce Funds benchmarked to that index outperformed it. Small-cap equity Royce & Associates is a small-cap equity specialist with unparalleled knowledge and experience, offering portfolios with distinctive investment approaches to meet an investor’s specific goals. Assets by strategy (%) 86 U.S. Equity 7 Non-U.S. Equity 4 European Equity 3 Cash and Cash Equivalents 14 | Legg Mason AR2016 Where they live matters Portfolio return in 2015 (%) for investors over 40 Looking abroad for opportunity 64% of investors over 40 say they'll focus more on international investments next year 8.6% Global investors 5.2% European investors 9.3% Asian investors 64% Learn more at LeggMason.com/TrendingConversations Fixed income Founded in 1971, the firm is known for its long-term fundamental value approach, proprietary research and team management. Western Asset Management is one of the world's leading global fixed-income managers. With more than 830 employees in nine global offices and $428.9 billion in assets under management as of March 31, 2016, the firm delivers client solutions across markets around the world. Since 1971, Western Asset has focused on long-term fundamental value with deep experience across the range of fixed income sectors. In January 2016, Western Asset became a UNPRI signatory, demonstrating its commitment to ESG issues. Strong investment performance at Western Asset also garnered recognition from the industry. Among its many accolades, the firm was named a finalist for Morningstar's 2015 Fixed-Income U.S. Fund Manager of the Year award for the Core and Core Plus Funds. In addition, Western Asset was named to Pensions & Investments' 2015 "Best Places to Work in Money Management." Total AUM by mandate (%) 46 Specialized 26 Liquidity 23 Broad Portfolio 5 Municipals † Awarded to Ken Leech, Carl Eichstaedt, and Mark Lindbloom for Western Asset Core Bond Fund (WACSX) and Western Asset Core Plus Bond Fund (WAPSX), nominated Morningstar 2015 U.S. Fixed Income Manager of the Year, United States of America. Morningstar Awards 2015 © Morningstar, Inc. Legg Mason AR2016 | 15 Board of Directors Standing (left to right) Seated (left to right) John H. Myers Senior Advisor, Angelo, Gordon & Co.; Retired CEO, GE Asset Management Joseph A. Sullivan Chairman & Chief Executive Officer, Legg Mason, Inc. Robert E. Angelica Private Investor; Retired Chairman and CEO, AT&T Investment Management Corporation; (Chair of the Risk Committee) Carol Anthony (“John”) Davidson Private Investor; Retired Controller and Chief Accounting Officer, Tyco International, LTD. Cheryl Gordon Krongard Private Investor; Retired CEO, Rothschild Asset Management; (Chair of the Compensation Committee) Barry W. Huff Retired Vice Chairman, Deloitte; (Chair of the Audit Committee) Dennis M. Kass Private Investor; Retired CEO, Jennison Associates Margaret Milner Richardson Private Consultant and Investor; Former U.S. Commissioner of Internal Revenue Kurt L. Schmoke President of the University of Baltimore; Former Mayor, City of Baltimore W. Allen Reed Private Investor; Retired CEO, GM Asset Management Corporation; (Chair of the Finance Committee) John V. Murphy Retired CEO, Oppenheimer Funds Inc.; (Lead Independent Director, Chair of the Nominating & Corporate Governance Committee) 16 | Legg Mason AR2016 Table of Contents SELECTED FINANCIAL DATA (Dollars in thousands, except per share amounts or unless otherwise noted) OPERATING RESULTS Operating Revenues Operating expenses, excluding impairment Impairment of intangible assets and goodwill Operating Income (Loss) Other non-operating expense, net, including $107,074 debt extinguishment loss in July 2014 and $68,975 in May 2012 Other non-operating income (expense) of consolidated investment vehicles, net Income (Loss) before Income Tax Provision (Benefit) Income tax provision (benefit) Net Income (Loss) Less: Net income (loss) attributable to noncontrolling interests Years ended March 31, 2016 2015 2014 2013 2012 $ 2,660,844 $ 2,819,106 $ 2,741,757 $2,612,650 $ 2,662,574 2,239,013 2,320,887 2,310,864 2,313,149 2,323,821 371,000 50,831 — — 498,219 430,893 734,000 (434,499) — 338,753 (68,806) (136,114) (13,726) (73,287) (54,006) (7,243) (25,218) 7,692 (32,910) (7,878) 5,888 367,993 125,284 242,709 5,629 2,474 419,641 137,805 281,836 (2,948) (2,821) (510,607) (150,859) (359,748) (6,421) 18,336 303,083 72,052 231,031 10,214 Net Income (Loss) Attributable to Legg Mason, Inc. $ (25,032) $ 237,080 $ 284,784 $ (353,327) $ 220,817 PER SHARE Net Income (Loss) per Share Attributable to Legg Mason, Inc. Shareholders: Basic Diluted Weighted-Average Number of Shares Outstanding: (1) Basic Diluted Dividends Declared BALANCE SHEET Total Assets(2) Long-term debt(2) Total Stockholders' Equity Attributable to Legg Mason, Inc. FINANCIAL RATIOS AND OTHER DATA Adjusted Income (3) Adjusted Income per diluted share (3) Operating Margin Operating Margin, as Adjusted (4) Adjusted EBITDA(5) Total debt to total capital (6) Assets under management (in millions) Full-time employees $ $ $ (0.25) (0.25) $ $ 2.06 2.04 $ $ 2.34 2.33 $ $ (2.65) (2.65) $ $ 1.54 1.54 107,406 107,406 112,019 113,246 121,941 122,383 133,226 133,226 143,292 143,349 0.80 $ 0.64 $ 0.52 $ 0.44 $ 0.32 $ 7,520,446 $ 7,064,834 $ 7,103,203 $7,264,582 $ 8,547,381 1,740,985 4,213,563 1,048,946 4,484,901 1,031,118 4,724,724 1,139,876 4,818,351 1,128,526 5,677,291 $ $ 370,271 3.36 1.9% 18.6% $ 621,722 29.9% $ 669,615 3,066 $ $ $ $ 378,751 3.26 17.7% 23.0% 686,499 19.1% 702,724 2,982 $ $ $ $ 417,805 $ 347,169 3.41 $ 2.61 15.7% 22.0% (16.6)% 17.5 % 617,092 $ 555,725 18.0% 19.2 % 701,774 $ 664,609 2,843 2,975 $ $ $ $ 397,030 2.77 12.7% 22.3% 585,275 19.6% 643,318 2,979 (1) (2) Excludes weighted-average unvested restricted shares deemed to be participating securities for the years ended March 31, 2016 and 2015. Basic and diluted shares are the same for periods with a Net Loss Attributable to Legg Mason, Inc. See Note 12 of Notes to Consolidated Financial Statements. For the year ended March 31, 2016, Legg Mason elected to early adopt updated accounting guidance which requires unamortized debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated long-term debt liability. This guidance was adopted on a retrospective basis. Therefore, for years prior to fiscal 2016, unamortized debt issuance costs have been reclassified from Other assets to Long-term debt in the Consolidated Balance Sheets. See Note 1 of Notes to Consolidated Financial Statements. (3) Adjusted Income is a non-GAAP performance measure. We define Adjusted Income as Net Income (Loss) Attributable to Legg Mason, Inc., plus amortization and deferred taxes related to intangible assets and goodwill, and imputed interest and tax benefits on contingent convertible debt less deferred income taxes on goodwill and indefinite- life intangible asset impairment, if any. We also adjust for certain non-core items, such as intangible asset impairments, the impact of fair value adjustments of contingent consideration liabilities, if any, the impact of tax rate adjustments on certain deferred tax liabilities related to indefinite-life intangible assets, and loss on extinguishment of contingent convertible debt. The calculation of Adjusted Income per diluted share includes weighted-average unvested restricted shares. See Supplemental Non-GAAP Information in Management's Discussion and Analysis of Financial Condition and Results of Operations. (4) Operating Margin, as Adjusted, is a non-GAAP performance measure we calculate by dividing (i) Operating Income (Loss), adjusted to exclude the impact on compensation expense of gains or losses on investments made to fund deferred compensation plans, the impact on compensation expense of gains or losses on seed capital investments by our affiliates under revenue sharing agreements, amortization related to intangible assets, transition-related costs of streamlining our business model, if any, income (loss) of consolidated investment vehicles, the impact of fair value adjustments of contingent consideration liabilities, if any, and impairment charges by (ii) our Operating Revenues, adjusted to add back net investment advisory fees eliminated upon consolidation of investment vehicles, less distribution and servicing expenses which we use as an approximate measure of revenues that are passed through to third parties, which we refer to as "Operating Revenues, as Adjusted." See Supplemental Non-GAAP Information in Management's Discussion and Analysis of Financial Condition and Results of Operations. (5) Adjusted EBITDA is a non-GAAP liquidity measure we define as cash provided by operations plus (minus) allocation of debt redemption payments, interest expense, net of accretion and amortization of debt discounts and premiums, current income tax expense, net gains on investment securities, the net change in other assets and liabilities and other. This definition results in a metric that is the same amount as EBITDA used in covenants in our revolving credit facility agreement. See Supplemental Non-GAAP Information in Management's Discussion and Analysis of Financial Condition and Results of Operations. Calculated based on total gross debt as a percentage of total capital (total stockholders' equity attributable to Legg Mason, Inc. plus total gross debt) as of March 31. (6) Legg Mason AR2016 | 17Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS We have made in this 2016 Annual Report, and from time to time may otherwise make in our public filings, press releases and statements by our management, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including information relating to anticipated growth in revenues, margins or earnings per share, anticipated changes in our business or in the amount of our client assets under management (“AUM”) or assets under advisement (“AUA”), anticipated future performance of our business, including expected earnings per share in future periods, anticipated future investment performance of our affiliates, our expected future net client cash flows, anticipated expense levels, changes in expenses, the expected effects of acquisitions and expectations regarding financial market conditions. The words or phrases "can be," "may be," "expects," "may affect," "may depend," "believes," "estimate," "project," "anticipate" and similar words and phrases are intended to identify such forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties and we caution readers that any forward- looking information provided by or on behalf of Legg Mason is not a guarantee of future performance. Actual results may differ materially from those in forward-looking information as a result of various factors, some of which are beyond our control, including but not limited to those discussed below and those discussed under the heading "Risk Factors" and elsewhere in our Annual Report on Form 10-K and our other public filings, press releases and statements by our management. Due to such risks, uncertainties and other factors, we caution each person receiving such forward-looking information not to place undue reliance on such statements. Further, such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligations to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. Our future revenues may fluctuate due to numerous factors, such as: the total value and composition of our AUM; the mix of our AUM among our affiliates, asset classes, client type and geography; the revenue yield of our AUM; the volatility and general level of securities prices and interest rates; the relative investment performance of company-sponsored investment funds and other asset management products both in absolute terms and relative to competing offerings and market indices; investor sentiment and confidence; general economic conditions; our ability to maintain investment management and administrative fees at current levels; competitive conditions in our business; the ability to attract and retain key personnel and the effects of acquisitions, including prior acquisitions. Our future operating results are also dependent upon the level of operating expenses, which are subject to fluctuation for the following or other reasons: variations in the level of compensation expense incurred as a result of changes in the number of total employees, competitive factors, changes in the percentages of revenues paid as compensation or other reasons; increases in distribution expenses; variations in expenses and capital costs, including depreciation, amortization and other non-cash charges incurred by us to maintain our administrative infrastructure; unanticipated costs that may be incurred by Legg Mason from time to time to protect client goodwill, to otherwise support investment products or in connection with litigation or regulatory proceedings; and the effects of acquisitions and dispositions. Our business is also subject to substantial governmental regulation and changes in legal, regulatory, accounting, tax and compliance requirements that may have a substantial effect on our business and results of operations. 818 | Legg Mason AR2016 Table of Contents EXECUTIVE OVERVIEW Legg Mason, Inc., a holding company, with its subsidiaries (which collectively comprise "Legg Mason") is a global asset management firm. Acting through our subsidiaries, we provide investment management and related services to institutional and individual clients, company-sponsored mutual funds and other investment vehicles. We offer these products and services directly and through various financial intermediaries. We have operations principally in the U.S. and the U.K. and also have offices in Australia, Bahamas, Brazil, Canada, Chile, China, Dubai, France, Germany, Italy, Japan, Poland, Singapore, Spain, Switzerland and Taiwan. All references to fiscal 2016, 2015 or 2014, refer to our fiscal year ended March 31 of that year. Terms such as "we," "us," "our," and "Company" refer to Legg Mason. Our operating revenues primarily consist of investment advisory fees from separate accounts and funds, and distribution and service fees. Investment advisory fees are generally calculated as a percentage of the assets of the investment portfolios that we manage. In addition, performance fees may be earned under certain investment advisory contracts for exceeding performance benchmarks or hurdle rates. The largest portion of our performance fees is earned based on 12-month performance periods that end in differing quarters during the year, with a portion based on quarterly performance periods. Distribution and service fees are received for distributing investment products and services, for providing other support services to investment portfolios, or for providing non-discretionary advisory services, and are generally calculated as a percentage of the assets in an investment portfolio or as a percentage of new assets added to an investment portfolio. Our revenues, therefore, are dependent upon the level of our assets under management ("AUM") and assets under advisement ("AUA") and fee rates, and thus are affected by factors such as securities market conditions, our ability to attract and maintain AUM and key investment personnel, and investment performance. Our AUM varies in large part from period to period due to inflows and outflows of client assets as well as market performance and changes in foreign exchange rates. Client decisions to increase or decrease their assets under our management, and decisions by potential clients to utilize our services, may be based on one or more of a number of factors. These factors include our reputation in the marketplace, the investment performance (both absolute and relative to benchmarks or competitive products) of our products and services, the fees we charge for our investment services, the client or potential client's situation, including investment objectives, liquidity needs, investment horizon and amount of assets managed, our relationships with distributors and the external economic environment, including market conditions. The fees that we charge for our investment services vary based upon factors such as the type of underlying investment product, the amount of AUM, the asset management affiliate that provides the services, and the type of services (and investment objectives) that are provided. Fees charged for equity asset management services are generally higher than fees charged for fixed income or liquidity asset management services. Accordingly, our revenues and average operating revenue yields will be affected by the composition of our AUM, with changes in the relative level of equity assets and alternatives typically more significantly impacting our revenues and average operating revenue yields. Average operating revenue yields are calculated as the ratio of annualized investment advisory fees, distribution and service fees, and other revenues, less performance fees, to average AUM. In addition, in the ordinary course of our business, we may reduce or waive investment management fees, or limit total expenses, on certain products or services for particular time periods to manage fund expenses, or for other reasons, and to help retain or increase managed assets. We have revenue sharing arrangements in place for most of our asset management affiliates, under which specified percentages of the affiliates' revenues are required to be distributed to us and the balance of the revenues is retained by the affiliates to pay their operating expenses, including compensation expenses, but excluding certain expenses and income taxes. Under these arrangements, our asset management affiliates retain different percentages of revenues to cover their costs. As such, our Net Income (Loss) Attributable to Legg Mason, Inc., operating margin and compensation as a percentage of operating revenues are impacted based on which affiliates and products generate our AUM, and a change in AUM at one affiliate or with respect to one product or class of products can have a dramatically different effect on our revenues and earnings than an equal change at another affiliate or in another product or class of products. In addition, from time to time, we may agree to changes in revenue sharing and other arrangements with our asset management personnel, which may impact our compensation expenses and profitability. The most significant component of our cost structure is employee compensation and benefits, of which a majority is variable in nature and includes incentive compensation that is primarily based upon revenue levels, non-compensation related operating expense levels at revenue share-based affiliates, and our overall profitability. The next largest component of our cost structure is distribution and servicing expense, which consists primarily of fees paid to third-party distributors for selling our asset management products and services and are largely variable in nature. Certain other operating costs are typically consistent from period to period, such as occupancy, depreciation and amortization, and fixed contract commitments for Legg Mason AR2016 | 19Table of Contents market data, communication and technology services, and usually do not decline with reduced levels of business activity or, conversely, usually do not rise proportionately with increased business activity. Our financial position and results of operations are materially affected by the overall trends and conditions of global financial markets. Results of any individual period should not be considered representative of future results. Our profitability is sensitive to a variety of factors, including the amount and composition of our AUM, and the volatility and general level of securities prices, and interest rates, as well as changes in foreign currency exchange rates, among other things. Periods of unfavorable market conditions are likely to have an adverse effect on our profitability. In addition, the diversification of services and products offered, investment performance, access to distribution channels, reputation in the market, attraction and retention of key employees and client relations are significant factors in determining whether we are successful in the attraction and retention of clients. In the last few years, the industry has seen flows into products for which we do not currently garner significant market share. The financial services business in which we are engaged is extremely competitive. Our competition includes numerous global, national, regional and local asset management firms, commercial banks, insurance companies and other financial services companies. The industry has been impacted by continued economic uncertainty, the constant introduction of new products and services, and the consolidation of financial services firms through mergers and acquisitions. The industry in which we operate is also subject to extensive regulation under federal, state, and foreign laws. Like most firms, we have been and will continue to be impacted by regulatory and legislative changes. Responding to these changes and keeping abreast of regulatory developments, has required, and will continue to require, us to incur costs that impact our profitability. Our strategic priorities are focused on four primary areas listed below. Management keeps these strategic priorities in mind when it evaluates our operating performance and financial condition. Consistent with this approach, we have also presented in the table below the most important initiatives on which management currently focuses in evaluating our performance and financial condition. Strategic Priorities Products Performance Distribution Initiatives Create an innovative portfolio of investment products and promote revenue growth by developing new products and leveraging the capabilities of our affiliates Identify and execute strategic acquisitions to increase product offerings, strengthen our affiliates, and fill gaps in products and services Deliver compelling and consistent performance against both relevant benchmarks and the products and services of our competitors Evaluate and reallocate resources within and to our distribution platform to continue to maintain and enhance our leading distribution function with the capability to offer solutions to relevant investment challenges and grow market share worldwide Productivity Operate with a high level of effectiveness and improve ongoing efficiency Manage expenses Align economic relationships with affiliate management teams, including retained affiliate management equity and the implementation of affiliate management equity plan agreements The strategic priorities discussed above are designed to drive improvements in our net flows, earnings, cash flows, AUM and other key metrics, including operating margin. Certain of these key metrics are discussed in our annual results discussion to follow. 20 | Legg Mason AR2016Table of Contents In connection with these strategic priorities (principally products and productivity): • On May 2, 2016, we completed the transaction to combine The Permal Group, Limited ("Permal"), our existing hedge fund platform, with EnTrust Capital ("EnTrust"). EnTrust is a leading alternative asset management firm headquartered in New York with approximately $10 billion in AUM and $2 billion in AUA and committed capital. We own 65% of the combined entity, which is branded EnTrustPermal. The combination of the businesses of EnTrust and Permal creates a new global alternatives firm with over $26 billion in AUM and total client assets (including AUA and committed capital) of approximately $30 billion. In connection with the restructuring of Permal for the combination with EnTrust, we expect to incur up to $100 million of total restructuring and transition-related costs, of which $43.3 million was incurred during the year ended March 31, 2016. Approximately $40 million to $50 million of the anticipated remaining costs associated with the restructuring are expected to be incurred in the year ending March 31, 2017. We expect to achieve approximately $35 million in annual savings from the cost structures of the two businesses. See Notes 2 and 18 of Notes to Consolidated Financial Statements for additional information. • On April 13, 2016, we acquired an 82% majority equity interest in Clarion Partners, a diversified real estate asset management firm based in New York. Clarion Partners managed approximately $41.5 billion in AUM as of April 30, 2016. See Note 18 of Notes to Consolidated Financial Statements for additional information. • • In March 2016, we completed the implementation of a management equity plan with the management of Royce & Associates ("Royce"). We incurred a non-cash charge of $21.4 million upon the issuance of management equity plan units in fiscal 2016. See Note 11 of Notes to Consolidated Financial Statements for additional information regarding the Royce management equity plan. In March 2016, we issued $450 million of Senior Notes due 2026, and $250 million of Junior Subordinated Notes due 2056, the net proceeds of which were used to finance the acquisitions of EnTrust and Clarion Partners. See Note 6 of Notes to Consolidated Financial Statements for additional information. • On January 22, 2016, we acquired a 20% minority equity position in Precidian Investments, LLC ("Precidian"), a firm specializing in creating innovative products and solutions and solving market structure issues, particularly with regard to the exchange-traded fund ("ETF") marketplace. See Note 2 of Notes to Consolidated Financial Statements for additional information. • In December 2015, we launched four new ETF products on the NASDAQ Stock Exchange. These outcome-oriented index-based ETF funds are managed by our wholly-owned asset management affiliate QS Investors Holdings, LLC ("QS Investors"). • On October 21, 2015, we acquired a 75% majority interest in RARE Infrastructure Limited ("RARE Infrastructure"). RARE Infrastructure specializes in global listed infrastructure investing, is headquartered in Sydney, Australia, and had approximately $6.8 billion in AUM at closing. See Note 2 of Notes to Consolidated Financial Statements for additional information. Net Loss Attributable to Legg Mason, Inc. for the year ended March 31, 2016, was $25.0 million, or $0.25 per diluted share, as compared to Net Income Attributable to Legg Mason, Inc. of $237.1 million, or $2.04 per diluted share for the year ended March 31, 2015. In addition to the $43.3 million of expenses related to the restructuring of Permal for the combination with EnTrust and the $21.4 million charge related to the Royce management equity plan, as discussed above, the year ended March 31, 2016, included pre-tax impairment charges of $371.0 million, or $2.76 per diluted share, related to Permal indefinite-life intangible assets, inclusive of the related intangible asset from Fauchier Partners Management Limited ("Fauchier"). The year ended March 31, 2015, included a pre-tax, non-operating charge of $107.1 million, or $0.59 per diluted share, related to the refinancing of our previously outstanding 5.5% Senior Notes, as well as $35.8 million in expenses related to the integration of two of our existing affiliates, Batterymarch Financial Management, Inc. ("Batterymarch") and Legg Mason Global Asset Management, LLC ("LMGAA") into QS Investors. Average AUM and total revenues decreased in fiscal 2016, as compared to fiscal 2015, as further discussed below. Legg Mason AR2016 | 21Table of Contents Total AUM decreased during the year ended March 31, 2016, due to the negative impact of market performance and other and net client outflows in both long-term and liquidity AUM, which were offset in part by the acquisition of RARE Infrastructure in October 2015. The following discussion and analysis provides additional information regarding our financial condition and results of operations. BUSINESS ENVIRONMENT AND RESULTS OF OPERATIONS During fiscal 2016, while the U.S. economic environment was characterized by continued growth and improving fundamentals, the business environment was strongly influenced by overall markets, which remained sensitive to increasing concerns over economic and political conditions in other countries, as well as the U.S. Federal Reserve Board's decision to increase the target federal funds rate in December 2015 for the first time since 2006. Both U.S. and international equity markets experienced significant volatility during fiscal 2016. Despite recovering a significant portion of the losses experienced as a result of this volatility, all three major U.S. equity market indices decreased during fiscal 2016, after increasing for the past two fiscal years, while bond indices were mixed, as illustrated in the table below: Indices(1) Dow Jones Industrial Average(2) S&P 500(2) NASDAQ Composite Index(2) Barclays Capital U.S. Aggregate Bond Index Barclays Capital Global Aggregate Bond Index (1) Indices are trademarks of Dow Jones & Company, McGraw-Hill Companies, Inc., NASDAQ Stock Market, Inc., and Barclays Capital, respectively, which are not affiliated with Legg Mason. (2) Excludes the impact of the reinvestment of dividends and stock splits. In December 2015, the Federal Reserve Board increased the target federal funds rate for the first time since 2006, from 0.25% to 0.50%. While the economic outlook for the U.S. has remained more positive in recent years, the financial environment in which we operate continues to reflect a heightened level of sensitivity as we move into fiscal 2017. % Change for the year ended March 31: 2015 2016 (0.5)% (0.4)% (0.6)% 2.0 % 4.6 % 8.0 % 10.4 % 16.7 % 5.7 % (3.7)% 2014 12.9 % 19.3 % 28.5 % (0.1)% 1.9 % 22 | Legg Mason AR2016Table of Contents The following table sets forth, for the periods indicated, amounts in the Consolidated Statements of Income (Loss) as a percentage of operating revenues and the increase (decrease) by item as a percentage of the amount for the previous period: Percentage of Operating Revenues Years Ended March 31, 2015 2016 2014 Operating Revenues Investment advisory fees Separate accounts Funds Performance fees Distribution and service fees Other Total Operating Revenues Operating Expenses Compensation and benefits Distribution and servicing Communications and technology Occupancy Amortization of intangible assets Impairment of intangible assets Other Total Operating Expenses Operating Income (Loss) Other Non-Operating Income (Expense) Interest income Interest expense Other income (expense), net Other non-operating income (expense) of consolidated investment vehicles, net Total other non-operating expense Income (Loss) before Income Tax Provision (Benefit) Income tax provision (benefit) Net Income (Loss) Less: Net income (loss) attributable to noncontrolling interests 31.0 % 53.0 1.6 14.3 0.1 100.0 29.2 % 54.8 3.0 12.8 0.2 100.0 28.4% 54.7 3.9 12.7 0.3 100.0 45.3 20.5 7.4 4.6 0.2 13.9 6.1 98.0 2.0 0.2 (1.8) (1.0) (0.3) (2.9) (0.9) 0.3 (1.2) (0.3) 43.7 21.1 6.5 3.9 0.1 — 7.0 82.3 17.7 0.3 (2.1) (3.0) 0.2 (4.6) 13.1 4.5 8.6 0.2 44.1 22.6 5.8 4.2 0.4 — 7.2 84.3 15.7 0.2 (1.9) 1.2 0.1 (0.4) 15.3 5.0 10.3 (0.1) Net Income (Loss) Attributable to Legg Mason, Inc. n/m-not meaningful (1) Calculated based on the change in actual amounts between fiscal years as a percentage of the prior year amount. (0.9)% 8.4 % 10.4% Period to Period Change(1) 2016 Compared to 2015 2015 Compared to 2014 0.2% (8.8) (49.7) 5.6 (60.7) (5.6) (2.3) (8.3) 8.5 11.8 89.7 n/m (17.9) 12.5 (89.8) (24.3) (16.8) (69.5) n/m (41.6) n/m n/m n/m n/m n/m 6.0 % 2.9 (22.0) 3.9 (32.1) 2.8 1.9 (3.9) 15.5 (4.8) (78.9) n/m 1.3 0.4 15.6 17.2 10.2 n/m n/m n/m (12.3) (9.1) (13.9) n/m (16.8)% Legg Mason AR2016 | 23Table of Contents ASSETS UNDER MANAGEMENT AND ASSETS UNDER ADVISEMENT Assets Under Management Our AUM is primarily managed across the following asset classes: Equity Fixed Income Liquidity Large Cap Growth Large Cap Value Small Cap Core Equity Income Large Cap Core International Equity Infrastructure Value Small Cap Value Sector Equity Mid Cap Core Emerging Markets Equity Global Equity U.S. Intermediate Investment Grade U.S. Managed Cash U.S. Credit Aggregate U.S. Municipal Cash Global Opportunistic Fixed Income Global Government U.S. Municipal Global Fixed Income U.S. Long Duration U.S. Limited Duration U.S. High Yield Emerging Markets The components of the changes in our AUM (in billions) for the years ended March 31, were as follows: Beginning of period Net client cash flows Investment funds, excluding liquidity funds(1) Subscriptions Redemptions Separate account flows, net Total long-term flows Liquidity fund flows, net Separate account flows, net Total liquidity flows Total net client cash flows Market performance and other (2) Impact of foreign exchange Acquisitions (dispositions), net (3) End of period 2016 2015 2014 $ 702.7 $ 701.8 $ 664.6 50.3 (62.3) 0.8 (11.2) (15.1) 0.2 (14.9) (26.1) (15.3) 1.4 6.9 669.6 72.1 (61.2) 5.6 16.5 (21.3) (0.9) (22.2) (5.7) 20.1 (18.5) 5.0 702.7 52.1 (58.1) 2.2 (3.8) 11.8 0.3 12.1 8.3 35.1 (4.9) (1.3) 701.8 $ (1) Subscriptions and redemptions reflect the gross activity in the funds and include assets transferred between funds and between share classes. (2) Other is primarily the reclassification of $0.5 billion and $12.8 billion of client assets from AUM to AUA for fiscal 2016 and 2015, respectively, and the $ $ (3) reinvestment of dividends. Includes $6.8 billion related to the acquisition of RARE Infrastructure and $0.1 billion related to the acquisition of PK Investments, LLP ("PK Investments") during the year ended March 31, 2016; and $9.5 billion related to the acquisition of Martin Currie (Holdings) Limited ("Martin Currie") and $5.0 billion related to the acquisition of QS Investors, offset in part by $9.5 billion related to the disposition of Legg Mason Investments Counsel and Trust ("LMIC"), for the year ended March 31, 2015. AUM at March 31, 2016, was $669.6 billion, a decrease of $33.1 billion, or 4.7%, from March 31, 2015. Total net client outflows were $26.1 billion, consisting of net client outflows from the liquidity and long-term asset classes of $14.9 billion and $11.2 billion, respectively. Net long-term asset outflows were comprised of equity and fixed income net outflows of $10.8 billion and $0.4 billion, respectively. Equity net outflows were primarily in products managed by Royce, for which outflows are expected to continue for the near-term, and ClearBridge Investments, LLC (“ClearBridge”), offset in part by equity net inflows at QS Investors. Fixed income net outflows were primarily in products managed by Western Asset Management Company ("Western Asset") and Permal, offset in part by fixed income net inflows at Brandywine Global 24 | Legg Mason AR2016 Table of Contents Investment Management, LLC ("Brandywine"). We generally earn higher fees and profits on equity AUM, and outflows in the equity asset class will more negatively impact our revenues and Net Income (Loss) Attributable to Legg Mason, Inc. than would outflows in other asset classes. Market performance and other was $(15.3) billion and the positive impact of foreign currency exchange rate fluctuations was $1.4 billion. Acquisitions of $6.9 billion primarily relate to the acquisition of RARE Infrastructure in October 2015. AUM at March 31, 2015, was $702.7 billion, an increase of $0.9 billion, or 0.1%, from March 31, 2014. Total net client outflows were $5.7 billion, as net client outflows of $22.2 billion from the liquidity asset class were substantially offset by $16.5 billion of net client inflows into long-term asset classes. In fiscal 2015, we experienced net inflows into long-term asset classes for the only time since fiscal 2007. Net long-term asset inflows were comprised of fixed income net inflows of $19.2 billion offset in part by equity net outflows of $2.7 billion. Fixed income net inflows were primarily in products managed by Brandywine and Western Asset. Equity net outflows were primarily in products managed by Royce and QS Investors and were partially offset by equity inflows at ClearBridge and Brandywine. Market performance and other totaled $20.1 billion, as the positive impact of market performance and other of $32.9 billion was offset in part by the reclassification of $12.8 billion of client assets from AUM to AUA in the first quarter of fiscal 2015, as further discussed below. The negative impact of foreign currency exchange rate fluctuations was $(18.5) billion. Acquisitions (dispositions), net, totaled $5.0 billion, with $9.5 billion related to the acquisition of Martin Currie and $5.0 billion related to the acquisition of QS Investors, offset in part by $9.5 billion related to the disposition of LMIC. Our investment advisory and administrative contracts are generally terminable at will or upon relatively short notice, and investors in the mutual funds that we manage may redeem their investments in the funds at any time without prior notice. Institutional and individual clients can terminate their relationships with us, reduce the aggregate amount of assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in prevailing interest rates, changes in our reputation in the marketplace, changes in management or control of clients or third-party distributors with whom we have relationships, loss of key investment management personnel or financial market performance. AUM by Asset Class AUM by asset class (in billions) for the years ended March 31 were as follows: Equity Fixed Income Total long-term assets Liquidity Total 2016 $ 180.5 376.8 557.3 112.3 $ 669.6 % of Total 2015 % of Total 2014 27% $ 199.4 56 376.1 83 575.5 17 127.2 100% $ 702.7 28% $ 186.4 365.2 54 551.6 82 150.2 18 100% $ 701.8 % of Total 27% 52 79 21 100% Average AUM by asset class (in billions) for the years ended March 31 were as follows: Equity Fixed Income Total long-term assets Liquidity Total 2016 $ 189.2 372.5 561.7 123.1 $ 684.8 % of Total 2015 % of Total 2014 28% $ 195.4 54 367.1 82 562.5 18 140.0 100% $ 702.5 28% $ 172.8 358.7 52 531.5 80 135.9 20 100% $ 667.4 % of Total 26% 54 80 20 100% % Change 2016 Compared to 2015 2015 Compared to 2014 (9)% — (3) (12) (5) 7% 3 4 (15) — % Change 2016 Compared to 2015 2015 Compared to 2014 (3)% 1 — (12) (3) 13% 2 6 3 5 Legg Mason AR2016 | 25Table of Contents The component changes in our AUM by asset class (in billions) for the fiscal years ended March 31, 2016, 2015 and 2014, were as follows: March 31, 2013 Investment funds, excluding liquidity funds Subscriptions Redemptions (1) Separate account flows, net Liquidity fund flows, net Net client cash flows Market performance and other (2) Impact of foreign exchange Acquisitions (dispositions), net March 31, 2014 Investment funds, excluding liquidity funds Subscriptions Redemptions Separate account flows, net Liquidity fund flows, net Net client cash flows Market performance and other (2) Impact of foreign exchange Acquisitions (dispositions), net (3) March 31, 2015 Investment funds, excluding liquidity funds Equity Fixed Income $ 161.8 $ 365.1 Total Long-Term 526.9 $ Liquidity Total $ 137.7 $ 664.6 27.0 (30.1) (1.9) — (5.0) 31.0 (0.1) (1.3) 186.4 29.4 (33.7) 1.6 — (2.7) 11.4 (2.7) 7.0 199.4 25.1 (28.0) 4.1 — 1.2 3.6 (4.7) — 365.2 42.7 (27.5) 4.0 — 19.2 8.4 (14.7) (2.0) 376.1 52.1 (58.1) 2.2 — (3.8) 34.6 (4.8) (1.3) 551.6 72.1 (61.2) 5.6 — 16.5 19.8 (17.4) 5.0 575.5 — — 0.3 11.8 12.1 0.5 (0.1) — 150.2 — — (0.9) (21.3) (22.2) 0.3 (1.1) — 127.2 52.1 (58.1) 2.5 11.8 8.3 35.1 (4.9) (1.3) 701.8 72.1 (61.2) 4.7 (21.3) (5.7) 20.1 (18.5) 5.0 702.7 Subscriptions Redemptions Separate account flows, net Liquidity fund flows, net 50.3 (62.3) 1.0 (15.1) Net client cash flows (26.1) Market performance and other (2) (15.3) Impact of foreign exchange 1.4 Acquisitions (dispositions), net (3) 6.9 669.6 March 31, 2016 (1) Fixed income redemptions include $4.7 billion for the year ended March 31, 2014, related to a single, low-fee global sovereign mandate client. Assets related 22.6 (36.1) 2.7 — (10.8) (15.3) 0.3 6.9 180.5 — — 0.2 (15.1) (14.9) 0.1 (0.1) — 112.3 27.7 (26.2) (1.9) — (0.4) (0.1) 1.2 — 376.8 50.3 (62.3) 0.8 — (11.2) (15.4) 1.5 6.9 557.3 $ $ $ $ $ to this client were reclassified from AUM to AUA during the first quarter of fiscal 2015, as further discussed below. (2) Other is primarily the reclassification of client assets from AUM to AUA for fiscal 2016 and 2015 of $0.5 billion and $12.8 billion, respectively, and the (3) reinvestment of dividends. Includes $6.8 billion related to the acquisition of RARE Infrastructure and $0.1 billion related to the acquisition of PK Investments during the year ended March 31, 2016; and $9.5 billion related to the acquisition of Martin Currie and $5.0 billion related to the acquisition of QS Investors, offset in part by $9.5 billion related to the disposition of LMIC for the year ended March 31, 2015. Alternative Asset Class Beginning in the first quarter of fiscal 2017, we will present alternative assets as a separate asset class of our AUM. We currently define alternative assets as all AUM managed by EnTrustPermal, Permal Capital Management, Clarion Partners, and RARE Infrastructure. 26 | Legg Mason AR2016Table of Contents AUM by Distribution Channel Broadly, we have two principal distribution channels, Global Distribution and Affiliate/Other, through which we sell a variety of investment products and services. Global Distribution, which consists of our centralized global distribution operations, principally sells U.S. and international mutual funds and other commingled vehicles, retail separately managed account programs, and sub-advisory accounts for insurance companies and similar clients. Affiliate/Other consists of the distribution operations within our asset managers which principally sell institutional separate account management, liquidity (money market) funds, and funds-of-hedge funds. The component changes in our AUM by distribution channel (in billions) for the years ended March 31, 2016, 2015 and 2014, were as follows: Global Distribution $ $ Total March 31, 2013 Net client cash flows, excluding liquidity funds Liquidity fund flows, net Net client cash flows, excluding liquidity funds Liquidity fund flows, net Net client cash flows Market performance and other Impact of foreign exchange Acquisitions (dispositions), net March 31, 2014 Affiliate/Other 432.5 $ (2.3) 11.8 9.5 16.4 (2.7) (1.3) 454.4 (0.8) (21.3) (22.1) 8.2 (12.8) 664.6 (3.5) 11.8 8.3 35.1 (4.9) (1.3) 701.8 15.6 (21.3) (5.7) 20.1 (18.5) 5.0 702.7 (11.0) (15.1) (26.1) (15.3) 1.4 6.9 669.6 Includes $6.8 billion related to the acquisition of RARE Infrastructure and $0.1 billion related to the acquisition of PK Investments during the year ended March 31, 2016; and $9.5 billion related to the acquisition of Martin Currie and $5.0 billion related to the acquisition of QS Investors, offset in part by $9.5 billion related to the disposition of LMIC for the year ended March 31, 2015. 232.1 (1.2) — (1.2) 18.7 (2.2) — 247.4 16.4 — 16.4 11.9 (5.7) — 270.0 (3.5) — (3.5) (13.1) 1.2 — 254.6 Net client cash flows Market performance and other Impact of foreign exchange Acquisitions (dispositions), net March 31, 2016 (1) Net client cash flows Market performance and other Impact of foreign exchange Acquisitions (dispositions), net March 31, 2015 Net client cash flows, excluding liquidity funds Liquidity fund flows, net 432.7 (7.5) (15.1) (22.6) (2.2) 0.2 6.9 (1) 5.0 (1) 415.0 $ $ $ Operating Revenue Yield Our overall operating revenue yield, less performance fees, across all asset classes and distribution channels was 38 basis points for the year ended March 31, 2016, and 39 basis points for each of the years ended March 31, 2015 and 2014. Fees for equity assets are generally higher, averaging approximately 70 basis points, 75 basis points and 85 basis points for the years ended March 31, 2016, 2015, and 2014, respectively. The average fee rate for equity assets has declined over the last four years due to a shift in the mix of equity assets from higher fee equity products to lower fee equity products. This compares to fees for fixed income assets, which averaged approximately 30 basis points for each of the years ended March 31, 2016, 2015 and 2014, respectively, and liquidity assets, which averaged under 10 basis points (reflecting the impact of current advisory fee waivers due to the low interest rate environment) for each of the years ended March 31, 2016, 2015, and 2014. Equity assets are primarily managed by ClearBridge, Royce, Brandywine, Permal, QS Investors, Martin Currie and RARE Infrastructure; fixed income assets are primarily managed by Western Asset, Brandywine, and Permal; and liquidity assets are managed by Western Asset. Fee rates for assets distributed through Legg Mason Global Distribution, which are predominately retail in nature, averaged approximately 45 basis points for the year ended March 31, 2016, and approximately 50 basis points for each of the years ended March 31, 2015 and 2014, while fee rates for assets distributed Legg Mason AR2016 | 27Table of Contents through the Affiliate/Other channel averaged approximately 35 basis points for each of the years ended March 31, 2016, 2015, and 2014. Investment Performance Overall investment performance of our AUM for the years ended March 31, 2016, 2015 and 2014, was mixed compared to relevant benchmarks. Year ended March 31, 2016 For the year ended March 31, 2016, U.S. indices produced mixed returns. The best performing was the Dow Jones Industrial Average, returning 2.1%. These returns were achieved in an economic environment characterized by unexpected declines in oil prices, a strong U.S. dollar, along with a slow-to-recover U.S. economy, and Chinese currency devaluation. In the fixed income markets, in December 2015, the Federal Reserve raised its target rate 0.25%, representing the Federal Reserve's first step toward monetary policy normalization, however, expectations of future Federal Reserve interest rate increases lessened as forecasts pointed to fewer future rate increases. This resulted in the yield curve continuing to flatten over the fiscal year as many long-dated yields declined. The lowest performing fixed income sector for the year ended March 31, 2016, was high yield bonds, as measured by the Barclays U.S. High Yield Index, which declined 3.7%. The best performing fixed income sector for the year ended March 31, 2016, was U.S. Government bonds as measured by the Barclays U.S. Government Index, which returned 2.4%. Year ended March 31, 2015 For the year ended March 31, 2015, most U.S. indices produced positive returns. The best performing was the NASDAQ Composite, which returned 16.7%. These returns were achieved in an economic environment characterized by uneven global growth and heightened sensitivity to economic news such as declining oil prices and unrest in the Middle East. In the fixed income markets, the Federal Reserve kept the target rate and discount rate steady while signaling an increase in the Federal Reserve funds target rate in the near term. Overall, the yield curve flattened over the fiscal year as many long- dated yields declined. The lowest performing fixed income sector for the year ended March 31, 2015, was high yield bonds, as measured by the Barclays U.S. High Yield Index, which returned 2.0%. The best performing fixed income sector for the year ended March 31, 2015, was corporate bonds as measured by the Barclays U.S. Credit Index, which returned 6.7%. Year ended March 31, 2014 For the year ended March 31, 2014, most U.S. indices produced positive returns. The best performing was the NASDAQ Composite, which returned 28.5%. These returns were achieved in an economic environment characterized by uneven global growth and heightened sensitivity to economic news, such as concerns for economic growth in China and the then ongoing Ukraine/Russia crisis. In the fixed income markets, the Federal Reserve kept the target rate and discount rate steady while tapering the bond-buying program. The yield curve steepened over the fiscal year but flattened in the last quarter as many long-dated yields declined. The lowest performing fixed income sector for the year ended March 31, 2014, was U.S. Treasury Inflation Protected Securities ("TIPS"), as measured by the Barclays U.S. TIPS Index, which declined 6.5%. The best performing fixed income sector for the year ended March 31, 2014, was high yield bonds as measured by the Barclays U.S. High Yield Bond Index, which returned 7.5%. 28 | Legg Mason AR2016 Table of Contents The following table presents a summary of the percentages of our AUM by strategy(1) that outpaced their respective benchmarks as of March 31, 2016, 2015 and 2014, for the trailing 1-year, 3-year, 5-year, and 10-year periods: As of March 31, 2016 As of March 31, 2015 As of March 31, 2014 1-year 3-year 5-year 10-year 1-year 3-year 5-year 10-year 1-year 3-year 5-year 10-year Total (includes liquidity) 48% 66% 86% 82% 67% 84% 86% 88% 75% 87% 84% 92% Equity: Large cap Small cap Total equity (includes other equity) Fixed income: U.S. taxable U.S. tax-exempt Global taxable Total fixed income 45% 70% 23% 19% 86% 30% 69% 63% 24% 10% 64% 11% 74% 26% 94% 42% 67% 33% 91% 26% 52% 29% 76% 82% 51% 32% 74% 68% 30% 58% 66% 81% 54% 69% 45% 77% 31% 100% 11% 29% 78% 0% 75% 72% 87% 79% 100% 100% 85% 87% 84% 82% 74% 100% 77% 76% 94% 100% 89% 93% 93% 100% 88% 92% 88% 100% 84% 88% 94% 0% 54% 74% 94% 100% 82% 91% 94% 100% 98% 96% 97% 100% 93% 96% The following table presents a summary of the percentages of our U.S. mutual fund assets(2) that outpaced their Lipper category averages as of March 31, 2016, 2015 and 2014, for the trailing 1-year, 3-year, 5-year, and 10-year periods: As of March 31, 2016 As of March 31, 2015 As of March 31, 2014 1-year 3-year 5-year 10-year 1-year 3-year 5-year 10-year 1-year 3-year 5-year 10-year Total (excludes liquidity) 48% 61% 72% 65% 55% 65% 63% 70% 44% 63% 56% 68% Equity: Large cap Small cap Total equity (includes other equity) Fixed income: U.S. taxable U.S. tax-exempt Global taxable Total fixed income 47% 36% 69% 15% 89% 20% 52% 60% 46% 15% 82% 19% 73% 21% 69% 59% 49% 27% 86% 19% 55% 25% 54% 72% 45% 52% 67% 54% 38% 57% 53% 63% 39% 55% 42% 60% 76% 11% 30% 51% 83% 51% 75% 73% 84% 63% 83% 78% 81% 88% 50% 81% 80% 83% 79% 80% 87% 57% 86% 78% 86% 60% 81% 77% 86% 88% 55% 84% 80% 27% 27% 54% 85% 61% 86% 78% 92% 68% 84% 83% 85% 86% 86% 86% (1) For purposes of investment performance comparisons, strategies are an aggregation of discretionary portfolios (separate accounts, investment funds, and other products) into a single group that represents a particular investment objective. In the case of separate accounts, the investment performance of the account is based upon the performance of the strategy to which the account has been assigned. Each of our asset managers has its own specific guidelines for including portfolios in their strategies. For those managers which manage both separate accounts and investment funds in the same strategy, the performance comparison for all of the assets is based upon the performance of the separate account. As of March 31, 2016, 2015 and 2014, 91%, 90% and 91% of total AUM is included in strategy AUM, respectively, although not all strategies have three-, five-, and ten-year histories. Total strategy AUM includes liquidity assets. Certain assets are not included in reported performance comparisons. These include: accounts that are not managed in accordance with the guidelines outlined above; accounts in strategies not marketed to potential clients; accounts that have not yet been assigned to a strategy; and certain smaller products at some of our affiliates. Past performance is not indicative of future results. For AUM included in institutional and retail separate accounts and investment funds included in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds (including fund- of-hedge funds) which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. These performance comparisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund performance may differ. (2) Source: Lipper Inc. includes open-end, closed-end, and variable annuity funds. As of March 31, 2016, 2015 and 2014, the U.S. long-term mutual fund assets represented in the data accounted for 19%, 21% and 20%, respectively, of our total AUM. The performance of our U.S. long-term mutual fund assets is included in the strategies. Legg Mason AR2016 | 29Table of Contents The following table presents a summary of the absolute and relative performance compared to the applicable benchmark for a representative sample of funds within our AUM, net of management and other fees as of the end of the period presented, for the 1-year, 3-year, 5-year, and 10-year periods, and from each fund's inception. The table includes a representative sample of funds from each significant subclass of our investment strategies (i.e., large cap equity, small cap equity, etc.). The funds within this group are representative of the performance of significant investment strategies we offer, that as of March 31, 2016, constituted an aggregate of approximately $433 billion, or approximately 65% of our total AUM. The only meaningful exclusion of funds are our funds-of-hedge funds strategies, which involve privately placed hedge funds, and represent only 2% of our total AUM as of March 31, 2016, for which investment performance is not made publicly available. Presenting investment returns of funds provides a relevant representation of our performance while avoiding the many complexities relating to factors such as multiple fee structures, bundled pricing, and asset level break points, that would arise in reporting performance for strategies or other product aggregations. Fund Name/Index(1) Equity Large Cap Inception Date Performance Type(2) 1-year 3-year 5-year 10-year Inception Annualized Absolute/Relative Total Return vs. Benchmark Clearbridge Aggressive Growth Fund 10/24/1983 Russell 3000 Growth Clearbridge Appreciation Fund S&P 500 Clearbridge Dividend Strategy S&P 500 3/10/1970 11/6/1992 Clearbridge Large Cap Growth Fund 8/29/1997 Russell 1000 Growth Clearbridge Value Trust S&P 500 Clearbridge All Cap Value Russell 3000 Value 4/16/1982 11/12/1981 Clearbridge Large Cap Value Fund 12/31/1988 Russell 1000 Value Legg Mason Brandywine Diversified Large Cap Value Fund Russell 1000 Value Small Cap Royce Total Return Fund Russell 2000 Royce Pennsylvania Mutual Russell 2000 Clearbridge Small Cap Growth Russell 2000 Growth Royce Premier Fund Russell 2000 Royce Special Equity Russell 2000 n/a - not applicable 9/7/2010 12/15/1993 6/30/1967 7/1/1998 12/31/1991 5/1/1998 Absolute Relative Absolute Relative Absolute Relative Absolute Relative Absolute Relative Absolute Relative Absolute Relative Absolute Relative Absolute Relative Absolute Relative Absolute Relative Absolute Relative Absolute Relative 6.24% (1.86)% 7.22% 0.21% 5.96% 11.86% 1.99% 10.26% (0.08)% 8.39% (1.05)% (0.69)% (2.32)% (2.25)% (6.33)% (1.80)% (1.87)% (9.70)% 9.99% (11.04)% (3.18)% 11.68% (0.33)% 10.65% (0.93)% 10.55% (1.03)% 13.99% 1.61% 9.33% 10.28% (1.54)% 8.67% (3.16)% 14.64% 1.03% 9.50% 5.32% (3.76)% 9.65% 0.27% 8.77% (0.61)% 5.44% (4.51)% 10.62% 0.37% 10.02% (0.23)% 5.88% 6.80% (0.96)% (0.41)% 4.67% 4.92% 2.42% 0.64% 1.62% (0.16)% 4.58% 2.06% (5.70)% (7.48)% (7.37)% (5.32)% (0.92)% 0.62% (2.34)% (0.80)% (4.09)% 5.67% (6.99)% 2.77% 7.67% (0.61)% 0.68% 3.81% 6.22% 0.50% n/a n/a 5.44% 0.19% 4.87% (2.17)% (2.28)% (0.39)% (14.24)% 4.37% 7.50% 5.83% (2.40)% (8.34)% 1.42% (9.60)% 0.16% (3.54)% (0.20)% (0.17)% 3.75% 3.64% (3.09)% (3.56)% 3.67% 5.76% (3.17)% (1.44)% 5.79% 0.53% 6.57% 1.32% 7.92% 2.02% 11.49% (0.17)% 9.77% 9.49% (0.56)% 12.82% 0.26% 10.43% 2.19% 11.45% n/a 9.25% 3.54% 11.11% 2.05% 8.58% 2.05% 30 | Legg Mason AR2016Table of Contents Fund Name/Index(1) Fixed Income U.S. Taxable Western Asset Core Plus Fund Barclays US Aggregate Western Asset Core Bond Fund Barclays US Aggregate Annualized Absolute/Relative Total Return vs. Benchmark Inception Date Performance Type(2) 1-year 3-year 5-year 10-year Inception 7/8/1998 Absolute 1.71% Relative (0.25)% 9/4/1990 Absolute Relative 2.07% 0.11% (0.85)% (2.81)% 3.27% 0.77% 3.22% 0.72% 0.87% 4.78% 1.00% 4.40% 0.62% 2.26% (1.63)% (1.51)% Western Asset Total Return Unconstrained 7/6/2006 Absolute Barclays US Aggregate Relative Western Asset Short Term Bond Fund 11/11/1991 Absolute 0.12% Citi Treasury Government/Credit 1-3 YR Relative Western Asset Inflation Index Plus Bond 3/1/2001 Absolute Barclays US TIPS Relative Western Asset Intermediate Bond Fund 7/1/1994 Absolute Barclays Intermediate Government/Credit Relative Western Asset Corporate Bond Fund 11/6/1992 Absolute Barclays US Credit Relative (0.87)% (0.78)% (2.30)% 2.14% 0.08% (0.64)% (1.58)% Western Asset Mortgage Defined Opportunity Fund Inc. 2/24/2010 Absolute 0.16% BOFAML Floating Rate Home Loan Index Western Asset High Yield Fund Barclays US Corp High Yield Relative 9/28/2001 Absolute Relative Western Asset Adjustable Rate Income 6/22/1992 Absolute Citi T-Bill 6-Month U.S. Tax-Exempt Relative (0.65)% (8.62)% (4.93)% (0.03)% (0.20)% 0.55% (0.36)% (1.67)% (0.96)% 2.20% 0.37% 3.38% 0.52% 9.13% 6.95% (1.04)% (2.88)% 0.54% 0.44% Western Asset Managed Municipals Fund 3/4/1981 Absolute 3.06% 3.28% Barclays Municipal Bond Global Taxable Relative (0.92)% (0.35)% Legg Mason Western Asset Macro Opportunities Bond 11/30/2013 Absolute 3-Month LIBOR Relative Legg Mason Brandywine Global Opportunities Bond 11/1/2006 Absolute Citi World Government Bond Relative Legg Mason Brandywine Absolute Return Opportunities Fund Citi 3-Month T-Bill 2/28/2011 Absolute Relative Legg Mason Brandywine Global Fixed Income 10/31/2003 Absolute Citi World Government Bond Relative Legg Mason Western Asset Global Multi Strategy Fund 8/31/2002 Absolute 50% Bar. Global Agg./ 25% Bar. HY 2%/25% JPM EMBI + Relative Western Asset Global High Yield Bond Fund 2/22/1995 Absolute Barclays Global High Yield Relative Legg Mason Western Asset Global Core Plus Bond Fund 12/31/2010 Absolute Barclays Global Aggregate Index Relative Legg Mason Western Asset Australian Bond Trust 6/30/1983 Absolute UBS Australian Composite Bond Index Relative Western Asset Emerging Markets Debt 10/17/1996 Absolute (0.39)% (0.80)% (0.30)% (6.23)% (3.70)% (3.78)% (0.94)% (6.87)% (4.21)% (7.03)% (6.50)% (7.13)% (0.30)% (2.75)% 1.99% 0.02% 0.42% JPM EMBI Global Liquidity Relative (3.94)% n/a n/a 0.56% 0.06% 0.07% 0.02% (0.75)% (1.24)% (0.87)% (2.51)% (1.51)% (3.86)% 3.60% (0.08)% 5.70% 0.30% (1.29)% (3.72)% 6.02% 1.13% 5.43% 0.54% n/a n/a 1.86% 6.30% 1.06% 7.04% 0.68% 4.37% (0.56)% 3.59% (0.93)% (0.69)% 4.10% 5.14% 1.12% 0.00% 2.28% (0.74)% (0.53)% (0.35)% 3.58% 0.57% 5.37% 0.37% 12.28% 8.31% 2.94% 5.03% 0.69% 5.06% (0.64)% n/a n/a 5.39% 5.90% 0.59% 6.47% 0.00% 14.59% 9.26% 6.54% (1.99)% (1.62)% (1.60)% 1.21% 1.10% 6.71% 1.12% n/a n/a 3.91% 2.74% 2.96% 2.90% 2.15% 0.99% 1.34% 1.47% 0.25% 5.32% 0.46% n/a n/a n/a n/a n/a n/a 4.31% 0.12% 3.84% 2.70% (0.13)% 7.84% 0.48% 4.43% 4.12% 5.78% 2.19% 2.98% 2.93% 4.41% 0.39% 6.01% (2.35)% (1.98)% (1.14)% 2.53% 4.55% 6.66% (2.61)% (2.83)% (2.20)% 4.87% 0.28% 7.14% 0.52% 2.74% n/a n/a 6.75% 0.48% 5.73% (3.23)% (1.38)% 4.86% 0.54% 6.41% 0.56% 9.31% 0.27% 3.30% 0.29% Western Asset Institutional Liquid Reserves Ltd. 12/31/1989 Absolute Citi 3-Month T-Bill Relative 0.21% 0.14% 0.12% 0.07% 0.14% 0.09% 1.38% 0.31% n/a - not applicable (1) Listed in order of size based on AUM of fund within each subcategory. (2) Absolute performance is the actual performance (i.e., rate of return) of the fund. Relative performance is the difference (or variance) between the performance of the fund and its stated benchmark. Legg Mason AR2016 | 31Table of Contents Assets Under Advisement During the quarter ended June 30, 2014, we began reporting AUA as a result of the acquisition of approximately $98 billion of AUA from QS Investors. Also during the first quarter of fiscal 2015, approximately $12.8 billion of assets previously reported as AUM, primarily related to a low-fee global sovereign mandate for which investment discretion had abated over time, were reclassified to AUA. We experienced significant AUA outflows during the year ended March 31, 2015 as a result of one client withdrawing approximately $80 billion. These redemptions did not have a material impact on our net income due to their low fee nature. As of March 31, 2016 and 2015, AUA was approximately $39 billion and $35 billion, respectively. AUA as of March 31, 2016 was comprised of approximately $17 billion related to QS Investors, approximately $10 billion related to Western Asset, approximately $8 billion related to ClearBridge, approximately $2 billion related to Permal, and approximately $2 billion related to Brandywine. AUA fee rates vary with the level of non-discretionary service provided. Our average annualized fee rate related to AUA was approximately 10 basis points for the year ended March 31, 2016 and was in the low single digit basis points for the year ended March 31, 2015. The increase in the average fee rate was due to the previously discussed $80 billion redemption of very low fee AUA in the quarter ended March 31, 2015. Fees for AUA, aggregating $41 million and $30 million, are considered servicing fees and are therefore recorded in Distribution and service fees in the Consolidated Statement of Income for the years ended March 31, 2016 and 2015, respectively. Prior to fiscal 2015, fees for AUA were not material. RESULTS OF OPERATIONS In accordance with financial accounting standards on consolidation, we consolidate and separately identify certain sponsored investment vehicles. The consolidation of these investment vehicles has no impact on Net Income (Loss) Attributable to Legg Mason, Inc. and does not have a material impact on our consolidated operating results. We also hold investments in other consolidated sponsored investment funds and the change in the value of these investments, which is recorded in Other non-operating income (expense), is reflected in Net Income (Loss) Attributable to Legg Mason, Inc. See Notes 1, 3, and 17 of Notes to Consolidated Financial Statements for additional information regarding the consolidation of investment vehicles. Operating Revenues The components of Total Operating Revenues (in millions), and the dollar and percentage changes between periods were as follows: Years Ended March 31, 2015 2016 2014 2016 Compared to 2015 $ Change % Change 2015 Compared to 2014 $ Change % Change Investment advisory fees: Separate accounts Funds Performance fees Distribution and service fees Other Total Operating Revenues $ $ 826.1 1,409.0 42.0 381.5 2.2 824.2 1,544.5 83.5 361.2 5.7 $ 2,660.8 $ 2,819.1 $ $ 777.4 1,501.3 107.1 347.6 8.4 $ 2,741.8 $ 1.9 (135.5) (41.5) 20.3 (3.5) (158.3) —% $ (9) (50) 6 (61) (6) $ 46.8 43.2 (23.6) 13.6 (2.7) 77.3 6% 3 (22) 4 (32) 3 Total Operating Revenues for the year ended March 31, 2016, were $2.66 billion, a decrease of 6% from $2.82 billion for the year ended March 31, 2015. The decrease was primarily due to a decrease in our operating revenue yield, excluding performance fees, from 39 basis points to 38 basis points, a 3% decrease in average AUM, and a decrease in performance fees. Although equity and fixed income AUM together comprised a higher percentage of our total average AUM for the year ended March 31, 2016, as compared to the year ended March 31, 2015, our operating revenue yield, excluding performance fees, declined due to a less favorable product mix, with lower yielding products comprising a higher percentage of our total average AUM for the year ended March 31, 2016, as compared to March 31, 2015. Total Operating Revenues for the year ended March 31, 2015, were $2.82 billion, an increase of 3% from $2.74 billion for the year ended March 31, 2014. This increase was primarily due to the impact of a 6% increase in average long-term AUM, offset in part by a decrease in performance fees. Although equity AUM comprised a higher percentage of our total AUM 32 | Legg Mason AR2016 Table of Contents as of March 31, 2015, as compared to March 31, 2014, our operating revenue yield, excluding performance fees, was 39 basis points in each of the years ended March 31, 2015 and 2014, due to a slightly less favorable product mix, with lower yielding products comprising a higher percentage of our total average AUM for the year ended March 31, 2015, as compared to the year ended March 31, 2014. Investment Advisory Fees from Separate Accounts For the year ended March 31, 2016, investment advisory fees from separate accounts increased $1.9 million, to $826.1 million, as compared to $824.2 million for the year ended March 31, 2015. Of this increase, $11.4 million was due to RARE Infrastructure after it was acquired in October 2015, $8.7 million was due to a full year of results for Martin Currie, which was acquired in October 2014, $6.8 million was the result of higher average equity assets managed by Brandywine, $6.9 million was the result of higher average fixed income assets managed by Brandywine and $3.1 million was the result of higher average assets managed by Permal. These increases were substantially offset by a decrease of $27.7 million due to the sale of LMIC in November 2014 and a decrease of $6.9 million due to lower averaged fixed income assets managed by Western Asset. For the year ended March 31, 2015, investment advisory fees from separate accounts increased $46.8 million, or 6%, to $824.2 million, as compared to $777.4 million for the year ended March 31, 2014. Of this increase, $34.7 million was due to higher average equity assets managed by ClearBridge, $29.5 million was due to higher average fixed income assets managed by Western Asset and Brandywine, and $17.4 million was due to Martin Currie, which was acquired in October 2014, including an increase in revenues related to Martin Currie Australia ("MC Australia"), which includes our legacy Australian asset manager. These increases were offset in part by approximately $25 million of revenues associated with certain existing client assets which were reclassified from AUM to AUA during the year ended March 31, 2015, as previously discussed. These revenues are now included in Distribution and service fees for fiscal 2015. The increases were also offset in part by a decrease of $15.8 million resulting from the sale of LMIC in November 2014. Investment Advisory Fees from Funds For the year ended March 31, 2016, investment advisory fees from funds decreased $135.5 million, or 9%, to $1.41 billion, as compared to $1.54 billion for the year ended March 31, 2015. Of this decrease, $104.9 million was due to lower average equity assets managed by Royce, $43.9 million was due to lower average assets managed by Permal and approximately $28 million was related to revenues which, due to a change in the distributor for certain funds in May 2015, are no longer included in advisory fee revenue. Revenues related to these funds is included in Distribution and service fees for fiscal 2016. These decreases were offset in part by an increase of $28.8 million due to higher average fixed income assets managed by Western Asset and Brandywine and a net increase of $18.3 million in fees from liquidity assets, largely due to a reduction in fee waivers on liquidity funds managed by Western Asset. For the year ended March 31, 2015, investment advisory fees from funds increased $43.2 million, or 3%, to $1.54 billion, as compared to $1.50 billion for the year ended March 31, 2014. Of this increase, $80.1 million was due to higher average equity assets managed by ClearBridge, $30.5 million was due to higher average fixed income assets managed by Brandywine and Western Asset, and $14.7 million was due to Martin Currie, which was acquired in October 2014, including the increase in revenues related to MC Australia. These increases were offset in part by a decrease of $40.5 million due to lower average equity assets managed by Royce, a decrease of $33.8 million due to lower average assets managed by Permal, and a net decrease of $9.3 million in fees from liquidity assets, due to fee waivers on liquidity funds managed by Western Asset. Investment Advisory Performance Fees Of our total AUM as of March 31, 2016, 2015, and 2014, approximately 7%, 7%, and 6% was in accounts that were eligible to earn performance fees. For the year ended March 31, 2016, Investment advisory performance fees decreased $41.5 million to $42.0 million, as compared to $83.5 million for the year ended March 31, 2015, primarily due to lower fees earned on assets managed at Permal and Brandywine. For the year ended March 31, 2015, investment advisory performance fees decreased $23.6 million to $83.5 million, as compared to $107.1 million for the year ended March 31, 2014, primarily due to lower fees earned on assets managed at Permal, offset in part by an increase in fees earned on assets managed at Brandywine. Distribution and Service Fees For the year ended March 31, 2016, Distribution and service fees increased $20.3 million, or 6%, to $381.5 million, as compared to $361.2 million for the year ended March 31, 2015, primarily as a result of approximately $29 million of revenue Legg Mason AR2016 | 33Table of Contents which is included in Distribution and service fees in fiscal 2016, due to a change in the distributor for certain funds in May 2015. Revenues related to these funds were previously included in Investment advisory fees from funds. An increase of $11.6 million in advisement fees associated with our AUA also contributed to the increase. These increases were offset in part by a decline in average mutual fund AUM subject to distribution and service fees. For the year ended March 31, 2015, Distribution and service fees increased $13.6 million, or 4%, to $361.2 million, as compared to $347.6 million for the year ended March 31, 2014, primarily as a result of approximately $25 million of revenues related to client assets that were reclassified from AUM to AUA, as well as an increase in average mutual fund AUM subject to distribution and service fees. As previously discussed, the revenues associated with AUA are included in Distribution and service fees beginning in fiscal 2015. These increases were offset in part by the impact of increased fee waivers related to liquidity funds managed by Western Asset. Operating Expenses The components of Total Operating Expenses (in millions), and the dollar and percentage changes between periods were as follows: Years Ended March 31, 2016 Compared to 2015 2015 Compared to 2014 Compensation and benefits Transition-related compensation $ 1,172.6 $ 1,208.2 24.6 32.2 2016 2015 2014 $ Change % Change $ 1,208.2 $ 2.2 1,210.4 619.1 157.9 115.2 12.3 (35.6) 7.6 (28.0) (49.1) 15.5 12.9 2.4 $ Change — 22.4 % Change n/m n/m (3)% $ 31 (2) (8) 8 12 92 22.4 (24.3) 24.5 (5.5) (9.7) 2 (4) 16 (5) (79) — 371.0 n/m — n/m 1,204.8 545.7 197.9 122.6 5.0 371.0 1,232.8 594.8 182.4 109.7 2.6 — Total Compensation and Benefits Distribution and servicing Communications and technology Occupancy Amortization of intangible assets Impairment of intangible assets Other, net, including $(33.4) million and $5.0 million of contingent consideration fair value (reduction) increase in fiscal 2016 and 2014, respectively Total Operating Expenses n/m - not meaningful 163.0 198.6 $ 2,610.0 $ 2,320.9 196.0 $ 2,310.9 $ (35.6) 289.1 (18) 12 $ 2.6 10.0 1 — Total Operating Expenses for the year ended March 31, 2016, increased $289.1 million, or 12%, to $2.61 billion, as compared to $2.32 billion for the year ended March 31, 2015. The increase was primarily due to intangible asset impairment charges of $371 million recorded during the year ended March 31, 2016, as further discussed below. Total operating expenses for the year ended March 31, 2015, remained relatively flat at $2.32 billion, as compared to $2.31 billion, for the year ended March 31, 2014. Operating expenses for the years ended March 31, 2016, 2015, and 2014, incurred at the investment management affiliate level comprised approximately 70% of total operating expenses in each year, excluding the impairment charges which are deemed to be corporate expenses. The remaining operating expenses are comprised of corporate costs, including costs of our global distribution operations. 34 | Legg Mason AR2016 Table of Contents Compensation and Benefits The components of Total Compensation and Benefits (in millions), and the dollar and percentage changes between periods were as follows: Years Ended March 31, 2016 Compared to 2015 2015 Compared to 2014 Salaries and incentives Benefits and payroll taxes (including deferred compensation) Transition and severance costs Royce management equity plan Gains (losses) on deferred compensation and seed capital investments Total Compensation and Benefits n/m - not meaningful 2016 $ 915.8 2015 $ 976.9 2014 $ 949.5 $ Change $ (61.1) % Change (6)% $ $ Change 27.4 % Change 3% 232.6 36.2 21.4 214.7 31.8 — 214.5 29.4 — 17.9 4.4 21.4 8 14 n/m 0.2 2.4 — — 8 — (1.2) 9.4 $1,204.8 $1,232.8 17.0 $ 1,210.4 $ (10.6) (28.0) n/m (2) $ (7.6) 22.4 (45) 2 Total Compensation and Benefits for the year ended March 31, 2016, decreased 2% to $1.20 billion, as compared to $1.23 billion for the year ended March 31, 2015; and for the year ended March 31, 2015, increased 2% to $1.23 billion, as compared to $1.21 billion for the year ended March 31, 2014: • • • • • • Salaries and incentives decreased $61.1 million, to $915.8 million for the year ended March 31, 2016, as compared to $976.9 million for the year ended March 31, 2015, primarily due to a decrease of $58.6 million in net compensation at investment affiliates, which was substantially the result of a reduction in operating revenue at revenue share- based affiliates, which creates an offsetting decrease in compensation per the applicable revenue share arrangements, and the sale of LMIC in November 2014, offset in part by the acquisition of Martin Currie in October 2014. Salaries and incentives increased $27.4 million, to $976.9 million for the year ended March 31, 2015, as compared to $949.5 million for the year ended March 31, 2014, principally due to an increase of $15.8 million in incentive- based compensation for distribution and corporate personnel, primarily related to increased retail sales in our global distribution group. A $9.7 million increase in net compensation at investment affiliates also contributed to the increase. The increase in net compensation at investment affiliates was primarily due to the acquisition of Martin Currie and the impact of increased revenues at certain revenue-share based affiliates, offset in part by the impact of the sale of LMIC in November 2014 and the sale of a small affiliate and the closing down of certain businesses in connection with various corporate initiatives in fiscal 2014. Benefits and payroll taxes increased $17.9 million, to $232.6 million for the year ended March 31, 2016, as compared to $214.7 million for the year ended March 31, 2015, primarily as a result of an increase in costs associated with certain employee benefit plans. Benefits and payroll taxes increased slightly to $214.7 million for the year ended March 31, 2015, as compared to $214.5 million for the year ended March 31, 2014, primarily as a result of an increase in payroll taxes and recruiting costs. Transition and severance costs increased $4.4 million, to $36.2 million for the year ended March 31, 2016, as compared to $31.8 million for the year ended March 31, 2015. Transition and severance costs for the year ended March 31, 2016, were primarily comprised of $32.2 million of costs associated with the previously discussed restructuring of Permal in preparation for the combination with EnTrust. For the year ended March 31, 2015, transition and severance costs were primarily comprised of $24.6 million of costs associated with the integration of Batterymarch and LMGAA into QS Investors, and $4.3 million related to the sale of LMIC. Transition costs and severance increased $2.4 million, to $31.8 million for the year ended March 31, 2015, as compared to $29.4 million for the year ended March 31, 2014, primarily due to higher compensation costs associated Legg Mason AR2016 | 35Table of Contents with the previously discussed integration of Batterymarch and LMGAA over time into QS Investors, as compared to compensation costs associated with various corporate initiatives recognized in the prior year. • Royce management equity plan represents the charge arising from the grant of equity units under the Royce management equity plan, as previously discussed. For the year ended March 31, 2016, compensation as a percentage of operating revenues increased to 45.3% from 43.7% for the year ended March 31, 2015, due to the impact of the charge associated with the Royce management equity plan grant, the impact of the acquisition of Martin Currie in October 2014, and the impact of higher transition and severance costs in the current year, offset in part by the impact of decreased revenues at certain revenue share-based affiliates that retain a relatively higher percentage of revenues as compensation. For the year ended March 31, 2015, compensation as a percentage of operating revenues decreased to 43.7% from 44.1% for the year ended March 31, 2014, due to the impact of decreased revenues at certain revenue share-based affiliates that retain a higher percentage of revenues as compensation, offset in part by the impact of higher compensation costs for corporate and distribution personnel. Distribution and Servicing For the year ended March 31, 2016, Distribution and servicing expenses decreased 8% to $545.7 million, as compared to $594.8 million for the year ended March 31, 2015, primarily due to the impact of lower average AUM in certain products for which we pay fees to third-party distributors. For the year ended March 31, 2015, Distribution and servicing expenses decreased 4% to $594.8 million, as compared to $619.1 million for the year ended March 31, 2014, primarily due to a net decrease of $20.9 million in structuring fees related to closed-end fund launches. Communications and Technology For the year ended March 31, 2016, Communications and technology expense increased 8% to $197.9 million, as compared to $182.4 million for the year ended March 31, 2015, as a result of an increase in technology consulting and license fees for software product implementations in the current year period, and the addition of Martin Currie, which was acquired in October 2014. For the year ended March 31, 2015, Communications and technology expense increased 16% to $182.4 million, as compared to $157.9 million for the year ended March 31, 2014, primarily due to increases in technology consulting, data management, depreciation expenses, and market data costs, principally resulting from cyber-security and data governance enhancements and the addition of Martin Currie and QS Investors expenses. Occupancy For the year ended March 31, 2016, Occupancy expense increased 12% to $122.6 million, as compared to $109.7 million for the year ended March 31, 2015. Real estate related charges of $17.7 million were recognized in the current year related to reduced space requirements and the restructuring of Permal for the combination with EnTrust, while real estate related charges of $8.2 million were recognized in the prior year in connection with the integration of Batterymarch and LMGAA into QS Investors. For the year ended March 31, 2015, Occupancy expense decreased 5% to $109.7 million, as compared to $115.2 million for the year ended March 31, 2014, primarily due to a decrease of $2.0 million in depreciation on furniture and leaseholds and a $1.9 million decrease in rent expense, principally as a result of lease reserves taken on vacant space in fiscal 2014. Amortization and Impairment of Intangible Assets For the year ended March 31, 2016, Amortization of intangible assets increased to $5.0 million, as compared to $2.6 million for the year ended March 31, 2015, primarily due to additional amortization expense related to the acquisition of RARE Infrastructure in October 2015. For the year ended March 31, 2015, Amortization of intangible assets decreased 79% to $2.6 million, as compared to $12.3 million for the year ended March 31, 2014, primarily due to certain management contracts becoming fully amortized in 36 | Legg Mason AR2016 Table of Contents October 2014 and December 2013 and the sale of LMIC, offset in part by additional amortization expense related to the acquisitions of QS Investors in May 2014 and Martin Currie in October 2014. Impairment of intangible assets was $371.0 million in the year ended March 31, 2016. The impairment charges relate to our Permal funds-of-hedge funds contracts asset and Permal trade name. The impairment charges resulted from a number of current trends and factors, including (i) periods of moderate inflows or outflows over recent years and related reductions in AUM; (ii) a reduction in growth assumptions for the next five years; (iii) a decrease in projected margins for the next two years; and (iv) an increase in the rate used to discount projected future cash flows primarily due to company specific factors including continued market influences. These changes resulted in a reduction of the projected cash flows and our overall assessment of fair value of the assets, such that the fair values of the Permal funds-of-hedge funds contracts asset and Permal trade name declined below their carrying values, and accordingly were impaired by $364.0 million and $7.0 million, respectively. See Critical Accounting Policies and Note 5 of Notes to Consolidated Financial Statements for further discussion of the impairment charges. Other For the year ended March 31, 2016, Other expenses decreased $35.6 million, or 18%, to $163.0 million, as compared to $198.6 million for the year ended March 31, 2015, primarily due to a $33.4 million credit related to fair value adjustments to decrease the contingent consideration liabilities associated with the acquisitions of Martin Currie and Fauchier and a $14.6 million decrease in expense reimbursements paid to certain mutual funds. These decreases were partially offset by a $13.6 million increase in professional fees, due in part to costs for the acquisitions of Clarion Partners and EnTrust. For the year ended March 31, 2015, Other expenses increased $2.6 million, or 1%, to $198.6 million, as compared to $196.0 million for the year ended March 31, 2014, primarily due to a $5.9 million increase in travel and entertainment expenses, a $5.3 million increase in advertising expenses, and a $4.7 million increase in professional fees. These increases were offset in part by a $14.2 million decrease in expense reimbursements paid to certain mutual funds. Non-Operating Income (Expense) The components of total other non-operating income (expense) (in millions), and the dollar and percentage changes between periods were as follows: Years Ended March 31, 2016 Compared to 2015 2015 Compared to 2014 Interest income Interest expense Other income (expense), net, including $107.1 million debt extinguishment loss in July 2014 Other non-operating income (expense) of consolidated investment vehicles, net Total Other Non-Operating Income (Expense) n/m - not meaningful 2016 2015 2014 $ 5.6 (48.4) $ 7.5 (58.3) $ 6.4 (52.9) $ Change $ (1.9) 9.9 % Change $ Change 1.1 (5.4) % Change 17% 10 (25)% $ (17) (26.0) (85.3) 32.8 59.3 (70) (118.1) n/m (7.2) 5.9 2.4 (13.1) n/m 3.5 146 $ (76.0) $(130.2) $ (11.3) $ 54.2 (42) $ (118.9) n/m Interest Income For the year ended March 31, 2016, Interest income decreased 25% to $5.6 million, as compared to $7.5 million for the year ended March 31, 2015, primarily due to a $0.9 million decrease in the current year related to lower average interest-bearing investment balances and lower yields earned on those balances, and $0.7 million of interest income received in the prior year in connection with a tax refund. For the year ended March 31, 2015, Interest income increased 17% to $7.5 million, as compared to $6.4 million for the year ended March 31, 2014, driven by higher yields earned on investment balances. Legg Mason AR2016 | 37Table of Contents Interest Expense For the year ended March 31, 2016, Interest expense decreased 17% to $48.4 million, as compared to $58.3 million for the year ended March 31, 2015. The decrease of $6.4 million was primarily due to a decrease in interest accruals for uncertain tax positions, offset in part by interest accretion on contingent consideration liabilities related to the acquisitions of Martin Currie and RARE Infrastructure. For the year ended March 31, 2015, Interest expense increased 10% to $58.3 million, as compared to $52.9 million for the year ended March 31, 2014, primarily due to an increase in interest accruals for uncertain tax positions and interest accretion on Contingent consideration liabilities related to the acquisitions of QS Investors and Martin Currie. Other Income (Expense), Net For the year ended March 31, 2016, Other expense, net, decreased $59.3 million, to expense of $26.0 million, as compared to expense of $85.3 million in fiscal 2015, primarily due to a $107.1 million charge recognized in the prior year related to the refinancing of our 5.5% Senior Notes in July 2014. This decrease was offset in part by net market losses of $27.0 million on corporate investments, which are not offset in compensation, net market losses of $10.6 million on seed capital investments and assets invested for deferred compensation plans, which are offset by corresponding increases in compensation, mentioned above, net market losses of $5.6 million on investments of consolidated sponsored investment vehicles that are not designated as consolidated investment vehicles ("CIVs"), which have no impact on Net Income Attributable to Legg Mason, Inc., as the losses are fully attributable to noncontrolling interests, and a $4.5 million loss on a foreign currency forward contract related to the acquisition of RARE Infrastructure. For the year ended March 31, 2015, Other income (expense), net, decreased $118.1 million, to expense of $85.3 million, as compared to income of $32.8 million in fiscal 2014. This decrease was primarily due to a $107.1 million charge related to the refinancing of the 5.5% Senior Notes in July 2014. A reduction in net market gains of $7.6 million on seed capital investments and assets invested for deferred compensation plans, which are offset by corresponding decreases in compensation mentioned above, and a reduction in net market gains of $5.3 million on corporate investments, which are not offset in compensation, also contributed to the decrease. Other Non-Operating Income (Loss) of Consolidated Investment Vehicles For the year ended March 31, 2016, Other non-operating income (expense) of consolidated investment vehicles, net, decreased $13.1 million to expense of $7.2 million, as compared to income of $5.9 million in fiscal 2015, primarily due to the deconsolidation of a CIV during the quarter ended March 31, 2015, and net market losses on investments of certain CIVs. For the year ended March 31, 2015, Other non-operating income (expense) of consolidated investment vehicles, net, increased $3.5 million to income of $5.9 million, primarily due to an increase in net market gains on investments of certain CIVs. Income Tax Provision For the year ended March 31, 2016, the provision for income taxes was $7.7 million, as compared to $125.3 million in the year ended March 31, 2015. The effective tax rate was (30.5)% for the year ended March 31, 2016, as compared to 34.0% for the year ended March 31, 2015. The change in the effective tax rate was largely due to the impact of the $371.0 million of impairment charges recognized in lower tax rate jurisdictions. In November 2015, the U.K. Finance Bill 2015 was enacted, which reduced the main U.K. corporate tax rate from 20% to 19% effective April 1, 2017, and to 18% effective April 1, 2020. The reductions in the U.K. corporate tax rate resulted in tax benefits of $8.4 million in fiscal 2016. The impact of CIVs increased the effective rate by 23.8 percentage points for the year ended March 31, 2016, and decreased the effective rate by 0.5 percentage points for the year ended March 31, 2015. For the year ended March 31, 2015, the provision for income taxes was $125.3 million, as compared to $137.8 million in the year ended March 31, 2014. The effective tax rate was 34.0% for the year ended March 31, 2015, as compared to 32.8% for the year ended March 31, 2014. The change in the effective rate was primarily related to the impact of $19.2 million of income tax benefits recorded in fiscal 2014 with respect to U.K. corporate tax rate reductions, which impacted the effective tax rate by 4.6 percentage points in fiscal 2014. The impact of CIVs decreased the effective rate by 0.5 percentage points for the year ended March 31, 2015, and increased the effective rate by 0.2 percentage points for the year ended March 31, 2014. 38 | Legg Mason AR2016 Table of Contents Net Income (Loss) Attributable to Legg Mason, Inc. and Operating Margin Net Loss Attributable to Legg Mason, Inc. for the year ended March 31, 2016, totaled $25.0 million, or $0.25 per diluted share, compared to Net Income Attributable to Legg Mason, Inc. of $237.1 million, or $2.04 per diluted share, in the year ended March 31, 2015. The decrease was primarily attributable to the impact of the pre-tax impairment charges of $371.0 million ($296.8 million, net of income tax benefits, or $2.76 per diluted share) related to our indefinite-life intangible assets in the year ended March 31, 2016, offset in part by the pre-tax non-operating charge of $107.1 million ($68.5 million, net of income tax benefits, or $0.59 per diluted share) recognized in the year ended March 31, 2015, in connection with the refinancing of the 5.5% Senior Notes. Operating margin was 1.9% for the year ended March 31, 2016, compared to 17.7% for the year ended March 31, 2015, with the decrease primarily attributable to the impairment charges. Net Income Attributable to Legg Mason, Inc. for the year ended March 31, 2015, totaled $237.1 million, or $2.04 per diluted share, compared to $284.8 million, or $2.33 per diluted share, in the year ended March 31, 2014. The decrease was primarily attributable to the pre-tax, non-operating charge of $107.1 million ($68.5 million, net of income tax benefits, or $0.59 per diluted share) related to the refinancing of the 5.5% Senior Notes in the year ended March 31, 2015, offset in part by a $20.7 million decrease in costs related to closed-end fund launches, and the net impact of increased operating revenues. Operating margin was 17.7% for the year ended March 31, 2015, compared to 15.7% for the year ended March 31, 2014. Supplemental Non-GAAP Financial Information As supplemental information, we are providing performance measures for "Adjusted Income" and "Operating Margin, as Adjusted" and a liquidity measure for "Adjusted EBITDA", each of which are based on methodologies other than generally accepted accounting principles (“non-GAAP”). Our management uses these measures as benchmarks in evaluating and comparing our period-to-period operating performance and liquidity. Adjusted Income decreased to $370.3 million for the year ended March 31, 2016, from $378.8 million for the year ended March 31, 2015; however, due to a reduction in weighted-average shares outstanding as a result of share repurchases, Adjusted Income per diluted share increased to $3.36 per diluted share for the year ended March 31, 2016, from $3.26 per diluted share for the year ended March 31, 2015. The decrease in Adjusted Income was primarily attributable to the net impact of decreased operating revenues, offset in part by the impact of the pre-tax, non-operating charge of $107.1 million ($68.5 million, net of income tax, or $0.59 per diluted share) related to the refinancing of the 5.5% Senior Notes in the prior year. Operating Margin, as Adjusted, for the years ended March 31, 2016 and 2015, was 18.6% and 23.0%, respectively. Operating Margin, as Adjusted, for the year ended March 31, 2016, was reduced by 2.0 percentage points due to costs associated with the restructuring of Permal for the combination with EnTrust, by 1.0 percentage point due to the compensation charge associated with the Royce management equity plan grant, and by 0.4 percentage points for real estate related charges recognized in the current year associated with reduced space requirements. Operating Margin, as Adjusted, for the year ended March 31, 2015 was reduced by 1.7 percentage points due to costs associated with the integration of Batterymarch and LMGAA into QS Investors and various other corporate initiatives. Adjusted EBITDA for the years ended March 31, 2016 and 2015, was $621.7 million and $686.5 million, respectively. The decrease in Adjusted EBITDA was primarily the result of a decrease in cash provided by operating activities. Adjusted Income decreased to $378.8 million, or $3.26 per diluted share, for the year ended March 31, 2015, from $417.8 million, or $3.41 per diluted share, for the year ended March 31, 2014. The decrease was primarily attributable to the pre- tax, non-operating charge of $107.1 million ($68.5 million, net of income tax, or $0.59 per diluted share) related to the refinancing of the 5.5% Senior Notes in the year ended March 31, 2015, offset in part by the net impact of increased operating revenues. Operating Margin, as Adjusted, for the years ended March 31, 2015 and 2014, was 23.0% and 22.0%, respectively. Operating Margin, as Adjusted, for the years ended March 31, 2015 and 2014, was reduced by 1.7 and 1.5 percentage points, respectively, due to costs associated with the integration of Batterymarch and LMGAA into QS Investors and various other corporate initiatives. Operating Margin, as Adjusted, for the year ended March 31, 2014, was also reduced by 1.0 percentage point due to structuring fees related to closed-end fund and real estate investment trust launches during that fiscal year. Adjusted EBITDA for the years ended March 31, 2015 and 2014, was $686.5 million and $617.1 million, respectively. The $69.4 million increase in Adjusted EBITDA was primarily the result of an increase in cash provided by operating activities. Legg Mason AR2016 | 39Table of Contents Adjusted Income We define “Adjusted Income” as Net Income (Loss) Attributable to Legg Mason, Inc., plus amortization and deferred taxes related to intangible assets and goodwill less deferred income taxes on goodwill and indefinite-life intangible asset impairment, if any. We also adjust for non-core items that are not reflective of our economic performance, such as intangible asset impairments, the impact of fair value adjustments of contingent consideration liabilities, if any, and the impact of tax rate adjustments on certain deferred tax liabilities related to indefinite-life intangible assets. We believe that Adjusted Income provides a useful representation of our operating performance adjusted for non-cash acquisition related items and other items that facilitate comparison of our results to the results of other asset management firms that have not made significant acquisitions. We also believe that Adjusted Income is an important metric in estimating the value of an asset management business. Adjusted Income only considers adjustments for certain items that relate to operating performance and comparability, and therefore, is most readily reconcilable to Net Income (Loss) Attributable to Legg Mason, Inc. determined under GAAP. This measure is provided in addition to Net Income (Loss) Attributable to Legg Mason, Inc., but is not a substitute for Net Income (Loss) Attributable to Legg Mason, Inc. and may not be comparable to non-GAAP performance measures, including measures of adjusted earnings or adjusted income, of other companies. Further, Adjusted Income is not a liquidity measure and should not be used in place of cash flow measures determined under GAAP. Fair value adjustments of contingent consideration liabilities may or may not provide a tax benefit, depending on the tax attributes of the acquisition transaction. We consider Adjusted Income to be useful to investors because it is an important metric in measuring the economic performance of asset management companies, as an indicator of value, and because it facilitates comparison of our operating results with the results of other asset management firms that have not made significant acquisitions. In calculating Adjusted Income, we adjust for the impact of the amortization of management contract assets and impairment of indefinite-life intangible assets, and add (subtract) the impact of fair value adjustments on contingent consideration liabilities, if any, all of which arise from acquisitions, to Net Income (Loss) Attributable to Legg Mason, Inc. to reflect the fact that these items distort comparisons of our operating results with the results of other asset management firms that have not engaged in significant acquisitions. Deferred taxes on indefinite-life intangible assets and goodwill include actual tax benefits from amortization deductions that are not realized under GAAP absent an impairment charge or the disposition of the related business. Because we fully expect to realize the economic benefit of the current period tax amortization, we add this benefit to Net Income (Loss) Attributable to Legg Mason, Inc. in the calculation of Adjusted Income. However, because of our net operating loss carry-forward, we will receive the benefit of the current tax amortization over time. Conversely, we subtract the non-cash income tax benefits on goodwill and indefinite-life intangible asset impairment charges and U.K. tax rate adjustments on excess book basis on certain acquired indefinite-life intangible assets, if applicable, that have been recognized under GAAP. These adjustments reflect that these items distort comparisons of our operating results to other periods and the results of other asset management firms that have not engaged in significant acquisitions, including any related impairments. Should a disposition, impairment charge or other non-core item occur, its impact on Adjusted Income may distort actual changes in the operating performance or value of our firm. Accordingly, we monitor these items and their related impact, including taxes, on Adjusted Income to ensure that appropriate adjustments and explanations accompany such disclosures. Although depreciation and amortization of fixed assets are non-cash expenses, we do not add these charges in calculating Adjusted Income because these charges are related to assets that will ultimately require replacement. 40 | Legg Mason AR2016 Table of Contents A reconciliation of Net Income (Loss) Attributable to Legg Mason, Inc. to Adjusted Income (in thousands except per share amounts) is as follows: For the Years Ended March 31, 2016 2015 2014 Net Income (Loss) Attributable to Legg Mason, Inc. $ (25,032) $ 237,080 $ 284,784 Plus (less): Amortization of intangible assets Impairment of intangible assets Contingent consideration fair value adjustments Deferred income taxes on intangible assets: Impairment charges Tax amortization benefit U.K. tax rate adjustment Adjusted Income Net Income (Loss) per diluted share Attributable to Legg Mason, Inc. Shareholders Plus (less):(1) $ $ Amortization of intangible assets Impairment of intangible assets Contingent consideration fair value adjustments Deferred income taxes on intangible assets: 4,979 371,000 (33,375) (74,200) 135,260 (8,361) 370,271 $ (0.25) $ 0.05 3.45 (0.31) 2,625 — — — 139,046 — 378,751 2.04 0.02 — — $ $ 12,314 — 5,000 — 134,871 (19,164) 417,805 2.33 0.10 — 0.04 Impairment charges Tax amortization benefit U.K. tax rate adjustment Allocation to participating securities(2) — 1.10 (0.16) — 3.41 In calculating Adjusted Income per diluted share, during periods of Net Income after participating securities dividends, we include the weighted-average of unvested restricted shares deemed to be participating securities and the earnings allocated to these participating securities. Weighted-average unvested restricted shares were 3,065 for the year ended March 31, 2015. For purposes of this non-GAAP performance measure, earnings are allocated in the same ratio to participating securities and common shares. As a result, the inclusion of these participating securities and the earnings allocated thereto do not impact the per share amounts of the adjustments made to Net Income (Loss) per diluted share Attributable to Legg Mason, Inc. Shareholders. (0.69) 1.26 (0.08) (0.07) 3.36 Adjusted Income per diluted share (1) — 1.20 — — 3.26 $ $ $ In calculating Adjusted Income per diluted share during periods of Net Loss after participating securities dividends, we exclude the weighted-average of unvested restricted shares deemed to be participating securities. Weighted-average unvested restricted shares were 2,831 for the year ended March 31, 2016. (2) During periods of Net Loss after participating securities dividends, there is an impact from weighted-average unvested restricted shares deemed to participating securities. Operating Margin, as Adjusted We calculate "Operating Margin, as Adjusted," by dividing (i) Operating Income (Loss), adjusted to exclude the impact on compensation expense of gains or losses on investments made to fund deferred compensation plans, the impact on compensation expense of gains or losses on seed capital investments by our affiliates under revenue sharing arrangements, amortization related to intangible assets, income (loss) of CIVs, the impact of fair value adjustments of contingent consideration liabilities, if any, and impairment charges by (ii) our operating revenues, adjusted to add back net investment advisory fees eliminated upon consolidation of investment vehicles, less distribution and servicing expenses which we use as an approximate measure of revenues that are passed through to third parties, which we refer to as "Operating Revenues, as Adjusted." The compensation items are removed from Operating Income (Loss) in the calculation because they are offset by an equal amount in Other non-operating income (expense), and thus have no impact on Net Income (Loss) Attributable to Legg Mason, Inc. We adjust for the impact of amortization of management contract assets and the impact of fair value adjustments of contingent consideration liabilities, if any, which arise from acquisitions to reflect the fact that these items distort comparison of our operating results with results of other asset management firms that have not engaged in significant acquisitions. Impairment charges and income (loss) of CIVs are removed from Operating Income (Loss) in the calculation because these items are not reflective of our core asset management operations. We use Operating Revenues, as Adjusted, in the calculation to show the operating margin without distribution and servicing expenses, which we use to approximate Legg Mason AR2016 | 41Table of Contents our distribution revenues that are passed through to third parties as a direct cost of selling our products, although distribution and servicing expenses may include commissions paid in connection with the launching of closed-end funds for which there is no corresponding revenue in the period. Operating Revenues, as Adjusted, also include our advisory revenues we receive from CIVs that are eliminated in consolidation under GAAP. We believe that Operating Margin, as Adjusted, is a useful measure of our performance because it provides a measure of our core business activities. It excludes items that have no impact on Net Income (Loss) Attributable to Legg Mason, Inc. and indicates what our operating margin would have been without the distribution revenues that are passed through to third parties as a direct cost of selling our products, amortization related to intangible assets, changes in the fair value of contingent consideration liabilities, if any, impairment charges, and the impact of the consolidation of certain investment vehicles described above. The consolidation of these investment vehicles does not have an impact on Net Income (Loss) Attributable to Legg Mason, Inc. This measure is provided in addition to our operating margin calculated under GAAP, but is not a substitute for calculations of margins under GAAP and may not be comparable to non-GAAP performance measures, including measures of adjusted margins of other companies. The calculation of Operating Margin and Operating Margin, as Adjusted, is as follows (dollars in thousands): Operating Revenues, GAAP basis Plus (less): Operating revenues eliminated upon consolidation of investment vehicles Distribution and servicing expense, excluding consolidated investment vehicles Operating Revenues, as Adjusted Operating Income, GAAP basis Plus: Gains (losses) on deferred compensation and seed investments, net Impairment of intangible assets Contingent consideration fair value adjustments Amortization of intangible assets Operating income and expenses of consolidated investment vehicles, net Operating Income, as Adjusted Operating Margin, GAAP basis Operating Margin, as Adjusted $ $ $ $ For the Years Ended March 31, 2016 2,660,844 318 (545,668) 2,115,494 50,831 (1,205) 371,000 (33,375) 4,979 2015 2,819,106 721 (594,746) 2,225,081 498,219 $ $ $ $ $ $ 9,369 — — 2,625 2014 2,741,757 1,950 (619,022) 2,124,685 430,893 16,987 — 5,000 12,314 461 392,691 $ 899 511,112 $ 2,370 467,564 1.9% 18.6 17.7% 23.0 15.7% 22.0 Adjusted EBITDA We define Adjusted EBITDA as cash provided by operating activities plus (minus) allocation of debt redemption payments, interest expense, net of accretion and amortization of debt discounts and premiums, current income tax expense, net gains (losses) on investment securities, the net change of other assets and liabilities and other. The net change of other assets and liabilities adjustment aligns with the Consolidated Statements of Cash Flows. This definition results in a metric that is the same amount as EBITDA used in covenants in our revolving credit facility agreement. We believe that Adjusted EBITDA is useful to investors as a liquidity measure that provides additional information with regard to our compliance with debt covenants and ability to meet future working capital requirements. This measure is provided in addition to Cash provided by operating activities and may not be comparable to non-GAAP liquidity measures, including measures of EBITDA or cash flow measures, of other companies. Further, Adjusted EBITDA is not to be confused 42 | Legg Mason AR2016 Table of Contents with Cash provided by operating activities or other measures of cash flows under GAAP, and is provided as a supplement to, and not in replacement of, a GAAP measure. A reconciliation of Cash provided by operating activities to Adjusted EBITDA is as follows (dollars in thousands): Trailing twelve months ended March 31, 2015 2014 2016 Cash provided by operating activities, GAAP basis $ 454,451 $ 568,118 $ 437,324 Plus (less): Debt redemption payments allocated to operations Interest expense, net of accretion and amortization of debt discounts and premiums Current tax expense Net gain on investment securities Net change of other assets and liabilities Other, principally transition-related costs in fiscal 2016 Adjusted EBITDA $ — 98,418 — 45,324 15,419 8,563 30,084 67,881 621,722 $ 53,999 24,897 50,853 (118,919) 9,133 686,499 $ 49,846 19,375 27,370 76,140 7,037 617,092 LIQUIDITY AND CAPITAL RESOURCES The primary objective of our capital structure is to appropriately support our business strategies and to provide needed liquidity at all times, including maintaining required capital in certain subsidiaries. Liquidity and the access to liquidity is important to the success of our ongoing operations. Our overall funding needs and capital base are continually reviewed to determine if the capital base meets the expected needs of our businesses. We intend to continue to explore potential acquisition opportunities as a means of diversifying and strengthening our asset management business. These opportunities may from time to time involve acquisitions that are material in size and may require, among other things, and subject to existing covenants, the raising of additional equity capital and/or the issuance of additional debt. The consolidation of variable interest entities discussed above does not impact our liquidity and capital resources. We have no rights to the benefits from, nor do we bear the risks associated with, the assets and liabilities of the CIVs and other consolidated sponsored investment vehicles beyond our investments in and investment advisory fees generated from these vehicles, which are eliminated in consolidation. Additionally, creditors of the CIVs and other consolidated sponsored investment vehicles have no recourse to our general credit beyond the level of our investment, if any, so we do not consider these liabilities to be our obligations. Our assets consist primarily of intangible assets, goodwill, cash and cash equivalents, investment securities, and investment advisory and related fee receivables. Our assets have been principally funded by equity capital, long-term debt and the results of our operations. At March 31, 2016, cash and cash equivalents, total assets, long-term debt and stockholders' equity were $1.3 billion, $7.5 billion, $1.7 billion and $4.2 billion, respectively. Total assets include amounts related to CIVs of $0.1 billion. Cash and cash equivalents are primarily invested in liquid domestic and non-domestic money market funds that hold principally domestic and non-domestic corporate commercial paper and bonds, government and agency securities, and bank deposits. We have not recognized any losses on these investments. Our monitoring of cash and cash equivalents partially mitigates the potential that material risks may be associated with these balances. Legg Mason AR2016 | 43Table of Contents The following table summarizes our Consolidated Statements of Cash Flows for the years ended March 31 (in millions): Cash flows provided by operating activities Cash flows provided by/(used in) investing activities Cash flows provided by/(used in) financing activities Effect of exchange rate changes Net change in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 2016 2015 2014 $ $ $ 454.5 (244.6) 465.7 (16.1) 659.5 669.6 1,329.1 $ 568.1 (208.0) (507.0) (41.5) (188.4) 858.0 669.6 $ $ 437.3 137.6 (639.0) (10.9) (75.0) 933.0 858.0 Cash inflows provided by operating activities during fiscal 2016, were $454.5 million, primarily related to Net Loss, adjusted for non-cash items. Cash inflows provided by operating activities during fiscal 2015 were $568.1 million, primarily related to Net Income, adjusted for non-cash items, and net activity related to CIVs. Cash inflows provided by operating activities during fiscal 2014 were $437.3 million, primarily related to Net Income, adjusted for non-cash items, offset in part by net purchases of trading and other investments and a decrease in net activity related to CIVs, primarily due to the wind-down of a consolidated loan obligation ("CLO"). See Note 17 of Notes to Consolidated Financial Statements for additional information regarding the CLO. Cash outflows used in investing activities during fiscal 2016, were $244.6 million, primarily related to payments associated with the acquisitions of RARE Infrastructure and PK Investments, and the investment in Precidian Investments, aggregating $234.1 million (net of acquired cash). Cash outflows used in investing activities during fiscal 2015, were $208.0 million, primarily related to payments associated with the acquisitions of Martin Currie and QS Investors of $183.7 million (net of acquired cash) and payments made for fixed assets of $45.8 million; offset in part by the proceeds from businesses sold of $47.0 million. Cash inflows provided by investing activities during fiscal 2014, were $137.6 million, primarily related to net activity related to CIVs, offset in part by payments made for fixed assets. Cash inflows provided by financing activities during fiscal 2016, were $465.7 million, primarily related to the proceeds of the issuance of $699.8 million of long-term debt, offset in part by the repurchase of 4.5 million shares of our common stock for $209.6 million. Cash outflows used in financing activities during fiscal 2015, were $507.0 million, primarily related to the repayment of long-term debt of $645.8 million, the repurchase of 6.9 million shares of our common stock for $356.5 million, the repayment of long-term debt of CIVs of $79.2 million, and dividends paid of $70.8 million, offset in part by the proceeds from the issuance of $658.8 million of long-term debt. Cash outflows used in financing activities during fiscal 2014, were $639.0 million, primarily related to the repayment of long-term debt of $500.4 million, the repayment of long- term debt of CIVs of $133.0 million, the repurchase of 9.7 million shares of our common stock for $360.0 million, and dividends paid of $62.0 million, offset in part by the proceeds from the long-term debt issuances of $393.7 million. 44 | Legg Mason AR2016Table of Contents Financing Transactions The table below reflects our primary sources of financing (in thousands) as of March 31, 2016: Type 2.7% Senior Notes due July 2019 3.95% Senior Notes due July 2024 4.75% Senior Notes Due March 2026 5.625% Senior Notes due January 2044 6.375% Junior Subordinated Notes Due March 2056 $ Available at March 31, 2016 250,000 250,000 450,000 550,000 Amount Outstanding at March 31, 2016 $ 250,000 250,000 450,000 550,000 2015 $ 250,000 250,000 — 550,000 Interest Rate 2.70% 3.95% 4.75% 5.625% 250,000 250,000 Maturity July 2019 July 2024 March 2026 January 2044 March 2056 December 2020 — — 6.375% Eurocurrency Rate + 1.25% + 0.175% annual commitment fee Revolving credit agreements 1,000,000 40,000 In March 2016, we issued $250 million of 6.375% Junior Subordinated Notes due 2056 (the "2056 Notes") and $450 million of 4.75% Senior Notes due 2026 (the "2026 Notes"). The net proceeds of these offerings were used to finance the acquisitions of Clarion Partners in April 2016 and EnTrust in May 2016, as further discussed below and in Note 18 of Notes to the Consolidated Financial Statements. In December 2015, we entered into a new unsecured credit agreement which provides for a $1.0 billion multi-currency revolving credit facility, and borrowed $40 million under this revolving credit facility, which remained outstanding as of March 31, 2016. The proceeds were used to repay the $40 million of outstanding borrowings under our previous revolving credit facility, which were used to partially finance the acquisition of RARE Infrastructure in October 2015, as further discussed below. In May 2016, we used $460 million of additional borrowings under the new revolving credit facility to finance the acquisition of EnTrust and to replenish cash used to complete the acquisitions of Clarion Partners and RARE Infrastructure. The amount of total borrowings outstanding under this facility is $500 million as of the date of filing. The new revolving credit facility may be increased by an aggregate amount of up to $500 million, to $1.5 billion, subject to the approval of the lenders, expires in December 2020, and can be repaid at any time. This revolving credit facility is available to fund working capital needs and for general corporate purposes. The financial covenants under our credit agreement were modified in March 2016 and include: maximum net debt to EBITDA ratio of 3.5 to 1 for the period from March 31, 2016 through September 30, 2016, 3.25 to 1 for the period from October 1, 2016 through December 31, 2016, and 3.0 to 1 thereafter; and minimum EBITDA to interest ratio of 4.0 to 1. Debt is defined to include all obligations for borrowed money, excluding non-recourse debt of CIVs and capital leases. Under these net debt covenants, our debt is reduced by the amount of our unrestricted cash in excess of the greater of subsidiary cash or $300 million, by the lesser of 50% of the aggregate amount of our seed capital investments or $125 million, and an amount equal to 50% of our hybrid capital securities. EBITDA is defined as consolidated net income (loss) plus/minus tax expense (benefit), interest expense, depreciation and amortization, amortization of intangibles, any extraordinary expense or losses, any non-cash charges, and certain transition-related costs, as defined in the agreements. As of March 31, 2016, Legg Mason's net debt to EBITDA ratio was 1.3 to 1 and EBITDA to interest expense ratio was 13.0 to 1, and therefore, Legg Mason has maintained compliance with the applicable covenants. If our net income (loss) significantly declines, or if we spend our available cash, it may impact our ability to maintain compliance with the financial covenants. If we determine that our compliance with these covenants may be under pressure at a time when we either have outstanding borrowings under this facility, want to utilize available borrowings, or otherwise desire to keep borrowings available, we may elect to take a number of actions, including reducing our expenses in order to increase our EBITDA, using available cash to repay all or a portion of our outstanding debt subject to these covenants or seeking to negotiate with our lenders to modify the terms or to restructure our debt. Using available cash to repay indebtedness would make the cash unavailable for other uses and might affect the liquidity discussions and conclusions. Entering into any modification or restructuring of our debt would likely result in additional fees or interest payments. Legg Mason AR2016 | 45(cid:55)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:72)(cid:81)(cid:87)(cid:86) (cid:44)(cid:81)(cid:3)(cid:48)(cid:68)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:85)(cid:72)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:71)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:81)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:21)(cid:17)(cid:24)(cid:8)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:38)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:87)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:5)(cid:38)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:87)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:5)(cid:12)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3) (cid:90)(cid:68)(cid:86)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:25)(cid:24)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:24)(cid:17)(cid:24)(cid:8)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:15)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:82)(cid:81)(cid:3) (cid:75)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:7)(cid:21)(cid:24)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:80)(cid:68)(cid:76)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:68)(cid:83)(cid:68)(cid:70)(cid:76)(cid:87)(cid:92)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:68)(cid:3)(cid:87)(cid:75)(cid:72)(cid:81)(cid:3)(cid:72)(cid:91)(cid:76)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3) (cid:68)(cid:79)(cid:79)(cid:3)(cid:7)(cid:20)(cid:17)(cid:21)(cid:24)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:87)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:68)(cid:85)(cid:85)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:87)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:90)(cid:68)(cid:85)(cid:85)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:79)(cid:68)(cid:70)(cid:72)(cid:71)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:72)(cid:68)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:81)(cid:89)(cid:72)(cid:85)(cid:87)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:15)(cid:3) (cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:74)(cid:74)(cid:85)(cid:72)(cid:74)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:82)(cid:73)(cid:3)(cid:20)(cid:23)(cid:17)(cid:21)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:15)(cid:3)(cid:82)(cid:81)(cid:3)(cid:68)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:86)(cid:72)(cid:87)(cid:87)(cid:79)(cid:72)(cid:71)(cid:3)(cid:69)(cid:68)(cid:86)(cid:76)(cid:86)(cid:15)(cid:3)(cid:68)(cid:87)(cid:3)(cid:68)(cid:81)(cid:3) (cid:72)(cid:91)(cid:72)(cid:85)(cid:70)(cid:76)(cid:86)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:27)(cid:27)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:90)(cid:68)(cid:85)(cid:85)(cid:68)(cid:81)(cid:87)(cid:86)(cid:3)(cid:72)(cid:91)(cid:83)(cid:76)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:45)(cid:88)(cid:79)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:81)(cid:3)(cid:69)(cid:72)(cid:3)(cid:86)(cid:72)(cid:87)(cid:87)(cid:79)(cid:72)(cid:71)(cid:15)(cid:3)(cid:68)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:76)(cid:81)(cid:3)(cid:72)(cid:76)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3) (cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:3)(cid:82)(cid:85)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:17) (cid:44)(cid:81)(cid:3)(cid:45)(cid:88)(cid:81)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:21)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:68)(cid:81)(cid:3)(cid:88)(cid:81)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:3)(cid:7)(cid:24)(cid:19)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) (cid:68)(cid:3)(cid:7)(cid:24)(cid:19)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:73)(cid:76)(cid:86)(cid:70)(cid:68)(cid:79)(cid:3)(cid:21)(cid:19)(cid:20)(cid:23)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3) (cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:83)(cid:68)(cid:92)(cid:3)(cid:7)(cid:24)(cid:19)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:68)(cid:3)(cid:83)(cid:85)(cid:72)(cid:89)(cid:76)(cid:82)(cid:88)(cid:86)(cid:3)(cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:81)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:72)(cid:71)(cid:17)(cid:3) (cid:44)(cid:81)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:23)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3)(cid:7)(cid:23)(cid:19)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:24)(cid:17)(cid:25)(cid:21)(cid:24)(cid:8)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:21)(cid:19)(cid:23)(cid:23)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:15)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3) (cid:82)(cid:81)(cid:3)(cid:75)(cid:68)(cid:81)(cid:71)(cid:15)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:83)(cid:68)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:7)(cid:23)(cid:24)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:81)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:76)(cid:89)(cid:72)(cid:16)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:3) (cid:70)(cid:82)(cid:81)(cid:77)(cid:88)(cid:81)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:88)(cid:81)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:81)(cid:82)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:24)(cid:17)(cid:25)(cid:21)(cid:24)(cid:8)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:86)(cid:82)(cid:79)(cid:71)(cid:3)(cid:68)(cid:87)(cid:3)(cid:68)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:25)(cid:17)(cid:22)(cid:3) (cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:76)(cid:86)(cid:3)(cid:69)(cid:72)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:80)(cid:82)(cid:85)(cid:87)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:22)(cid:19)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:17) (cid:36)(cid:79)(cid:86)(cid:82)(cid:3)(cid:76)(cid:81)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:23)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:7)(cid:21)(cid:24)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:72)(cid:80)(cid:83)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) (cid:90)(cid:68)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:7)(cid:24)(cid:19)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:76)(cid:81)(cid:3)(cid:45)(cid:88)(cid:81)(cid:72)(cid:3) (cid:21)(cid:19)(cid:20)(cid:21)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:83)(cid:88)(cid:85)(cid:83)(cid:82)(cid:86)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) (cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:91)(cid:83)(cid:76)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:45)(cid:88)(cid:81)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:72)(cid:76)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:17)(cid:3)(cid:3)(cid:44)(cid:81)(cid:3)(cid:50)(cid:70)(cid:87)(cid:82)(cid:69)(cid:72)(cid:85)(cid:3) (cid:21)(cid:19)(cid:20)(cid:24)(cid:15)(cid:3)(cid:47)(cid:72)(cid:74)(cid:74)(cid:3)(cid:48)(cid:68)(cid:86)(cid:82)(cid:81)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:72)(cid:71)(cid:3)(cid:7)(cid:23)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:53)(cid:36)(cid:53)(cid:40)(cid:3)(cid:44)(cid:81)(cid:73)(cid:85)(cid:68)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:88)(cid:85)(cid:72)(cid:15)(cid:3) (cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:68)(cid:76)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:88)(cid:81)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:72)(cid:71)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3) (cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:87)(cid:72)(cid:85)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:88)(cid:83)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17) (cid:44)(cid:81)(cid:3)(cid:45)(cid:88)(cid:81)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:23)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:71)(cid:3)(cid:7)(cid:21)(cid:24)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:17)(cid:26)(cid:8)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:3)(cid:68)(cid:87)(cid:3)(cid:68)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:19)(cid:17)(cid:25)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:7)(cid:21)(cid:24)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:22)(cid:17)(cid:28)(cid:24)(cid:8)(cid:3) (cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:21)(cid:19)(cid:21)(cid:23)(cid:3)(cid:68)(cid:87)(cid:3)(cid:68)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:19)(cid:17)(cid:24)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:81)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:7)(cid:20)(cid:24)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:24)(cid:17)(cid:25)(cid:21)(cid:24)(cid:8)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:21)(cid:19)(cid:23)(cid:23)(cid:3)(cid:68)(cid:87)(cid:3)(cid:68)(cid:3) (cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:28)(cid:17)(cid:27)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:3)(cid:44)(cid:81)(cid:3)(cid:45)(cid:88)(cid:79)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:23)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:25)(cid:24)(cid:28)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:72)(cid:72)(cid:86)(cid:15)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:82)(cid:81)(cid:3)(cid:75)(cid:68)(cid:81)(cid:71)(cid:15)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3) (cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:71)(cid:72)(cid:72)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:81)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:7)(cid:25)(cid:24)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:24)(cid:17)(cid:24)(cid:8)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:24)(cid:17)(cid:24)(cid:8)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:83)(cid:85)(cid:72)(cid:16)(cid:87)(cid:68)(cid:91)(cid:15)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:75)(cid:68)(cid:85)(cid:74)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:20)(cid:19)(cid:26)(cid:17)(cid:20)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3)(cid:45)(cid:88)(cid:79)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:23)(cid:15)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:16)(cid:90)(cid:75)(cid:82)(cid:79)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3) (cid:7)(cid:28)(cid:27)(cid:17)(cid:25)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:7)(cid:19)(cid:17)(cid:25)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:85)(cid:86)(cid:72)(cid:3)(cid:87)(cid:85)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:92)(cid:3)(cid:79)(cid:82)(cid:70)(cid:78)(cid:15)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:68)(cid:79)(cid:79)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:24)(cid:17)(cid:24)(cid:8)(cid:3)(cid:54)(cid:72)(cid:81)(cid:76)(cid:82)(cid:85)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:7)(cid:27)(cid:17)(cid:24)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:86)(cid:86)(cid:82)(cid:70)(cid:76)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:72)(cid:91)(cid:76)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:71)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:85)(cid:76)(cid:74)(cid:76)(cid:81)(cid:68)(cid:79)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:72)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:17) (cid:50)(cid:88)(cid:85)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:90)(cid:82)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:74)(cid:72)(cid:81)(cid:70)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3) (cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:72)(cid:72)(cid:3)(cid:82)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:79)(cid:76)(cid:81)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:90)(cid:82)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:74)(cid:72)(cid:81)(cid:70)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3) (cid:44)(cid:81)(cid:3)(cid:45)(cid:88)(cid:81)(cid:72)(cid:3)(cid:21)(cid:19)(cid:20)(cid:20)(cid:15)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:92)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:68)(cid:74)(cid:72)(cid:81)(cid:70)(cid:76)(cid:72)(cid:86)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:71)(cid:82)(cid:90)(cid:81)(cid:74)(cid:85)(cid:68)(cid:71)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:72)(cid:3)(cid:74)(cid:85)(cid:68)(cid:71)(cid:72)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:17)(cid:3)(cid:3)(cid:54)(cid:75)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:74)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3) (cid:71)(cid:82)(cid:90)(cid:81)(cid:74)(cid:85)(cid:68)(cid:71)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:68)(cid:69)(cid:86)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:3)(cid:88)(cid:83)(cid:74)(cid:85)(cid:68)(cid:71)(cid:72)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:80)(cid:72)(cid:85)(cid:3)(cid:68)(cid:74)(cid:72)(cid:81)(cid:70)(cid:92)(cid:15)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:85)(cid:76)(cid:86)(cid:72)(cid:3)(cid:80)(cid:82)(cid:71)(cid:72)(cid:86)(cid:87)(cid:79)(cid:92)(cid:17) (cid:54)(cid:72)(cid:72)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:3)(cid:25)(cid:3)(cid:82)(cid:73)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:74)(cid:68)(cid:85)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:71)(cid:72)(cid:69)(cid:87)(cid:17) (cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:55)(cid:85)(cid:68)(cid:81)(cid:86)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86) (cid:58)(cid:72)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:72)(cid:91)(cid:87)(cid:3)(cid:20)(cid:21)(cid:3)(cid:80)(cid:82)(cid:81)(cid:87)(cid:75)(cid:86)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:82)(cid:81)(cid:3)(cid:75)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:3) (cid:68)(cid:71)(cid:72)(cid:84)(cid:88)(cid:68)(cid:87)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:15)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:17)(cid:3)(cid:3)(cid:44)(cid:81)(cid:3)(cid:48)(cid:68)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3) (cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:7)(cid:23)(cid:25)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:69)(cid:82)(cid:85)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:68)(cid:83)(cid:68)(cid:70)(cid:76)(cid:87)(cid:92)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3)(cid:73)(cid:68)(cid:70)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:70)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:86)(cid:86)(cid:88)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) (cid:21)(cid:19)(cid:21)(cid:25)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:21)(cid:19)(cid:24)(cid:25)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:40)(cid:81)(cid:55)(cid:85)(cid:88)(cid:86)(cid:87)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:83)(cid:79)(cid:72)(cid:81)(cid:76)(cid:86)(cid:75)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:87)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:79)(cid:68)(cid:85)(cid:76)(cid:82)(cid:81)(cid:3)(cid:51)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:36)(cid:83)(cid:85)(cid:76)(cid:79)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:53)(cid:36)(cid:53)(cid:40)(cid:3)(cid:44)(cid:81)(cid:73)(cid:85)(cid:68)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:50)(cid:70)(cid:87)(cid:82)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:17)(cid:3)(cid:3)(cid:58)(cid:72)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:68)(cid:79)(cid:86)(cid:82)(cid:3) (cid:88)(cid:87)(cid:76)(cid:79)(cid:76)(cid:93)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:89)(cid:68)(cid:76)(cid:79)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:82)(cid:88)(cid:85)(cid:70)(cid:72)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:81)(cid:92)(cid:3)(cid:81)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:82)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:69)(cid:88)(cid:87)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:15)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:86)(cid:72)(cid:72)(cid:71)(cid:3) (cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:15)(cid:3)(cid:85)(cid:72)(cid:83)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:82)(cid:81)(cid:3)(cid:86)(cid:87)(cid:82)(cid:70)(cid:78)(cid:15)(cid:3)(cid:85)(cid:72)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:71)(cid:72)(cid:69)(cid:87)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:81)(cid:71)(cid:86)(cid:17)(cid:3)(cid:3)(cid:44)(cid:81)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:82)(cid:85)(cid:71)(cid:76)(cid:81)(cid:68)(cid:85)(cid:92)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:81)(cid:87)(cid:76)(cid:70)(cid:76)(cid:83)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:81)(cid:72)(cid:91)(cid:87)(cid:3)(cid:20)(cid:21)(cid:3) (cid:80)(cid:82)(cid:81)(cid:87)(cid:75)(cid:86)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:17) 46 | Legg Mason AR2016Table of Contents Acquisitions RARE Infrastructure Martin Currie PK Investments QS Investors Fauchier Total Maximum Remaining Contingent Consideration(1) Contingent consideration liability Current Contingent consideration Non-current Contingent consideration Balance as of March 31, 2016 $ $ $ 81.3 $ 467.1 $ 2.5 $ 30.0 $ 28.7 $ 609.6 7.0 $ 12.8 $ — $ 6.6 $ — $ 26.4 20.1 27.1 $ 28.4 41.2 $ 2.5 2.5 $ 7.2 13.8 $ — — $ 58.2 84.6 (1) Using the applicable exchange rate as of March 31, 2016 for amounts denominated in currencies other than the U.S. dollar. On May 2, 2016, we closed the transaction to combine Permal and EnTrust, to create EnTrustPermal, of which we own 65%. The transaction required a cash payment of $400 million, which was funded with borrowings under our revolving credit facility, as well as a portion of the proceeds from the 2026 Notes and the 2056 Notes that were issued in March 2016. In connection with the combination, we expect to incur restructuring and transition costs of approximately $100 million, of which approximately 15% are non-cash charges. As of March 31, 2016, approximately $43 million of these charges have been incurred, and approximately $24 million have been paid. A significant portion of the remaining costs will be paid in the year ending March 31, 2017. See Notes 2 and 18 of Notes to Consolidated Financial Statements for additional information. On April 13, 2016, we acquired a majority interest in Clarion Partners. The acquisition required a cash payment of $577 million, which was funded with a portion of the proceeds from the issuance of the 2026 Notes and the 2056 Notes in March 2016. In conjunction with the acquisition, we committed to provide $100 million of seed capital to Clarion Partners products within two years of closing. See Note 18 of Notes to Consolidated Financial Statements for additional information. On October 21, 2015, we acquired a majority interest in RARE Infrastructure. The acquisition required an initial cash payment of approximately $214 million (using the foreign exchange rate as of October 21, 2015 for the 296 million Australian dollar payment), which was funded with $40 million of net borrowings under our previous revolving credit facility, as well as existing cash resources. Contingent consideration may be due March 31, 2017 and March 31, 2018, aggregating up to approximately $81 million (using the foreign exchange rate as of March 31, 2016 for the maximum 106 million Australia dollar amount per the contract), dependent on the achievement of certain net revenue targets, and subject to potential catch- up adjustments extending through March 31, 2019. Noncontrolling interests of 25% are subject to put and call provisions that may result in future cash outlays. On October 1, 2014, we acquired all outstanding equity interests of Martin Currie. The transaction included an initial cash payment of $203 million (using the foreign exchange rate as of October 1, 2014 for the £125 million payment), which was funded from existing cash. Contingent consideration payments may be due on the March 31 following the second and third anniversaries of closing, aggregating up to approximately $467 million (using the foreign exchange rate as of March 31, 2016 for the maximum £325 million contract amount), inclusive of the payment of certain potential pension and other obligations, and dependent on the achievement of certain financial metrics, as specified in the share purchase agreement, at March 31, 2017 and 2018. No contingent consideration payment was due as of March 31, 2016, for the first anniversary payment. Actual payments to be made may also include amounts for certain potential pension and other obligations that are accounted for separately. In addition, Martin Currie and the trustees of the pension plan referenced above have received a notice that the Pensions Regulator in the U.K. is reviewing the plan’s current structure and funding status. While the review is still in process, there can be no assurance that the review will not result in accelerated funding. In December 2015, Martin Currie acquired certain assets of PK Investments. The business acquisition was comprised of an initial cash payment of $5.0 million and a contingent payment, due on December 31, 2017, which is currently estimated at $2.5 million. The amount of any ultimate contingent payment will be based on certain financial metrics. The initial cash payment was funded with existing cash resources. Effective May 31, 2014, we completed the acquisition of QS Investors. In July 2016, we may be required to pay up to $10 million for the second anniversary contingent consideration, with the amount of the payment dependent on the achievement Legg Mason AR2016 | 47Table of Contents of certain net revenue targets. We intend to fund any amount due with existing cash resources. In addition, contingent consideration of up to $20 million for the fourth anniversary payment may be due in July 2018, also dependent on the achievement of certain net revenue targets, and subject to a potential catch-up adjustment in the fourth anniversary payment for any second anniversary payment shortfall. In March 2013, we completed the acquisition of all of the outstanding share capital of Fauchier. Contingent consideration of up to approximately $29 million (using the exchange rate as of March 31, 2016, for the £20 million maximum contractual amount), may be due on or about the fourth anniversary of closing, dependent on achieving certain levels of revenue, net of distribution costs. See Note 2 of Notes to Consolidated Financial Statements for additional information related to the acquisitions of RARE Infrastructure, Martin Currie, QS Investors, and Fauchier. Other In March 2016, we implemented an affiliate management equity plan with the management of Royce. Under this management equity plan, minority interests equivalent to 16.9% in the Royce entity were issued to its management team. In addition, in June 2013 and March 2014, we implemented affiliate management equity plans that will entitle certain key employees of Permal and ClearBridge, respectively, to participate in 15% of the future growth of the respective enterprise value (subject to appropriate discounts), if any, as further discussed in Note 11 of Notes to Consolidated Financial Statements. Repurchases of units granted under these plans may impact future liquidity requirements. In conjunction with the acquisition of Clarion Partners, we implemented an affiliate management equity plan similar to the plan implemented for ClearBridge, with immediate vesting for the initial grant. Certain of our asset management affiliates maintain various credit facilities for general operating purposes. Certain affiliates are subject to the capital requirements of various regulatory agencies. All such affiliates met their respective capital adequacy requirements during the periods presented. In January 2015, our Board of Directors authorized $1.0 billion for additional purchases of our common stock, approximately $800 million of which remained available as of March 31, 2016. We intend to utilize up to $90 million of cash generated from future operations to purchase shares of our common stock on a quarterly basis, subject to market conditions and other potential uses of cash. Future Outlook As described above, we currently project that our cash flows from operating activities will be sufficient to fund our present and foreseeable, near-term liquidity needs, other than for the acquisitions of Clarion Partners in April 2016 and EnTrust in May 2016. As of March 31, 2016, we had approximately $1.1 billion in cash and cash equivalents in excess of our working capital requirements, $689 million of which was used to fund the previously discussed acquisitions of Clarion Partners and EnTrust. As discussed above, we intend to utilize up to $90 million of cash generated from future operations to purchase shares of our common stock during each quarter of the year ending March 31, 2017, subject to market conditions and other cash needs. We temporarily interrupted share repurchases in November 2015 and resumed share repurchases in March 2016. We intend to catch up an additional $12 million in share repurchases in the quarter ending June 30, 2016. In addition, in fiscal 2017, we intend to repay approximately $50 million of the outstanding $500 million of borrowings under our revolving credit facility, subject to market conditions and other cash needs. After drawing $460 million on our revolving credit facility in May 2016, in connection with the acquisitions of Clarion Partners and EnTrust, subject to compliance with applicable covenants, we have approximately $350 million of available borrowing capacity under our revolving credit facility, which expires in December 2020. We do not currently expect to raise incremental debt or equity financing over the next 12 months beyond our current levels, unless we enter into one or more acquisitions or refinancings. Going forward, there can be no assurances of these expectations as our projections could prove to be incorrect, events may occur that require additional liquidity in excess of amounts under our revolving credit facility, such as an opportunity to refinance indebtedness, or market conditions might significantly worsen, affecting our results of operations and generation of available cash. If these events result in our operations and available cash being insufficient to fund liquidity needs, we would likely seek to manage our available resources by taking actions such as reducing future share repurchases, reducing operating expenses, reducing our expected expenditures on investments, selling assets (such as investment securities), repatriating earnings from foreign subsidiaries, reducing our dividend, or modifying arrangements with our affiliates and/or employees. Should these types of actions prove insufficient, or should an acquisition or refinancing opportunity arise, we would likely utilize borrowing capacity under our revolving credit facility or seek to raise additional equity or debt. 48 | Legg Mason AR2016 Table of Contents Our liquid assets include cash, cash equivalents, and certain current investment securities. At March 31, 2016, our total liquid assets were $1.7 billion, $689 million of which was used to fund the previously discussed acquisitions of Clarion Partners in April 2016 and EnTrust in May 2016. The remaining $1.0 billion of liquid assets included $378 million of cash and investments held by foreign subsidiaries. Other net working capital amounts of foreign subsidiaries are not significant. In order to increase our cash available in the U.S. for general corporate purposes, we plan to utilize up to $170 million of foreign cash over the next several years, of which $8.5 million is accumulated foreign earnings. Any additional tax provision associated with these repatriations was previously recognized. No further repatriation of accumulated prior period foreign earnings is currently planned. However, if circumstances change, we will provide for and pay any applicable additional U.S. taxes in connection with repatriation of offshore earnings. It is not practical at this time to determine the income tax liability that would result from any further repatriation of accumulated foreign earnings. Credit and Liquidity Risk Cash and cash equivalent deposits involve certain credit and liquidity risks. We maintain our cash and cash equivalents with a number of high quality financial institutions or funds and from time to time may have concentrations with one or more of these institutions. The balances with these financial institutions or funds and their credit quality are monitored on an ongoing basis. Off-Balance Sheet Arrangements Off-balance sheet arrangements, as defined by the Securities and Exchange Commission ("SEC"), include certain contractual arrangements pursuant to which a company has an obligation, such as certain contingent obligations, certain guarantee contracts, retained or contingent interest in assets transferred to an unconsolidated entity, certain derivative instruments classified as equity or material variable interests in unconsolidated entities that provide financing, liquidity, market risk or credit risk support. Disclosure is required for any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, results of operations, liquidity or capital resources. We generally do not enter into off-balance sheet arrangements, as defined, other than those described in the Contractual Obligations section that follows and Consolidation discussed in Critical Accounting Policies and Notes 1 and 17 of Notes to Consolidated Financial Statements. Legg Mason AR2016 | 49Contractual and Contingent Obligations We have contractual obligations to make future payments, principally in connection with our long-term debt, non-cancelable lease agreements, acquisition agreements and service agreements. See Notes 6 and 8 of Notes to Consolidated Financial Statements for additional disclosures related to our commitments. The following table sets forth these contractual obligations (in millions) by fiscal year, and excludes contractual obligations of CIVs, as we are not responsible or liable for these obligations: 2017 2018 2019 2020 2021 Thereafter Total $ 40.0 $ — $ — $ — $ — $ — $ 40.0 — — — 250.0 — 1,500.0 1,750.0 86.9 86.7 86.7 83.3 79.4 1,410.8 1,833.8 128.0 254.9 109.4 196.1 88.6 175.3 79.8 413.1 73.4 152.8 225.7 704.9 3,136.5 4,328.7 Contractual Obligations Short-term borrowings by contract maturity(1) Long-term borrowings by contract maturity Interest on long-term borrowings and credit facility commitment fees Minimum rental and service commitments Total Contractual Obligations Contingent Obligations Payments related to business acquisitions(2) Clarion Partners EnTrust Martin Currie RARE Infrastructure Other 577.5 400.0 467.1 23.8 38.7 — — — 57.5 2.5 60.0 — — — — 20.0 20.0 — — — — — — — — — — — — — — — — — — 577.5 400.0 467.1 81.3 61.2 1,587.1 Total payments related to business acquisitions 1,507.1 Total Obligations(3)(4)(5)(6) (1) Represents borrowings under our revolving credit facility which does not expire until December 2020. In April 2016, we borrowed an additional $460 million under this facility and exercised an amortizing variable for fixed interest rate swap with the intention of repaying the $500 million of borrowings through December 2020. However, we may elect to repay this debt sooner if management elects to utilize a portion of our available cash for this purpose. $ 1,762.0 $ 256.1 $ 5,915.8 $ 3,136.5 $ 195.3 $ 413.1 $ 152.8 (2) The amount of contingent payments reflected for any year represents the maximum amount that could be payable at the earliest possible date under the terms of the business purchase agreements, using the applicable exchange rate as of March 31, 2016, for amounts denominated in currencies other than the U.S. dollar. The related contingent consideration liabilities had a fair value of $84.6 million as of March 31, 2016, net of certain potential pension and other obligations related to Martin Currie. See Notes 2 and 8 of Notes to Consolidated Financial Statements. The fiscal 2017 amounts reflected for Clarion Partners and EnTrust represent the cash payments made in April 2016 and May 2016, respectively, in connection with the acquisitions, which are further discussed in Note 18 of Notes to Consolidated Financial Statements. (3) The table above does not include approximately $28.9 million in capital commitments to investment partnerships in which we are a limited partner or $100 million of co-investment commitment associated with the Clarion Partners acquisition. These obligations will be outstanding, or funded as required, through the end of the commitment periods running through fiscal 2021. (4) The table above does not include amounts for uncertain tax positions of $49.6 million (net of the federal benefit for state tax liabilities), because the timing of any related cash outflows cannot be reliably estimated. (5) The table above does not include redeemable noncontrolling interests, primarily related to affiliate minority interests and CIVs, of $175.8 million as of March 31, 2016, because the timing of any related cash outflows cannot be reliably estimated. As further described in Note 18 of Notes to Consolidated Financial Statements, Clarion Partners and EnTrust will also have redeemable noncontrolling interests. (6) The table above excludes potential obligations arising from the ultimate settlement of awards under the affiliate management equity plans with key employees of Permal, ClearBridge, and Royce due to the uncertainty of the timing and amounts ultimately payable. See Notes 1and 11 of Notes to Consolidated Financial Statements for additional information regarding affiliate management equity plans. 50 | Legg Mason AR2016Table of Contents MARKET RISK We maintain an enterprise risk management program to oversee and coordinate risk management activities of Legg Mason and its subsidiaries. Under the program, certain risk activities are managed at the subsidiary level. The following describes certain aspects of our business that are sensitive to market risk. Revenues and Net Income (Loss) The majority of our revenue is calculated from the market value of our AUM. Accordingly, a decline in the value of the underlying securities will cause our AUM, and thus our revenues, to decrease. In addition, our fixed income and liquidity AUM are subject to the impact of interest rate fluctuations, as rising interest rates may tend to reduce the market value of bonds held in various mutual fund portfolios or separately managed accounts. In the ordinary course of our business, we may also reduce or waive investment management fees, or limit total expenses, on certain products or services for particular time periods to manage fund expenses, or for other reasons, and to help retain or increase managed assets. Market conditions, such as the current historical low interest rate environment, may lead us to take such actions. Performance fees may be earned on certain investment advisory contracts for exceeding performance benchmarks, and strong markets tend to increase these fees. Declines in market values of AUM will result in reduced fee revenues and net income. We generally earn higher fees on equity assets than fees charged for fixed income and liquidity assets. Declines in market values of AUM in this asset class will have a greater impact on our revenues. In addition, under revenue sharing arrangements, certain of our affiliates retain different percentages of revenues to cover their costs, including compensation. Our net income (loss), profit margin and compensation as a percentage of operating revenues are impacted based on which affiliates generate our revenues, and a change in AUM at one subsidiary can have a dramatically different effect on our revenues and earnings than an equal change at another subsidiary. Trading and Non-Trading Assets Our trading and non-trading assets are comprised of investment securities, including seed capital in sponsored mutual funds and products, limited partnerships, limited liability companies and certain other investment products. Trading and other current investments, excluding CIVs, at March 31, 2016 and 2015, subject to risk of security price fluctuations are summarized in the table below (in thousands): Investment securities, excluding CIVs: Trading investments relating to long-term incentive compensation plans Trading investments of proprietary fund products and other trading investments Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments Total current investments, excluding CIVs 2016 2015 $ $ 106,564 393,400 15,371 515,335 $ $ 80,529 358,034 16,172 454,735 Trading and other current investments of $113.0 million and $89.2 million at March 31, 2016 and 2015, respectively, relate to long-term incentive plans which will have offsetting liabilities at the end of the respective vesting periods, but for which the related liabilities may not completely offset at the end of each reporting period due to vesting provisions. Therefore, fluctuations in the market value of these trading investments will impact our compensation expense, non-operating income (expense) and, dependent on the vesting provisions of the plan, our net income (loss). Approximately $402.3 million and $365.5 million of trading and other current investments at March 31, 2016 and 2015, respectively, are investments in proprietary fund products and other investments for which fluctuations in market value will impact our non-operating income (expense). Of these amounts, the fluctuations in market value related to approximately $35.8 million and $37.5 million of proprietary fund products as of March 31, 2016 and 2015, respectively, have offsetting compensation expense under revenue share arrangements. The fluctuations in market value related to approximately $141.3 million and $163.0 million in proprietary fund products as of March 31, 2016 and 2015, respectively, are substantially offset by gains (losses) on market hedges and therefore do not materially impact Net Income (Loss) Attributable to Legg Mason, Inc. Investments in proprietary fund products are not liquidated before the related fund establishes a track record, has other investors, or a decision is made to no longer pursue the strategy. Legg Mason AR2016 | 51(cid:55)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:82)(cid:81)(cid:87)(cid:72)(cid:81)(cid:87)(cid:86) (cid:49)(cid:82)(cid:81)(cid:16)(cid:87)(cid:85)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:15)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:44)(cid:57)(cid:86)(cid:15)(cid:3)(cid:68)(cid:87)(cid:3)(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:15)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)(cid:73)(cid:79)(cid:88)(cid:70)(cid:87)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:86)(cid:88)(cid:80)(cid:80)(cid:68)(cid:85)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3) (cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:11)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:82)(cid:88)(cid:86)(cid:68)(cid:81)(cid:71)(cid:86)(cid:12)(cid:29) (cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:44)(cid:57)(cid:86)(cid:29) (cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:86)(cid:15)(cid:3)(cid:47)(cid:47)(cid:38)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85) (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:80)(cid:72)(cid:87)(cid:75)(cid:82)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:47)(cid:47)(cid:38)(cid:86) (cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:87)(cid:85)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:15)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:44)(cid:57)(cid:86) (cid:21)(cid:19)(cid:20)(cid:25) (cid:21)(cid:19)(cid:20)(cid:24) (cid:7) (cid:7) (cid:27)(cid:15)(cid:19)(cid:20)(cid:22) (cid:22)(cid:26)(cid:15)(cid:21)(cid:28)(cid:21) (cid:27)(cid:22) (cid:23)(cid:24)(cid:15)(cid:22)(cid:27)(cid:27) (cid:7) (cid:7) (cid:20)(cid:23)(cid:15)(cid:24)(cid:20)(cid:20) (cid:23)(cid:27)(cid:15)(cid:22)(cid:23)(cid:23) (cid:26)(cid:26) (cid:25)(cid:21)(cid:15)(cid:28)(cid:22)(cid:21) (cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:44)(cid:57)(cid:86)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:72)(cid:71)(cid:3)(cid:7)(cid:23)(cid:27)(cid:17)(cid:26)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:7)(cid:23)(cid:27)(cid:17)(cid:19)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:15)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:17)(cid:3)(cid:3)(cid:36)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3) (cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3) (cid:21)(cid:19)(cid:20)(cid:25)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:21)(cid:19)(cid:20)(cid:24)(cid:15)(cid:3) (cid:90)(cid:72)(cid:3) (cid:75)(cid:72)(cid:79)(cid:71)(cid:3) (cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3) (cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:76)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:38)(cid:44)(cid:57)(cid:86)(cid:3) (cid:82)(cid:73)(cid:3) (cid:7)(cid:20)(cid:22)(cid:17)(cid:25)(cid:3) (cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:7)(cid:20)(cid:24)(cid:17)(cid:25)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3) (cid:85)(cid:72)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:17)(cid:3) (cid:41)(cid:79)(cid:88)(cid:70)(cid:87)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:44)(cid:57)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:86)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)(cid:49)(cid:72)(cid:87)(cid:3)(cid:44)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3) (cid:11)(cid:47)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:36)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:47)(cid:72)(cid:74)(cid:74)(cid:3)(cid:48)(cid:68)(cid:86)(cid:82)(cid:81)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:3)(cid:3)(cid:43)(cid:82)(cid:90)(cid:72)(cid:89)(cid:72)(cid:85)(cid:15)(cid:3)(cid:76)(cid:87)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:81)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:11)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:12)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:44)(cid:57)(cid:86)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:85)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:73)(cid:86)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:81)(cid:82)(cid:81)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:86)(cid:17) (cid:57)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:85)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:87)(cid:85)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:71)(cid:72)(cid:86)(cid:70)(cid:85)(cid:76)(cid:69)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:38)(cid:85)(cid:76)(cid:87)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:51)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:72)(cid:86)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:72)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3) (cid:5)(cid:57)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:44)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:5)(cid:3)(cid:3)(cid:54)(cid:72)(cid:72)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:20)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:20)(cid:24)(cid:3)(cid:82)(cid:73)(cid:3)(cid:49)(cid:82)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:81)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3) (cid:82)(cid:73)(cid:3)(cid:71)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:17) (cid:55)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:86)(cid:88)(cid:80)(cid:80)(cid:68)(cid:85)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:3)(cid:20)(cid:19)(cid:8)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:11)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:82)(cid:88)(cid:86)(cid:68)(cid:81)(cid:71)(cid:86)(cid:12)(cid:29) (cid:38)(cid:68)(cid:85)(cid:85)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:57)(cid:68)(cid:79)(cid:88)(cid:72) (cid:41)(cid:68)(cid:76)(cid:85)(cid:3)(cid:57)(cid:68)(cid:79)(cid:88)(cid:72) (cid:36)(cid:86)(cid:86)(cid:88)(cid:80)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68) (cid:20)(cid:19)(cid:8)(cid:3)(cid:44)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:11)(cid:20)(cid:12) (cid:41)(cid:68)(cid:76)(cid:85)(cid:3)(cid:57)(cid:68)(cid:79)(cid:88)(cid:72) (cid:36)(cid:86)(cid:86)(cid:88)(cid:80)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68) (cid:20)(cid:19)(cid:8)(cid:3)(cid:39)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:11)(cid:20)(cid:12) (cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:86)(cid:72)(cid:70)(cid:88)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:44)(cid:57)(cid:86)(cid:29) (cid:55)(cid:85)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80)(cid:3)(cid:76)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72) (cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:86) (cid:55)(cid:85)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:85)(cid:76)(cid:72)(cid:87)(cid:68)(cid:85)(cid:92)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86) (cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:87)(cid:85)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86) (cid:7) (cid:20)(cid:19)(cid:25)(cid:15)(cid:24)(cid:25)(cid:23) (cid:7) (cid:20)(cid:20)(cid:26)(cid:15)(cid:21)(cid:21)(cid:19) (cid:7) (cid:28)(cid:24)(cid:15)(cid:28)(cid:19)(cid:27) (cid:22)(cid:28)(cid:22)(cid:15)(cid:23)(cid:19)(cid:19) (cid:23)(cid:22)(cid:21)(cid:15)(cid:26)(cid:23)(cid:19) (cid:22)(cid:24)(cid:23)(cid:15)(cid:19)(cid:25)(cid:19) (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:80)(cid:72)(cid:87)(cid:75)(cid:82)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:79)(cid:82)(cid:81)(cid:74)(cid:16)(cid:87)(cid:72)(cid:85)(cid:80) (cid:76)(cid:81)(cid:70)(cid:72)(cid:81)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:86)(cid:15)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:85)(cid:76)(cid:72)(cid:87)(cid:68)(cid:85)(cid:92)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71) (cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86) (cid:20)(cid:22)(cid:15)(cid:27)(cid:22)(cid:23) (cid:23)(cid:25)(cid:22)(cid:15)(cid:27)(cid:19)(cid:21) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:15)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:44)(cid:57)(cid:86) (cid:20)(cid:21)(cid:15)(cid:21)(cid:26)(cid:26) (cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:38)(cid:44)(cid:57)(cid:86) (cid:26)(cid:15)(cid:21)(cid:20)(cid:21) (cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:86)(cid:15)(cid:3)(cid:47)(cid:47)(cid:38)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85) (cid:22)(cid:22)(cid:15)(cid:24)(cid:25)(cid:22) (cid:40)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)(cid:80)(cid:72)(cid:87)(cid:75)(cid:82)(cid:71)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:81)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:47)(cid:47)(cid:38)(cid:86) (cid:26)(cid:24) (cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86) (cid:24)(cid:20)(cid:25)(cid:15)(cid:28)(cid:21)(cid:28) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78) (cid:11)(cid:20)(cid:12) (cid:42)(cid:68)(cid:76)(cid:81)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:79)(cid:82)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3) (cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:76)(cid:81)(cid:3) (cid:71)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:83)(cid:79)(cid:68)(cid:81)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:83)(cid:85)(cid:82)(cid:83)(cid:85)(cid:76)(cid:72)(cid:87)(cid:68)(cid:85)(cid:92)(cid:3) (cid:73)(cid:88)(cid:81)(cid:71)(cid:3) (cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3) (cid:68)(cid:85)(cid:72)(cid:3) (cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:79)(cid:92)(cid:3) (cid:82)(cid:73)(cid:73)(cid:86)(cid:72)(cid:87)(cid:3) (cid:82)(cid:89)(cid:72)(cid:85)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:83)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3) (cid:69)(cid:92)(cid:3) (cid:68) (cid:70)(cid:82)(cid:85)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:17)(cid:3)(cid:3)(cid:44)(cid:81)(cid:3)(cid:68)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:85)(cid:82)(cid:83)(cid:85)(cid:76)(cid:72)(cid:87)(cid:68)(cid:85)(cid:92)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:91)(cid:76)(cid:80)(cid:68)(cid:87)(cid:72)(cid:79)(cid:92)(cid:3)(cid:7)(cid:20)(cid:23)(cid:20)(cid:17)(cid:22) (cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:72)(cid:70)(cid:82)(cid:81)(cid:82)(cid:80)(cid:76)(cid:70)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:75)(cid:72)(cid:71)(cid:74)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:17)(cid:3)(cid:3)(cid:36)(cid:86)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:15)(cid:3)(cid:68)(cid:3)(cid:20)(cid:19)(cid:8)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:88)(cid:81)(cid:85)(cid:72)(cid:68)(cid:79)(cid:76)(cid:93)(cid:72)(cid:71)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86) (cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:86)(cid:3)(cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:7)(cid:21)(cid:27)(cid:17)(cid:23)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)(cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:85)(cid:72)(cid:16)(cid:87)(cid:68)(cid:91)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:17) (cid:20)(cid:25)(cid:15)(cid:28)(cid:19)(cid:27) (cid:24)(cid:25)(cid:25)(cid:15)(cid:27)(cid:25)(cid:27) (cid:20)(cid:24)(cid:15)(cid:19)(cid:19)(cid:24) (cid:27)(cid:15)(cid:27)(cid:20)(cid:23) (cid:23)(cid:20)(cid:15)(cid:19)(cid:21)(cid:20) (cid:28)(cid:20) (cid:25)(cid:22)(cid:20)(cid:15)(cid:26)(cid:28)(cid:28) (cid:20)(cid:24)(cid:15)(cid:22)(cid:26)(cid:20) (cid:24)(cid:20)(cid:24)(cid:15)(cid:22)(cid:22)(cid:24) (cid:20)(cid:22)(cid:15)(cid:25)(cid:23)(cid:20) (cid:27)(cid:15)(cid:19)(cid:20)(cid:22) (cid:22)(cid:26)(cid:15)(cid:21)(cid:28)(cid:21) (cid:27)(cid:22) (cid:24)(cid:26)(cid:23)(cid:15)(cid:22)(cid:25)(cid:23) (cid:7) (cid:7) (cid:7) (cid:36)(cid:79)(cid:86)(cid:82)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:68)(cid:85)(cid:70)(cid:75)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:15)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:71)(cid:3)(cid:7)(cid:20)(cid:17)(cid:20)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:7)(cid:22)(cid:24)(cid:22)(cid:17)(cid:22)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:15)(cid:3)(cid:82)(cid:73)(cid:3) (cid:80)(cid:82)(cid:81)(cid:72)(cid:92)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:86)(cid:17)(cid:3)(cid:3) (cid:41)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:54)(cid:72)(cid:81)(cid:86)(cid:76)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:92) (cid:58)(cid:72)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:76)(cid:79)(cid:92)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:15)(cid:3)(cid:69)(cid:88)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:15)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:70)(cid:88)(cid:85)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:76)(cid:71)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:17)(cid:54)(cid:17)(cid:3)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:85)(cid:71)(cid:76)(cid:81)(cid:74)(cid:79)(cid:92)(cid:15)(cid:3) (cid:73)(cid:79)(cid:88)(cid:70)(cid:87)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:72)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:70)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:83)(cid:85)(cid:76)(cid:81)(cid:70)(cid:76)(cid:83)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:17)(cid:46)(cid:17)(cid:15)(cid:3)(cid:37)(cid:85)(cid:68)(cid:93)(cid:76)(cid:79)(cid:15)(cid:3)(cid:45)(cid:68)(cid:83)(cid:68)(cid:81)(cid:15)(cid:3)(cid:38)(cid:68)(cid:81)(cid:68)(cid:71)(cid:68)(cid:15)(cid:3)(cid:54)(cid:76)(cid:81)(cid:74)(cid:68)(cid:83)(cid:82)(cid:85)(cid:72)(cid:15)(cid:3)(cid:36)(cid:88)(cid:86)(cid:87)(cid:85)(cid:68)(cid:79)(cid:76)(cid:68)(cid:15)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:82)(cid:86)(cid:72)(cid:3)(cid:71)(cid:72)(cid:81)(cid:82)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:88)(cid:85)(cid:82)(cid:15)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:36)(cid:56)(cid:48)(cid:15)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:86)(cid:15)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:86)(cid:15)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:72)(cid:75)(cid:72)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3) (cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:17)(cid:3)(cid:3)(cid:58)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:68)(cid:73)(cid:73)(cid:76)(cid:79)(cid:76)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:72)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:73)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:3)(cid:68)(cid:3)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:73)(cid:79)(cid:88)(cid:70)(cid:87)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:76)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:72)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17)(cid:3)(cid:3)(cid:58)(cid:72)(cid:3)(cid:71)(cid:82)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:73)(cid:79)(cid:88)(cid:70)(cid:87)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3) (cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:11)(cid:79)(cid:82)(cid:86)(cid:86)(cid:12)(cid:3)(cid:82)(cid:85)(cid:3)(cid:79)(cid:76)(cid:84)(cid:88)(cid:76)(cid:71)(cid:76)(cid:87)(cid:92)(cid:17) 52 | Legg Mason AR2016Table of Contents Interest Rate Risk Exposure to interest rate changes on our outstanding debt is substantially mitigated as our $250 million of 3.95% Senior Notes due July 2024, $550 million of 5.625% Senior Notes due July 2044, $450 million of 4.75% Senior Notes due March 2026, and $250 million of 6.375% Junior Subordinated Notes due March 2056 are at fixed interest rates. In June 2014, we entered into an interest rate swap contract, designated as a fair value hedge, to effectively convert our $250 million of 2.7% Senior Notes due July 2019 from fixed rate debt to floating rate debt. In addition, the $40 million of outstanding borrowings under our revolving credit agreement as of March 31, 2016, is also subject to fluctuations in interest rates. As of March 31, 2016, and as a result of the interest rate swap and the outstanding borrowings under our revolving credit agreement, we estimate that a 1% change in interest rates would result in a net annual change to interest expense of $2.9 million. On an economic basis, the interest rate swap contract wholly or partially hedges interest rate exposure on operating cash. On April 21, 2016, the interest rate swap designated as a fair value hedge was terminated. Therefore, as of this date, the $250 million of 2.7% Senior Notes are at a fixed interest rate. In addition, on April 29, 2016, we entered into a 4.67-year amortizing interest rate swap, designated as a cash flow hedge, that reduces our exposure to interest rate risk on the $500 million of outstanding borrowings under our revolving credit facility. See Notes 6 and 15 of Notes to Consolidated Financial Statements for additional discussion of debt and derivatives and hedging, respectively. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Accounting policies are an integral part of the preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America. Understanding these policies, therefore, is a key factor in understanding our reported results of operations and financial position. See Note 1 of Notes to Consolidated Financial Statements for a discussion of our significant accounting policies and other information. Certain critical accounting policies require us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the financial statements. Due to their nature, estimates involve judgment based upon available information. Therefore, actual results or amounts could differ from estimates and the difference could have a material impact on the consolidated financial statements. We consider the following to be our critical accounting policies that involve significant estimates or judgments. Consolidation In the normal course of our business, we sponsor and manage various types of investment vehicles. For our services, we are entitled to receive management fees and may be eligible, under certain circumstances, to receive additional subordinate management fees or other incentive fees. Our exposure to risk in these entities is generally limited to any equity investment we have made or are required to make, and any earned but uncollected management fees. Uncollected management fees from managed investment vehicles were not material at March 31, 2016, we have not issued any investment performance guarantees to these investment vehicles or their investors, and we did not sell or transfer assets to any of these investment vehicles. In accordance with financial accounting standards, we consolidate certain sponsored investment vehicles, some of which are designated as CIVs. Certain investment vehicles we sponsor and are the manager of are considered to be variable interest entities ("VIEs") (further described below) while others are considered to be voting rights entities (“VREs”) subject to traditional consolidation concepts based on ownership rights. Sponsored investment vehicles that are considered VREs are consolidated if we have a controlling financial interest in the investment vehicle, absent substantive investor rights to replace the manager of the entity (kick-out rights). We may also fund the initial cash investment in certain VRE investment vehicles to generate an investment performance track record in order to attract third-party investors in the product. Our initial investment in a new product typically represents 100% of the ownership in that product. As further discussed below, these “seed capital investments” are consolidated as long as we maintain a controlling financial interest in the product, but they are not designated as CIVs unless the investment is longer-term. A VIE is an entity which does not have adequate equity to finance its activities without additional subordinated financial support; or the equity investors, as a group, do not have the normal characteristics of equity for a potential controlling financial interest. Legg Mason AR2016 | 53Table of Contents Investment Company VIEs For most sponsored investment fund VIEs deemed to be investment companies, including money market funds, we determine we are the primary beneficiary of the VIE if we absorb a majority of the VIE's expected losses, or receive a majority of the VIE's expected residual returns, if any. Our determination of expected residual returns excludes gross fees paid to a decision maker if certain criteria are met. In determining whether we are the primary beneficiary of an investment company VIE, we consider both qualitative and quantitative factors such as the voting rights of the equity holders; economic participation of all parties, including how fees are earned and paid to us; related party (including employees’) ownership; guarantees and implied relationships. In determining the primary beneficiary, we must make assumptions and estimates about, among other things, the future performance of the underlying assets held by the VIE, including investment returns, cash flows, and credit and interest rate risks. In determining whether a VIE is significant for disclosure purposes, we consider the same factors used for determination of the primary beneficiary. Other VIEs For other sponsored investment funds that do not meet the investment company criteria, such as collateralized debt obligation entities and CLO entities, we determine if we are the primary beneficiary of a VIE if we have both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses, or the right to receive benefits, that potentially could be significant to the VIE. We consider the management fee structure, including the seniority level of our fees, the current and expected economic performance of the entity, as well as other provisions included in the governing documents that might restrict or guarantee an expected loss or residual return. In evaluating whether we have the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to a VIE, we consider factors regarding the design, terms, and characteristics of the investment vehicles, including the following qualitative factors: if we have involvement with the investment vehicle beyond providing management services; if we hold equity or debt interests in the investment vehicle; if we have transferred any assets to the investment vehicle; if the potential aggregate fees in future periods are insignificant relative to the potential cash flows of the investment vehicle; and if the variability of the expected fees in relation to the potential cash flows of the investment vehicle is more than insignificant. We must consolidate any VIE for which we are deemed to be the primary beneficiary. See Notes 1, 3, and 17 of Notes to Consolidated Financial Statements for additional discussion of CIVs and other VIEs. Revenue Recognition The vast majority of our revenues are calculated as a percentage of the fair value of our AUM. The underlying securities within the portfolios we manage, which are not reflected within our consolidated financial statements, are generally valued as follows: (i) with respect to securities for which market quotations are readily available, the market value of such securities; and (ii) with respect to other securities and assets, fair value as determined in good faith. For most of our mutual funds and other pooled products, their boards of directors or similar bodies are responsible for establishing policies and procedures related to the pricing of securities. Each board of directors generally delegates the execution of the various functions related to pricing to a fund valuation committee which, in turn, may rely on information from various parties in pricing securities such as independent pricing services, the fund accounting agent, the fund manager, broker-dealers, and others (or a combination thereof). The funds have controls reasonably designed to ensure that the prices assigned to securities they hold are accurate. Management has established policies to ensure consistency in the application of revenue recognition. As manager and advisor for separate accounts, we are generally responsible for the pricing of securities held in client accounts (or may share this responsibility with others) and have established policies to govern valuation processes similar to those discussed above for mutual funds that are reasonably designed to ensure consistency in the application of revenue recognition. Management relies extensively on the data provided by independent pricing services and the custodians in the pricing of separate account AUM. Separate account customers typically select the custodian. Valuation processes for AUM are dependent on the nature of the assets and any contractual provisions with our clients. Equity securities under management for which market quotations are available are usually valued at the last reported sales 54 | Legg Mason AR2016 Table of Contents price or official closing price on the primary market or exchange on which they trade. Debt securities under management are usually valued at bid, or the mean between the last quoted bid and asked prices, provided by independent pricing services that are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various other relationships between securities. Short-term debt obligations are generally valued at amortized cost, which approximates fair value. The vast majority of our AUM is valued based on data from third parties such as independent pricing services, fund accounting agents, custodians and brokers. This varies slightly from time to time based upon the underlying composition of the asset class (equity, fixed income and liquidity) as well as the actual underlying securities in the portfolio within each asset class. Regardless of the valuation process or pricing source, we have established controls reasonably designed to assess the reasonableness of the prices provided. Where market prices are not readily available, or are determined not to reflect fair value, value may be determined in accordance with established valuation procedures based on, among other things, unobservable inputs. Management fees on AUM where fair values are based on unobservable inputs are not material. As of March 31, 2016, equity, fixed income, and liquidity AUM values aggregated $180.5 billion, $376.8 billion and $112.3 billion, respectively. As the vast majority of our AUM is valued by independent pricing services based upon observable market prices or inputs, we believe market risk is the most significant risk underlying the value of our AUM. Economic events and financial market turmoil have increased market price volatility; however, the valuation of the vast majority of the securities held by our funds and in separate accounts continues to be derived from readily available market price quotations. As of March 31, 2016, less than 1% of total AUM is valued based on unobservable inputs. All AUM related to Clarion Partners will be Level 3. Valuation of Financial Instruments Substantially all financial instruments are reflected in the financial statements at fair value or amounts that approximate fair value, except a portion of our long-term debt. Trading investments, investment securities and derivative assets and liabilities included in the Consolidated Balance Sheets include forms of financial instruments. Unrealized gains and losses related to these financial instruments are reflected in Net Income (Loss) or Other Comprehensive Income (Loss), depending on the underlying purpose of the instrument. For equity investments where we do not control the investee, and where we are not the primary beneficiary of a VIE, but can exert significant influence over the financial and operating policies of the investee, we follow the equity method of accounting. The evaluation of whether we exert control or significant influence over the financial and operational policies of an investee requires significant judgment based on the facts and circumstances surrounding each individual investment. Factors considered in these evaluations may include investor voting or other rights, any influence we may have on the governing board of the investee, the legal rights of other investors in the entity pursuant to the fund's operating documents and the relationship between us and other investors in the entity. Our equity method investees that are investment companies record their underlying investments at fair value. Therefore, under the equity method of accounting, our share of the investee's underlying net income or loss predominantly represents fair value adjustments in the investments held by the equity method investee. Our share of the investee's net income or loss is based on the most current information available and is recorded as a net gain (loss) on investments within non-operating income (expense). For investments, we value equity and fixed income securities using closing market prices for listed instruments or broker or dealer price quotations, when available. Fixed income securities may also be valued using valuation models and estimates based on spreads to actively traded benchmark debt instruments with readily available market prices. We evaluate our non- trading investment securities for "other than temporary" impairment. Impairment may exist when the fair value of an investment security has been below the adjusted cost for an extended period of time. If an "other than temporary" impairment is determined to exist, the difference between the adjusted cost of the investment security and its current fair value is recognized as a charge to earnings in the period in which the impairment is determined. For investments in illiquid or privately-held securities for which market prices or quotations are not readily available, the determination of fair value requires us to estimate the value of the securities using a variety of methods and resources, including the most current available financial information for the investment and the industry. As of March 31, 2016 and 2015, excluding investments in CIVs, we owned approximately $0.2 million and $0.3 million, respectively, of financial investments that were valued on our assumptions or estimates and unobservable inputs. At March 31, 2016 and 2015, we also had approximately $45.3 million and $62.9 million, respectively, of other investments, such as investment partnerships, that are included in Other noncurrent assets on the Consolidated Balance Sheets, of which approximately $37.3 million and $48.3 million, respectively, are accounted for under the equity method. The remainder is Legg Mason AR2016 | 55Table of Contents accounted for under the cost method, which considers if factors indicate there may be an impairment in the value of these investments. In addition, as of March 31, 2016 and 2015, we had $15.4 million and $16.2 million, respectively, of equity method investments that are included in Investment securities on the Consolidated Balance Sheets. The accounting guidance for fair value measurements and disclosures defines fair value and establishes a framework for measuring fair value. The accounting guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value measurement should reflect all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of non-performance. The accounting guidance for fair value measurements establishes a hierarchy that prioritizes the inputs for valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Our financial instruments measured and reported at fair value are classified and disclosed in one of the following categories: Level 1 — Financial instruments for which prices are quoted in active markets, which, for us, include investments in publicly traded mutual funds with quoted market prices and equities listed in active markets. Level 2 — Financial instruments for which prices are quoted for similar assets and liabilities in active markets; prices are quoted for identical or similar assets in inactive markets; or prices are based on observable inputs, other than quoted prices, such as models or other valuation methodologies. For us, this category may include fixed income securities, certain proprietary fund products, and certain long-term debt. Level 3 — Financial instruments for which values are based on unobservable inputs, including those for which there is little or no market activity. This category includes investments in partnerships, limited liability companies, and private equity funds. This category may also include certain proprietary fund products with redemption restrictions. The valuation of an asset or liability may involve inputs from more than one level of the hierarchy. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Proprietary fund products and certain investments held by CIVs are valued at net asset value ("NAV") determined by the fund administrator. These funds are typically invested in exchange traded investments with observable market prices. Their valuations may be classified as Level 1, Level 2, or Level 3 based on whether the fund is exchange traded, the frequency of the related NAV determinations and the impact of redemption restrictions. For investments in illiquid and privately-held securities (private equity and investment partnerships) for which market prices or quotations may not be readily available, including certain investments held by CIVs, management must estimate the value of the securities using a variety of methods and resources, including the most current available financial information for the investment and the industry to which it applies in order to determine fair value. These valuation processes for illiquid and privately-held securities inherently require management's judgment and are therefore classified in Level 3. Futures contracts are valued at the last settlement price at the end of each day on the exchange upon which they are traded and are classified as Level 1. As a practical expedient, we rely on the NAVs of certain investments as their fair value. The NAVs that have been provided by investees are derived from the fair values of the underlying investments as of the reporting date. 56 | Legg Mason AR2016Table of Contents As of March 31, 2016, approximately 1% of total assets (3% of financial assets measured at fair value) and 3% of total liabilities (82% of financial liabilities measured at fair value) meet the definition of Level 3. Excluding the assets and liabilities of CIVs, approximately 1% of total assets (3% of financial assets measured at fair value) and 3% of liabilities (82% of financial liabilities measured at fair value) meet the definition of Level 3. Any transfers between categories are measured at the beginning of the period. See Note 3 and 17 of Notes to Consolidated Financial Statements for additional information. Intangible Assets and Goodwill Balances as of March 31, 2016, are as follows (in thousands): Amortizable intangible asset management contracts Indefinite-life intangible assets Trade names Goodwill $ $ 88,344 3,000,954 57,187 1,479,516 4,626,001 Our identifiable intangible assets consist primarily of asset management contracts, contracts to manage proprietary mutual funds or funds-of-hedge funds, and trade names resulting from acquisitions. Asset management contracts are amortizable intangible assets that are capitalized at acquisition and amortized over the expected life of the contract. Contracts to manage proprietary mutual funds or funds-of-hedge funds are indefinite-life intangible assets because we assume that there is no foreseeable limit on the contract period due to the likelihood of continued renewal at little or no cost. Similarly, trade names are considered indefinite-life intangible assets because they are expected to generate cash flows indefinitely. In allocating the purchase price of an acquisition to intangible assets, we must determine the fair value of the assets acquired. We determine fair values of intangible assets acquired based upon projected future cash flows, which take into consideration estimates and assumptions including profit margins, growth or attrition rates for acquired contracts based upon historical experience and other factors, estimated contract lives, discount rates, projected net client flows and market performance. The determination of estimated contract lives requires judgment based upon historical client turnover and attrition rates and the probability that contracts with termination provisions will be renewed. The discount rate employed is a weighted-average cost of capital that takes into consideration a premium representing the degree of risk inherent in the asset, as more fully described below. Goodwill represents the residual amount of acquisition cost in excess of identified tangible and intangible assets and assumed liabilities. Given the relative significance of our intangible assets and goodwill to our consolidated financial statements, on a quarterly basis we consider if triggering events have occurred that may indicate a significant change in fair values. Triggering events may include significant adverse changes in our business or the legal or regulatory environment, loss of key personnel, significant business dispositions, or other events, including changes in economic arrangements with our affiliates that will impact future operating results. If a triggering event has occurred, we perform quantitative tests, which include critical reviews of all significant assumptions, to determine if any intangible assets or goodwill are impaired. If we have not qualitatively concluded that it is more likely than not that the respective fair values exceed the related carrying values, we perform these tests for indefinite-life intangible assets and goodwill annually at December 31. We completed our annual impairment tests of goodwill and indefinite-life intangible assets as of December 31, 2015. As a result of these impairment tests, our Permal funds-of-hedge funds contracts and trade name indefinite-life intangible assets were determined to be partially impaired, resulting in aggregate pre-tax operating charges of $371 million. Neither goodwill nor any other intangible assets were deemed to be impaired. Further, no impairments in the value of amortizable intangible assets were recognized during the year ended March 31, 2016, as our estimates of the related future cash flows exceeded the asset carrying values. We also determined that no triggering events had occurred as of March 31, 2016, therefore, no additional indefinite-life intangible asset and goodwill impairment testing was necessary. As a result of uncertainty regarding future market conditions, assessing the fair value of the reporting unit and intangible assets requires management to exercise significant judgment. Details of our intangible assets and goodwill and the related impairment tests follow. Legg Mason AR2016 | 57Table of Contents Our acquisition of RARE Infrastructure resulted in the addition of an indefinite-life mutual fund contracts asset, an amortizable separate accounts asset, a trade name asset and goodwill of $123 million, $68 million, $5 million, and $162 million (170 million Australian dollars, 94 million Australian dollars, 7 million Australian dollars, and 225 million Australian dollars), respectively, using the foreign exchange rate as of October 21, 2015. Because the fair values of the RARE Infrastructure indefinite-life mutual fund contracts asset and amortizable separate accounts asset were established as of the October 21, 2015 acquisition date, our December 31, 2015, impairment consideration was limited to a review of AUM trends and other critical valuation inputs, which noted no significant changes. Amortizable Intangible Assets Intangible assets subject to amortization are considered for impairment at each reporting period using an undiscounted cash flow analysis. Significant assumptions used in assessing the recoverability of management contract intangible assets include projected cash flows generated by the contracts and the remaining lives of the contracts. Projected cash flows are based on fees generated by current AUM for the applicable contracts. Contracts are generally assumed to turnover evenly throughout the life of the intangible asset. The remaining life of the asset is based upon factors such as average client retention and client turnover rates. If the amortization periods are no longer appropriate, the expected lives are adjusted and the impact on the fair value is assessed. Actual cash flows in any one period may vary from the projected cash flows without resulting in an impairment charge because a variance in any one period must be considered in conjunction with other assumptions that impact projected cash flows. As of March 31, 2016, the estimated remaining useful lives of amortizable intangible assets range from three to 12 years with a weighted-average life of approximately 10.9 years. Indefinite-Life Intangible Assets For intangible assets with lives that are indeterminable or indefinite, fair value is determined from a market participant's perspective based on projected discounted cash flows, taking into account the values market participants would pay in a taxable transaction to acquire the respective assets. We have two primary types of indefinite-life intangible assets: proprietary fund contracts and, to a lesser extent, trade names. We determine the fair value of our intangible assets based upon discounted projected cash flows, which take into consideration estimates of future fees, profit margins, growth rates, taxes, and discount rates. The determination of the fair values of our indefinite-life intangible assets is highly dependent on these estimates and changes in these inputs could result in a material impairment of the related carrying values. An asset is determined to be impaired if the current implied fair value is less than the recorded carrying value of the asset. If an asset is impaired, the difference between the current implied fair value and the carrying value of the asset reflected on the financial statements is recognized as an Operating expense in the period in which the impairment is determined to exist. Contracts that are managed and operated as a single unit, such as contracts within the same family of funds, are reviewed in aggregate and are considered interchangeable because investors can transfer between funds with limited restrictions. Similarly, cash flows generated by new funds added to the fund group are included when determining the fair value of the intangible asset. The Fauchier acquisition completed by Permal in March 2013 included a funds-of-hedge fund business, which was merged with the existing Permal fund business through common management, shared resources (including infrastructure, employees and processes) and co-branding initiatives. Accordingly, the related carrying values and cash flows of these funds have been aggregated for impairment testing. Projected cash flows are based on annualized cash flows for the applicable contracts projected forward 40 years, assuming annual cash flow growth from estimated net client flows and projected market performance. To estimate the projected cash flows, projected growth rates by affiliate are used to project their AUM. Cash flow growth rates consider estimates of both AUM flows and market expectations by asset class (equity, fixed income and liquidity) and by investment manager based upon, among other things, historical experience and expectations of future market and investment performance from internal and external sources. Currently, our market growth assumptions are 6% for equity, 3% for fixed income, and 0% for liquidity products, with a general assumption of 2% organic growth for all products, subject to exceptions for organic growth (contraction), generally in years one through five. The starting point for these assumptions is our corporate planning process that includes three-year AUM projections from the management of each operating affiliate that consider the specific business circumstances of each affiliate, with flow 58 | Legg Mason AR2016Table of Contents assumptions for certain affiliates adjusted, as appropriate, to reflect a market participant view. Beyond year three, the estimates move towards our general organic growth assumption of 2%, as appropriate for each affiliate and asset class, through year 20. The resulting cash flow growth rate for year 20 is held constant and used to further project cash flows through year 40. Based on projected AUM by affiliate and asset class, affiliate advisory fee rates are applied to determine projected revenues. The domestic mutual fund contracts projected revenues are applied to a weighted-average margin for the applicable affiliates that manage the AUM. Margins are based on arrangements currently in place at each affiliate. Projected operating income is further reduced by an appropriate tax rate to calculate the projected cash flows. We believe our growth assumptions are reasonable given our consideration of multiple inputs, including internal and external sources, although our assumptions are subject to change based on fluctuations in our actual results and market conditions. Our assumptions are also subject to change due to, among other factors, poor investment performance by one or more of our operating affiliates, the withdrawal of AUM by clients, changes in business climate, adverse regulatory actions, or loss of key personnel. We consider these risks in the development of our growth assumptions and discount rates, discussed further below. Further, actual cash flows in any one period may vary from the projected cash flows without resulting in an impairment charge because a variance in any one period must be considered in conjunction with other assumptions that impact projected cash flows. Our process includes comparison of actual results to prior growth projections. However, differences between actual results and our prior projections are not necessarily indicative of a need to reassess our estimates given that: our discounted projected cash flow analyses include projections well beyond three years and variances in the near-years may be offset in subsequent years; fair value assessments are point-in-time, and the consistency of a fair value assessment with other indicators of value that reflect expectations of market participants at that point-in-time is critical evidence of the soundness of the estimate of value. In subsequent periods, we consider the differences in actual results from our prior projections in considering the reasonableness of the growth assumptions used in our current impairment testing. Discount rates are based on appropriately weighted estimated costs of debt and equity capital using a market participant perspective. We estimate the cost of debt based on published debt rates. We estimate the cost of equity capital based on the Capital Asset Pricing Model, which considers the risk-free interest rate, peer-group betas, and company and equity risk premiums. The equity risk is further adjusted to consider the relative risk associated with each of our indefinite-life intangible asset and our reporting unit. The discount rates are also calibrated based on an assessment of relevant market values. Consistent with standard valuation practices for taxable transactions, the projected discounted cash flow analysis also factors in a tax benefit value, as appropriate. This tax benefit represents the discounted tax savings a third party that purchased an asset on a given valuation date would receive from future tax deductions for the amortization of the purchase price over 15 years. The Permal funds-of-hedge funds contracts of $698 million accounted for approximately 20% of our indefinite-life intangible assets, prior to the previously discussed impairment charge, and are supported by the combined funds-of-hedge funds business. These funds have continued to experience periods of moderate inflows or outflows over recent years and certain increased risks, as follows. The past several years have seen declines in the traditional high net worth client funds-of-hedge funds business, Permal's historical focus, which Permal has offset to some extent with inflows in their institutional business. Further, funds-of-hedge fund managers are subject to certain market influences, as evidenced in Permal's growth in institutional funds and separate accounts, adding additional uncertainty to our estimates. Due in part to these factors, actual results for the 12 months ended December 31, 2015, generally compared unfavorably to growth assumptions for the Permal funds-of-hedge funds contracts used in the asset impairment testing at December 31, 2014. Additionally, the historical Fauchier portion of Permal's business is now subject to risk associated with the loss of certain key staff. As a result, in our December 2015 testing, the growth assumptions for these contracts were reduced in the first five years, which, together with the impact of decreased margins in the first two years, led to decreased projected cash flows from the business. Also, the projected cash flows from the Permal funds-of-hedge funds contracts were discounted at 16.5%, compared to 14.5% used in the prior year's impairment testing, reflecting the factors noted above. Based upon our projected discounted cash flow analyses, the carrying value of the Permal funds-of-hedge funds contracts asset exceeded its fair value of $335 million, resulting in an impairment charge of $364 million for the excess. Cash flows on the Permal funds-of-hedge funds contracts are assumed to have an average annual growth rate of approximately 7% (5% market and 2% organic/other). However, given current experience, projected near-year cash flows reflect moderate AUM outflows in years one and two, no net AUM flows in year three, and trend to modest AUM inflows in year four. Investment Legg Mason AR2016 | 59Table of Contents performance, including its expected impact on future asset flows, is a significant factor in our growth projections for the Permal funds-of-hedge funds contracts. Our market performance projections are supported by the fact that the two largest funds that comprise approximately half of the contracts asset AUM, have 10-year average returns approximating 5%. Our market projections are further supported by industry statistics. The domestic mutual fund contracts acquired in the Citigroup Asset Management (“CAM”) transaction of $2.1 billion, account for approximately 70% of our indefinite-life intangible assets. As of December 31, 2015, approximately $150 billion of AUM, primarily managed by ClearBridge and Western Asset, are associated with this asset, with approximately 35% in each of equity and fixed income AUM and 30% in liquidity AUM. Previously disclosed uncertainties regarding market conditions and asset flows and risks related to potential regulatory changes in the liquidity business, are reflected in our projected discounted cash flow analyses. Based on our projected discounted cash flow analyses, the related fair value exceeded its carrying value by approximately $1.0 billion. For our impairment test, cash flows from the domestic mutual fund contracts are assumed to have annual growth rates that average approximately 6%, and reflect moderate AUM inflows in years 1 and 2. Projected cash flows of the domestic mutual fund contracts are discounted at 13.0%. Results for the 12 months through December 31, 2015, compared favorably to the growth assumptions related to the domestic mutual fund contracts asset impairment testing at December 31, 2014. Assuming all other factors remain the same, our actual results and/or changes in assumptions for the domestic mutual fund contracts cash flow projections over the long-term would have to deviate more than 30% from previous projections, or the discount rate would have to be raised from 13.0% to more than 16.5%, for the asset to be deemed impaired. Despite the higher excess of fair value over the related carrying value, given the current uncertainty regarding future market conditions, it is reasonably possible that fund performance, flows and AUM levels may decrease in the near term such that actual cash flows from the domestic mutual funds contracts could deviate from the projections by more than 30% and the asset could be deemed to be impaired by a material amount. Trade names account for 2% of indefinite-life intangible assets and are primarily related to Permal, which had a carrying value of $45 million. We tested these intangible assets using assumptions similar to those described above for indefinite- life contracts. The Permal trade name carrying value exceeded its estimated fair value of $38 million, resulting in a $7 million impairment for the excess. The resulting fair values of the other trade names significantly exceeded the related carrying amounts. Goodwill Goodwill is evaluated at the reporting unit level and is considered for impairment when the carrying amount of the reporting unit exceeds the implied fair value of the reporting unit. In estimating the implied fair value of the reporting unit, we use valuation techniques based on discounted projected cash flows and EBITDA multiples, similar to techniques employed in analyzing the purchase price of an acquisition. We continue to manage our business as one Global Asset Management operating segment. Internal management reporting of discrete financial information regularly received by the chief operating decision maker, our Chief Executive Officer, is at the consolidated Global Asset Management business level. As a result, goodwill is recorded and evaluated at one Global Asset Management reporting unit level. Our Global Asset Management reporting unit consists of the operating businesses of our asset management affiliates and our centralized global distribution operations. In our impairment testing process, all consolidated assets (except for certain tax benefits) and liabilities are allocated to our single Global Asset Management reporting unit. Similarly, the projected operating results of the reporting unit include our holding company corporate costs and overhead, including costs associated with executive management, finance, human resources, legal and compliance, internal audit and other central corporate functions. Goodwill principally originated from the acquisitions of CAM, Permal, Royce, Martin Currie, and more recently RARE Infrastructure. The value of the reporting unit is based in part, on projected consolidated net cash flows, including all cash flows of assets managed in our mutual funds, closed-end funds and other proprietary funds, in addition to separate account assets of our managers. Significant assumptions used in assessing the implied fair value of the reporting unit under the discounted cash flow method are consistent with the methodology discussed above for indefinite-life intangible assets. Also, at the reporting unit level, future corporate costs are estimated and consolidated with the projected operating results of all our affiliates. 60 | Legg Mason AR2016Table of Contents Actual cash flows in any one period may vary from the projected cash flows without resulting in an impairment charge because a variance in any one period must be considered in conjunction with other assumptions that impact projected cash flows. Discount rates are based on appropriately weighted estimated costs of equity using a market participant perspective, also consistent with the methodology discussed above for indefinite-life intangible assets. We also perform a market-based valuation of our reporting unit value, which applies an average of EBITDA multiples paid in change of control transactions for peer companies to our EBITDA. The results of our two estimates of value for the reporting unit (the discounted cash flow and EBITDA multiple analyses) are compared and any significant differences, if any, are assessed to determine the reasonableness of each value and whether any adjustment to either result is warranted. Once the values are accepted, the appropriately weighted average of the two reporting unit valuations (the discounted cash flow and EBITDA multiple analyses) is used as the implied fair value of our Global Asset Management reporting unit, which at December 31, 2015, exceeded the carrying value by a material amount. Considering the relative merits of the details involved in each valuation process, we used an equal weighting of the two values for the December 2015 testing. We further assess the accuracy of the reporting unit value determined from these valuation methods by comparing their results to our market capitalization to determine an implied control premium. The reasonableness of this implied control premium is considered by comparing it to control premiums that have been paid in relevant actual change of control transactions. This assessment provides evidence that our underlying assumptions in our analyses of our reporting unit fair value are reasonable. In calculating our market capitalization for these purposes, market volatility can have a significant impact on our capitalization, and if appropriate, we may consider the average market prices of our stock for a period of one or two months before the test date to determine market capitalization. A control premium arises from the fact that in an acquisition, there is typically a premium paid over current market prices of publicly traded companies that relates to the ability to control the operations of an acquired company. Further, assessments of control premiums in the asset management industry are difficult because many acquisitions involve privately held companies, or involve only portions of a public company, such that no control premium can be calculated. Based on our analysis and consideration, we believe the implied control premium determined by our reporting unit value estimation at December 31, 2015, which is at the lower end of the observed range, is reasonable. Contingent Consideration Liabilities In connection with business acquisitions, we may be required to pay additional future consideration based on the achievement of certain designated financial metrics. We estimate the fair value of these potential future obligations at the time a business combination is consummated and record a Contingent consideration liability in the Consolidated Balance Sheet. The fair values of contingent consideration liabilities are revised as of each quarterly reporting date. As of March 31, 2016, the fair values of our contingent consideration liabilities aggregate $84.6 million, relating to our acquisitions of RARE Infrastructure, Martin Currie, QS Investors, and PK Investments. There was no contingent consideration liability associated with the Fauchier acquisition as of March 31, 2016. We estimate the fair value of contingent consideration liabilities using probability-weighted modeling specific to each business acquisition and its arrangement for contingent consideration. Estimated payments are discounted to their present value at the measurement date. The Martin Currie purchase agreement requires us to pay additional consideration based on the achievement of certain financial metrics, as specified in the share purchase agreement, at certain future dates over the three and one-half year earn- out term. Our modeling of the Martin Currie contingent payment arrangement includes Monte Carlo simulation of projected AUM, performance fees and product performance to determine the related estimated payment amounts. If the expected payment amounts subsequently change, the contingent consideration liabilities are (reduced) or increased in the current period, resulting in a (gain) or loss, which is reflected within Other operating expense in the Consolidated Statements of Income (Loss). Significant increases (decreases) in projected AUM or performance fee levels for Martin Currie would result in significantly higher (lower) contingent consideration liability fair value and the resulting changes could be material to our operating results. The RARE Infrastructure, Fauchier, and QS Investors purchase agreements require us to pay additional consideration based on whether certain future revenue thresholds are achieved. Likewise, significant increases (decreases) Legg Mason AR2016 | 61Table of Contents in projected revenue levels for RARE Infrastructure, Fauchier, and QS Investors would result in significantly higher (lower) contingent consideration liability fair value and the resulting changes could be material to our operating results. Stock-Based Compensation Our stock-based compensation plans include stock options, an employee stock purchase plan, market-based performance shares payable in common stock, restricted stock awards and units, affiliate management equity plans and deferred compensation payable in stock. Under our stock compensation plans, we issue equity awards to directors, officers, and key employees. In accordance with the applicable accounting guidance, compensation expense for the years ended March 31, 2016, 2015, and 2014, includes compensation cost for all non-vested share-based awards at their grant date fair value amortized over the respective vesting periods on the straight-line method. Also, under the accounting guidance, cash flows related to income tax deductions in excess of or less than the stock-based compensation expense are classified as financing cash flows. We granted 0.9 million, 0.9 million, and 1.2 million stock options in fiscal 2016, 2015, and 2014, respectively. During fiscal 2016, we implemented an affiliate management equity plan with Royce which resulted in the issuance of minority equity interests in the affiliate to its management team. These interests allow the holders to receive quarterly distributions of the affiliate's net revenues in amounts equal to the percentage of ownership represented by the equity they hold. During fiscal 2014, we also implemented management equity plans for Permal and ClearBridge and granted units to certain of their employees that entitle them to participate in 15% of the future growth of the respective affiliate's enterprise value (subject to appropriate discounts). For additional information on share-based compensation, see Notes 1 and 11 of Notes to Consolidated Financial Statements. We determine the fair value of each option grant using the Black-Scholes option-pricing model, except for market-based grants, for which we use a Monte Carlo option-pricing model. Both models require management to develop estimates regarding certain input variables. The inputs for the Black-Scholes model include: stock price on the date of grant, exercise price of the option, dividend yield, volatility, expected life and the risk-free interest rate, all of which, with the exception of the grant date stock price and the exercise price, require estimates or assumptions. We calculate the dividend yield based upon the average of the historical quarterly dividend payments over a term equal to the expected life of the options. We estimate volatility equally weighted between the historical prices of our stock over a period equal to the expected life of the option and the implied volatility of market listed options at the date of grant. The expected life is the estimated length of time an option will be held before it is either exercised or canceled, based upon our historical option exercise experience. The risk-free interest rate is the rate available for zero-coupon U.S. Government issues with a remaining term equal to the expected life of the options being valued. If we used different methods to estimate our variables for the Black-Scholes and Monte Carlo models, or if we used a different type of option-pricing model, the fair value of our option grants might be different. We also determine the fair value of option-like affiliate management equity plan grants using the Black-Scholes option- pricing model, subject to any post-vesting illiquidity discounts. Inputs to the Black-Scholes model are generally determined in a fashion similar to the fair value of grants of options in our own stock, described above. However, because our affiliates are private companies without quoted stock prices, we utilize discounted cash flow analyses and market-based valuations, similar to those discussed above under the heading “Intangible Assets and Goodwill”, to determine the respective business enterprise values, subject to appropriate discounts for lack of control and marketability. Noncontrolling Interests Noncontrolling interests include affiliate minority interests, third-party investor equity in consolidated sponsored investment vehicles, and vested management equity plan interests. Noncontrolling interests where the holder may be able to request settlement are classified as redeemable, and are reported at their estimated settlement values. When settlement is not expected to occur until a future date, changes in the expected settlement value are recognized over the settlement period. Nonredeemable noncontrolling interests do not permit the holder to request settlement, and are reported at their issuance value, together with undistributed net income allocated to noncontrolling interests. We estimate the settlement value of noncontrolling interests as their fair value. For consolidated sponsored investment vehicles, where the investor may request withdrawal at any time, fair value is based on market quotes of the underlying securities held by the investment vehicles. For affiliate minority interests and management equity plan interests, fair value reflects the related total business enterprise value, after appropriate discounts for lack of marketability and control. 62 | Legg Mason AR2016 Table of Contents There may also be features of these equity interests, such as dividend subordination, that are contemplated in their valuations. The fair value of option-like management equity plan interests also relies on Black-Scholes option pricing model calculations, as noted above. Income Taxes We are subject to the income tax laws of the federal, state and local jurisdictions of the U.S. and numerous foreign jurisdictions in which we operate. We file income tax returns representing our filing positions with each jurisdiction. Due to the inherent complexities arising from conducting business and being taxed in a substantial number of jurisdictions, we must make certain estimates and judgments in determining our income tax provision for financial statement purposes. These estimates and judgments are used in determining the tax basis of assets and liabilities and in the calculation of certain tax assets and liabilities that arise from differences in the timing of revenue and expense recognition for tax and financial statement purposes. Management assesses the likelihood that we will be able to realize our deferred tax assets. If it is more likely than not that the deferred tax asset will not be realized, then a valuation allowance is established with a corresponding increase to deferred tax provision. As a result of the prospective application of new accounting guidance, we have offset all deferred tax assets, liabilities, and any related valuation allowances, and present them as a single non-current amount as of March 31, 2016. We have not retrospectively adjusted prior periods. Substantially all of our deferred tax assets relate to U.S. federal and state, and U.K. taxing jurisdictions. As of March 31, 2016, U.S. federal deferred tax assets aggregated $711.5 million, realization of which is expected to require $3.2 billion of future U.S. earnings, of which $740 million must be foreign sourced earnings. Deferred tax assets generated in U.S. jurisdictions resulting from net operating losses generally expire 20 years after they are generated and those resulting from foreign tax credits generally expire 10 years after they are generated. Based on estimates of future taxable income, using assumptions consistent with those used in our goodwill impairment testing, it is more likely than not that substantially all of the current federal tax benefits relating to net operating losses are realizable. With respect to those resulting from foreign tax credit carryforwards, it is more likely than not that tax benefits relating to the utilization of approximately $23.5 million of foreign taxes as credits will not be realized and a valuation allowance has been established. Further, our estimates and assumptions do not contemplate certain possible future changes in the ownership of Legg Mason stock, which, under the U.S. Internal Revenue Code, could limit our utilization of net operating loss and foreign tax credit benefits. As of March 31, 2016, federal valuation allowances aggregated $21.0 million. The decrease in federal valuation allowances from the prior year relates to $12.7 million of expiring foreign tax credits. The release was offset in part by $6.9 million, of which $2.5 million relates to foreign tax credits, $3.4 million relates to charitable contributions, and $1.0 million relates to Martin Currie's operating losses. While tax planning may enhance our tax positions, the realization of tax benefits on deferred tax assets for which valuation allowances have not been provided is not dependent on implementation of any significant tax strategies. As of March 31, 2016, U.S. state deferred tax assets aggregated $175.7 million. Due to limitations on the utilization of net operating loss carryforwards and taking into consideration state tax planning strategies, the related valuation allowance was $26.8 million, substantially all of which relates to prior years for state net operating loss benefits generated in certain jurisdictions in cases where it is more likely that these benefits will not ultimately be realized. Due to the uncertainty of future state apportionment factors and future effective state tax rates, the value of state net operating loss benefits ultimately realized may vary. For foreign jurisdictions, a decrease in valuation allowances of $11.4 million in fiscal 2016 primarily relates to the change in statutory rates, tax planning to utilize attributes previously considered realizable, and adjustments to intercompany pricing models. To the extent our analysis of the realization of deferred tax assets relies on deferred tax liabilities, we have considered the timing, nature and jurisdiction of reversals, as well as, future increases relating to the tax amortization of goodwill and indefinite-life intangible assets. In the event we determine all or any portion of our deferred tax assets that are not already subject to a valuation allowance are not realizable, we will be required to establish a valuation allowance by a charge to the Legg Mason AR2016 | 63Table of Contents income tax provision in the period in which that determination is made. Depending on the facts and circumstances, the charge could be material to our earnings. The calculation of our tax liabilities involves uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax uncertainties in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. RECENT ACCOUNTING DEVELOPMENTS See discussion of Recent Accounting Developments in Note 1 of Notes to Consolidated Financial Statements. EFFECTS OF INFLATION The rate of inflation can directly affect various expenses, including employee compensation, communications and technology and occupancy, which may not be readily recoverable in charges for services provided by us. Further, to the extent inflation adversely affects the securities markets, it may impact revenues and recorded intangible asset and goodwill values. See discussion of "Market Risk — Revenues and Net Income (Loss)" and "Critical Accounting Policies — Intangible Assets and Goodwill" previously discussed. 64 | Legg Mason AR2016FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Legg Mason, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Legg Mason's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Legg Mason's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Legg Mason; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of Legg Mason are being made only in accordance with authorizations of management and directors of Legg Mason; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Legg Mason's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of Legg Mason's internal control over financial reporting as of March 31, 2016, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control — Integrated Framework (2013). Based on that assessment, management concluded that, as of March 31, 2016, Legg Mason's internal control over financial reporting is effective based on the criteria established in the COSO framework. The effectiveness of Legg Mason's internal control over financial reporting as of March 31, 2016, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing herein, which expresses an unqualified opinion on the effectiveness of Legg Mason's internal control over financial reporting as of March 31, 2016. Joseph A. Sullivan Chairman and Chief Executive Officer Peter H. Nachtwey Senior Executive Vice President and Chief Financial Officer Legg Mason AR2016 | 65REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Legg Mason, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income (loss), comprehensive income (loss), changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Legg Mason, Inc. and its subsidiaries (“the Company”) at March 31, 2016 and March 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Baltimore, Maryland May 23, 2016 66 | Legg Mason AR2016Table of Contents ASSETS Current Assets LEGG MASON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) March 31, 2016 March 31, 2015 Cash and cash equivalents Cash and cash equivalents of consolidated investment vehicles Restricted cash Receivables: Investment advisory and related fees Other Investment securities Investment securities of consolidated investment vehicles Deferred income taxes Other Other assets of consolidated investment vehicles Total Current Assets Fixed assets, net Intangible assets, net Goodwill Deferred income taxes Other TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES Current Liabilities Accrued compensation Accounts payable and accrued expenses Short-term borrowings Contingent consideration Other Other current liabilities of consolidated investment vehicles Total Current Liabilities Deferred compensation Deferred income taxes Contingent consideration Other Long-term debt TOTAL LIABILITIES Commitments and Contingencies (Note 8) REDEEMABLE NONCONTROLLING INTERESTS STOCKHOLDERS' EQUITY Common stock, par value $.10; authorized 500,000,000 shares; issued 107,011,664 shares in March 2016 and 111,469,142 shares in March 2015 Additional paid-in capital Employee stock trust Deferred compensation employee stock trust Retained earnings Accumulated other comprehensive loss, net Total stockholders' equity attributable to Legg Mason, Inc. Nonredeemable noncontrolling interest TOTAL STOCKHOLDERS' EQUITY TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY See Notes to Consolidated Financial Statements $ $ $ $ $ 1,329,126 297 19,580 334,922 74,694 515,335 48,715 — 55,405 7,054 2,385,128 163,305 3,146,485 1,479,516 206,797 139,215 7,520,446 430,736 201,572 40,000 26,396 138,301 4,548 841,553 65,897 260,386 58,189 141,886 1,740,985 3,108,896 $ $ 669,552 2,808 32,114 368,399 118,850 454,735 48,000 169,706 51,002 6,121 1,921,287 179,606 3,313,334 1,339,510 161,978 149,119 7,064,834 400,245 208,210 — 22,276 177,879 6,436 815,046 51,706 362,209 88,508 167,998 1,048,946 2,534,413 175,785 45,520 10,701 2,693,113 (26,263) 26,263 1,576,242 (66,493) 4,213,563 22,202 4,235,765 7,520,446 $ 11,147 2,844,441 (29,570) 29,570 1,690,055 (60,742) 4,484,901 — 4,484,901 7,064,834 Legg Mason AR2016 | 67Table of Contents LEGG MASON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Dollars in thousands, except per share amounts) OPERATING REVENUES Investment advisory fees: Separate accounts Funds Performance fees Distribution and service fees Other Total Operating Revenues OPERATING EXPENSES Compensation and benefits Transition-related compensation Total Compensation and Benefits Distribution and servicing Communications and technology Occupancy Amortization of intangible assets Impairment charges Other, net, including $(33,375) and $5,000 of contingent consideration fair value (reduction) increase in fiscal 2016 and 2014, respectively Total Operating Expenses OPERATING INCOME OTHER NON-OPERATING INCOME (EXPENSE) Interest income Interest expense Other income (expense), net, including $107,074 debt extinguishment loss in fiscal 2015 Other non-operating income (expense) of consolidated investment vehicles, net Total Other Non-Operating Income (Expense) INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) Income tax provision NET INCOME (LOSS) Less: Net income (loss) attributable to noncontrolling interests NET INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC. NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO LEGG MASON, INC. SHAREHOLDERS: Basic Diluted See Notes to Consolidated Financial Statements Years Ended March 31, 2015 2014 2016 826,080 1,409,059 41,982 381,486 2,237 2,660,844 1,172,645 32,172 1,204,817 545,710 197,857 122,610 4,979 371,000 163,040 2,610,013 50,831 $ 824,211 1,544,494 83,519 361,188 5,694 2,819,106 1,208,214 24,556 1,232,770 594,788 182,438 109,708 2,625 — 198,558 2,320,887 498,219 $ 777,420 1,501,278 107,087 347,598 8,374 2,741,757 1,208,226 2,161 1,210,387 619,070 157,872 115,234 12,314 — 195,987 2,310,864 430,893 5,634 (48,463) 7,440 (58,274) 6,367 (52,911) (25,977) (85,280) 32,818 (7,243) (76,049) (25,218) 7,692 (32,910) 5,888 (130,226) 367,993 125,284 242,709 2,474 (11,252) 419,641 137,805 281,836 (7,878) 5,629 (2,948) (25,032) $ 237,080 $ 284,784 (0.25) (0.25) $ $ 2.06 2.04 $ $ 2.34 2.33 $ $ $ $ 68 | Legg Mason AR2016Table of Contents LEGG MASON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in thousands) NET INCOME (LOSS) Other comprehensive loss: Foreign currency translation adjustment Unrealized losses on investment securities: Unrealized holding losses, net of tax benefit of $3 and $123, respectively Reclassification adjustment for losses included in net income Net unrealized losses on investment securities Net actuarial gains (losses) on defined benefit pension plan Unrealized gains on reverse treasury rate lock, net of tax provision of $233 Reclassification for realized gain on termination of reverse treasury rate lock, net of tax provision of $233 Reclassification of assets held for sale Total other comprehensive loss COMPREHENSIVE INCOME (LOSS) Less: Comprehensive income (loss) attributable to noncontrolling interests COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO LEGG MASON, INC. See Notes to Consolidated Financial Statements Years Ended March 31, 2015 2014 2016 $ (32,910) $ 242,709 $ 281,836 (8,525) (88,982) (9,424) — — — 2,774 — — — (5,751) (38,661) (11,738) (5) 5 — (9,595) 405 (405) (114) (98,691) 144,018 (184) 18 (166) — — — — (9,590) 272,246 5,629 (2,948) $ (26,923) $ 138,389 $ 275,194 Legg Mason AR2016 | 69Table of Contents LEGG MASON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Dollars in thousands) Years Ended March 31, 2015 2014 2016 STOCKHOLDERS' EQUITY ATTRIBUTABLE TO LEGG MASON, INC. COMMON STOCK Beginning balance Stock options exercised Deferred compensation employee stock trust Stock-based compensation Employee tax withholdings by settlement of net share transactions Shares repurchased and retired Ending balance ADDITIONAL PAID-IN CAPITAL Beginning balance Stock options exercised Deferred compensation employee stock trust Stock-based compensation Additional tax benefit on Equity Unit exchange in fiscal 2010 Employee tax withholdings by settlement of net share transactions Shares repurchased and retired Redeemable noncontrolling interest reclassification for affiliate management equity plans Ending balance EMPLOYEE STOCK TRUST Beginning balance Shares issued to plans Distributions and forfeitures Ending balance DEFERRED COMPENSATION EMPLOYEE STOCK TRUST Beginning balance Shares issued to plans Distributions and forfeitures Ending balance RETAINED EARNINGS Beginning balance Net Income (Loss) Attributable to Legg Mason, Inc. Dividends declared Reclassification for net increase in estimated redemption value of affiliate management equity plans Ending balance APPROPRIATED RETAINED EARNINGS FOR CONSOLIDATED INVESTMENT VEHICLE Beginning balance Net income reclassified to appropriated retained earnings Ending balance ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET Beginning balance Net unrealized losses on investment securities Net actuarial gains (losses) on defined benefit pension plan Reclassification to assets held for sale Foreign currency translation adjustment Ending balance TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO LEGG MASON, INC. Nonredeemable noncontrolling interest TOTAL STOCKHOLDERS’ EQUITY See Notes to Consolidated Financial Statements 12,534 78 5 123 (55) (968) 11,717 3,449,190 23,741 1,779 53,939 — (19,409) (359,028) (1,816) 3,148,396 (32,623) (1,784) 4,485 (29,922) 32,623 1,784 (4,485) 29,922 $ $ 11,147 33 2 14 (41) (454) 10,701 $ 11,717 71 5 94 (47) (693) 11,147 3,148,396 21,994 2,218 54,935 — (22,067) (355,829) (5,206) 2,844,441 (29,922) (2,223) 2,575 (29,570) 29,922 2,223 (2,575) 29,570 2,844,441 9,482 505 65,373 9,173 (21,596) (209,178) (5,087) 2,693,113 (29,570) (507) 3,814 (26,263) 29,570 507 (3,814) 26,263 1,690,055 (25,032) (87,818) (963) 1,576,242 1,526,662 237,080 (73,687) 1,304,259 284,784 (62,381) — — 1,690,055 1,526,662 — — — — — — (60,742) — 2,774 — (8,525) (66,493) 4,213,563 22,202 4,235,765 $ 37,949 — (9,595) (114) (88,982) (60,742) 4,484,901 — 4,484,901 $ $ $ 4,829 (4,829) — 47,539 (166) — — (9,424) 37,949 4,724,724 — 4,724,724 70 | Legg Mason AR2016Table of Contents LEGG MASON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Years Ended March 31, 2015 2014 2016 CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) 5.5% Senior Notes Due 2019: Loss on extinguishments Allocation of redemption payments Adjustments to reconcile Net Income to net cash provided by operations: Impairment of intangible assets Depreciation and amortization Accretion and amortization of securities discounts and premiums, net Stock-based compensation Net losses (gains) on investments Net losses (gains) of consolidated investment vehicles Deferred income taxes Contingent consideration fair value adjustments Other Decrease (increase) in assets: Investment advisory and related fees receivable Net sales (purchases) of trading and other investments Other receivables Other assets Other assets of consolidated investment vehicles Increase (decrease) in liabilities: Accrued compensation Deferred compensation Accounts payable and accrued expenses Other liabilities Other liabilities of consolidated investment vehicles CASH PROVIDED BY OPERATING ACTIVITIES $ (32,910) $ 242,709 $ 281,836 — — 107,074 (98,418) — — 371,000 60,297 3,140 92,927 26,056 2,496 (7,727) (33,375) 2,631 34,308 (82,423) (9,545) 4,947 (1,631) — 55,086 4,275 66,245 (13,912) (1,308) 100,387 — (12,939) (28,668) 47,357 19,547 (9,936) 114,934 — 62,845 3,037 66,488 (26,805) (643) 118,430 5,000 3,276 (2,061) (44,293) 14,105 (24,042) (62,916) 30,998 14,316 (7,593) (11,573) (1,888) $ 454,451 (17,727) 10,314 (14,763) 1,182 (3,321) $ 568,118 76,968 (7,191) 319 (23,310) (3,719) $ 437,324 Legg Mason AR2016 | 71Table of Contents LEGG MASON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Dollars in thousands) Years Ended March 31, 2015 2016 2014 CASH FLOWS FROM INVESTING ACTIVITIES Payments for fixed assets Business investments and acquisitions, net of cash acquired of $9,667 and $29,830 in fiscal 2016 and 2015, respectively Proceeds from sale of businesses and assets Change in restricted cash Purchases of investment securities Proceeds from sales and maturities of investments Purchases of investments by consolidated investment vehicles Proceeds from sales and maturities of investments by consolidated investment vehicles CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Net increase in short-term borrowings Repayments of debt Payment of contingent consideration Repayment of long-term debt of consolidated investment vehicles Proceeds from issuance of long-term debt Debt issuance costs Issuances of common stock for stock-based compensation Employee tax withholdings by settlement of net share transactions Repurchases of common stock Dividends paid Dividends paid to noncontrolling interest holders Net (redemptions/distributions paid to) subscriptions received and other noncontrolling interests CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES EFFECT OF EXCHANGE RATES ON CASH NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS AT END OF PERIOD SUPPLEMENTAL DISCLOSURE Cash paid for: Income taxes, net of refunds of $(4,689), $(865), and $(13,835), respectively Interest See Notes to Consolidated Financial Statements $ (40,330) $ (45,773) $ (40,452) (234,053) — 21,065 — 8,749 — (183,747) 47,001 (25,571) (2,641) 2,688 — — 1,351 (5,801) (4,335) 4,306 (17,328) — (244,569) — 199,886 137,627 (208,043) 40,000 — — (645,780) — (79,179) 658,769 (5,250) 24,288 (22,114) (356,522) (70,815) — (22,765) — 699,793 (13,539) 10,022 (21,637) (209,632) (84,093) (1,016) — (500,439) — (133,047) 393,740 (3,940) 25,603 (19,464) (359,996) (61,966) — 68,639 465,772 (16,080) 659,574 669,552 $ 1,329,126 (10,459) (507,062) (41,483) (188,470) 858,022 $ 669,552 20,438 (639,071) (10,894) (75,014) 933,036 $ 858,022 $ $ 23,743 49,393 19,578 59,039 $ 10,140 44,295 72 | Legg Mason AR2016Table of Contents LEGG MASON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per share amounts or unless otherwise noted) 1. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Legg Mason, Inc. ("Parent") and its subsidiaries (collectively, "Legg Mason" or "the Company") are principally engaged in providing asset management and related financial services to individuals, institutions, corporations and municipalities. The consolidated financial statements include the accounts of the Parent and its subsidiaries in which it has a controlling financial interest. Generally, an entity is considered to have a controlling financial interest when it owns a majority of the voting interest in an entity. Legg Mason is also required to consolidate any variable interest entity ("VIE") in which it is considered to be the primary beneficiary. See "Consolidation" below and Note 17 for a further discussion of VIEs. All material intercompany balances and transactions have been eliminated. Certain amounts in prior year financial statements have been reclassified to conform to the current year presentation, including the classification in our Consolidated Balance Sheets of deferred debt issuance costs, as more fully described below. All references to fiscal 2016, 2015 or 2014, refer to Legg Mason's fiscal year ended March 31 of that year. Use of Estimates The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and the applicable rules and regulations of the Securities and Exchange Commission, which require management to make assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes, including revenue recognition, valuation of financial instruments, intangible assets and goodwill, stock-based compensation, income taxes, and consolidation. Management believes that the estimates used are reasonable, although actual amounts could differ from the estimates and the differences could have a material impact on the consolidated financial statements. Consolidation In the normal course of its business, Legg Mason sponsors and manages various types of investment vehicles. For its services, Legg Mason is entitled to receive management fees and may be eligible, under certain circumstances, to receive additional subordinated management fees or other incentive fees. Legg Mason's exposure to risk in these entities is generally limited to any equity investment it has made or is required to make, and any earned but uncollected management fees. Legg Mason did not sell or transfer assets to any of these investment vehicles. In accordance with financial accounting standards, Legg Mason consolidates certain sponsored investment vehicles, some of which are designated and reported as consolidated investment vehicles (“CIVs”). The consolidation of sponsored investment vehicles, including those designated as CIVs, has no impact on Net Income (Loss) Attributable to Legg Mason, Inc. and does not have a material impact on Legg Mason's consolidated operating results. The change in the value of all consolidated sponsored investment vehicles, is recorded in Other Non-Operating Income (Expense) and reflected in Net income (loss) attributable to noncontrolling interests. Certain investment vehicles Legg Mason sponsors and is the manager of are considered to be VIEs (as further described below) while others are considered to be voting rights entities (“VREs”) subject to traditional consolidation concepts based on ownership rights. Sponsored investment vehicles that are considered VREs are consolidated if Legg Mason has a controlling financial interest in the investment vehicle, absent substantive investor rights to replace the manager of the entity (kick-out rights). Legg Mason may also fund the initial cash investment in certain VRE investment vehicles to generate an investment performance track record in order to attract third-party investors in the product. Legg Mason's initial investment in a new product typically represents 100% of the ownership in that product. As further discussed below, these “seed capital investments” are consolidated as long as Legg Mason maintains a controlling financial interest in the product, but they are not designated as CIVs by Legg Mason unless the investment is longer-term. Legg Mason held a longer-term controlling financial interest in one sponsored investment fund VRE, which has third-party investors and was consolidated and included as a CIV prior to the quarter ended March 31, 2015. Prior to March 31, 2015, Legg Mason redeemed a significant portion Legg Mason AR2016 | 73Table of Contents of its investment in this fund and as a result no longer had a controlling financial interest in the fund; therefore, the fund was not included as a CIV as of or subsequent to March 31, 2015. A VIE is an entity which does not have adequate equity to finance its activities without additional subordinated financial support; or the equity investors, as a group, do not have the normal characteristics of equity investors for a potential controlling financial interest. Investment Company VIEs For most sponsored investment fund VIEs deemed to be investment companies, including money market funds, Legg Mason determines it is the primary beneficiary of the VIE if it absorbs a majority of the VIE's expected losses, or receives a majority of the VIE's expected residual returns, if any. Legg Mason's determination of expected residual returns excludes gross fees paid to a decision maker if certain criteria relating to the fees are met. In determining whether it is the primary beneficiary of an investment company VIE, Legg Mason considers both qualitative and quantitative factors such as the voting rights of the equity holders; economic participation of all parties, including how fees are earned and paid to Legg Mason; related party (including employees) ownership; guarantees and implied relationships. Legg Mason concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated (and designated as a CIV) as of March 31, 2016, 2015, and 2014, despite significant third-party investments in this product. As of March 31, 2016, 2015, and 2014, Legg Mason also concluded it was the primary beneficiary of 14, 17, and 17 employee- owned funds it sponsors, respectively, which were consolidated and designated as CIVs. Other VIEs For other sponsored investment funds that do not meet the investment company criteria, Legg Mason determines it is the primary beneficiary of a VIE if it has both the power to direct the activities of the VIE that most significantly impact the entity's economic performance and the obligation to absorb losses, or the right to receive benefits, that potentially could be significant to the VIE. As of March 31, 2016 and 2015, Legg Mason had a variable interest in four collateralized loan obligations ("CLOs"). Legg Mason concluded it was not the primary beneficiary of these CLOs, which were not consolidated, as it holds no equity interest in these investment vehicles and the level of fees they are expected to pay to Legg Mason is insignificant. As of March 31, 2014, Legg Mason had a variable interest in two of these CLOs, which also were not consolidated during that period. As of March 31, 2014, Legg Mason concluded that it was the primary beneficiary of another CLO in which it held a variable interest. Although it held no equity interest in this investment vehicle, it had both the power to control the CLO and had a significant variable interest because of the level of its expected subordinated fees. As of March 31, 2014, the balances related to this CLO were consolidated and reported as a CIV in the Company's consolidated financial statements. During the three months ended June 30, 2014, this CLO was substantially liquidated and therefore was not consolidated by Legg Mason as of, or subsequent to, June 30, 2014. Legg Mason's investment in CIVs as of March 31, 2016 and 2015 was $13,641 and $15,553, respectively, which represents its maximum risk of loss, excluding uncollected advisory fees, which were not material. The assets of these CIVs are primarily comprised of investment securities. Investors and creditors of these CIVs have no recourse to the general credit or assets of Legg Mason beyond its investment in these funds. See Notes 3 and 17 for additional information regarding VIEs and VREs. Cash and Cash Equivalents Cash equivalents are highly liquid investments with original maturities of 90 days or less. Restricted Cash Restricted cash represents cash collateral required for market hedge arrangements, long-term escrow deposits, and other cash that is not available to Legg Mason for general corporate use. 74 | Legg Mason AR2016Table of Contents Financial Instruments Substantially all financial instruments are reflected in the financial statements at fair value or amounts that approximate fair value, except Legg Mason's long-term debt not designated for a hedging transaction. As discussed above in "Consolidation," seed capital investments in proprietary fund products are initially consolidated and the individual securities within the portfolio are accounted for as trading investments. Legg Mason consolidates these products as long as it holds a controlling financial interest in the product. Upon deconsolidation, which typically occurs after several years, Legg Mason accounts for its investments in proprietary fund products as equity method investments (further described below) if its ownership is between 20% and 50%, or it otherwise has the ability to significantly influence the financial and operating policies of the investee. For partnerships and LLCs, where third-party investors may have less ability to influence operations, the equity method of accounting is considered if Legg Mason's ownership is greater than 3%. Changes in the fair value of proprietary fund products classified as trading or equity method investments are recognized in Other Non-Operating Income (Expense) on the Consolidated Statements of Income (Loss). Legg Mason generally redeems its investment in proprietary fund products when the related product establishes a sufficient track record, when third-party investments in the related product are sufficient to sustain the strategy, or when a decision is made to no longer pursue the strategy. The length of time Legg Mason holds a majority interest in a product varies based on a number of factors, such as market demand, market conditions and investment performance. See Notes 3 and 17 for additional information regarding Legg Mason's seed capital investments and the determination of whether investments in proprietary fund products represent VIEs, respectively. For equity investments in which Legg Mason does not control the investee and is not the primary beneficiary of a VIE, but can exert significant influence over the financial and operating policies of the investee, Legg Mason follows the equity method of accounting. The evaluation of whether Legg Mason can exert control or significant influence over the financial and operational policies of an investee requires significant judgment based on the facts and circumstances surrounding each individual investment. Factors considered in these evaluations may include investor voting or other rights, any influence Legg Mason may have on the governing board of the investee, the legal rights of other investors in the entity pursuant to the fund's operating documents and the relationship between Legg Mason and other investors in the entity. Legg Mason's equity method investees that are investment companies record their underlying investments at fair value. Therefore, under the equity method of accounting, Legg Mason's share of the investee's underlying net income or loss predominantly represents fair value adjustments in the investments held by the equity method investee. Legg Mason's share of the investee's net income or loss is based on the most current information available and is recorded as a net gain (loss) on investments within Non-Operating Income (Expense). A significant portion of earnings (losses) attributable to Legg Mason's equity method investments has offsetting compensation expense adjustments under revenue sharing arrangements and deferred compensation arrangements, therefore, fluctuations in the market value of these investments will not have a material impact on Net Income (Loss) Attributable to Legg Mason, Inc. Legg Mason also holds debt and marketable equity investments which are classified as trading. Certain investment securities, including those held by CIVs, are also classified as trading securities. These investments are recorded at fair value and unrealized gains and losses are included in current period earnings. Realized gains and losses for all investments are included in current period earnings. Equity and fixed income securities classified as trading are valued using closing market prices for listed instruments or broker price quotations, when available. Fixed income securities may also be valued using valuation models and estimates based on spreads to actively traded benchmark debt instruments with readily available market prices. Legg Mason evaluates its non-trading investment securities for "other-than-temporary" impairment. Impairment may exist when the fair value of an investment security has been below the adjusted cost for an extended period of time. If an "other- than-temporary" impairment is determined to exist, the amount of impairment that relates to credit losses is recognized as a charge to income. As of March 31, 2016, 2015 and 2014, the amount of temporary unrealized losses for investment securities not recognized in income was not material. For investments in illiquid or privately-held securities for which market prices or quotations may not be readily available, management estimates the value of the securities using a variety of methods and resources, including the most current available financial information for the investment and the industry. Legg Mason AR2016 | 75Table of Contents In addition to the financial instruments described above and the derivative instruments described below, other financial instruments that are carried at fair value or amounts that approximate fair value include Cash and cash equivalents and Short- term borrowings. The fair value of Long-term debt at March 31, 2016 and 2015, aggregated $1,773,852 and $1,166,697, respectively. Except for long-term debt designated for a hedging transaction, these fair values were estimated using publicly quoted market prices and were classified as Level 2 in the fair value hierarchy, as described below. Additionally, the 2.7% Senior Notes due 2019 designated for a hedging transaction are valued as the sum of the amortized cost of the debt and the fair value of the related interest rate contract designated for a hedging transaction which approximates the debt fair value, and was classified as a Level 2 measurement, as discussed below. Derivative Instruments The fair values of derivative instruments are recorded as assets or liabilities on the Consolidated Balance Sheets. Legg Mason has used foreign exchange forwards and interest rate swaps to hedge the risk of movement in exchange rates or interest rates on financial assets and liabilities on a limited basis. Also, Legg Mason has used futures contracts on index funds to hedge the market risk of certain seed capital investments. With the exception of an interest rate swap and a reverse treasury rate lock contract, as further discussed in Note 6, Legg Mason has not designated any financial instruments for hedge accounting, as defined in the accounting literature, during the periods presented. The gains or losses on derivative instruments not designated for hedge accounting are included as Other operating income (expense) or Other Non-Operating Income (Expense) in the Consolidated Statements of Income (Loss), depending on the strategy. Gains and losses on derivative instruments of CIVs are recorded as Other non-operating income (loss) of consolidated investment vehicles, net, in the Consolidated Statements of Income (Loss), if applicable. See Note 15 for additional information regarding derivatives and hedging. Fair Value Measurements Accounting guidance for fair value measurements defines fair value and establishes a framework for measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Under accounting guidance, a fair value measurement should reflect all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of non-performance. The objective of fair value accounting measurements is to reflect, at the date of the financial statements, how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) under current market conditions. Specifically, it requires the use of judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. This accounting guidance also relates to other-than-temporary impairments and is intended to bring greater consistency to the timing of impairment recognition. It is also intended to provide greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. The guidance also requires timely disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Fair value accounting guidance also establishes a hierarchy that prioritizes the inputs for valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Legg Mason's financial instruments are measured and reported at fair value (except debt not designated for a hedging transaction) and are classified and disclosed in one of the following categories: Level 1 — Financial instruments for which prices are quoted in active markets, which, for Legg Mason, include investments in publicly traded mutual funds with quoted market prices and equities listed in active markets and certain derivative instruments. Level 2 — Financial instruments for which: prices are quoted for similar assets and liabilities in active markets; prices are quoted for identical or similar assets in inactive markets; or prices are based on observable inputs, other than quoted prices, such as models or other valuation methodologies. For Legg Mason, this category may include fixed income securities, certain proprietary fund products and certain long-term debt. 76 | Legg Mason AR2016Table of Contents Level 3 — Financial instruments for which values are based on unobservable inputs, including those for which there is little or no market activity. This category includes investments in partnerships, limited liability companies, and private equity funds. This category may also include certain proprietary fund products with redemption restrictions and contingent consideration liabilities. The valuation of an asset or liability may involve inputs from more than one level of the hierarchy. The level in the fair value hierarchy in which a fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Certain proprietary fund products and investments held by CIVs are valued at net asset value ("NAV") determined by the applicable fund administrator. These funds are typically invested in exchange traded investments with observable market prices. Their valuations may be classified as Level 1, Level 2 or Level 3 based on whether the fund is exchange traded, the frequency of the related NAV determinations and the impact of redemption restrictions. For investments in illiquid and privately-held securities (private equity and investment partnerships) for which market prices or quotations may not be readily available, management must estimate the value of the securities using a variety of methods and resources, including the most current available financial information for the investment and the industry to which it applies in order to determine fair value. These valuation processes for illiquid and privately-held securities inherently require management's judgment and are therefore classified as Level 3. Futures contracts are valued at the last settlement price at the end of each day on the exchange upon which they are traded and are classified as Level 1. As a practical expedient, Legg Mason relies on the NAV of certain investments, classified as Level 2 or Level 3, as their fair value. The NAVs that have been provided by investees are derived from the fair values of the underlying investments as of the reporting date. Any transfers between categories are measured at the beginning of the period. See Note 3 for additional information regarding fair value measurements. Appropriated Retained Earnings Prior to June 30, 2014, Legg Mason elected the fair value option for certain eligible assets and liabilities, including corporate loans and debt, of the then consolidated CLO. Upon the election of the fair value option for eligible assets and liabilities of the CLO, Legg Mason recorded a cumulative effect adjustment to Appropriated retained earnings for consolidated investment vehicle on the Consolidated Balance Sheets equal to the difference between the fair values of the CLO's assets and liabilities. This difference was recorded as "Appropriated retained earnings for consolidated investment vehicle" because the investors in the CLO, not Legg Mason shareholders, would ultimately realize any benefits or losses associated with the CLO. Changes in the fair values of the CLO assets and liabilities were recorded as Net income (loss) attributable to noncontrolling interests in the Consolidated Statements of Income (Loss) and Appropriated retained earnings for consolidated investment vehicle in the Consolidated Balance Sheet. The CLO substantially liquidated and was deconsolidated as of June 30, 2014. At March 31, 2014, the CLO was in the final stage of liquidation, and the fair value of its assets and liabilities were substantially equal, and there were no Appropriated retained earnings. Fixed Assets Fixed assets primarily consist of equipment, software and leasehold improvements. Equipment consists primarily of communications and technology hardware and furniture and fixtures. Capitalized software includes both purchased software and internally developed software. The cost of software used under a service contract where Legg Mason does not own or control the software is expensed over the term of the contract. Fixed assets are reported at cost, net of accumulated depreciation and amortization. Depreciation and amortization are determined by use of the straight-line method. Equipment is depreciated over the estimated useful lives of the assets, generally ranging from three to eight years. Software is amortized over the estimated useful lives of the assets, generally three years. Leasehold improvements are amortized or depreciated over the initial term of the lease unless options to extend are likely to be exercised. Maintenance and repair costs are expensed as incurred. Internally developed software is reviewed periodically to determine if there is a change in the useful life, or if an impairment in value may exist. If impairment is deemed to exist, the asset is written down to its fair value or is written off if the asset is determined to no longer have any value. Legg Mason AR2016 | 77Table of Contents Intangible Assets and Goodwill Legg Mason's identifiable intangible assets consist principally of asset management contracts, contracts to manage proprietary mutual funds or funds-of-hedge funds, and trade names resulting from acquisitions. Intangible assets are amortized over their estimated useful lives, using the straight-line method, unless the asset is determined to have an indefinite useful life. Asset management contracts are amortizable intangible assets that are capitalized at acquisition and amortized over the expected life of the contract. The value of contracts to manage assets in proprietary mutual funds or funds-of-hedge funds and the value of trade names are classified as indefinite-life intangible assets. The assignment of indefinite lives to proprietary fund contracts is based upon the assumption that there is no foreseeable limit on the contract period to manage proprietary funds due to the likelihood of continued renewal at little or no cost. The assignment of indefinite lives to trade names is based on the assumption that they are expected to generate cash flows indefinitely. Goodwill represents the residual amount of acquisition cost in excess of identified tangible and intangible assets and assumed liabilities. Indefinite-life intangible assets and goodwill are not amortized for financial statement purposes. Given the relative significance of intangible assets and goodwill to the Company's consolidated financial statements, on a quarterly basis Legg Mason considers if triggering events have occurred that may indicate that the fair values have declined below their respective carrying amounts. Triggering events may include significant adverse changes in the Company's business or the legal or regulatory environment, loss of key personnel, significant business dispositions, or other events, including changes in economic arrangements with our affiliates that will impact future operating results. If a triggering event has occurred, the Company will perform quantitative tests, which include critical reviews of all significant factors and assumptions, to determine if any intangible assets or goodwill are impaired. Legg Mason considers factors such as projected cash flows and revenue multiples, to determine whether the value of the assets is impaired and the indefinite-life assumptions are appropriate. If an asset is impaired, the difference between the value of the asset reflected on the consolidated financial statements and its current fair value is recognized as an expense in the period in which the impairment is determined. If a triggering event has not occurred, the Company performs quantitative tests annually at December 31, for indefinite-life intangible assets and goodwill, unless the Company can qualitatively conclude that it is more likely than not that the respective fair values exceed the related carrying values. The fair values of intangible assets subject to amortization are considered for impairment at each reporting period using an undiscounted cash flow analysis. For intangible assets with indefinite lives, fair value is determined from a market participant's perspective based on projected discounted cash flows, which take into consideration estimates of future fees, profit margins, growth rates, taxes, and discount rates. Proprietary fund contracts that are managed and operated as a single unit and meet other criteria may be aggregated for impairment testing. Goodwill is evaluated at the reporting unit level, and is considered for impairment when the carrying value of the reporting unit exceeds the implied fair value of the reporting unit. In estimating the implied fair value of the reporting unit, Legg Mason uses valuation techniques principally based on discounted projected cash flows and EBITDA multiples, similar to techniques employed in analyzing the purchase price of an acquisition. Goodwill is deemed to be recoverable at the reporting unit level, which is also the operating segment level that Legg Mason defines as the Global Asset Management segment. This results from the fact that the chief operating decision maker, Legg Mason's Chief Executive Officer, regularly receives discrete financial information at the consolidated Global Asset Management business level and does not regularly receive discrete financial information, such as operating results, at any lower level, such as the asset management affiliate level. Allocations of goodwill for management restructures, acquisitions, and dispositions are based on relative fair values of the respective businesses restructured, acquired, or divested. See Note 5 for additional information regarding intangible assets and goodwill and Note 16 for additional business segment information. Debt For the year ended March 31, 2016, Legg Mason elected to early adopt updated accounting guidance which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated long-term debt liability, consistent with the presentation of a debt discount. This updated guidance was adopted on a retrospective basis and, as a result, Legg Mason reclassified unamortized debt issuance costs of $8,395 from Other non-current assets and $748 from Other current assets to Long-term debt within the Consolidated Balance Sheet for the year ended March 31, 2015. Contingent Consideration Liabilities In connection with business acquisitions, Legg Mason may be required to pay additional future consideration based on the achievement of certain designated financial metrics. Legg Mason estimates the fair value of these potential future obligations 78 | Legg Mason AR2016Table of Contents at the time a business combination is consummated and records a Contingent consideration liability in the Consolidated Balance Sheet. Legg Mason accretes contingent consideration liabilities to the expected payment amounts over the related earn-out terms until the obligations are ultimately paid, resulting in Interest expense in the Consolidated Statements of Income (Loss). If the expected payment amounts subsequently change, the contingent consideration liabilities are (reduced) or increased in the current period, resulting in a (gain) or loss, which is reflected within Other operating expense in the Consolidated Statements of Income (Loss). See Notes 2 and 8 for additional information regarding contingent consideration liabilities. Translation of Foreign Currencies Assets and liabilities of foreign subsidiaries that are denominated in non-U.S. dollar functional currencies are translated at exchange rates as of the Consolidated Balance Sheet dates. Revenues and expenses are translated at average exchange rates during the period. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars are included in stockholders' equity and comprehensive income (loss). Gains or losses resulting from foreign currency transactions are included in Net Income (Loss). Investment Advisory Fees Legg Mason earns investment advisory fees on assets in separately managed accounts, investment funds, and other products managed for Legg Mason's clients. These fees are primarily based on predetermined percentages of the market value of the assets under management ("AUM"), and are recognized over the period in which services are performed and may be billed in advance of the period earned based on AUM at the beginning of the billing period in accordance with the related advisory contracts. Revenue associated with advance billings is deferred and included in Other current liabilities in the Consolidated Balance Sheets and is recognized over the period earned. Performance fees may be earned on certain investment advisory contracts for exceeding performance benchmarks on a relative or absolute basis, depending on the product, and are recognized at the end of the performance measurement period. Accordingly, neither advanced billings nor performance fees are subject to reversal. The largest portion of performance fees are earned based on 12-month performance periods that end in differing quarters during the year, with a portion also based on quarterly performance periods. Legg Mason has responsibility for the valuation of AUM, substantially all of which is based on observable market data from independent pricing services, fund accounting agents, custodians or brokers. Distribution and Service Fees Revenue and Expense Distribution and service fees represent fees earned from funds to reimburse the distributor for the costs of marketing and selling fund shares and servicing proprietary funds and are generally determined as a percentage of client assets. Reported amounts also include fees earned from providing client or shareholder servicing, including record keeping or administrative services to proprietary funds, and non-discretionary advisory services. Distribution fees earned on company-sponsored investment funds are reported as revenue. When Legg Mason enters into arrangements with broker-dealers or other third parties to sell or market proprietary fund shares, distribution and servicing expense is accrued for the amounts owed to third parties, including finders' fees and referral fees paid to unaffiliated broker-dealers or introducing parties. Distribution and servicing expense also includes payments to third parties for certain shareholder administrative services and sub-advisory fees paid to unaffiliated asset managers. Deferred Sales Commissions Commissions paid to financial intermediaries in connection with sales of certain classes of company-sponsored mutual funds are capitalized as deferred sales commissions. The asset is amortized over periods not exceeding six years, which represent the periods during which commissions are generally recovered from distribution and service fee revenues and from contingent deferred sales charges ("CDSC") received from shareholders of those funds upon redemption of their shares. CDSC receipts are recorded as distribution and service fee revenue when received and a reduction of the unamortized balance of deferred sales commissions, with a corresponding expense. Management periodically tests the deferred sales commission asset for impairment by reviewing the changes in value of the related shares, the relevant market conditions and other events and circumstances that may indicate an impairment in value has occurred. If these factors indicate an impairment in value, management compares the carrying value to the estimated undiscounted cash flows expected to be generated by the asset over its remaining life. If management determines that the deferred sales commission asset is not fully recoverable, the asset will be deemed impaired and a loss will be recorded in the amount by which the recorded amount of the asset exceeds its estimated fair value. For the years ended March 31, 2016, Legg Mason AR2016 | 79Table of Contents 2015 and 2014, no impairment charges were recorded. Deferred sales commissions, included in Other non-current assets in the Consolidated Balance Sheets, were $6,713 and $10,422 at March 31, 2016 and 2015, respectively. Income Taxes Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements. Deferred income tax assets are subject to a valuation allowance if, in management's opinion, it is more likely than not that these benefits will not be realized. Legg Mason's deferred income taxes principally relate to net operating loss and other carryforward benefits, business combinations, amortization of intangible assets and accrued compensation. Under applicable accounting guidance, a tax benefit should only be recognized if it is more likely than not that the position will be sustained based on its technical merits. A tax position that meets this threshold is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon settlement by the appropriate taxing authority having full knowledge of all relevant information. The Company's accounting policy is to classify interest related to tax matters as interest expense and related penalties, if any, as other operating expense. For the year ended March 31, 2016, Legg Mason elected to early adopt new accounting guidance relating to the balance sheet classification of deferred taxes. The updated guidance requires that all deferred tax assets, liabilities, and any related valuation allowances be classified prospectively as noncurrent in a classified balance sheet. See Note 7 for additional information regarding income taxes. Loss Contingencies Legg Mason accrues estimates for loss contingencies related to legal actions, investigations, and proceedings, exclusive of legal fees, when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Related insurance recoveries are recorded separately when the underwriter has confirmed coverage of a specific claim amount. See Note 8 for additional information. Stock-Based Compensation Legg Mason's stock-based compensation includes stock options, an employee stock purchase plan, market-based performance shares payable in common stock, restricted stock awards and units, management equity plans for certain affiliates and deferred compensation payable in stock. Under its stock compensation plans, Legg Mason issues equity awards to directors, officers, and other key employees. In accordance with the applicable accounting guidance, compensation expense includes costs for all non-vested share-based awards classified as equity at their grant date fair value amortized over the respective vesting periods on the straight-line method. The grant-date fair value of equity-classified share-based awards with immediate vesting is also included in Compensation and benefits expense. Legg Mason determines the fair value of stock options using the Black-Scholes option- pricing model, with the exception of market-based performance grants, which are valued with a Monte Carlo option-pricing model. Legg Mason also determines the fair value of option-like affiliate management equity plan grants using the Black- Scholes option-pricing model, subject to any post-vesting illiquidity discounts. See Note 11 for additional information regarding stock-based compensation. Earnings Per Share Basic earnings per share attributable to Legg Mason, Inc. shareholders ("EPS") is calculated by dividing Net Income (Loss) Attributable to Legg Mason, Inc. (adjusted by earnings allocated to participating securities) by the weighted-average number of shares outstanding. Legg Mason has issued to employees restricted stock that are deemed to be participating securities prior to vesting, because the unvested restricted shares entitle their holder to nonforfeitable dividend rights. In this circumstance, accounting guidance requires a “two-class method” for EPS calculations that excludes earnings (potentially both distributed and undistributed) allocated to participating securities. Diluted EPS is similar to basic EPS, but adjusts for the effect of potential common shares unless they are antidilutive. For periods with a net loss, potential common shares other than potentially unvested restricted shares, are considered antidilutive. See Note 12 for additional discussion of EPS. 80 | Legg Mason AR2016Table of Contents Restructuring Costs As further discussed in Note 2, Legg Mason is restructuring The Permal Group, Ltd. ("Permal") for the combination with EnTrust Capital ("EnTrust"). The costs associated with this restructuring primarily relate to employee termination benefits, including severance and retention incentives, which are recorded as Transition-related compensation in the Consolidated Statement of Income (Loss), and charges for consolidating leased office space, which are recorded as Occupancy in the Consolidated Statement of Income (Loss). Also, as further discussed in Note 2, in May 2014, Legg Mason acquired QS Investors Holdings, LLC ("QS Investors") and integrated its two existing affiliates, Batterymarch Financial Management, Inc. ("Batterymarch") and Legg Mason Global Asset Allocation, LLC ("LMGAA") into QS Investors to leverage the best aspects of each subsidiary. The costs related to this integration primarily related to employee termination benefits, including severance and retention incentives, which were recorded as Transition-related compensation in the Consolidated Statements of Income (Loss). Noncontrolling Interests Noncontrolling interests include affiliate minority interests, third-party investor equity in consolidated sponsored investment vehicles, and vested affiliate management equity plan interests. For CIVs and other consolidated sponsored investment vehicles with third-party investors, the related noncontrolling interests are classified as redeemable noncontrolling interests if investors in these funds may request withdrawals at any time. Also included in redeemable noncontrolling interests are vested affiliate management equity plan interests for which the holder may, at some point, request settlement of their interests. Redeemable noncontrolling interests are reported in the Consolidated Balance Sheets at their estimated settlement values. When settlement is not expected to occur until a future date, changes in the expected settlement value are recognized over the settlement period as an adjustment from retained earnings. Nonredeemable noncontrolling interests include vested affiliate management equity plan interests that do not permit the holder to request settlement of their interests. Nonredeemable noncontrolling interests are reported in the Consolidated Balance Sheets at their issuance value, together with undistributed net income allocated to noncontrolling interests. Legg Mason estimates the settlement value of noncontrolling interests as their fair value. For consolidated sponsored investment vehicles, where the investor may request withdrawal at any time, fair value is based on market quotes of the underlying securities held by the investment vehicles. For affiliate minority interests and management equity plan interests, fair value reflects the related total business enterprise value, after appropriate discounts for lack of marketability and control. There may also be features of these equity interests, such as dividend subordination, that are contemplated in their valuations. The fair value of option-like management equity plan interests also relies on Black-Scholes option pricing model calculations, as noted above. Net income (loss) attributable to noncontrolling interests in the Consolidated Statements Of Income (Loss) includes that share of income (loss) of the respective subsidiary allocated to the minority interest holders. Net income (loss) attributable to noncontrolling interests in the Consolidated Statement of Income (Loss) for the year ended March 31, 2014, also includes Net loss reclassified to Appropriated retained earnings for consolidated investment vehicle. See Note 14 for additional information regarding noncontrolling interests. Related Parties For its services to sponsored investment funds, Legg Mason earns management fees, incentive fees, distribution and service fees, and other revenue and incurs distribution and servicing and other expenses, as disclosed in the Consolidated Statements of Income. Sponsored investment funds are deemed to be affiliated entities under the related party definition in relevant accounting guidance. Recent Accounting Developments In March 2016, the Financial Accounting Standards Board ("FASB") updated the guidance on stock-based compensation accounting. The updated guidance simplifies several aspects of accounting for stock-based compensation including the income tax consequences, classification criteria for awards as either equity or liabilities, and classification of related amounts in statements of cash flows. The guidance will be effective in fiscal 2018, with the option for early adoption in fiscal 2017. Legg Mason is evaluating the impact of its adoption. Legg Mason AR2016 | 81Table of Contents In February 2016, the FASB updated the guidance on accounting for leases. The updated guidance requires that a lessee shall recognize the assets and liabilities that arise from lease transactions. A lessee will recognize a right-of-use asset to use the underlying asset and a liability representing the lease payments. The updated guidance also requires an evaluation at the inception of a contract, to determine whether the contract is or contains a lease. The guidance will be effective in fiscal 2020. Legg Mason is evaluating the impact of its adoption. In May 2015, the FASB updated the guidance on fair value measurement. The updated guidance removes the requirement for all investments for which fair value is measured using the NAV practical expedient to be categorized within the fair value hierarchy and related sensitivity disclosures. The amount of such investments would instead be disclosed as a reconciling item between the fair value hierarchy table and the investment amounts reported on the balance sheet. This guidance will be effective for Legg Mason in fiscal 2017. Legg Mason is evaluating the impact of its adoption. In February 2015, the FASB updated the guidance for consolidation requirements. The updated guidance eliminates the presumption that a general partner should consolidate a limited partnership, and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or VREs. Additionally, the updated guidance affects the conclusion such that certain fees paid to decision makers are no longer variable interests, and certain related party relationships with a sponsored investment fund may no longer require its consolidation. The update also eliminates the deferral of accounting guidance that requires separate evaluation for investment company VIEs and other VIEs. This update will be effective in fiscal 2017, and Legg Mason intends to adopt it on the modified retrospective basis. Legg Mason expects under the new guidance that certain of its sponsored investment vehicles residing in foreign mutual fund trusts will qualify as VIEs and will be subject to consolidation at a lower ownership percentage than the currently employed threshold of 50%. In May 2014, the FASB updated the guidance on revenue recognition. The updated guidance improves comparability and removes inconsistencies in revenue recognition practices across entities, industries, jurisdictions, and capital markets. In March 2016, the FASB further updated the revenue guidance on determining whether to report revenue on a gross versus net basis. The updated guidance clarifies how entities evaluate principal versus agent aspects of the revenue recognition guidance issued in May 2014. The evaluation will require entities to identify all goods or services to be provided to the customer, and determine whether they obtain control of the good or service before it is transferred to the customer, where control would suggest a principal relationship, which would be accounted for on a gross basis. These updates are effective for Legg Mason in fiscal 2019. Legg Mason is evaluating the impact of its adoption. 82 | Legg Mason AR2016Table of Contents 2. ACQUISITIONS AND DISPOSITION Acquisitions The following table presents a summary of the acquisition-date fair values of the assets acquired and liabilities assumed for each of Legg Mason's significant recent acquisitions: Acquisition Date October 21, 2015 October 1, 2014 RARE Infrastructure Limited (1) Martin Currie (Holdings) Limited QS Investors Holdings, LLC May 30, 2014 Fauchier Partners Management, Limited March 13, 2013 Purchase price Cash $ Estimated contingent consideration Total Consideration Fair value of noncontrolling interest Total Identifiable assets and liabilities Cash Investments Receivables Indefinite-life intangible fund management contracts Amortizable intangible asset management contracts Indefinite-life trade name Fixed assets Other current liabilities, net Liabilities, net Pension liability Deferred tax liabilities Total identifiable assets and liabilities Goodwill $ $ 213,739 25,000 238,739 62,722 301,461 9,667 — 6,612 $ 202,577 75,211 277,788 — 277,788 29,389 — — 122,755 135,321 67,877 4,766 673 (10,605) (3,948) — (58,619) 139,178 162,283 $ 15,234 7,130 784 — (4,388) (32,433) (31,537) 119,500 158,288 $ $ 11,000 13,370 24,370 — 24,370 441 3,281 2,699 — 7,060 — 599 — (6,620) — — 7,460 16,910 $ 63,433 21,566 84,999 — 84,999 8,156 — 12,174 65,126 2,865 — — (16,667) — — (15,638) 56,016 28,983 (1) Subject to prospective adjustments, including for amounts ultimately realized and adjustments provided for in the share purchase agreement. RARE Infrastructure Limited On October 21, 2015, Legg Mason acquired a majority equity interest in RARE Infrastructure Limited ("RARE Infrastructure"). RARE Infrastructure specializes in global listed infrastructure security investing, is headquartered in Sydney, Australia, and had approximately $6,800,000 in AUM at the closing of the transaction. Under the terms of the related transaction agreements, Legg Mason acquired a 75% ownership interest in the firm, the firm's management team retained a 15% equity interest and The Treasury Group, a continuing minority owner, retained 10%. The acquisition required an initial cash payment of $213,739 (using the foreign exchange rate as of October 21, 2015 for the 296,000 Australian dollar payment), which was funded with approximately $40,000 of net borrowings under the Company's previous revolving credit facility, as further discussed in Note 6, as well as existing cash resources. In August 2015, Legg Mason executed a currency forward contract to economically hedge the risk of movement in the exchange rate between the U.S. dollar and the Australian dollar in which the initial cash payment was denominated. This currency forward contract was closed in October 2015. See Note 15 for additional information regarding derivatives and hedging. In addition, contingent consideration may be due March 31, 2017 and 2018, aggregating up to $81,320 (using the foreign exchange rate as of March 31, 2016, for the maximum 106,000 Australian dollar amount per the related agreements), dependent on the achievement of certain net revenue targets, and subject to potential catch-up adjustments extending through March 31, 2019. Legg Mason AR2016 | 83Table of Contents The noncontrolling interests can be put by the holders or called by Legg Mason for settlement at fair value, except for the non-management portion of the noncontrolling interests, which are callable at a pre-agreed formula, as specified in the agreements. The fair value of the noncontrolling interests reflects the total business enterprise value, after appropriate discounts for lack of marketability and control. The fair value of the acquired amortizable intangible asset management contracts had a useful life of 12 years at acquisition. Purchase price allocated to intangible assets and goodwill is not deductible for Australian tax purposes. Goodwill is principally attributable to synergies expected to arise with RARE Infrastructure. Management estimated the fair values of the indefinite-life intangible fund management contracts, indefinite-life trade name, and amortizable intangible asset management contracts based upon discounted cash flow analyses, using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in these analyses at acquisition, including projected annual cash flows, projected AUM growth rates and discount rates, are summarized as follows: Indefinite-life intangible fund management contracts and indefinite-life trade name Amortizable intangible asset management contracts Projected Cash Flow Growth Discount Rate 0% to 10% (weighted-average - 7%) 16.5% Projected AUM Growth / (Attrition) 7% / (8)% Discount Rate 16.5% The fair value of the contingent consideration was estimated using Monte Carlo simulation in a risk-neutral framework with various observable inputs, as well as, with various unobservable data inputs which are Level 3 measurements. The simulation considered variables, including AUM growth and performance fee levels. Consistent with risk-neutral framework, projected AUM and performance fees were dampened by a measure of risk referred to as 'market price of risk' to account for its market risk or systematic risk before calculating the earn-out payments. These earn-out payments were then discounted commensurate with their timing. A summary of various assumption values follows: AUM growth rates Performance fee growth rates Projected AUM and performance fee market price of risk AUM volatility Earn-out payment discount rate 0% to 14% (weighted-average - 7%) 0% to 7% (weighted-average - 3%) 6.5% 20.0% 1.9% Significant increases (decreases) in projected AUM or performance fees would result in a significantly higher (lower) contingent consideration liability fair value. The contingent consideration liability established at closing had an acquisition date fair value of $25,000 (using the foreign exchange rate as of October 21, 2015). As of March 31, 2016, the fair value of the contingent consideration liability was $27,145, of which $7,001 relates to the first anniversary payment and is included in current Contingent consideration in the Consolidated Balance Sheet, with the remainder included in non-current Contingent consideration in the Consolidated Balance Sheet. The increase of $2,145 from October 21, 2015, was attributable to changes in the exchange rate, which is included in Accumulated other comprehensive loss, net, as Foreign currency translation adjustment, and accretion. The contingent consideration liability is recorded at an entity with an Australian dollar functional currency, such that related changes in the exchange rate do not impact net income (loss). The Company has not presented pro forma combined results of operations for this acquisition because the results of operations as reported in the accompanying Consolidated Statements of Income (Loss) would not have been materially different. The financial results of RARE Infrastructure included in Legg Mason's consolidated financial results for the year ended March 31, 2016, include revenues of $18,420, and did not have a material impact on Net Income (Loss) Attributable to Legg Mason, Inc. 84 | Legg Mason AR2016Table of Contents Martin Currie (Holdings) Limited On October 1, 2014, Legg Mason acquired all outstanding equity interests of Martin Currie (Holdings) Limited ("Martin Currie"), an international equity specialist based in the United Kingdom. The acquisition required an initial payment of $202,577 (using the foreign exchange rate as of October 1, 2014 for the £125,000 contract amount), which was funded from existing cash. In addition, contingent consideration payments may be due March 31 following the second and third anniversaries of closing, aggregating up to approximately $467,076 (using the foreign exchange rate as of March 31, 2016 for the maximum £325,000 contract amount), inclusive of the payment of certain potential pension and other obligations, and dependent on the achievement of certain financial metrics at March 31, 2017, and 2018, as specified in the share purchase agreement. The agreement provided for a potential first anniversary payment due as of March 31, 2016, however no such payment was due based on relevant financial metrics. The fair value of the amortizable intangible asset management contracts asset is being amortized over a period of 12 years. Goodwill is principally attributable to synergies expected to arise with Martin Currie. These acquired intangible assets and goodwill are not deductible for U.K. tax purposes. Management estimated the fair values of the indefinite-life intangible fund management contracts, indefinite-life trade name, and amortizable intangible asset management contracts based upon discounted cash flow analyses, using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in these analyses at acquisition, including projected annual cash flows, projected AUM growth rates and discount rates, are summarized as follows: Indefinite-life intangible fund management contracts and indefinite-life trade name Amortizable intangible asset management contracts Projected Cash Flow Growth Discount Rate 0% to 25% (weighted-average - 11%) 15.0% Projected AUM Growth / (Attrition) 6% / (17)% Discount Rate 15.0% The fair value of the contingent consideration was measured using Monte Carlo simulation with various unobservable market data inputs, which are Level 3 measurements. The simulation considered variables, including AUM growth, performance fee levels and relevant product performance. Projected AUM, performance fees and earn-out payments were discounted as appropriate. A summary of various assumption values follows: AUM growth rates Performance fee growth rates Discount rates: Projected AUM Projected performance fees Earn-out payments AUM volatility 0% to 28% (weighted-average - 14%) 0% to 30% (weighted-average - 15%) 13.0% 15.0% 1.3% 18.8% Significant future increases (decreases) in projected AUM or performance fees would result in a significantly higher (lower) contingent consideration liability fair value. The contingent consideration liability established at closing had an acquisition date fair value of $75,211 (using the foreign exchange rate as of October 1, 2014). Actual payments to be made may also include amounts for certain potential pension and other obligations that are accounted for separately. As of March 31, 2016, the fair value of the contingent consideration liability was $41,222, a decrease of $28,892 from March 31, 2015. During the year ended March 31, 2016, a decrease in projected AUM and performance fees resulted in a $28,361 reduction in the estimated contingent consideration liability, recorded as a credit to Other operating expense in the Consolidated Statement of Income (Loss). Changes related to the exchange rate of $531 for the year ended March 31, 2016, which are included in Accumulated other comprehensive loss, net, as Foreign currency translation adjustment, net of accretion, also impacted the contingent consideration liability. The contingent consideration liability is recorded at an entity with a British pound functional currency, such that related changes in the exchange rate do not impact net income (loss). The total contingent consideration liability as of March 31, 2016, Legg Mason AR2016 | 85Table of Contents includes $12,846 related to the second anniversary payment, which is included in current Contingent consideration in the Consolidated Balance Sheet, with the remainder included in non-current Contingent consideration in the Consolidated Balance Sheet. The Company has not presented pro forma combined results of operations for this acquisition because the results of operations as reported in the accompanying Consolidated Statements of Income (Loss) would not have been materially different. The financial results of Martin Currie included in Legg Mason's consolidated financial results for the year ended March 31, 2015, include revenues of $32,293 and did not have a material impact on Net Income (Loss) Attributable to Legg Mason, Inc. Martin Currie Defined Benefit Pension Plan Martin Currie sponsors a retirement and death benefits plan, a defined benefit pension plan with assets held in a separate trustee-administered fund. Plan assets are measured at fair value and comprised of 60% equities (Level 1) and 40% bonds (Level 2) as of March 31, 2016, and 58% equities (Level 1) and 42% bonds (Level 2) as of March 31, 2015. Assumptions used to determine the expected return on plan assets targets a 55% / 45% equity/bond allocation with reference to the 15- year FTSE U.K. Gilt yield for equities and U.K. long-dated bond yields for bonds. Plan liabilities are measured on an actuarial basis using the projected unit method and discounted at a rate equivalent to the current rate on a high quality bond in the local U.K. market and currency. There were no significant concentrations of risk in plan assets as of March 31, 2016 or 2015. The most recent actuarial valuation was performed as of May 31, 2013, which was updated through the acquisition and at subsequent balance sheet dates. Accrual of service credit under the plan ceased on October 3, 2014. The resulting net benefit obligation, comprised as follows, is included in the March 31, 2016 and 2015, Consolidated Balance Sheets as Other non-current liabilities: Fair value of plan assets (at 5.2 % and 6.3%, respectively, expected weighted-average long-term return) Benefit obligation (at 3.6% and 3.3%, respectively, discount rate) Unfunded status (excess of benefit obligation over plan assets) The change in the benefit obligation is summarized below: Beginning benefit obligation Interest costs Actuarial (gain) loss Benefits paid Plan curtailments Exchange rate changes Ending benefit obligation 2016 2015 $ 57,253 (90,010) (32,757) $ 59,404 (98,110) (38,706) Year ended March 31, 2016 Period from Acquisition through March 31, 2015 98,110 3,268 (6,922) (1,524) — (2,922) 90,010 $ $ 91,750 1,730 14,461 (762) (789) (8,280) 98,110 $ $ $ $ 86 | Legg Mason AR2016Table of Contents The change in plan assets is summarized below: Beginning plan assets Actual return on plan assets Employer contributions Benefits paid Exchange rate changes Ending plan assets Year ended March 31, 2016 Period from Acquisition through March 31, 2015 $ $ 59,404 (984) 2,262 (1,524) (1,905) 57,253 $ $ 59,317 6,028 1 (762) (5,180) 59,404 For the years ended March 31, 2016 and 2015, a net periodic loss (gain) of $92 and $(815), respectively, was included in Compensation and benefits expense in the Consolidated Statements of Income (Loss). The components of the net periodic loss (gain) for the year ended March 31, 2016, and for the period from acquisition through March 31, 2015, are as follows: Interest costs Expected return on plan assets Curtailment gain recognized Net periodic benefit loss (gain) 2016 2015 $ $ 3,268 (3,176) — 92 $ $ 1,730 (1,756) (789) (815) Net actuarial losses of $6,821 and $9,595 were included in Accumulated other comprehensive loss, net, in the Consolidated Balance Sheets at March 31, 2016 and 2015, respectively. As of March 31, 2016, the plan expects to make benefit payments over the next 10 fiscal years as follows: 2017 2018 2019 2020 2021 2022 - 2026 $ 1,195 1,281 1,559 1,537 1,884 14,789 The contingent consideration payments are expected to provide some, if not all, funding of the net plan benefit obligation, through a provision of the share purchase agreement requiring certain amounts to be paid to the plan. Any contingent consideration payments to the plan are based on determination of the plan benefit obligation under local technical provisions utilized by the plan trustees. Absent any such funding or any regulatory requirement for additional payments, Martin Currie expects to contribute $2,156 to the plan during the year ending March 31, 2017. The contingent consideration provisions of the share purchase agreement also require a designated percentage of the earn- out payments, net of any pension contribution, to be allocated to fund an incentive plan for Martin Currie's management. No payments to employees under the arrangement will be made until the end of the earn-out period. The estimated payment (adjusted quarterly) is being amortized over the earn-out term. Legg Mason AR2016 | 87Table of Contents Other In December 2015, Martin Currie acquired certain assets of PK Investment Management, LLP ("PK Investments"), a London based equity manager, for an initial cash payment of $4,981 and an estimated contingent payment of $2,469 due on December 31, 2017. The amount of any ultimate contingent payment will be based on certain financial metrics. The initial cash payment was funded with existing cash resources. In connection with the acquisition, Legg Mason recognized indefinite- life intangible fund management contracts and goodwill of $6,619 and $827, respectively. QS Investors Holdings, LLC Effective May 31, 2014, Legg Mason acquired all of the outstanding equity interests of QS Investors, a customized solutions and global quantitative equities provider. The initial purchase price was a cash payment of $11,000, funded from existing cash. In addition, contingent consideration of up to $10,000 and $20,000 for the second and fourth anniversary payments may be due in July 2016 and July 2018, respectively, dependent on the achievement of certain net revenue targets, and subject to a potential catch-up adjustment in the fourth anniversary payment for any second anniversary payment shortfall. The fair value of the amortizable intangible asset management contracts had a useful life of 10 years at acquisition. Purchase price allocated to goodwill is expected to be deductible for U.S. tax purposes over a period of 15 years. Management estimated the fair values of the amortizable intangible asset management contracts based upon a discounted cash flow analysis, and the contingent consideration expected to be paid and discounted, based upon probability-weighted revenue projections, using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in these analyses at acquisition including projected annual cash flows, revenues and discount rates, are summarized as follows: Amortizable intangible asset management contracts Contingent consideration Projected Cash Flow Attrition, Net (10.0)% Projected Revenue Growth Rates 0% to 10% (weighted-average - 6%) Discount Rate 15.0% Discount Rates 1.2% / 2.1% Goodwill is principally attributable to synergies expected to arise with QS Investors. The contingent consideration liability established at closing had an acquisition date fair value of $13,370. As of March 31, 2016, the fair value of the contingent consideration liability has accreted to $13,749, an increase of $196 from March 31, 2015. Of the $13,749, $6,549 relates to the second anniversary payment and is included in current Contingent consideration in the Consolidated Balance Sheet, with the remainder included in non-current Contingent consideration in the Consolidated Balance Sheet as of March 31, 2016. The Company has not presented pro forma combined results of operations for this acquisition because the results of operations as reported in the accompanying Consolidated Statements of Income (Loss) would not have been materially different. The financial results of QS Investors included in Legg Mason's consolidated financial results for the year ended March 31, 2015, include revenues of $12,340 and did not have a material impact on Net Income (Loss) Attributable to Legg Mason, Inc. Legg Mason integrated two existing affiliates, Batterymarch and LMGAA, into QS Investors to capture synergies and leverage the best capabilities of each entity. In connection with the integration, total charges for restructuring and transition costs of $38,404 were recognized through the completion of the plan in March 31, 2015, which includes $35,846, and $2,558 for the years ended March 31, 2015 and 2014, respectively, primarily recorded in Compensation and benefits in the Consolidated Statements of Income (Loss). These costs were primarily comprised of charges for employee termination benefits, including severance and retention incentives, as well as real estate related charges. Any additional charges related to the integration are not expected to be material. 88 | Legg Mason AR2016Table of Contents The table below presents a summary of changes in the restructuring and transition-related liability from December 31, 2013 through March 31, 2016 and cumulative charges incurred through the completion of the plan in fiscal 2015: Balance as of December 31, 2013 Accrued charges Balance as of March 31, 2014 Accrued charges Payments Balance as of March 31, 2015 Payments Balance as of March 31, 2016 Non-cash charges(2) Year ended March 31, 2014 Year ended March 31, 2015 Total Compensation — $ 2,161 2,161 22,897 (24,658) 400 (400) — $ $ $ $ — 1,659 1,659 26,717 $ $ $ $ $ Other Total — 111 111 9,720 (1) (3,940) 5,891 (2,148) 3,743 286 1,570 1,856 11,687 $ $ $ $ $ — 2,272 2,272 32,617 (28,598) 6,291 (2,548) 3,743 286 3,229 3,515 38,404 Cumulative charges incurred through March 31, 2015 (1) (2) Includes lease loss reserve of $6,760 for space permanently abandoned. Includes stock-based compensation expense and accelerated fixed asset depreciation. Fauchier Partners Management, Limited On March 13, 2013, Permal, a wholly-owned subsidiary of Legg Mason, acquired all of the outstanding share capital of Fauchier Partners Management, Limited ("Fauchier"), a European based manager of funds-of-hedge funds. The initial purchase price was a cash payment of $63,433, which was funded from existing cash resources. In May 2015, Legg Mason paid contingent consideration of $22,765 (using the exchange rate as of May 5, 2015 for the maximum £15,000 payment amount) for the second anniversary payment. Additional contingent consideration of up to approximately $28,743 (using the exchange rate as of March 31, 2016 for the £20,000 maximum contract amount), may be due on or about the fourth anniversary of closing, dependent on achieving certain levels of revenue, net of distribution costs. The fair value of the amortizable intangible asset management contracts is being amortized over a period of six years. These acquired intangible assets and goodwill are not deductible for U.K. tax purposes. Management estimated the fair values of the indefinite-life intangible fund management contracts based upon discounted cash flow analyses, and the contingent consideration expected to be paid based upon probability-weighted revenue projections, using unobservable market data inputs, which are Level 3 measurements. As is typical with the acquisition of a portion of a business from a larger financial services firm with other related operations, Legg Mason expected some initial contraction in the acquired business. The significant assumptions used in these analyses at acquisition, including projected annual cash flows, revenues and discount rates, are summarized as follows: Indefinite-life intangible fund management contracts Contingent consideration Projected Cash Flow Growth Rates (35)% to 11% (weighted-average - 6% ) Projected Revenue Growth Rates (16)% to 3% (weighted-average - (5)%) Discount Rate 16.0% Discount Rate 2.0% As of March 31, 2016, no contingent consideration liability was included in the Consolidated Balance Sheet, and a liability of $27,117 was included as of March 31, 2015. During the three months ended December 31, 2015, due to lower actual and expected performance fees earned over the earn out period, the contingent consideration liability was reduced by $5,014, recorded as a credit to Other operating expense in the Consolidated Statement of Income (Loss). The decrease of $27,117 from March 31, 2015, reflects this reduction and the payment discussed above, offset in part by changes in the exchange Legg Mason AR2016 | 89Table of Contents rate, net of accretion. In December 2015, Legg Mason closed the currency forward contracts that were previously executed to economically hedge the risk of movements in the exchange rate between the U.S. dollar and the British pound in which the estimated contingent liability payment amounts were denominated. See Note 15 for additional information regarding derivatives and hedging. Precidian Investments, LLC On January 22, 2016, Legg Mason acquired a minority equity position in Precidian Investments, LLC ("Precidian"), a firm specializing in creating innovative products and solutions and solving market structure issues, particularly with regard to the Exchange Traded Funds marketplace. The transaction required a cash payment, which was funded from existing cash resources. Under the terms of the transaction, Legg Mason acquired series B preferred units of Precidian that entitle Legg Mason to approximately 20% of the voting and economic interests of Precidian, along with customary preferred equity protections. At its sole option during the 48 months following the initial investment, Legg Mason may, subject to satisfaction of certain closing conditions, convert its preferred units to 75% of the common equity of Precidian on a fully diluted basis. Legg Mason accounts for its investment in Precidian, which is included in Other assets in the Consolidated Balance Sheet as of March 31, 2016, under the equity method of accounting. EnTrustPermal On May 2, 2016, Legg Mason closed a transaction to combine Permal, Legg Mason's existing hedge fund platform, with EnTrust, an alternative asset management firm with largely complimentary investment strategies, investor base and business mix to Permal. In connection with the combination, Legg Mason expects to incur total restructuring and transition-related charges of approximately $100,000, primarily comprised of charges for employee termination benefits, including severance and retention incentives, and real estate related charges. Charges for restructuring and transition costs for the year ended March 31, 2016, were $43,296, primarily recorded as Transition-related compensation in the Consolidated Statement of Income (Loss). Legg Mason expects that approximately $40,000 to $50,000 of the remaining anticipated costs associated with the combination will be incurred in the year ending March 31, 2017. The table below presents a summary of changes in the restructuring and transition-related liability from December 31, 2015 through March 31, 2016 and cumulative charges incurred through March 31, 2016: Balance as of December 31, 2015 Accrued charges Payments Balance as of March 31, 2016 Non-cash charges(2) Year ended March 31, 2016 Cumulative charges incurred through March 31, 2016 Compensation $ — $ 31,581 (21,938) 9,643 591 32,172 $ $ $ $ $ $ Other Total — 9,981 (1) (2,097) 7,884 1,143 11,124 $ $ $ $ — 41,562 (24,035) 17,527 1,734 43,296 (1) (2) Includes lease loss reserve of $7,212 for space permanently abandoned. Includes stock-based compensation expense and accelerated fixed asset depreciation. Clarion Partners On April 13, 2016, Legg Mason acquired a majority equity interest in Clarion Partners, a diversified real estate asset management firm based in New York. Clarion Partners managed approximately $41,500,000 in AUM as of April 30, 2016. See Note 18 for additional information regarding the acquisitions of EnTrust and Clarion Partners. Disposition Legg Mason Investment Counsel & Trust On November 7, 2014, Legg Mason completed the previously announced sale of all of its equity interests in Legg Mason Investment Counsel & Trust Company N.A. ("LMIC") for proceeds of $47,000 to Stifel Financial Corporation's Global 90 | Legg Mason AR2016Table of Contents Wealth Management segment. The sale did not have a material impact on Legg Mason's consolidated financial condition or results of operations. 3. INVESTMENTS AND FAIR VALUES OF ASSETS AND LIABILITIES The disclosures below include details of Legg Mason's financial assets and financial liabilities that are measured at fair value, excluding the financial assets and financial liabilities of CIVs. See Note 17, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the assets and liabilities of CIVs that are measured at fair value. The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs: Assets: Cash equivalents:(1) Money market funds Time deposits and other Total cash equivalents Trading investments of proprietary fund products and other trading investments:(2) Seed capital investments Other(3) Trading investments relating to long-term incentive compensation plans(4) Equity method investments relating to proprietary fund products and long-term incentive compensation plans:(5) Seed capital investments Investments related to long-term incentive compensation plans Total current investments(6) Equity method investments in partnerships and LLCs:(5)(7) Seed capital investments Investments related to long-term incentive compensation plans Other Investments in partnerships and LLCs(7) Derivative assets(7)(8) Other investments(7) Total Liabilities: Contingent consideration liabilities(9) Derivative liabilities(8) Total Quoted prices in active markets (Level 1) As of March 31, 2016 Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total $ $ 1,057,916 — 1,057,916 — $ 35,265 35,265 — $ 1,057,916 — 35,265 — 1,093,181 205,608 65,112 105,979 1,329 — 378,028 120,216 2,352 585 7,575 6,467 137,195 112 — 325,936 67,464 — 106,564 — — 112 8,904 6,467 515,335 — — 20,439 20,439 — — — 1,051 — 1,436,995 $ — (18,079) (18,079) $ $ $ — — — 7,599 — 180,059 $ 7,501 9,352 8,013 — 83 45,500 7,501 9,352 8,013 8,650 83 $ 1,662,554 — — — $ (84,585) — (84,585) (18,079) (84,585) $ (102,664) Legg Mason AR2016 | 91Table of Contents Assets: Cash equivalents:(1) Money market funds Time deposits and other Total cash equivalents Trading investments of proprietary fund products and other trading investments:(2) Seed capital investments Other Trading investments relating to long-term incentive compensation plans(4) Equity method investments relating to proprietary fund products and long-term incentive compensation plans:(5) Seed capital investments Investments related to long-term incentive compensation plans Total current investments(6) Equity method investments in partnerships and LLCs:(5)(7) Seed capital investments Investments related to long-term incentive compensation plans Other As of March 31, 2015 Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Total $ $ 353,265 — 353,265 — $ 47,035 47,035 — $ — — 353,265 47,035 400,300 259,840 9,807 80,529 2,148 — 352,324 85,220 2,981 — 5,296 8,728 102,225 186 — — — — 186 345,246 12,788 80,529 7,444 8,728 454,735 — — 23,796 23,796 5,595 18,953 14,511 — 77 63,118 5,595 18,953 14,511 6,042 77 924,009 — — — 580 — 706,169 — — — 5,462 — 154,722 Investments in partnerships and LLCs(7) Derivative assets(7)(8) Other investments(7) Total Liabilities: Contingent consideration liabilities(9) (110,784) Derivative liabilities(8) (8,665) (110,784) $ (119,449) Total (1) Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at NAV and are classified as Level 1. Cash investments in time deposits and other are measured at amortized cost, which approximates fair value because of the short time between purchase of the instrument and its expected realization, and are classified as Level 2. — (8,665) (8,665) $ — — — $ (110,784) — $ $ $ $ $ (2) Trading investments of proprietary fund products and other trading investments consist of approximately 68% and 32% of equity and debt securities, respectively, as of March 31, 2016, and approximately 63% and 37% of equity and debt securities, respectively, as of March 31, 2015. Includes $54,392 in noncontrolling interests associated with consolidated seed investment products as of March 31, 2016. (3) (4) Primarily mutual funds where there is minimal market risk to the Company as any change in value is primarily offset by an adjustment to compensation expense and related deferred compensation liability. (5) Legg Mason's equity method investments that are investment companies record underlying investments at fair value. Therefore, fair value is measured using Legg Mason's share of the investee's underlying net income or loss, which is predominately representative of fair value adjustments in the investments held by the equity method investee. (6) Excludes seed capital investments of $13,641 and $15,553 related to Legg Mason's investments in CIVs as of March 31, 2016 and 2015, respectively. (7) Amounts are included in Other non-current assets in the Consolidated Balance Sheets for each of the periods presented. (8) See Note 15. (9) See Note 2 and Note 8. 92 | Legg Mason AR2016Table of Contents Proprietary fund products include seed capital investments made by Legg Mason to fund new investment strategies and products. Legg Mason had seed capital investments in proprietary fund products, which totaled $368,920 and $392,039, as of March 31, 2016 and 2015, respectively, which are substantially comprised of investments in 63 funds and 52 funds, respectively, that are individually greater than $1,000, with minimal third-party investment, and together comprise over 90% of the total seed capital investments at each period end. See Notes 1 and 17 for information regarding the determination of whether investments in proprietary fund products represent VIEs and consolidation. Substantially all of the above financial instruments where valuation methods rely on other than observable market inputs as a significant input utilize the equity method, the cost method, or NAV practical expedient discussed below, such that measurement uncertainty has little relevance. The net realized and unrealized gain (loss) for investment securities classified as trading was $(27,654), $10,545, and $22,963 for the years ended March 31, 2016, 2015, and 2014, respectively. The net unrealized gains (losses) relating to trading investments still held as of the reporting dates were $(35,111), $(10,858), and $26,618 for the years ended March 31, 2016, 2015, and 2014, respectively. Legg Mason AR2016 | 93Table of Contents The changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the years ended March 31, 2016 and 2015, are presented in the tables below: Value as of March 31, 2015 Purchases Sales Redemptions/ Settlements/ Other Transfers Realized and unrealized gains/ (losses), net Value as of March 31, 2016 Assets: Trading investments of seed capital investments in proprietary fund products Investments in partnerships and LLCs Equity method investments in partnerships and LLCs: Seed capital investments Investments related to long-term incentive compensation plans Other Other investments Liabilities: Contingent consideration liabilities n/a - not applicable $ 186 $ 1 $ (80) $ — $ — $ 5 $ 112 14,511 — (27) (5,647) — (824) 8,013 23,796 678 — (3,127) — (908) 20,439 5,595 18,953 77 63,118 $ 1,906 — — (6,774) — — $ (6,881) $ 2,585 — (2,037) — (10,811) $ — — — — $ — (790) 6 (2,511) $ 7,501 9,352 83 45,500 $ $ (110,784) $ (27,457) n/a $ 22,765 n/a $ 30,891 $ (84,585) 94 | Legg Mason AR2016Table of Contents Assets: Trading investments of seed capital investments in proprietary fund products Investments in partnerships and LLCs Equity method investments in partnerships and LLCs: Seed capital investments Investments related to long- term incentive compensation plans Other Other investments Liabilities: Contingent consideration liabilities n/a - not applicable $ $ Value as of March 31, 2014 Purchases Sales Redemptions/ Settlements/ Other Transfers Realized and unrealized gains/ (losses), net Value as of March 31, 2015 $ 190 $ 2 $ (27) $ — $ — $ 21 $ 186 21,586 — (24) (5,108) — (1,943) 14,511 33,611 725 (11,617) 1,426 — (349) 23,796 4,284 25,078 90 84,839 $ 1,311 12 — 2,050 — (2,484) — $(14,152) $ — (2,547) — (6,229) $ — — — — $ — (1,106) (13) (3,390) $ 5,595 18,953 77 63,118 (29,553) $ (88,581) n/a $ — n/a $ 7,350 $ (110,784) Realized and unrealized gains and losses recorded for Level 3 investments are primarily included in Other Non-Operating Income (Expense) in the Consolidated Statements of Income (Loss). The change in unrealized gains (losses) for Level 3 investments and liabilities still held at the reporting date was $24,182, $2,439, $(5,210) and for the years ended March 31, 2016, 2015, and 2014, respectively. There were no significant transfers between Level 1 and Level 2 during the years ended March 31, 2016 and 2015. Legg Mason AR2016 | 95Table of Contents As a practical expedient, Legg Mason relies on the NAV of certain investments as their fair value. The NAVs that have been provided by the investees have been derived from the fair values of the underlying investments as of the respective reporting dates. The following table summarizes, as of March 31, 2016 and 2015, the nature of these investments and any related liquidation restrictions or other factors which may impact the ultimate value realized: Fair Value Determined Using NAV As of March 31, 2016 March 31, 2016 March 31, 2015 Unfunded Commitments Remaining Term $ 19,139 (1) $ 23,787 n/a n/a Category of Investment Funds-of- hedge funds Hedge funds Private equity funds Investment Strategy Global macro, fixed income, long/short equity, natural resources, systematic, emerging market, European hedge Fixed income - developed market, event driven, fixed income - hedge, relative value arbitrage, European hedge 11,403 14,515 $ 20,000 n/a Up to 8 years Various (3) Long/short equity 20,471 (2) 23,563 8,254 Various Other Total n/a - not applicable (1) Liquidation restrictions: 2% daily redemption, 11% monthly redemption and 87% quarterly redemption as of March 31, 2016. (2) Liquidations are expected over the remaining term. (3) Of this balance, 28% has a remaining term of less than one year and 72% has a remaining term of 16 years. (4) Comprised of 1%, 36%, and 63% of Level 1, Level 2, and Level 3 assets, respectively, as of March 31, 2016 and 38% and 62% of Level 2 and 1,129 62,994 (4) $ n/a 28,254 51,691 (4) $ 678 $ Level 3 assets, respectively, as of March 31, 2015. There are no current plans to sell any of these investments held as of March 31, 2016. As of March 31, 2016 and 2015, Legg Mason did not hold any available-for-sale investments. 4. FIXED ASSETS The following table reflects the components of fixed assets as of March 31: Equipment Software Leasehold improvements Total cost Less: accumulated depreciation and amortization Fixed assets, net 2016 2015 $ $ 150,259 293,844 199,354 643,457 (480,152) 163,305 $ $ 152,893 269,745 203,420 626,058 (446,452) 179,606 Depreciation and amortization expense related to fixed assets was $55,318, $52,461, and $50,531 for the years ended March 31, 2016, 2015, and 2014, respectively. The expense includes accelerated depreciation and amortization of $4,147 in fiscal 2016 primarily related to reduced space requirements and the restructuring of Permal for the combination with EnTrust, $1,265 in fiscal 2015 primarily related to the integration of Batterymarch into QS Investors, and $2,542 in fiscal 2014 primarily related to various corporate initiatives. 96 | Legg Mason AR2016Table of Contents 5. INTANGIBLE ASSETS AND GOODWILL Goodwill and indefinite-life intangible assets are not amortized, and the values of other identifiable intangible assets are amortized over their useful lives, unless the assets are determined to have indefinite useful lives. Goodwill and indefinite- life intangible assets are analyzed to determine if the fair value of the assets exceeds the book value. Intangible assets subject to amortization are considered for impairment at each reporting period. If the fair value is less than the book value, Legg Mason will record an impairment charge. The following table reflects the components of intangible assets as of: Amortizable intangible asset management contracts Cost Accumulated amortization Net(1) Indefinite–life intangible assets U.S. domestic mutual fund management contracts Permal funds-of-hedge funds management contracts Other fund management contracts(1) Trade names(1) March 31, 2016 March 31, 2015 $ 259,513 (171,169) $ 88,344 2,106,351 334,104 560,499 188,312 (166,583) 21,729 2,106,351 698,104 427,816 59,334 3,291,605 3,313,334 Intangible assets, net (1) As of March 31, 2016, Amortizable intangible asset management contracts, net, Other fund management contracts, and Trade names include $69,610, 57,187 3,058,141 3,146,485 $ $ $130,419, and $5,063, respectively, related to the acquisition of RARE Infrastructure. See Note 2 for additional information. Certain of Legg Mason's intangible assets are denominated in currencies other than the U.S. dollar and balances related to these assets will fluctuate with changes in the related foreign currency exchange rates. Legg Mason completed its annual impairment testing process as of December 31, 2015, and determined that the carrying value of the Permal indefinite-life funds-of-hedge funds management contracts intangible asset, inclusive of the related indefinite-life funds-of-hedge funds management contracts intangible asset from Fauchier, and the Permal trade name asset exceeded their respective fair values, and the assets were impaired by an aggregate amount of $371,000. The impairment charges resulted from a number of current trends and factors, including (i) periods of moderate inflows or outflows over recent years and related reductions in AUM; (ii) reduced growth assumptions for the next five years; (iii) a decrease in projected margins for the next two years; and (iv) an increase in the rate used to discount projected future cash flows primarily due to company specific factors including continued market influences. These changes resulted in a reduction of the projected cash flows and Legg Mason's overall assessment of fair value of the assets such that the fair values of the Permal funds-of- hedge funds contracts asset and Permal trade name declined below their carrying values, and accordingly were impaired by $364,000 and $7,000, respectively. Management estimated the fair values of these assets based upon discounted cash flow analyses using unobservable market data inputs, which are Level 3 measurements. The significant assumptions used in these cash flow analyses included projected revenue growth rates and discount rates. Total revenues related to the Permal funds-of-hedge funds contracts were assumed to have annual growth rates ranging from (6)% to 6% (average - 5%), and the projected cash flows from the Permal funds- of-hedge funds contracts were discounted at 16.5%. Projected revenue growth rates for these assets are most dependent on client AUM flows, changes in market conditions, and product investment performance. Discount rates are also influenced by changes in market conditions, as well as interest rates and other factors. Decreases in the projected revenue growth rates and/or increases in the discount rates could result in lower fair value measurements and potential additional impairments. There were no other impairments to indefinite-life intangible assets, amortizable management contracts intangible assets, or goodwill as of December 31, 2015. Legg Mason also determined that no triggering events occurred as of March 31, 2016, that would require further impairment testing. Legg Mason AR2016 | 97Table of Contents The December 31, 2015, assessed fair value of the indefinite-life domestic mutual funds contracts asset related to the Citigroup Asset Management ("CAM") acquisition exceeds the carrying value by 48%. As of March 31, 2016, amortizable intangible asset management contracts are being amortized over a weighted-average remaining life of 10.9 years. Estimated amortization expense for each of the next five fiscal years is as follows: 2017 2018 2019 2020 2021 Thereafter Total The change in the carrying value of goodwill is summarized below: Balance as of March 31, 2014 Impact of excess tax basis amortization Business acquisitions, net of $(9,271) relating to the sale of LMIC (See Note 2) Changes in foreign exchange rates and other Balance as of March 31, 2015 Impact of excess tax basis amortization Business acquisitions (See Note 2) Changes in foreign exchange rates and other Balance as of March 31, 2016 Gross Book Value 2,402,423 (21,742) $ 165,927 (45,198) 2,501,410 (20,920) 163,110 (2,184) 2,641,416 $ Accumulated Impairment $ (1,161,900) $ — — — (1,161,900) — — — $ (1,161,900) $ $ $ 8,569 8,569 8,569 8,085 8,085 46,467 88,344 Net Book Value 1,240,523 (21,742) 165,927 (45,198) 1,339,510 (20,920) 163,110 (2,184) 1,479,516 Legg Mason recognizes the tax benefit of the amortization of excess tax benefit related to the CAM acquisition. In accordance with accounting guidance for income taxes, the tax benefit is recorded as a reduction of goodwill and deferred tax liabilities as the benefit is realized. 6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings In June 2012, Legg Mason entered into an unsecured credit agreement which provided for a $500,000 revolving credit facility. In January 2014, Legg Mason entered into a $250,000 incremental borrowing credit facility, which was contemplated in, and was in addition to the $500,000 revolving credit facility. Both revolving credit facilities were to expire in June 2017. The revolving credit facilities had interest rates of LIBOR plus 150 basis points and annual commitment fees of 20 basis points and were available for capital needs and for general corporate purposes. In October 2015, Legg Mason borrowed $40,000 under these facilities to partially finance the acquisition of RARE Infrastructure. There were no borrowings outstanding under these facilities as of March 31, 2015. On December 29, 2015, Legg Mason entered into a new unsecured credit agreement which provides for a $1,000,000 multi- currency revolving credit facility. Legg Mason borrowed $40,000 under this revolving credit facility, which remained outstanding as of March 31, 2016, and used the proceeds to repay the $40,000 of outstanding borrowings under its previous revolving credit facility, as discussed above. The previous revolving credit facility was terminated effective upon the repayment. 98 | Legg Mason AR2016Table of Contents The new revolving credit facility may be increased by an aggregate amount of up to $500,000, subject to the approval of the lenders, expires in December 2020, and can be repaid at any time. The revolving credit facility has an interest rate of the monthly Eurocurrency Rate plus 125 basis points and an annual commitment fee of 17.5 basis points. As of March 31, 2016, the effective interest rate was 1.9%. Interest is payable at least quarterly on any amounts outstanding under the revolving credit facility and the interest rate may change in the future based on changes in Legg Mason's credit ratings. This revolving credit facility is available to fund working capital needs and for general corporate purposes. The revolving credit facility has standard financial covenants. These covenants were modified in March 2016 and include: maximum net debt to EBITDA ratio (as defined in the documents) of 3.5 to 1 for the period from March 31, 2016 through September 30, 2016, 3.25 to 1 for the period from October 1, 2016 through December 31, 2016, and 3.0 to 1 thereafter; and minimum EBITDA to interest ratio (as defined in the documents) of 4.0 to 1. As of March 31, 2016, Legg Mason's net debt to EBITDA ratio was 1.3 to 1 and EBITDA to interest expense ratio was 13.0 to 1, and therefore, Legg Mason has maintained compliance with the applicable covenants. As of March 31, 2016 and 2015, Legg Mason had $960,000 and $750,000 of undrawn revolving credit facility capacity. On April 29, 2016, Legg Mason entered into a forward starting, amortizing interest rate swap agreement with a financial intermediary, which was designated as a cash flow hedge. The interest rate swap is being used to hedge interest rate risk on outstanding borrowings under the revolving credit facility. The swap has a 4.67-year term, with five reductions beginning on March 31, 2017, and expires on December 29, 2020. Under the terms of the interest rate swap agreement, Legg Mason will pay a fixed interest rate of 2.3% on a notional amount of $500,000. As previously discussed, the interest rate on the revolving credit facility may change in the future based on changes in Legg Mason's credit ratings, and such a change would result in a corresponding change in the fixed interest rate paid under the interest rate swap agreement. The interest rate swap has similar terms to the underlying debt being hedged. Changes in the market value of the interest rate swap will be recorded in Other comprehensive income on the Consolidated Balance Sheets. In May 2016, Legg Mason used additional borrowings under the new revolving credit facility to finance the acquisition of EnTrust, as further discussed in Note 18, and to replenish cash used to complete the acquisitions of Clarion Partners in April 2016 and RARE Infrastructure in October 2015. The amount of total borrowings outstanding under this facility is $500,000, as of the date of filing. Long-term Debt Long-term debt consists of the following: March 31, 2016 Carrying Value Fair Value Hedge Adjustment Unamortized Discount (Premium) (7,599) $ — 359 377 Debt Issuance Costs(1) $ 1,185 Maturity Amount $ 250,000 1,595 2,970 5,615 — (3,396) — 7,909 (2,660) $ 19,274 250,000 450,000 550,000 250,000 March 31, 2015 Carrying Value(1) $ 253,452 247,792 — 547,702 — $ 1,750,000 $1,048,946 2.7% Senior Notes due July 2019 $ 256,055 $ 3.95% Senior Notes due July 2024 4.75% Senior Notes due March 2026 5.625% Senior Notes due January 2044 6.375% Junior Notes due March 2056 248,028 447,030 547,781 242,091 Total $1,740,985 $ — — — (7,599) $ (1) As previously discussed in Note 1, for the year ended March 31, 2016, Legg Mason elected to early adopt updated accounting guidance which requires unamortized debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated long- term debt liability. This updated guidance was adopted on a retrospective basis; therefore, the carrying value of debt as of March 31, 2015, has been reduced by the amount of related unamortized debt issuance costs. In March 2016, Legg Mason issued $450,000 of 4.75% Senior Notes due 2026 (the "2026 Notes") and $250,000 of 6.375% Junior Subordinated Notes due 2056 (the "2056 Notes"). Legg Mason used the net proceeds of these offerings to finance the acquisitions of EnTrust in May 2016 and Clarion Partners in April 2016, as further discussed in Note 18. Legg Mason AR2016 | 99Table of Contents In May 2012, Legg Mason repurchased the Company's then outstanding 2.5% convertible notes (the "Convertible Notes"). The terms of the repurchase included a non-cash exchange of warrants to the holders of the Convertible Notes that replicated and extended the contingent conversion feature of the Convertible Notes. The warrants issued to the holders of the Convertible Notes in connection with the repurchase of the Convertible Notes provide for the purchase, in the aggregate and subject to adjustment, of 14,205 shares of our common stock, on a net share settled basis, at an exercise price of $88 per share. The warrants expire in July 2017 and can be settled, at the Company's election, in either shares of common stock or cash. Accordingly, the warrants are accounted for as equity. In January 2014, Legg Mason issued $400,000 of 5.625% Senior Notes due January 2044, the net proceeds of which, together with cash on hand, were used to repay the $450,000 of borrowings under the Company's then outstanding five-year term loan. The 5.625% Senior Notes were sold at a discount of $6,260, which is being amortized to interest expense over the 30-year term. In June 2014, Legg Mason issued $250,000 of 2.7% Senior Notes due 2019 (the "2019 Notes"), $250,000 of 3.95% Senior Notes due 2024 (the "2024 Notes"), and an additional $150,000 of the existing 5.625% Senior Notes due 2044 (the "2044 Notes" and, together with the 2019 Notes and the 2024 Notes, the "Notes"). In July 2014, the Company used $658,769 in proceeds from the sale of the Notes, net of related fees, together with cash on hand, to call the then outstanding $650,000 of 5.5% Senior Notes and pay a related make-whole premium of $98,418, as discussed below. On June 23, 2014, Legg Mason entered into a reverse treasury rate lock contract with a financial intermediary with a notional amount of $650,000, which was designated as a cash flow hedge. The contract was issued in connection with the retirement of the 5.5% Senior Notes. The Company entered into the reverse treasury rate lock agreement in order to hedge the variability in the retirement payment on the entire principal amount of debt. The reverse treasury rate lock contract effectively fixed the present value of the forecasted debt make-whole payment which was priced on July 18, 2014, to eliminate risk associated with changes in the five-year U.S. treasury yield. The 5.5% Senior Notes were retired on July 23, 2014, and resulted in a pre-tax, non-operating charge of $107,074, consisting of a make-whole premium of $98,418 to call the 5.5% Senior Notes, net of $638 from the settlement of the reverse treasury lock before related administrative fees, and $8,656 associated with existing deferred charges and original issue discount. 2.7% Senior Notes due July 2019 The $250,000 2019 Notes were sold at a discount of $553, which is being amortized to interest expense over the five-year term. The 2019 Notes can be redeemed at any time prior to the scheduled maturity in part or in aggregate, at the greater of the related principal amount at that time or the sum of the remaining scheduled payments discounted at the treasury rate (as defined) plus 0.20%, together with any related accrued and unpaid interest. On June 23, 2014, Legg Mason entered into an interest rate swap contract with a financial intermediary with a notional amount of $250,000, which was designated as a fair value hedge. The interest rate swap was being used to effectively convert the 2019 Notes from fixed rate debt to floating rate debt and has identical terms as the underlying debt being hedged, so no ineffectiveness is expected. The related hedging gains and losses offset one another resulting in no net income or loss impact. The swap has a five-year term, and matures on July 15, 2019. The fair value of the contract at March 31, 2016 and 2015, was a derivative asset of $7,599 and $5,462, respectively, classified as Other assets in the Consolidated Balance Sheets. The increase of $2,137 and $5,462 for the years ended March 31, 2016 and 2015, respectively, reflects a gain on hedging activity related to the fair value adjustment on the derivative asset, which is recorded as Other income (gain on hedging activity) in the Consolidated Statements of Income (Loss). The carrying value of the debt in the Consolidated Balance Sheets was likewise increased by $7,599 and $5,462 as of March 31, 2016 and 2015, respectively. The increase of $2,137 and $5,462 for the years ended March 31, 2016 and 2015, respectively, reflects a loss on hedging activity related to the fair value adjustment on the debt, which is recorded as Other expense (loss on hedging activity) in the Consolidated Statements of Income (Loss). The swap payment dates coincide with the debt payment dates on July 15 and January 15. The related receipts/payments by Legg Mason are recorded as Interest expense in the Consolidated Statements of Income (Loss). Since the original terms and conditions of the hedged instruments are unchanged, the swap was an effective fair value hedge. On April 21, 2016, the fair value hedge swap was terminated for a receipt of approximately $6,500, which will be amortized over the hedge term. 100 | Legg Mason AR2016Table of Contents 3.95% Senior Notes due July 2024 The $250,000 2024 Notes were sold at a discount of $458, which is being amortized to interest expense over the 10-year term. The 2024 Notes can be redeemed at any time prior to the scheduled maturity in part or in aggregate, at the greater of the related principal amount at that time or the sum of the remaining scheduled payments discounted at the treasury rate (as defined) plus 0.25%, together with any related accrued and unpaid interest. 4.75% Senior Notes due March 2026 The $450,000 2026 Notes were sold at a discount of $207, and Legg Mason incurred debt issuance costs of $2,970 in connection with the issuance. The 2026 Notes can be redeemed in part or in aggregate at the greater of the related principal amount at the time of redemption or the sum of the remaining scheduled payments discounted at the treasury rate (as defined) plus 0.45%, together with any related accrued and unpaid interest. 5.625% Senior Notes due January 2044 As previously discussed, in January 2014, Legg Mason issued $400,000 of 5.625% Senior Notes, sold at a discount of $6,260, which is being amortized to interest expense over the 30-year term. An additional $150,000 of 2044 Notes were issued in June 2014 and were sold at a premium of $9,779, which is also being amortized to interest expense over the 30- year term. All of the 2044 Notes can be redeemed at any time prior to their scheduled maturity in part or in aggregate, at the greater of the related principal amount at that time or the sum of the remaining scheduled payments discounted at the treasury rate (as defined) plus 0.30%, together with any related accrued and unpaid interest. 6.375% Junior Subordinated Notes due March 2056 The $250,000 2056 Notes were issued at 100% of principal amount and Legg Mason incurred debt issuance costs of $7,909 in connection with the issuance. The 2056 Notes rank junior and subordinate in right of payment to all of Legg Mason's current and future senior indebtedness. Prior to March 15, 2021, the 2056 Notes can be redeemed in aggregate, but not in part, at 100% of the principal amount, plus any accrued and unpaid interest, if called for a tax event (as defined), or 102% of the principal amount, plus any accrued and unpaid interest, if called for a rating agency event (as defined). On or after March 15, 2021, the 2056 Notes can be redeemed in aggregate or in part, at 100% of the principal amount, plus any related accrued and unpaid interest. As of March 31, 2016, $250,000 of long-term debt matures in fiscal 2020, and $1,500,000 matures thereafter. Legg Mason AR2016 | 101Table of Contents 7. INCOME TAXES The components of income (loss) before income tax provision are as follows: Domestic Foreign Total The components of income tax expense (benefit) are as follows: Federal Foreign State and local Total income tax provision Current Deferred Total income tax provision 2016 245,046 (270,264) (25,218) $ $ 2015 249,380 118,613 367,993 2016 87,166 (71,828) (7,646) 7,692 15,419 (7,727) 7,692 $ $ $ $ 2015 95,499 20,365 9,420 125,284 24,897 100,387 125,284 2014 320,890 98,751 419,641 2014 125,494 (1,450) 13,761 137,805 19,375 118,430 137,805 $ $ $ $ $ $ $ $ $ $ $ $ A reconciliation of the difference between the effective income tax rate and the statutory federal income tax rate is as follows: Tax provision at statutory U.S. federal income tax rate State income taxes, net of federal income tax benefit(1) Uncertain tax benefits Effect of foreign tax rates(1) Changes in U.K. tax rates on deferred tax assets and liabilities Net (income) loss attributable to noncontrolling interests Change in valuation allowances(2) Federal effect of permanent tax adjustments Other, net Effective income tax rate 2016 35.0 % 43.2 41.8 (172.5) 33.2 (15.6) (33.9) 39.1 (0.8) (30.5)% 2015 2014 35.0% 4.0 1.8 (4.8) — (0.5) (2.7) 1.7 (0.5) 34.0% 35.0% 1.0 0.6 (4.8) (4.6) 0.3 2.2 2.2 0.9 32.8% (1) State income taxes include changes in valuation allowances related to change in apportionment and provision to return differences, net of the impact on deferred tax assets of changes in state apportionment factors and planning strategies. The effect of foreign tax rates for fiscal 2016 also includes a $66,780 tax benefit for non-cash impairment charges related to the intangible assets of the Permal business, as further discussed in Note 5. (2) See schedule below for the change in valuation allowances by jurisdiction. In July 2013, the Finance Bill 2013 was enacted, which reduced the main U.K. corporate tax rate from 23% to 21% effective April 1, 2014, and 20% effective April 1, 2015. In November 2015, the U.K. Finance Bill 2015 was enacted, which further reduced the main U.K. corporate tax rate to 19% effective April 1, 2017, and to 18% effective April 1, 2020. The reductions in the U.K. corporate tax rate resulted in tax benefits of $8,383 and $19,164, recognized in fiscal 2016 and 2014, respectively, as a result of the revaluation of deferred tax assets and liabilities at the new rates. 102 | Legg Mason AR2016Table of Contents Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Consolidated Balance Sheets. These temporary differences result in taxable or deductible amounts in future years. A summary of Legg Mason's deferred tax assets and liabilities are as follows: DEFERRED TAX ASSETS Accrued compensation and benefits Accrued expenses Operating loss carryforwards Capital loss carryforwards Foreign tax credit carryforward Federal benefit of uncertain tax positions Mutual fund launch costs Martin Currie defined benefit pension liability Charitable contributions carryforwards Net unrealized losses from investments Basis differences in partnerships Other Deferred tax assets Valuation allowance Deferred tax assets after valuation allowance DEFERRED TAX LIABILITIES Basis differences, principally for intangible assets and goodwill Depreciation and amortization Net unrealized gains from investments Basis differences in partnerships Other Deferred tax liabilities Net deferred tax liabilities 2016 2015 $ $ $ $ 185,311 50,865 273,133 3,121 258,486 12,290 30,234 5,896 4,552 4,389 — 5,181 833,458 (79,476) 753,982 $ $ $ 56,625 686,421 — 64,525 — 807,571 (53,589) $ 158,369 60,282 290,765 5,335 247,027 18,461 30,968 7,741 — — 4,174 — 823,122 (96,687) 726,435 82,636 666,057 7,832 — 435 756,960 (30,525) Certain tax benefits associated with Legg Mason's employee stock plans are recorded directly in Stockholders' Equity. No tax benefit was recorded to equity in fiscal 2016, 2015 or 2014, due to the cumulative net operating loss position of the Company. As of March 31, 2016, an aggregate $22,585 of tax benefit will be recognized as an increase in Stockholders' Equity when the related net operating losses are ultimately realized. Legg Mason has various loss and tax credit carryforwards that may provide future tax benefits. Related valuation allowances are established in accordance with accounting guidance for income taxes, if it is management's opinion that it is more likely than not that these benefits will not be realized. To the extent the analysis of the realization of deferred tax assets relies on deferred tax liabilities, Legg Mason has considered the timing, nature, and jurisdiction of reversals, as well as, future increases relating to the tax amortization of goodwill and indefinite-life intangible assets. On March 1, 2016, Legg Mason executed agreements with the management of its wholly-owned subsidiary Royce and Associates ("Royce") which changed the tax reporting of Royce from a disregarded entity to a partnership. As a result, Legg Mason's deferred balance for tax basis differences in partnership investments changed by $68,526 with an offsetting change to the tax basis of other temporary differences. Substantially all of Legg Mason's deferred tax assets relate to U.S. federal, state and U.K. taxing jurisdictions. As of March 31, 2016, U.S. federal deferred tax assets aggregated $711,535, realization of which is expected to require approximately $3,200,000 of future U.S. earnings, of which $740,000 must be foreign sourced earnings. Based on estimates of future taxable income, using assumptions consistent with those used in Legg Mason's goodwill impairment testing, it is more likely than not that substantially all of the current federal tax benefits relating to net operating losses will be realizable. With respect to deferred tax assets relating to foreign tax credit carryforwards, it is more likely than not that tax benefits relating Legg Mason AR2016 | 103Table of Contents to the utilization of approximately $23,465 of foreign taxes as credits will not be realized and a valuation allowance has been established. Further, the Company's estimates and assumptions do not contemplate certain possible future changes in the ownership of Legg Mason stock, which, under the U.S. Internal Revenue Code, could limit the utilization of net operating loss and foreign tax credit benefits. Any such limitation would impact the timing or amount of net operating loss or foreign tax credit benefits ultimately realized before they expire. As of March 31, 2016, federal valuation allowances aggregated $20,950. Of the decrease in federal valuation allowances from the prior year, $12,677 relates to expiring foreign tax credits which have been reclassified to net operating losses. The release was offset in part by $6,916, of which $2,500 relates to foreign tax credits, $3,443 relates to charitable contributions, and $973 relates to Martin Currie’s operating losses. While tax planning may enhance Legg Mason's tax positions, the realization of tax benefits on deferred tax assets for which valuation allowances have not been provided is not dependent on implementation of any significant tax strategies. As of March 31, 2016, U.S. state deferred tax assets aggregated approximately $175,749. Due to limitations on utilization of net operating loss carryforwards and taking into consideration certain state tax planning strategies, the related valuation allowance of $26,816 was substantially established in prior years for state net operating loss benefits generated in certain jurisdictions in cases where it is more likely that these benefits will ultimately not be realized. For foreign jurisdictions, the decrease in valuation allowances of $11,438 during fiscal 2016, primarily relates to the change in statutory rates, the expiration of certain deferred tax assets, and the utilization of attributes previously considered unrealizable. The following deferred tax assets and valuation allowances relating to carryforwards have been recorded at March 31, 2016 and 2015, respectively. 2016 2015 Expires Beginning after Fiscal Year 96,774 247,027 233 168,069 44 — 25,877 5,290 543,314 2028 2017 2016 2017 2017 2022 2027 n/a $ $ $ DEFERRED TAX ASSETS U.S. federal net operating losses U.S. federal foreign tax credits U.S. charitable contributions U.S. state net operating losses (1,2) U.S. state capital losses U.S. state tax credits Foreign net operating losses Foreign capital losses Total deferred tax assets for carryforwards VALUATION ALLOWANCES U.S. federal net operating losses U.S. federal foreign tax credits U.S. charitable contributions U.S. state net operating losses U.S. state capital losses Foreign net operating losses Foreign capital losses Valuation allowances for carryforwards Foreign other deferred assets $ $ $ 82,350 258,486 4,552 166,772 44 308 24,192 3,077 539,781 2,255 15,252 3,443 26,816 44 20,631 3,077 71,518 7,958 79,476 1,282 25,429 — 26,828 44 23,504 5,290 82,377 14,310 96,687 Total valuation allowances (1) Substantially all of the U.S. state net operating losses carryforward through fiscal 2036. (2) Due to potential for change in the factors relating to apportionment of income to various states, Legg Mason's effective state tax rates are subject to fluctuation which will impact the value of the Company's deferred tax assets, including net operating losses, and could have a material impact on the future effective tax rate of the Company. $ $ 104 | Legg Mason AR2016Table of Contents Legg Mason had total gross unrecognized tax benefits of approximately $73,873, $92,344 and $77,892 as of March 31, 2016, 2015 and 2014, respectively. Of these totals, approximately $49,629, $62,775 and $51,518, respectively, (net of the federal benefit for state tax liabilities) are the amounts of unrecognized benefits which, if recognized, would favorably impact future income tax provisions and effective tax rates. During fiscal 2016, as a result of the net impact of effective settlement of tax examinations, previously unrecognized benefits of $24,106 were realized, of which $5,145 was recorded in equity. A reconciliation of the beginning and ending amount of unrecognized gross tax benefits for the years ended March 31, 2016, 2015 and 2013, is as follows: Balance, beginning of year Additions based on tax positions related to the current year Additions for tax positions of prior years Reductions for tax positions of prior years Decreases related to settlements with taxing authorities Expiration of statutes of limitations Balance, end of year 2016 2015 2014 $ $ 92,344 3,514 10,078 (155) (25,046) (6,862) 73,873 $ $ 77,892 9,919 13,054 — (8,521) — 92,344 $ $ 72,650 5,659 12,610 (138) (12,889) — 77,892 Although management cannot predict with any degree of certainty the timing of ultimate resolution of matters under review by various taxing jurisdictions, it is reasonably possible that the Company’s gross unrecognized tax benefits balance may change within the next 12 months by up to $9,000 as a result of the expiration of statutes of limitations and the completion of tax authorities' examinations. On April 13, 2015, reforms to New York City’s corporate tax structure were enacted which included changes in the calculation of net operating loss carryforwards and changes in the way sales revenue is sourced. The revaluation of deferred tax assets and liabilities under the new rules resulted in the recognition of a one-time income tax benefit of $17,053 for the year ended March 31, 2016. The Company accrues interest related to unrecognized tax benefits in interest expense and recognizes penalties in other operating expense. During the years ended March 31, 2016, 2015 and 2014, the Company recognized approximately $(4,441), $1,492, and $(580), respectively, which was substantially all interest. At March 31, 2016, 2015 and 2014, Legg Mason had approximately $1,900, $8,570, and $7,300, respectively, accrued for interest and penalties on tax contingencies in the Consolidated Balance Sheets. Legg Mason's prior year tax returns are subject to examination by the Internal Revenue Service, Her Majesty’s Revenue & Customs, Brazilian and other tax authorities in various other countries and states. The following tax years remain open to income tax examination for each of the more significant jurisdictions where Legg Mason is subject to income taxes: after fiscal 2014 for U.S. federal; after fiscal 2014 for the U.K.; after calendar year 2008 for Brazil; after fiscal 2011 for the state of California; after fiscal 2008 for the state of New York; and after fiscal 2012 for the states of Connecticut and Maryland. The Company does not anticipate making any significant cash payments with the settlement of these audits in excess of amounts that have been reserved. Except as noted below, Legg Mason intends to permanently reinvest overseas substantially all of the cumulative undistributed earnings of its foreign subsidiaries. Accordingly, no additional U.S. federal income taxes have been provided for undistributed earnings to the extent that they are permanently reinvested in Legg Mason's foreign operations. It is not practical at this time to determine the income tax liability that would result upon repatriation of additional accumulated foreign earnings. In order to increase the amount of cash available in the U.S. for general corporate purposes, Legg Mason plans to utilize up to $170,000 of foreign cash over the next several years, of which $8,500 is accumulated foreign earnings. Any additional tax provision associated with these repatriations was previously recognized. No further repatriation of accumulated prior period foreign earnings is currently planned. However, if circumstances change, Legg Mason will provide for and pay any applicable additional U.S. taxes in connection with repatriation of offshore funds. It is not practical at this time to determine the income tax liability that would result from any further repatriation of accumulated foreign earnings. Excluding cash used to fund the acquisitions of Clarion Partners in April 2016 and EnTrust in May 2016, Legg Mason had available domestically cash and cash equivalents of approximately $375,000 as of March 31, 2016; and, after borrowing $460,000 in Legg Mason AR2016 | 105Table of Contents May 2016 in connection with these acquisitions, had $500,000 of remaining undrawn capacity on our revolving credit facility to meet domestic liquidity needs, subject to compliance with applicable covenants, and to provide flexibility in maximizing cost effective capital deployment without repatriating additional accumulated foreign earnings. 8. COMMITMENTS AND CONTINGENCIES Legg Mason leases office facilities and equipment under non-cancelable operating leases, and also has multi-year agreements for certain services. These leases and service agreements expire on varying dates through fiscal 2028. Certain leases provide for renewal options and contain escalation clauses providing for increased rentals based upon maintenance, utility and tax increases. As of March 31, 2016, the minimum annual aggregate rentals under operating leases and service agreements are as follows: 2017 2018 2019 2020 2021 Thereafter Total $ $ 128,023 109,368 88,644 79,765 73,432 225,678 704,910 The minimum rental commitments shown above have not been reduced by $140,780 for minimum sublease rentals to be received in the future under non-cancelable subleases, of which approximately 35% is due from one counterparty. The lease reserve liability, which is included in the table below, for space subleased as of March 31, 2016 and 2015, was $31,745 and $43,726, respectively. If a sub-tenant defaults on a sublease, Legg Mason may incur operating charges to adjust the existing lease reserve liability to reflect expected future sublease rentals at reduced amounts, as a result of the then current commercial real estate market. The above minimum rental commitments include $633,350 in real estate and equipment leases and $71,560 in service and maintenance agreements. The minimum rental commitments shown above include $32,395 for commitments related to space that has been vacated, but for which subleases are being pursued. The related lease reserve liability, also included in the table below, was $20,495 and $2,213 as of March 31, 2016 and 2015, respectively, and remains subject to adjustment based on circumstances in the real estate markets that may require a change in assumptions or the actual terms of a sublease that is ultimately secured. The lease reserve liability takes into consideration various assumptions, including the expected amount of time it will take to secure a sublease agreement and prevailing rental rates in the applicable real estate markets. During fiscal 2016, certain headquarters space was permanently vacated to pursue a sublease and certain office space was permanently vacated in connection with the restructuring of Permal for the combination with EnTrust, both of which are reflected in the lease reserve liability in the table below. 106 | Legg Mason AR2016Table of Contents The lease reserve liability for subleased space and vacated space for which subleases are being pursued is included in Other current liabilities and Other non-current liabilities in the Consolidated Balance Sheets. The table below presents a summary of the changes in the lease reserve liability: Balance as of March 31, 2014 Accrued charges for vacated and subleased space (1) (2) Payments, net Adjustments and other Balance as of March 31, 2015 Accrued charges for vacated and subleased space (1) (2) Payments, net Adjustments and other Balance as of March 31, 2016 $ $ 55,500 9,023 (15,001) (3,583) 45,939 14,642 (12,689) 4,348 52,240 (1) (2) Included in Occupancy expense in the Consolidated Statements of Income (Loss) Includes $7,212 related to the restructuring of Permal for the merger with EnTrust and $6,760 related to the integration of Batterymarch and LMGAA into QS Investors for the years ended March 31, 2016 and 2015, respectively. See Note 2 for additional information. The following table reflects rental expense under all operating leases and servicing agreements: Rental expense Less: sublease income Net rent expense 2016 135,850 21,154 114,696 $ $ 2015 136,414 19,672 116,742 $ $ 2014 130,880 16,289 114,591 $ $ Legg Mason recognizes rent expense ratably over the lease period based upon the aggregate lease payments. The lease period is determined as the original lease term without renewals, unless and until the exercise of lease renewal options is reasonably assured, and also includes any periods provided by the landlord as a "free rent" period. Aggregate lease payments include all rental payments specified in the contract, including contractual rent increases, and are reduced by any lease incentives received from the landlord, including those used for tenant improvements. As of March 31, 2016, Legg Mason had commitments to invest $28,859 in limited partnerships that make private investments. These commitments are expected to be outstanding, or funded as required, through the end of their respective investment periods ranging through fiscal 2024. Legg Mason AR2016 | 107Table of Contents As of March 31, 2016, Legg Mason had various commitments to pay contingent consideration relating to business acquisitions. The following table presents a summary of the maximum remaining contingent consideration and changes in the contingent consideration liability for each of Legg Mason's recent acquisitions. See Note 2 for additional details regarding each significant acquisition. Acquisition Date Maximum Remaining Contingent Consideration(1) Contingent Consideration Liability Balance as of March 31, 2014 Initial purchase accounting accrual(2) Foreign exchange and accretion Balance as of March 31, 2015 Initial purchase accounting accrual(2) Payment Foreign exchange and accretion Fair value adjustment Balance as of March 31, 2016 Balance Sheet Classification Current Contingent consideration Non-current Contingent consideration Balance as of March 31, 2016 RARE Infrastructure October 21, 2015 Martin Currie October 1, 2014 PK Investments December 31, 2015 QS Investors May 30, 2014 Fauchier March 13, 2013 Total $ $ $ $ $ 81,320 $ 467,076 $ 2,469 $ 30,000 $ 28,743 $ 609,608 — $ — $ — $ — $ 29,553 $ 29,553 — — — 25,000 — 2,145 — 27,145 7,001 20,144 27,145 75,211 (5,097) 70,114 — — (531) (28,361) 41,222 12,846 28,376 41,222 $ $ $ $ $ $ — — — 2,457 — 12 — 2,469 $ 13,370 183 13,553 — — 196 — 13,749 — $ 6,549 2,469 2,469 $ 7,200 13,749 $ $ $ — (2,436) 27,117 — (22,765) 662 (5,014) — $ 88,581 (7,350) 110,784 27,457 (22,765) 2,484 (33,375) 84,585 — $ 26,396 — — $ 58,189 84,585 (1) Using the applicable exchange rate as of March 31, 2016 for amounts denominated in currencies other than the U.S. dollar. (2) Using the applicable exchange rate on the date of acquisition for amounts denominated in currencies other than the U.S. dollar. In the normal course of business, Legg Mason enters into contracts that contain a variety of representations and warranties and that provide general indemnifications, which are not considered financial guarantees by relevant accounting guidance. Legg Mason’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against Legg Mason that have not yet occurred. Legg Mason has been the subject of customer complaints and has also been named as a defendant in various legal actions arising primarily from asset management, securities brokerage, and investment banking activities, including certain class actions, which primarily allege violations of securities laws and seek unspecified damages, which could be substantial. In the normal course of its business, Legg Mason has also received subpoenas and is currently involved in governmental and industry self-regulatory agency inquiries, investigations and, from time to time, proceedings involving asset management activities. In accordance with guidance for accounting for contingencies, Legg Mason has established provisions for estimated losses from pending complaints, legal actions, investigations and proceedings when it is probable that a loss has been incurred and a reasonable estimate of loss can be made. Legg Mason cannot estimate the reasonably possible loss or range of loss associated with matters of litigation and other proceedings, including those described above as customer complaints, legal actions, inquiries, proceedings and investigations. The inability to provide a reasonably possible amount or range of losses is not because there is uncertainty as to the ultimate outcome of a matter, but because liability and damage issues have not developed to the point where Legg Mason can conclude that there is both a reasonable possibility of a loss and a meaningful amount or range of possible losses. There are numerous aspects to customer complaints, legal actions, inquiries, proceedings and investigations that prevent Legg Mason from estimating a related amount or range of reasonably possible losses. These aspects include, among other things, the nature of the matters; that significant relevant facts are not known, are uncertain or are in dispute; and that damages 108 | Legg Mason AR2016 Table of Contents sought are not specified, are uncertain, unsupportable or unexplained. In addition, for legal actions, discovery may not yet have started, may not be complete or may not be conclusive, and meaningful settlement discussions may not have occurred. Further, for regulatory matters, investigations may run their course without any clear indication of wrongdoing or fault until their conclusion. In management's opinion, an adequate accrual has been made as of March 31, 2016, to provide for any probable losses that may arise from matters for which the Company could reasonably estimate an amount. Legg Mason's financial condition, results of operations and cash flows could be materially affected during a period in which a matter is ultimately resolved. In addition, the ultimate costs of litigation-related charges can vary significantly from period-to-period, depending on factors such as market conditions, the size and volume of customer complaints and claims, including class action suits, and recoveries from indemnification, contribution, insurance reimbursement, or reductions in compensation under revenue share arrangements. As of March 31, 2016 and 2015, Legg Mason's liability for losses and contingencies was $400 and $200, respectively. During fiscal 2016, 2015, and 2014, Legg Mason incurred charges relating to litigation and other proceedings of approximately $250, $200, and $200, respectively (net of recoveries of $19,300 in fiscal 2014). As further described in Note 2, Legg Mason may be obligated to settle noncontrolling interests related to RARE Infrastructure. The balance of the related noncontrolling interests was $67,155 as of March 31, 2016. Also, as further described in Note 11, in April 2016, in conjunction with the Permal restructuring in preparation for the combination with EnTrust, the Permal management equity plan was liquidated with the payment of $7,150 to its participants. As further described in Note 18, subsequent to March 31, 2016, Legg Mason acquired Clarion Partners and EnTrust. Both of these acquisitions resulted in redeemable noncontrolling interests and the Clarion Partners acquisition terms included the implementation of an affiliate management equity plan. 9. EMPLOYEE BENEFITS Legg Mason, through its subsidiaries, maintains various defined contribution plans covering substantially all employees. Through these plans, Legg Mason can make two types of discretionary contributions. One is a profit sharing contribution to eligible plan participants based on a percentage of qualified compensation and the other is a match of employee 401(k) contributions. Matches range from 50% to 100% of employee 401(k) contributions, up to a maximum of the lesser of up to 6% of employee compensation or a specified amount up to $16 per year. Corporate profit sharing and matching contributions, together with contributions made under subsidiary plans, totaled $33,152, $27,888 and $29,355 in fiscal 2016, 2015 and 2014, respectively. In addition, employees can make voluntary contributions under certain plans. In connection with the acquisition of Martin Currie on October 1, 2014, Legg Mason assumed the obligations of Martin Currie's defined benefit pension plan, more fully discussed in Note 2. 10. CAPITAL STOCK At March 31, 2016, the authorized numbers of common and preferred shares were 500,000 and 4,000, respectively. At March 31, 2016 and 2015, there were 6,988 and 8,815 shares of common stock, respectively, reserved for issuance under Legg Mason's equity plans. In May 2012, Legg Mason's Board of Directors approved a share repurchase authorization for up to $1,000,000 for purchases of common stock. All but $13,515 of the share repurchases under this authorization were completed by March 2015, and the remaining share repurchases under this authorization were completed in April 2015. In January 2015, Legg Mason's Board of Directors approved a new share repurchase authorization for up to $1,000,000 for additional repurchases of common stock. There is no expiration attached to this share repurchase authorization. During fiscal 2016, 2015, and 2014, Legg Mason purchased and retired 4,537, 6,931, and 9,677 shares of its common stock, respectively, for $209,632, $356,522, and $359,996, respectively, through open market purchases. The remaining balance of the authorized stock buyback is approximately $804,000. As discussed in Note 6, warrants issued in connection with the repurchase of the Convertible Notes could result in the issuance of a maximum of 14,205 shares of Legg Mason common stock, subject to adjustment, if certain conditions are met. Legg Mason AR2016 | 109Table of Contents Changes in common stock for the years ended March 31, 2016, 2015 and 2014, respectively, are as follows: COMMON STOCK Beginning balance Shares issued for: Stock option exercises Deferred compensation employee stock trust Stock-based compensation Shares repurchased and retired Employee tax withholding by settlement of net share transactions Ending balance Years Ended March 31, 2015 2014 2016 111,469 117,173 125,341 338 12 142 (4,537) (412) 107,012 718 44 938 (6,931) (473) 111,469 781 50 1,233 (9,677) (555) 117,173 Dividends declared per share were $0.80, $0.64 and $0.52 for fiscal 2016, 2015 and 2014, respectively. Dividends declared but not paid at March 31, 2016, 2015 and 2014, were $22,038, $17,837 and $14,945, respectively, and are included in Other current liabilities of the Consolidated Balance Sheets. 11. STOCK-BASED COMPENSATION Legg Mason's stock-based compensation includes stock options, an employee stock purchase plan, market-based performance shares payable in common stock, restricted stock awards and units, affiliate management equity plans and deferred compensation payable in stock. Shares available for issuance under the active equity incentive stock plan as of March 31, 2016, were 6,476. Options under Legg Mason’s employee stock plans have been granted at prices not less than 100% of the fair market value. Options are generally exercisable in equal increments over four or five years and expire within eight to ten years from the date of grant. As further discussed below, the components of Legg Mason's total stock-based compensation expense for the years ended March 31, 2016, 2015, and 2014, were as follows: Stock options Restricted stock and restricted stock units Employee stock purchase plan Affiliate management equity plans Non-employee director awards Performance share units Employee stock trust Total stock-based compensation expense Years Ended March 31, 2015 2016 2014 $ $ 9,403 52,670 729 26,184 1,150 2,766 25 92,927 $ $ 11,584 45,975 673 5,206 1,550 1,056 201 66,245 $ $ 13,530 48,263 315 2,270 1,950 — 160 66,488 110 | Legg Mason AR2016Table of Contents Stock Options Stock option transactions under Legg Mason's equity incentive plans during the years ended March 31, 2016, 2015, and 2014, are summarized below: Options outstanding at March 31, 2013 Granted Exercised Canceled/forfeited Options outstanding at March 31, 2014 Granted Exercised Canceled/forfeited Options outstanding at March 31, 2015 Granted Exercised Canceled/forfeited Options outstanding at March 31, 2016 Number of Shares 5,361 1,215 (804) (971) 4,801 918 (694) (593) 4,432 876 (349) (453) 4,506 Weighted-Average Exercise Price Per Share 53.13 $ 33.64 30.52 97.49 43.02 47.65 30.75 90.31 39.58 54.51 28.35 88.06 38.48 $ The total intrinsic value of options exercised during the years ended March 31, 2016, 2015, and 2014, was $5,811, $14,351, and $6,064, respectively. At March 31, 2016, the aggregate intrinsic value of options outstanding was $11,009. The following information summarizes Legg Mason's stock options outstanding at March 31, 2016: Exercise Price Range $ 14.81 - $ 25.00 25.01 - 35.00 35.01 - 55.18 Option Shares Outstanding Weighted-Average Exercise Price Per Share Weighted-Average Remaining Life (in years) $ 567 1,706 2,233 4,506 23.68 31.88 47.28 4.10 3.39 6.27 At March 31, 2016, 2015, and 2014, options were exercisable for 2,544, 2,202, and 2,531 shares, respectively, and the weighted-average exercise price was $32.22, $41.50, and $54.04, respectively. Stock options exercisable at March 31, 2016, have a weighted-average remaining contractual life of 3.9 years. At March 31, 2016, the aggregate intrinsic value of exercisable shares was $9,070. The following summarizes Legg Mason's stock options exercisable at March 31, 2016: Exercise Price Range $ 14.81 - $ 25.00 25.01 - 35.00 35.01 - 55.18 Option Shares Exercisable Weighted-Average Exercise Price Per Share $ 391 1,702 451 2,544 23.67 31.88 40.94 Legg Mason AR2016 | 111Table of Contents The following information summarizes unvested stock options under Legg Mason's equity incentive plans for the year ended March 31, 2016: Shares unvested at March 31, 2015 Granted Vested Canceled/forfeited Shares unvested at March 31, 2016 Number of Shares Weighted-Average Grant Date Fair Value 2,230 876 (1,074) (70) 1,962 $ $ 11.73 11.26 11.82 11.62 11.48 For the years ended March 31, 2016, 2015, and 2014, income tax benefits related to stock options were $3,730, $4,681, and $5,244, respectively. Unamortized compensation cost at March 31, 2016, was $13,480 and was related to unvested options for 1,962 shares. The unamortized compensation cost at March 31, 2016, is expected to be recognized over a weighted-average period of 1.7 years. Cash received from exercises of stock options under Legg Mason's equity incentive plans was $9,516, $22,069, and $23,818 for the years ended March 31, 2016, 2015, and 2014, respectively. The tax benefit expected to be realized for the tax deductions from these option exercises totaled $1,962, $4,856, and $1,815 for the years ended March 31, 2016, 2015, and 2014, respectively. The weighted-average fair value of service-based stock options granted during the years ended March 31, 2016, 2015, and 2014, excluding those granted to our Chief Executive Officer in May 2013 discussed below, using the Black-Scholes option pricing model, was $11.26, $12.03, and $12.13 per share, respectively. The following weighted-average assumptions were used in the model for grants in fiscal 2016, 2015, and 2014: Expected dividend yield Risk-free interest rate Expected volatility Expected life (in years) 2016 Years Ended March 31, 2015 2014 1.18% 1.44% 24.37% 4.97 1.04% 1.51% 29.53% 4.94 1.54% 0.80% 45.08% 4.93 Legg Mason uses an equally weighted combination of both implied and historical volatility to measure expected volatility for calculating Black-Scholes option values. In May 2013, Legg Mason awarded options to purchase 500 shares of Legg Mason, Inc. common stock at an exercise price of $31.46, equal to the then current market value of Legg Mason's common stock, to its Chief Executive Officer, which are included in the outstanding options table above. The award had a grant date fair value of $5,525 and was subject to vesting requirements, all of which had been satisfied by May 2015. The vesting requirements were as follows: 25% over a two-year service period; 25% over a two-year service period and was subject to Legg Mason's common stock price equaling or exceeding $36.46 for 20 consecutive trading days; 25% was subject to Legg Mason's common stock price equaling or exceeding $41.46 for 20 consecutive trading days; and 25% was subject to Legg Mason's common stock price equaling or exceeding $46.46 for 20 consecutive trading days; and a requirement that certain shares received upon exercise are retained for a two-year period. In each of January and June 2014, 25% (50% in aggregate) of this award vested when the Legg Mason stock price met and exceeded $41.46 and $46.46, respectively, for 20 consecutive trading days. In May 2015 the remaining 50% of this award vested when the two-year service period was satisfied. 112 | Legg Mason AR2016 Table of Contents The weighted-average fair value per share for these awards of $11.05 was estimated as of the grant date using a grant price of $31.46, and a Monte Carlo option pricing model with the following assumptions: Expected dividend yield Risk-free interest rate Expected volatility 1.48% 0.86% 44.05% Restricted Stock Restricted stock and restricted stock unit transactions during the years ended March 31, 2016, 2015, and 2014, are summarized below: Number of Shares Weighted-Average Grant Date Value Unvested shares at March 31, 2013 Granted Vested Canceled/forfeited Unvested shares at March 31, 2014 Granted Vested Canceled/forfeited Unvested shares at March 31, 2015 Granted Vested Canceled/forfeited Unvested shares at March 31, 2016 3,738 1,369 (1,622) (151) 3,334 1,236 (1,330) (190) 3,050 1,332 (1,261) (63) 3,058 $ $ 27.99 35.66 28.66 29.04 30.77 48.03 30.92 35.95 37.38 48.95 34.91 42.09 43.34 The restricted stock and restricted stock units were non-cash transactions. For the years ended March 31, 2016, 2015, and 2014, Legg Mason recognized income tax benefits related to restricted stock and restricted stock unit awards of $20,597, $18,246, and $18,575, respectively. Unamortized compensation cost related to unvested restricted stock and restricted stock unit awards for 3,058 shares not yet recognized at March 31, 2016, was $81,271 and is expected to be recognized over a weighted-average period of 1.7 years. In connection with the change in Legg Mason's Chief Executive Officer in September 2012, 325 shares of restricted stock were granted to certain executives and key employees, of which the vesting of 85 of these shares was accelerated in connection with the termination of the recipients' employment. The remaining shares vested on March 31, 2014. Affiliate Management Equity Plans Effective March 1, 2016, Legg Mason executed agreements with the management of its existing wholly-owned subsidiary, Royce, regarding employment arrangements with Royce management, revised revenue sharing, and the implementation of a management equity plan for its key employees. Under the management equity plan, minority equity interests equivalent to 16.9% in the Royce entity were issued to its management team. These interests allow the holders to receive quarterly distributions of Royce's net revenues in amounts equal to the percentage of ownership represented by the equity they hold. The previously existing revenue sharing arrangement was terminated with an arrangement under the plan whereby the percentage of Royce net revenues reserved to pay all expenses (including bonus awards), was reduced to reflect the percentage of revenues paid under the equity units and an increased percentage to Legg Mason. Legg Mason receives a permanent increase of two percent of Royce's net revenues over the percentage provided for in the prior revenue sharing arrangement, phased in over a 13-month period. The management equity plan also provides an option for the issuance of additional equity over the next three years. Current and future grants under the plan vest immediately and, upon issuance, the related grant- date fair value of equity units will be recognized as Compensation and benefits expense in the Consolidated Statements of Income (Loss) and reflected in the Consolidated Balance Sheets as Nonredeemable noncontrolling interest. As a result of the implementation of the management equity plan, Legg Mason incurred a non-cash charge of $21,400 in the year ended March 31, 2016. As of March 31, 2016, the redemption amount of units under the plan was $22,202. Legg Mason AR2016 | 113Table of Contents In conjunction with the December 2012 modification of employment and other arrangements with certain employees of its subsidiary, Permal, Legg Mason completed implementation of a management equity plan during the quarter ended June 30, 2013. On March 31, 2014, a similar management equity plan was implemented by Legg Mason for certain employees of its subsidiary ClearBridge Investments, LLC ("ClearBridge"). The plans better align the interests of each affiliate's management with those of Legg Mason and its shareholders, and provide for, among other things, higher margins at specified higher revenue levels. The affiliate management equity plans entitle certain key employees of each affiliate to participate in 15% of the future growth, if any, of the respective affiliates' enterprise value (subject to appropriate discounts) subsequent to the date of grant. Current and future grants under the plans vest 20% annually for five years. Independent valuations determined the aggregate cost of the awards to be approximately $9,000 and $16,000 for Permal and ClearBridge, respectively, which will be recognized as Compensation and benefits expense in the Consolidated Statements of Income (Loss) over the related vesting periods, through December 2017 and March 2019, respectively. Total compensation expense related to the Permal and ClearBridge affiliate management equity plans was $4,784, $5,206, and $2,270 for the years ended March 31, 2016, 2015, and 2014, respectively. Both arrangements provide that one-half of the respective cost will be absorbed by the affiliates' incentive pool. Once vested, plan units can be put to Legg Mason for settlement at fair value, beginning one year after the holder terminates their employment. Legg Mason can also call plan units, generally post employment, for settlement at fair value. Changes in control of Legg Mason or either affiliate do not impact vesting, settlement or other provisions of the units. However, upon sale of substantially all of the affiliate's assets, the vesting of the respective units would accelerate and participants would receive a fair value payment in respect of their interests under the plan. Future grants of additional plan units will dilute the participation of existing outstanding units in 15% of the future growth of the respective affiliates' enterprise value, if any, subsequent to the related future grant date, for which additional compensation expense would be incurred. Further, future grants under either plan will not entitle the plan participants, collectively, to more than an aggregate 15% of the future growth of the respective affiliate's enterprise value. Upon vesting, the grant-date fair value of vested plan units will be reflected in the Consolidated Balance Sheets as Redeemable noncontrolling interests through an adjustment to additional paid-in capital. Thereafter, redeemable noncontrolling interests will continue to be adjusted to the ultimate maximum estimated redemption value over the expected term, through retained earnings adjustments. As of March 31, 2016, the redemption amount of vested units under the ClearBridge plan, as if they were currently redeemable, aggregated approximately $22,160. In April 2016, in conjunction with the Permal restructuring in preparation for the combination with EnTrust, the Permal management equity plan was liquidated with the payment of $7,150 to its participants, and the remaining $3,481 unamortized cost was expensed. Other Legg Mason has a qualified Employee Stock Purchase Plan covering substantially all U.S. employees. Shares of common stock are purchased in the open market on behalf of participating employees, subject to a 4,500 total share limit under the plan. Purchases are made through payroll deductions and Legg Mason provides a 15% contribution towards purchases, which is charged to earnings. Legg Mason’s contribution increased from 10% to 15% in January 2014. During the fiscal years ended March 31, 2016, 2015, and 2014, approximately 134, 107, and 85 shares, respectively, have been purchased in the open market on behalf of participating employees. Legg Mason also has an equity plan for non-employee directors. Under the current equity plan, directors may elect to receive shares of stock or restricted stock units. Prior to a July 19, 2007 amendment to the Plan, directors could also elect to receive stock options, which were immediately exercisable at a price equal to the market value of the shares on the date of grant and have a term of not more than ten years. Shares, options, and restricted stock units issuable under this equity plan are limited to 625 in aggregate, of which 384 and 359 shares were issued as of March 31, 2016 and 2015, respectively. As of March 31, 2016 and 2015, non-employee directors held no stock options, and as of March 31, 2014, non-employee directors held 32 stock options, which are included in the outstanding options table. During the years ended March 31, 2016, 2015, and 2014, non-employee directors did not exercise any stock options. During the year ended March 31, 2016, there were no stock options canceled or forfeited from the current equity plan and during the years ended March 31, 2015 and 2014, there were 32 and 26 stock options canceled or forfeited from the current equity plan for non-employee directors, respectively. For the year ended March 31, 2014, there were 54 stock options canceled or forfeited related to an equity plan for non- employee directors which was discontinued in July 2005. As of March 31, 2016, 2015, and 2014, non-employee directors held 53, 45, and 64 restricted stock units, respectively, which vest on the grant date and are, therefore, not included in the unvested shares of restricted stock and restricted stock units in the table above. During the years ended March 31, 2016, 2015 and 2014, non-employee directors were granted 9, 8, and 12 restricted stock units, respectively, and 16, 23, and 47 shares of common stock, respectively. During the year ended March 31, 2016, there were no restricted stock units distributed, and during the years ended March 31, 2015, and 2014, there were 27 and 39 restricted stock units distributed, respectively. 114 | Legg Mason AR2016 Table of Contents In May 2015 and 2014, Legg Mason granted certain executive officers a total of 107 and 78 performance share units, respectively, as part of their fiscal 2015 and 2014 incentive award with an aggregate value of $4,312 and $3,457, respectively. The vesting of performance share units granted in May 2015 and 2014 and the number of shares payable at vesting are determined based on Legg Mason’s relative total stockholder return over a three-year period ending March 31, 2018 and 2017, respectively. The grant date fair value per unit for the May 2015 and 2014 performance share units of $40.29 and $44.11, respectively, was estimated as of the grant date using a Monte Carlo pricing model with the following assumptions: Expected dividend yield Risk-free interest rate Expected volatility 2016 2015 1.46% 0.86% 22.63% 1.33% 0.75% 30.81% During fiscal 2012, Legg Mason established a long-term incentive plan (the "LTIP") under its equity incentive plan, which provided an additional element of compensation that is based on performance, determined as the achievement of a pre- defined amount of Legg Mason’s cumulative adjusted earnings per share over a three year performance period. Under the LTIP, executive officers were granted cash value performance units in the quarter ended September 2012 for a total targeted amount of $1,850. The September 2012 grant performance period ended March 31, 2015, and resulted in a payment amount of $1,000 that was settled in cash on May 31, 2015. Deferred compensation payable in shares of Legg Mason common stock has been granted to certain employees in an elective plan. The vesting in the plan is immediate and the plan provides for discounts of up to 10% on contributions and dividends. Effective January 1, 2015, there will be no additional contributions to the plan, with the remaining 271 shares reserved for future dividend distributions. During fiscal 2016, 2015, and 2014, Legg Mason issued 12, 44, and 51 shares, respectively, under the plan with a weighted-average fair value per share at the grant date of $41.82, $45.83, and $31.90, respectively. The undistributed shares issued under this plan are held in a rabbi trust. Assets of the rabbi trust are consolidated with those of the employer, and the value of the employer's stock held in the rabbi trust is classified in stockholders' equity and accounted for in a manner similar to treasury stock. Therefore, the shares Legg Mason has issued to the rabbi trust and the corresponding liability related to the deferred compensation plan are presented as components of stockholders' equity as Employee stock trust and Deferred compensation employee stock trust, respectively. Shares held by the trust at March 31, 2016, 2015 and 2014, were 583, 660 and 672, respectively. 12. EARNINGS PER SHARE Basic earnings per share attributable to Legg Mason, Inc. shareholders ("EPS") is calculated by dividing Net Income (Loss) Attributable to Legg Mason, Inc. (adjusted by earnings allocated to participating securities) by the weighted-average number of shares outstanding. Legg Mason issues to employees restricted stock that are deemed to be participating securities prior to vesting, because the unvested restricted shares entitle their holder to nonforfeitable dividend rights. In this circumstance, accounting guidance requires a “two-class method” for EPS calculations that excludes earnings (potentially both distributed and undistributed) allocated to participating securities. Diluted EPS is similar to basic EPS, but adjusts for the effect of potential common shares unless they are antidilutive. For periods with a Net Loss Attributable to Legg Mason, Inc., potential common shares are considered antidilutive and are therefore, excluded from the calculation. During fiscal 2016, 2015, and 2014, pursuant to the $1,000,000 share repurchase authorization discussed in Note 10, Legg Mason purchased and retired 4,537, 6,931, and 9,677 shares of its common stock, respectively, for $209,632, $356,522, and $359,996, respectively, through open market purchases. These total repurchases reduced weighted-average shares outstanding by 2,564, 3,528, and 4,908 shares for the years ended March 31, 2016, 2015, and 2014, respectively. The par value of the shares repurchased is charged to common stock, with the excess of the purchase price over par first charged against additional paid-in capital, with the remaining balance, if any, charged against retained earnings. Legg Mason AR2016 | 115Table of Contents The following table presents the computations of basic and diluted EPS: Basic weighted-average shares outstanding for EPS Potential common shares: Dilutive employee stock options Diluted weighted-average shares outstanding for EPS Years Ended March 31, 2015 112,019 2016 107,406 2014 121,941 — 107,406 1,227 113,246 442 122,383 Net Income (Loss) Attributable to Legg Mason, Inc. $ (25,032) $ 237,080 $ 284,784 Less: Earnings (distributed and undistributed) allocated to participating securities 2,288 6,340 — Net Income (Loss) (Distributed and Undistributed) Allocated to Shareholders (Excluding Participating Securities) $ (27,320) $ 230,740 $ 284,784 Net Income (Loss) per share Attributable to Legg Mason, Inc. Shareholders Basic Diluted $ $ (0.25) $ (0.25) $ 2.06 2.04 $ $ 2.34 2.33 The weighted-average shares for the years ended March 31, 2016 and 2015, exclude weighted-average unvested restricted shares deemed to be participating securities of 2,831 and 3,065, respectively. The diluted EPS calculations for the years ended March 31, 2016, 2015, and 2014, exclude any potential common shares issuable under the 14,205 warrants issued in connection with the repurchase of the Convertible Notes in May 2012 because the market price of Legg Mason common stock did not exceed the exercise price, and therefore, the warrants would be antidilutive. The diluted EPS calculation for the year ended March 31, 2016, excludes 814 potential common shares that are antidilutive due to the net loss in the year. Options to purchase 1,319 and 2,620 shares for the years ended March 31, 2015 and 2014, respectively, were not included in the computation of diluted EPS because the presumed proceeds from exercising such options, including the related income tax benefits, exceed the average price of the common shares for the period and therefore, the options are deemed antidilutive. Further, market- and performance-based awards are excluded from potential dilution until the designated market or performance condition is met. Unvested restricted shares for the years ended March 31, 2016, 2015, and 2014, were antidilutive and therefore do not further impact diluted EPS. 116 | Legg Mason AR2016Table of Contents 13. ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss includes cumulative foreign currency translation adjustments and gains and losses on defined benefit pension plans. The change in the accumulated translation adjustments for fiscal 2016 and 2015, primarily resulted from the impact of changes in the Brazilian real, British pound, the Australian dollar, the Canadian dollar, and the Singaporean dollar, in relation to the U.S. dollar on the net assets of Legg Mason's subsidiaries in Brazil, the U.K., Australia, Canada and Singapore, for which the real, the pound, the Australian dollar, Canadian dollar, and the Singaporean dollar, are the functional currencies, respectively. A summary of Legg Mason's accumulated other comprehensive loss as of March 31, 2016 and 2015, is as follows: Foreign currency translation adjustment Net actuarial losses on defined benefit pension plan Total Accumulated other comprehensive loss 2016 (59,672) $ (6,821) (66,493) $ 2015 (51,147) (9,595) (60,742) $ $ There were no significant amounts reclassified from Accumulated other comprehensive loss to the Consolidated Statements of Income (Loss) for the years ended March 31, 2016, 2015, or 2014, except for $405, net of income tax provision of $233, realized on the termination of a reverse treasury rate lock contract, in the year ended March 31, 2015 as further described in Note 6. 14. NONCONTROLLING INTERESTS Net income (loss) attributable to noncontrolling interests for the years ended March 31, included the following amounts: Net income (loss) attributable to redeemable noncontrolling interests Net income attributable to nonredeemable noncontrolling interests Net income reclassified to appropriated retained earnings for consolidated investment vehicle Total $ $ (8,680) $ 802 — (7,878) $ 5,629 — — 5,629 $ $ 1,881 — (4,829) (2,948) Years Ended March 31, 2015 2014 2016 Legg Mason AR2016 | 117Table of Contents Total redeemable and nonredeemable noncontrolling interests for the years ended March 31, included the following amounts: Consolidated investment vehicles(1) and other Noncontrolling Interests(2) $ 19,754 $ 1,255 1,540 20,678 — 41,972 5,061 (10,484) — 36,549 (11,052) 68,639 — — — 341 (240) — 1,356 568 25 — 1,949 2,372 (1,981) — 62,722 3,860 Value as of March 31, 2013 Net income attributable to noncontrolling interests Net subscriptions (redemptions) Vesting/change in estimated redemption value of affiliate management equity plan interests Value as of March 31, 2014 Net income attributable to noncontrolling interests Net subscriptions (redemptions) Vesting/change in estimated redemption value of affiliate management equity plan interests Value as of March 31, 2015 Net income (loss) attributable to noncontrolling interests Net subscriptions (redemptions) Grants/settlements of affiliate management equity plan interests Business acquisition Foreign exchange Vesting/change in estimated redemption value of affiliate management equity plan interests Redeemable noncontrolling interests Affiliate Nonredeemable noncontrolling interests(3) Total Management equity plans $ — $ — — 1,816 1,816 21,009 $ 1,881 20,438 1,816 45,144 — — — — — — — — — 802 — 21,400 — — — 22,202 — — 5,629 (10,459) 5,206 7,022 — — (345) — — 5,206 45,520 (8,680) 66,658 (345) 62,722 3,860 Value as of March 31, 2016 $ (1) Principally related to VIE and seeded investment products. (2) Principally related to RARE Infrastructure. (3) Related to Royce. — 94,136 $ — 68,922 $ 6,050 12,727 6,050 $ 175,785 $ 118 | Legg Mason AR2016Table of Contents 15. DERIVATIVES AND HEDGING The disclosures below detail Legg Mason’s derivatives and hedging activities excluding the derivatives and hedging activities of CIVs. See Note 17, Variable Interest Entities and Consolidated Investment Vehicles, for information related to the derivatives and hedging of CIVs. Legg Mason uses currency forwards to economically hedge the risk of movements in exchange rates, primarily between the U.S. dollar, Australian dollar, British pound, euro, Japanese yen, and Singapore dollar. All derivative transactions for which Legg Mason has certain legally enforceable rights of setoff are governed by International Swaps and Derivative Association ("ISDA") Master Agreements. For these derivative transactions, Legg Mason has one ISDA Master Agreement with each of the significant counterparties, which covers transactions with that counterparty. Each of the respective ISDA agreements provides for settlement netting and close-out netting between Legg Mason and that counterparty, which are legally enforceable rights to setoff. Other assets recorded in the Consolidated Balance Sheets as of March 31, 2016 and 2015, were $8,650 and $6,042, respectively. Other liabilities recorded in the Consolidated Balance Sheets as of March 31, 2016 and 2015, were $18,079 and $8,665, respectively. Legg Mason also uses market hedges on certain seed capital investments by entering into futures contracts to sell index funds that benchmark the hedged seed capital investments. With the exception of the interest rate swap contract and reverse treasury rate lock contract discussed in Note 6, Legg Mason has not designated any derivatives as hedging instruments for accounting purposes during the periods ended March 31, 2016, 2015, or 2014. As of March 31, 2016, Legg Mason had open currency forward contracts with aggregate notional amounts totaling $334,640 and open futures contracts relating to seed capital investments with aggregate notional values totaling $127,736. These amounts are representative of the level of non-hedge designation derivative activity throughout fiscal 2016. As of March 31, 2016, the weighted-average remaining contract terms for both currency forward contracts and futures contracts relating to seed capital investments were three months. As discussed in Note 6, subsequent to March 31, 2016, Legg Mason executed a 4.67-year, amortizing interest rate swap, and terminated the previously existing interest rate swap. Legg Mason AR2016 | 119Table of Contents The following table presents the derivative assets and related offsets, if any, as of March 31, 2016: Gross amounts not offset in the Balance Sheet Gross amounts of recognized assets Gross amounts offset in the Balance Sheet Net amount of derivative assets presented in the Balance Sheet Financial instruments Cash collateral Net amount as of March 31, 2016 Derivative instruments designated as hedging instruments (See Note 6) Interest rate swap $ — $ — $ — $ 7,599 $ — $ 7,599 Derivative instruments not designated as hedging instruments Currency forward contracts Futures contracts relating to seed capital investments Total derivative instruments not designated as hedging instruments Total derivative instruments 1,933 (963) — — 970 — — 81 — 970 1,840 1,921 1,933 1,933 $ $ (963) (963) $ 970 970 $ 81 7,680 $ 1,840 1,840 $ 2,891 10,490 The following table presents the derivative liabilities and related offsets, if any, as of March 31, 2016: Gross amounts not offset in the Balance Sheet Gross amounts of recognized liabilities Gross amounts offset in the Balance Sheet Net amount of derivative liabilities presented in the Balance Sheet Financial instruments Cash collateral Net amount as of March 31, 2016 Derivative instruments not designated as hedging instruments Currency forward contracts Futures contracts relating to seed capital investments Total derivative instruments not designated as hedging instruments $ (16,364) $ 280 $ (16,084) $ — $ — $ (16,084) — — — (1,995) 5,920 3,925 $ (16,364) $ 280 $ (16,084) $ (1,995) $ 5,920 $ (12,159) 120 | Legg Mason AR2016Table of Contents The following table presents the derivative assets and related offsets, if any, as of March 31, 2015: Gross amounts not offset in the Balance Sheet Gross amounts of recognized assets Gross amounts offset in the Balance Sheet Net amount of derivative assets presented in the Balance Sheet Financial instruments Cash collateral Net amount as of March 31, 2015 Derivative instruments designated as hedging instruments (See Note 6) Interest rate swap $ — $ — $ — $ 5,462 $ — $ 5,462 Derivative instruments not designated as hedging instruments Currency forward contracts Futures and forward contracts relating to seed capital investments Total derivative instruments not designated as hedging instruments Total derivative instruments 781 (259) 522 75 (17) 58 — — — — 522 58 856 856 $ (276) (276) $ $ 580 580 $ — 5,462 $ — — $ 580 6,042 The following table presents the derivative liabilities and related offsets, if any, as of March 31, 2015: Gross amounts not offset in the Balance Sheet Gross amounts of recognized liabilities Gross amounts offset in the Balance Sheet Net amount of derivative liabilities presented in the Balance Sheet Financial instruments Cash collateral Net amount as of March 31, 2015 Derivative instruments not designated as hedging instruments Currency forward contracts Futures and forward contracts relating to seed capital investments Total derivative instruments not designated as hedging instruments $ (8,623) $ 2,327 $ (6,296) $ — $ — $ (6,296) — — — (2,369) 8,343 5,974 $ (8,623) $ 2,327 $ (6,296) $ (2,369) $ 8,343 $ (322) Legg Mason AR2016 | 121Table of Contents The following table presents gains (losses) recognized in the Consolidated Statements of Income (Loss) on derivative instruments. As described above, the currency forward contracts and futures and forward contracts for seed capital investments included below are economic hedges of interest rate and market risk of certain operating and investing activities of Legg Mason, including foreign exchange risk on acquisition contingent consideration. Gains and losses on these derivative instruments substantially offset gains and losses of the economically hedged items. In connection with the acquisition of RARE Infrastructure, in August 2015 Legg Mason executed a U.S. dollar - Australian dollar currency forward contract to economically hedge against currency changes affecting the Australian dollar denominated purchase price, which was closed in October 2015. 2016 Years Ended March 31, 2015 2014 Income Statement Classification Gains Losses Gains Losses Gains Losses Derivatives not designated as hedging instruments Currency forward contracts for: Operating activities Seed capital investments Other non-operating activities(1) Futures and forward contracts relating to seed capital investments Other expense Other non-operating income (expense) Other non-operating income (expense) Other non-operating income (expense) $ 7,887 $ (19,547) $ 5,150 $ (16,518) $ 7,098 $ (2,617) 547 (1,611) 2,491 (259) — (4,493) — — 56 — (1,719) — 11,270 (9,206) 10,801 (15,413) 2,471 (19,403) Total gain (loss) from derivatives not designated as hedging instruments 19,704 (34,857) 18,442 (32,190) 9,625 (23,739) Derivatives designated as hedging instruments (See Note 6) Interest rate swap Reverse treasury rate lock Interest expense Other non-operating income (expense) Total 5,710 — 5,462 — — — — $ 25,414 — 638 $ (34,857) $ 24,542 — — $ (32,190) $ 9,625 — $(23,739) (1) Relates to a currency forward executed in August 2015 and closed in October 2015 in connection with the October 2015 acquisition of RARE Infrastructure. 122 | Legg Mason AR2016Table of Contents 16. BUSINESS SEGMENT INFORMATION Legg Mason is a global asset management company that provides investment management and related services to a wide array of clients. The company operates in one reportable business segment, Global Asset Management. Global Asset Management provides investment advisory services to institutional and individual clients and to company-sponsored investment funds. The primary sources of revenue in Global Asset Management are investment advisory, distribution and administrative fees, which typically are calculated as a percentage of AUM and vary based upon factors such as the type of underlying investment product and the type of services that are provided. In addition, performance fees may be earned under certain investment advisory contracts for exceeding performance benchmarks. Revenues by geographic location are primarily based on the geographic location of the advisor or the domicile of fund families managed by Legg Mason. The table below reflects our revenues and long-lived assets by geographic region as of March 31: OPERATING REVENUES United States United Kingdom Other International Total INTANGIBLE ASSETS, NET AND GOODWILL United States United Kingdom Other International Total 2016 2015 2014 $ 1,868,076 $ 1,977,975 398,729 442,402 $ 2,660,844 $ 2,819,106 338,552 454,216 $ 1,874,328 436,542 430,887 $ 2,741,757 $ 3,134,267 $ 3,135,226 1,062,332 455,286 $ 4,626,001 $ 4,652,844 820,730 671,004 $ 3,127,654 879,946 404,696 $ 4,412,296 17. VARIABLE INTEREST ENTITIES AND CONSOLIDATED INVESTMENT VEHICLES As further discussed in Notes 1 and 3, in accordance with financial accounting standards, Legg Mason consolidates certain sponsored investment vehicles, some of which are designated as CIVs. As of March 31, 2016, Legg Mason concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated (and designated a CIV) as of March 31, 2016, 2015, and 2014, despite significant third party investments in this product. As of March 31, 2016, 2015, and 2014, Legg Mason also concluded it was the primary beneficiary of 14, 17, and 17, respectively, employee-owned funds it sponsors, which were consolidated and reported as CIVs. Prior to March 31, 2015, Legg Mason also held a longer-term controlling financial interest in one sponsored investment fund VRE, which has third-party investors and was consolidated and included as a CIV prior to the three months ended March 31, 2015. Legg Mason redeemed a significant portion of its investment in this fund prior to March 31, 2015, and as a result no longer had a controlling financial interest in the fund; therefore, the fund was not consolidated, or included as a CIV as of or subsequent to March 31, 2015. Prior to June 30, 2014, Legg Mason concluded it was the primary beneficiary of one of three CLOs in which it had a variable interest and the balances related to this CLO were consolidated and reported as a CIV in the Company's consolidated financial statements. During the three months ended June 30, 2014, this CLO substantially liquidated and therefore was not consolidated by Legg Mason as of, or subsequent to, June 30, 2014. Legg Mason's investment in CIVs, as of March 31, 2016 and 2015, was $13,641 and $15,553, respectively, which represents its maximum risk of loss, excluding uncollected advisory fees. The assets of these CIVs are primarily comprised of investment securities. Investors and creditors of these CIVs have no recourse to the general credit or assets of Legg Mason beyond its investment in these funds. Legg Mason AR2016 | 123Table of Contents The following tables reflect the impact of CIVs in the Consolidated Balance Sheets as of March 31, 2016 and 2015, respectively, and the Consolidated Statements of Income (Loss) for the years ended March 31, 2016, 2015, and 2014, respectively: Consolidating Balance Sheets March 31, 2016 March 31, 2015 Balance Before Consolidation of CIVs and Other(1) 2,288,080 CIVs and Other(1) $ 110,715 5,135,318 — 7,423,398 $ 110,715 837,031 $ 4,548 2,267,343 3,104,374 — 4,548 Eliminations Consolidated Totals Balance Before Consolidation of CIVs CIVs Eliminations Consolidated Totals $ $ $ (13,667) $ 2,385,128 $ 1,879,941 $ 56,929 $ (15,583) $ 1,921,287 — 5,135,318 (13,667) $ 7,520,446 (26) $ 841,553 — (26) 2,267,343 3,108,896 $ $ $ $ 5,143,547 7,023,488 808,640 1,719,367 2,528,007 — 56,929 6,436 — 6,436 $ $ — 5,143,547 (15,583) $ 7,064,834 (30) $ 815,046 — (30) 1,719,367 2,534,413 81,649 94,027 109 175,785 8,971 29,397 7,152 45,520 4,237,375 12,140 (13,750) 4,235,765 4,486,510 21,096 (22,705) 4,484,901 $ 7,423,398 $ 110,715 $ (13,667) $ 7,520,446 $ 7,023,488 $ 56,929 $ (15,583) $ 7,064,834 (1) Other represents consolidated sponsored investment vehicles that are not designated as CIVs. $ $ $ Current Assets Non-current assets Total Assets Current Liabilities Non-current liabilities Total Liabilities Redeemable Non- controlling interests Total Stockholders’ Equity Total Liabilities and Equity 124 | Legg Mason AR2016Table of Contents Consolidating Statements of Income (Loss) Total Operating Revenues Total Operating Expenses Operating Income (Loss) Total Other Non-Operating Income (Expense) Income (Loss) Before Income Tax Provision (Benefit) Income tax provision (benefit) Net Income (Loss) Less: Net income (loss) attributable to noncontrolling interests Year Ended March 31, 2016 Balance Before Consolidation of CIVs and Other(1) CIVs and Other(1) Eliminations Consolidated Totals $ 2,661,162 $ — $ (318) $ 2,660,844 2,609,870 51,292 (65,458) (14,166) 7,692 (21,858) 3,174 466 (466) (12,757) (13,223) — (13,223) (323) 5 2,166 2,171 — 2,171 — (11,052) 2,610,013 50,831 (76,049) (25,218) 7,692 (32,910) (7,878) (25,032) Net Income (Loss) Attributable to Legg Mason, Inc. $ (25,032) $ (13,223) $ 13,223 $ (1) Other represents consolidated sponsored investment vehicles that are not designated as CIVs. Total Operating Revenues Total Operating Expenses Operating Income (Loss) Total Other Non-Operating Income (Expense) Income Before Income Tax Provision Income tax provision Net Income Less: Net income attributable to noncontrolling interests Year Ended March 31, 2015 Balance Before Consolidation of CIVs CIVs Eliminations Consolidated Totals $ 2,819,827 $ — $ (721) $ 2,819,106 2,320,709 499,118 (136,186) 362,932 125,284 237,648 568 906 (906) 5,883 4,977 — 4,977 — (728) 2,320,887 7 77 84 — 84 5,061 498,219 (130,226) 367,993 125,284 242,709 5,629 Net Income (Loss) Attributable to Legg Mason, Inc. $ 237,080 $ 4,977 $ (4,977) $ 237,080 Total Operating Revenues Total Operating Expenses Operating Income (Loss) Total Other Non-Operating Income (Expense) Income Before Income Tax Provision (Benefit) Income tax provision Net Income (Loss) Less: Net income (loss) attributable to noncontrolling interests Year Ended March 31, 2014 Balance Before Consolidation of CIVs CIVs Eliminations Consolidated Totals $ 2,743,707 $ — $ (1,950) $ 2,741,757 2,310,444 433,263 (10,333) 422,930 137,805 285,125 341 2,376 (2,376) 2,445 69 — 69 — 69 (1,956) 2,310,864 6 (3,364) (3,358) — (3,358) (3,289) 430,893 (11,252) 419,641 137,805 281,836 (2,948) $ (69) $ 284,784 Net Income (Loss) Attributable to Legg Mason, Inc. $ 284,784 $ Other non-operating income (expense) includes interest income, interest expense, and net gains (losses) on investments. The consolidation of CIVs has no impact on Net Income (Loss) Attributable to Legg Mason, Inc. Legg Mason AR2016 | 125Table of Contents Legg Mason had no financial liabilities of CIVs carried at fair value as of March 31, 2016 or 2015. The fair value of the financial assets of CIVs were determined using the following categories of inputs as of March 31, 2016 and 2015: Assets: Trading investments: Hedge funds Proprietary funds Total trading investments Assets: Trading investments: Hedge funds Proprietary funds Total trading investments Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Value as of March 31, 2016 $ $ 922 22,327 23,249 $ $ 7,138 8,244 15,382 $ $ 10,084 — 10,084 $ $ 18,144 30,571 48,715 Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Value as of March 31, 2015 $ $ 1,108 28,387 29,495 $ $ 4,412 — 4,412 $ $ 14,093 — 14,093 $ $ 19,613 28,387 48,000 Substantially all of the above financial instruments where valuation methods rely on other than observable market inputs as a significant input utilize the NAV practical expedient, such that measurement uncertainty has little relevance. During the quarter ended June 30, 2014, the CLO substantially liquidated and was not consolidated as of March 31, 2015. 126 | Legg Mason AR2016Table of Contents The changes in assets and (liabilities) of CIVs measured at fair value using significant unobservable inputs (Level 3) for the years ended March 31, 2016 and 2015, are presented in the tables below: Value as of March 31, 2015 Purchases Sales Settlements / Other Transfers Realized and unrealized gains/ (losses), net Value as of March 31, 2016 Assets: Hedge funds $ 14,093 $ 251 $ (1,455) $ (825) $ (526) $ (1,454) $ 10,084 Value as of March 31, 2014 Purchases Sales Settlements / Other Transfers Realized and unrealized gains/ (losses), net Value as of March 31, 2015 17,888 $ 2,580 $ (5,761) $ — $ 78 $ (692) $ 14,093 Assets: Hedge funds Private equity funds $ $ 31,810 49,698 $ 4,727 7,307 $ (3,124) (8,885) $ (34,042) (34,042) $ Liabilities: CLO debt $ Total realized and unrealized gains, net (79,179) $ — $ — $ 79,179 $ — 78 $ — $ $ 629 (63) $ — $ (63) — 14,093 — Realized and unrealized gains and losses recorded for Level 3 assets and liabilities of CIVs are included in Other non- operating income (expense) of CIVs in the Consolidated Statements of Income (Loss). The change in unrealized losses for Level 3 investments and liabilities of CIVs relating only to those assets and liabilities still held at the reporting date were $2,580 and $79 for the years ended March 31, 2016 and 2015, respectively. There were no transfers between Level 1 and Level 2 during either of the years ended March 31, 2016 and 2015. The NAVs used as a practical expedient by CIVs have been provided by the investees and have been derived from the fair values of the underlying investments as of the respective reporting dates. The following table summarizes, as of March 31, 2016 and 2015, the nature of these investments and any related liquidation restrictions or other factors, which may impact the ultimate value realized: Category of Investment Hedge funds Fair Value Determined Using NAV As of March 31, 2016 Investment Strategy March 31, 2016 March 31, 2015 Unfunded Commitments Remaining Term Global macro, fixed income, long/short equity, systematic, emerging market, U.S. and European hedge $ 18,144 (1) $ 19,613 n/a n/a n/a - not applicable (1) Redemption restrictions: 5% daily redemption; 13% monthly redemption; 10% quarterly redemption; and 72% are subject to three to five year lock-up or side pocket provisions. There are no current plans to sell any of these investments held as of March 31, 2016. As of March 31, 2014, Legg Mason elected the fair value option for certain eligible assets and liabilities, including corporate loans and debt, of the consolidated CLO. Legg Mason did not elect the fair value option for any assets or liabilities as of March 31, 2016 or 2015, as the CLO was no longer consolidated. Legg Mason AR2016 | 127Table of Contents During the year ended March 31, 2014, total net losses of $5,914, were recognized in Other non-operating income (losses) of CIVs, net, in the Consolidated Statements of Income (Loss) related to assets and liabilities for which the fair value option was elected. CLO loans and CLO debt measured at fair value have floating interest rates; therefore, substantially all of the estimated gains and losses included in earnings for the year ended March 31, 2014, were attributable to instrument specific credit risk. As of March 31, 2016 and 2015, there were no derivative liabilities of CIVs. Gains and (losses) of $1,311 and $(1,537), respectively, for the year ended March 31, 2014, related to derivative liabilities of CIVs are included in Other non-operating income (loss) of CIVs. As of March 31, 2016 and 2015, for VIEs in which Legg Mason holds a variable interest or is the sponsor and holds a variable interest, but for which it was not the primary beneficiary, Legg Mason's carrying value and maximum risk of loss were as follows: As of March 31, 2016 As of March 31, 2015 CLOs Real Estate Investment Trust Other sponsored investment funds Total Equity Interests on the Consolidated Balance Sheet (1) $ 9,540 22,551 32,091 $ — $ Maximum Risk of Loss (2) 288 14,595 27,852 42,735 $ Equity Interests on the Consolidated Balance Sheet (1) $ 13,026 21,983 35,009 $ — $ Maximum Risk of Loss (2) 1,146 18,096 34,463 53,705 $ (1) (2) Includes $32,091 and $27,463 related to investments in proprietary funds products as of March 31, 2016 and 2015, respectively. Includes equity investments the Company has made or is required to make and any earned but uncollected management fees. The Company's total AUM of unconsolidated VIEs was $17,170,697 and $19,527,670 as of March 31, 2016 and 2015, respectively. The assets of these VIEs are primarily comprised of cash and cash equivalents, investment securities, and CLO loans, and the liabilities are primarily comprised of CLO debt and various expense accruals. These VIEs are not consolidated because either (1) Legg Mason does not have the power to direct significant economic activities of the entity and rights/obligations associated with benefits/losses that could be significant to the entity, or (2) Legg Mason does not absorb a majority of each VIE's expected losses or does not receive a majority of each VIE's expected residual gains. 18. SUBSEQUENT EVENTS Clarion Partners On April 13, 2016, Legg Mason acquired a majority equity interest in Clarion Partners, a diversified real estate asset management firm based in New York. Clarion Partners managed approximately $41,500,000 in AUM as of April 30, 2016. Under the terms of the transaction, Legg Mason acquired an 82% ownership interest in Clarion Partners for a cash payment of $577,458, which was funded with a portion of the proceeds from the issuance of the 2026 Notes and the 2056 Notes in March 2016. In addition, Legg Mason paid $16,000 for certain co-investments on a dollar-for-dollar basis. The Clarion Partners management team retained 18% of the outstanding equity in Clarion Partners. In addition, Legg Mason implemented an affiliate management equity plan for the management team of Clarion Partners. The affiliate management equity plan entitles certain key employees of Clarion Partners to participate in 15% of the future growth, if any, of the enterprise value (subject to appropriate discounts) subsequent to the date of the grant. The initial grant under the plan vests immediately. The firm's previous majority owner sold its entire ownership interest in the transaction. The noncontrolling interests held by the management team can be put by the holders or called by Legg Mason for settlement at fair value starting after three years from the closing of the agreement. The holders' put is limited to certain amounts, which increase in years four and five. The acquired assets and liabilities and related results of operations of Clarion Partners will be included in Legg Mason's financial statements, subsequent to the acquisition. Due to the timing of the acquisition, purchase accounting adjustments and related disclosures require additional analysis and are not currently possible. During fiscal 2016, there were $2,807 of costs incurred in connection with the acquisition of Clarion Partners. 128 | Legg Mason AR2016 EnTrust On May 2, 2016, Legg Mason closed the transaction to combine Permal, Legg Mason's existing hedge fund platform, with EnTrust. EnTrust is an alternative asset management firm headquartered in New York with approximately $10,000,000 in AUM and approximately $2,000,000 in assets under advisement and committed capital at closing, and largely complementary investment strategies, investor base, and business mix to Permal. As a result of the combination, Legg Mason owns 65% of the new entity, branded EnTrustPermal, with the remaining 35% owned by EnTrust's co-founder and managing partner. The noncontrolling interests can be put by the holder or called by Legg Mason for settlement at fair value starting after five years from the closing of the agreement. The transaction included a cash payment of $400,000, which was funded with borrowings under Legg Mason's revolving credit facility, as well as a portion of the proceeds from the issuance of the 4.75% Senior Notes due 2026 and the 6.375% Junior Subordinated Notes due 2056 in March 2016. The acquired assets and liabilities and related results of operations of EnTrust will be included in Legg Mason's financial statements, subsequent to the acquisition. Due to the timing of the acquisition, purchase accounting adjustments and related disclosures require additional analysis and are not currently possible. During fiscal 2016, there were $3,492 of costs incurred in connection with the acquisition of EnTrust. In connection with the combination, Legg Mason expects to incur total restructuring and transition-related costs of approximately $100,000, of which $43,296 was incurred in fiscal 2016. See Note 2 for further discussion of the restructuring and transition-related costs. Legg Mason AR2016 | 129Table of Contents QUARTERLY FINANCIAL DATA (Dollars in thousands, except per share amounts or unless otherwise noted) (Unaudited) Fiscal 2016(1) Operating Revenues Operating Expenses Operating Income (Loss) Other Non-Operating Income (Expense) Income before Income Tax Provision (Benefit) Income tax provision (benefit) Net Income (Loss) Less: Net income (loss) attributable to noncontrolling interests Net Income (Loss) Attributable to Legg Mason, Inc. Quarter Ended Mar. 31 Dec. 31 Sept. 30 June 30 $ $ $ 619,551 585,648 33,903 (27,455) 6,448 58,606 (52,158) 659,557 900,202 (240,645) (1,616) (242,261) (103,651) (138,610) 673,086 540,056 133,030 (42,464) 90,566 27,647 62,919 (6,885) (45,273) $ (138,626) $ 16 $ (1,400) 64,319 Net Income (Loss) per share Attributable to Legg Mason, Inc. Shareholders: Basic Diluted Cash dividend declared per share Stock price range: High Low Assets Under Management (in millions): End of period Average $ $ $ (0.43) $ (0.43) 0.20 (1.31) $ (1.31) 0.20 39.97 24.93 669,615 662,323 $ $ 46.41 37.84 671,474 683,006 $ $ 0.58 0.58 0.20 52.61 40.60 672,136 687,173 (1) Due to rounding of quarterly results, total amounts for fiscal year may differ immaterially from the annual results. As of May 17, 2016, the closing price of Legg Mason's common stock was $31.60. $ $ $ $ $ 708,650 584,107 124,543 (4,514) 120,029 25,090 94,939 391 94,548 0.85 0.84 0.20 55.88 50.39 699,166 703,860 Fiscal 2015(1) Operating Revenues Operating Expenses Operating Income Other Non-Operating Income (Expense) Income before Income Tax Provision Income tax provision Net Income Less: Net income attributable to noncontrolling interests Net Income Attributable to Legg Mason, Inc. Net Income per share Attributable to Legg Mason, Inc. Shareholders: Basic Diluted Cash dividend declared per share Stock price range: High Low Assets Under Management (in millions): End of period Average Quarter Ended Mar. 31 Dec. 31 Sept. 30 June 30 $ $ $ $ $ 702,346 573,396 128,950 (2,115) 126,835 42,807 84,028 1,069 82,959 0.73 0.73 0.16 59.19 52.16 702,724 707,143 $ $ $ $ $ 718,984 599,616 119,368 (1,303) 118,065 38,017 80,048 3,012 77,036 0.67 0.67 0.16 57.15 45.78 709,086 710,948 $ $ $ $ $ 703,895 573,540 130,355 (121,530) 8,825 3,804 5,021 124 4,897 0.04 0.04 0.16 52.00 45.68 707,834 704,148 $ $ $ $ $ 693,881 574,335 119,546 (5,278) 114,268 40,656 73,612 1,424 72,188 0.62 0.61 0.16 51.80 43.25 704,295 691,337 (1) Due to rounding of quarterly results, total amounts for fiscal year may differ immaterially from the annual results. 130 | Legg Mason AR2016Executive Officers Joseph A. Sullivan Chairman & Chief Executive Officer Peter H. Nachtwey Senior Executive Vice President & Chief Financial Officer Thomas K. Hoops Executive Vice President & Head of Business Development Terence A. Johnson Executive Vice President & Head of Global Distribution Thomas C. Merchant Executive Vice President & General Counsel Ursula A. Schliessler Executive Vice President & Chief Administrative Officer Corporate Data Executive Offices 100 International Drive Baltimore, Maryland 21202 (410) 539-0000 www.LeggMason.com Form 10-K Legg Mason’s Annual Report on Form 10-K for the year ended March 31, 2016, filed with the Securities and Exchange Commission and containing audited financial statements, is available upon request without charge by writing to the Corporate Secretary at the Executive Offices of the Company. Copies can also be obtained by accessing our website at www.LeggMason.com Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP 100 E. Pratt Street Baltimore, Maryland 21202 (410) 783-7600 www.pwc.com Transfer Agent American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11219 (212) 936-5100 www.amstock.com Common Stock Shares of Legg Mason, Inc. common stock are listed and traded on the New York Stock Exchange (symbol: LM). As of March 31, 2016, there were approximately 1,300 shareholders of record of the Company’s common stock. 

Continue reading text version or see original annual report in PDF format above