Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                         

 

001-32492

(Commission File Number)

 

 

 

LAZARD LTD

(Exact name of registrant as specified in its charter)

 

Bermuda    98-0437848
(State or Other Jurisdiction of Incorporation    (I.R.S. Employer Identification No.)
or Organization)   

 

 

 

Clarendon House

2 Church Street

Hamilton HM11, Bermuda

(Address of principal executive offices)

 

Registrant’s telephone number: (441) 295-1422

 

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x    Accelerated filer  ¨
Non-accelerated filer  ¨    Smaller reporting company  ¨

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

As of October 24, 2011, there were 122,871,152 shares of the Registrant’s Class A common stock (including 4,815,788 shares held by subsidiaries) and one share of the Registrant’s Class B common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

When we use the terms “Lazard”, “we”, “us”, “our” and “the Company”, we mean Lazard Ltd, a company incorporated under the laws of Bermuda, and its subsidiaries, including Lazard Group LLC, a Delaware limited liability company (“Lazard Group”), that is the current holding company for our businesses. Lazard Ltd has no operating assets other than indirect ownership as of September 30, 2011 of approximately 94.7% of the common membership interests in Lazard Group and its controlling interest in Lazard Group.

 

     Page

 

Part I. Financial Information

        

Item 1. Financial Statements (Unaudited)

     1   

Item 2. Management’s Discussion and Analysis of Financial  Condition and Results of Operations

     41   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     73   

Item 4. Controls and Procedures

     73   

Part II. Other Information

        

Item 1. Legal Proceedings

     74   

Item 1A. Risk Factors

     74   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     74   

Item 3. Defaults Upon Senior Securities

     75   

Item 4. (Removed and Reserved)

     75   

Item 5. Other Information

     75   

Item 6. Exhibits

     76   

Signatures

     82   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

    Page  

Condensed Consolidated Statements of Financial Condition as of September 30, 2011 and December  31, 2010

    2   

Condensed Consolidated Statements of Operations for the three month and nine month periods ended September 30, 2011 and 2010

    4   

Condensed Consolidated Statements of Cash Flows for the nine month periods ended September  30, 2011 and 2010

    5   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine month periods ended September 30, 2011 and 2010

    6   

Notes to Condensed Consolidated Financial Statements

    8   

 

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Table of Contents

LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     September 30,
2011
     December 31,
2010
 

ASSETS

     
Cash and cash equivalents    $ 989,894         $1,209,695   
Deposits with banks      267,906         356,539   
Cash deposited with clearing organizations and other segregated cash      66,219         92,911   
Receivables-net:      

Fees

     439,857         480,340   

Customers and other

     141,246         63,490   

Related parties

     14,248         24,874   
  

 

 

    

 

 

 
     595,351         568,704   

Investments

     346,912         417,410   
     

Property (net of accumulated amortization and depreciation of $268,374 and $250,898 at September 30, 2011 and December 31, 2010, respectively)

     150,708         150,524   

Goodwill and other intangible assets (net of accumulated amortization of $19,903 and $15,007 at September 30, 2011 and December 31, 2010, respectively)

     394,382         361,439   
Other assets      325,097         265,310   
  

 

 

    

 

 

 

Total assets

   $ 3,136,469       $ 3,422,532   
  

 

 

    

 

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

(UNAUDITED)

(dollars in thousands, except for per share data)

 

$3,422,532 $3,422,532
     September 30,
2011
    December 31,
2010
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits and other customer payables

   $ 342,704      $ 361,553   

Accrued compensation and benefits

     250,252        498,880   

Senior debt

     1,076,850        1,076,850   

Capital lease obligations

     21,576        22,903   

Related party payables

     4,082        2,819   

Other liabilities

     523,023        513,410   

Subordinated debt

            150,000   
  

 

 

   

 

 

 

Total liabilities

     2,218,487        2,626,415   
  

 

 

   

 

 

 

Commitments and contingencies

    

STOCKHOLDERS’ EQUITY

    

Preferred stock, par value $.01 per share; 15,000,000 shares authorized:

    

Series A - 7,921 and 22,021 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively

    

  
      

Series B - no shares issued and outstanding

    

  
      

Common stock:

    

Class A, par value $.01 per share (500,000,000 shares authorized; 122,871,152 and 119,697,936 shares issued at September 30, 2011 and December 31, 2010, respectively, including shares held by a subsidiary as indicated below)

  

 

1,229

  

    1,197   

Class B, par value $.01 per share (1 share authorized, issued and outstanding at September 30, 2011 and December 31, 2010)

  

 

  

      

Additional paid-in-capital

     685,800        758,841   

Retained earnings

     285,575        166,468   

Accumulated other comprehensive loss, net of tax

    
(57,712

    (46,158
  

 

 

   

 

 

 
    
914,892
  
    880,348   

Class A common stock held by a subsidiary, at cost (4,098,431 and 6,847,508 shares at September 30, 2011 and December 31, 2010, respectively)

    
(141,593

    (227,950
  

 

 

   

 

 

 

Total Lazard Ltd stockholders’ equity

    
773,299
  
    652,398   

Noncontrolling interests

     144,683        143,719   
  

 

 

   

 

 

 

Total stockholders’ equity

     917,982        796,117   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,136,469      $ 3,422,532   
  

 

 

   

 

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010

(UNAUDITED)

(dollars in thousands, except for per share data)

 

138,094,101 138,094,101 138,094,101 138,094,101
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2011     2010     2011     2010  

REVENUE

       

Investment banking and other advisory fees

    $248,358      $ 245,294        $   711,781      $    759,785   

Money management fees

    213,276        202,662        658,874        560,664   

Interest income

    3,418        5,430        11,273        16,037   

Other

    19,531        23,924        64,601        47,785   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    484,583        477,310        1,446,529        1,384,271   

Interest expense

    22,164        24,073        68,795        73,788   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    462,419        453,237        1,377,734        1,310,483   
 

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES

       

Compensation and benefits

    273,532        282,528        830,011        845,926   

Occupancy and equipment

    24,345        22,414        70,030        65,004   

Marketing and business development

    19,844        17,503        58,834        51,358   

Technology and information services

    20,417        18,904        60,566        53,552   

Professional services

    11,434        10,731        34,395        29,716   

Fund administration and outsourced services

    14,019        12,037        40,777        34,407   

Amortization of intangible assets related to acquisitions

    1,716        1,719        4,896        5,258   

Restructuring

                         87,108   

Other

    9,374        7,934        27,839        26,117   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    374,681        373,770        1,127,348        1,198,446   
 

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

    87,738        79,467        250,386        112,037   

Provision for income taxes

    20,605        9,113        51,704        29,049   
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

    67,133        70,354        198,682        82,988   

LESS - NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

    4,434        6,263        18,972        7,859   
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO LAZARD LTD

    $  62,699      $ 64,091        $   179,710      $ 75,129   
 

 

 

   

 

 

   

 

 

   

 

 

 

ATTRIBUTABLE TO LAZARD LTD CLASS A COMMON STOCKHOLDERS:

       

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

       

Basic

    118,315,944        111,059,071        117,586,028        101,440,741   

Diluted

    136,857,956        138,094,101        138,265,494        135,554,131   

NET INCOME PER SHARE OF COMMON STOCK:

       

Basic

    $0.53        $0.58        $1.53        $0.74   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    $0.49        $0.51        $1.39        $0.58   
 

 

 

   

 

 

   

 

 

   

 

 

 

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

    $0.16        $0.125        $0.445        $0.375   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2011 AND 2010

(UNAUDITED)

(dollars in thousands)

 

     Nine Months Ended
September 30,
 
        2011             2010      

CASH FLOWS FROM OPERATING ACTIVITIES:

   

Net income

  $ 198,682      $ 82,988   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

   

Noncash items included in net income:

   

Depreciation and amortization of property

    18,176        16,131   

Amortization of deferred expenses, share-based incentive compensation and interest rate hedge

    228,213        257,840   

Amortization of intangible assets related to acquisitions

    4,896        5,258   

(Gain) loss on extinguishment of debt

    (18,171     424   

(Increase) decrease in operating assets:

   

Deposits with banks

    96,193        (41,255

Cash deposited with clearing organizations and other segregated cash

    28,574        (4,824

Receivables-net

    (28,681     (88,109

Investments

    71,127        (38,902

Other assets

    (64,267     (35,174

Increase (decrease) in operating liabilities:

   

Deposits and other payables

    (22,187     83,741   

Accrued compensation and benefits and other liabilities

    (230,935     (191,480
 

 

 

   

 

 

 

Net cash provided by operating activities

    281,620        46,638   
 

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

   

Distributions relating to equity method investments

    –          51,437   

Additions to property

    (17,277     (10,073

Disposals of property

    353        301   

Proceeds from sales and maturities of available-for-sale securities

    –          71,579   
 

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    (16,924     113,244   
 

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

   

Proceeds from:

   

Contribution from noncontrolling interests

    3,821        3,005   

Excess tax benefits from share-based incentive compensation

   
2,848
  
    –     

Other financing activities

    –          6,638   

Payments for:

   

Senior and subordinated debt

    (131,829     (10,375

Capital lease obligations

    (1,600     (1,626

Distributions to noncontrolling interests

    (21,431     (20,315

Repurchase of common membership interests from members of LAZ-MD Holdings

    (794     (5,072

Purchase of Class A common stock

    (158,617     (106,316

Class A common stock dividends

    (51,409     (36,714

Settlement of vested share-based incentive compensation

    (92,337     (54,947

Other financing activities

    (33,386     (53
 

 

 

   

 

 

 

Net cash used in financing activities

    (484,734     (225,775
 

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

    237        (4,005
 

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (219,801     (69,898

CASH AND CASH EQUIVALENTS—January 1

    1,209,695        917,329   
 

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS—September 30

  $ 989,894      $ 847,431   
 

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

   

Supplemental investing non-cash transaction:

   

Class A common stock issued/issuable in connection with business acquisitions

  $
39,654
  
  $ –     
 

 

 

   

 

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2011

(UNAUDITED)

(dollars in thousands)

 

    Series A
Preferred
Stock
    Common Stock     Additional
Paid-In-
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
    Class A
Common Stock
Held By a Subsidiary
    Total
Lazard Ltd
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Stockholders’
Equity
 
    Shares       $       Shares (*)         $               Shares       $          

Balance – January 1, 2011

    22,021      $     –        119,697,937      $ 1,197      $ 758,841      $ 166,468      $ (46,158     6,847,508      $ (227,950   $ 652,398      $ 143,719      $ 796,117   
                   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss):

                       

Net income

              179,710              179,710        18,972        198,682   

Other comprehensive income (loss) - net of tax:

                       

Currency translation adjustments

                (5,866         (5,866     (456     (6,322

Amortization of interest rate hedge

                749            749        42        791   

Employee benefit plans:

                       

Net actuarial loss

                (7,778         (7,778     (437     (8,215

Adjustments for items reclassified to earnings

                1,585            1,585        89        1,674   
                   

 

 

   

 

 

   

 

 

 

Comprehensive income

                      168,400        18,210        186,610   
                   

 

 

   

 

 

   

 

 

 

Business acquisitions:

                       

Class A common stock issued/issuable (including in connection with LAM Merger and related amortization)

            41,688                41,688        3,115        44,803   

Conversion of Series A preferred stock into Class A common stock

    (14,100            2,434,561        25        (25                        

Delivery of Class A common stock

            (45,935         (1,247,555     45,147        (788       (788

Amortization of share-based incentive compensation

            200,230                200,230        11,236        211,466   

Dividend-equivalents

            9,140        (9,194           (54     (3     (57

Class A common stock dividends

              (51,409           (51,409       (51,409 )  

Purchase of Class A common stock

                  4,318,916        (158,617     (158,617       (158,617

Delivery of Class A common stock in connection with share-based incentive compensation and related tax benefits of $2,178

            (290,059         (5,820,438     199,827        (90,232     73        (90,159

Repurchase of common membership interests from
LAZ-MD Holdings

            (751             (751     (43     (794

Class A common stock issued in exchange for Lazard Group common membership interests

        738,655        7        (7                        

Adjustment related to the change in Lazard Ltd’s ownership in Lazard Group

            (1,580             (1,580       (1,580

Distributions to noncontrolling interests, net

                             (17,610     (17,610

Other adjustments related to noncontrolling interests

            14,258          (244         14,014        (14,014       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2011

    7,921      $        122,871,153      $ 1,229      $ 685,800      $ 285,575      $ (57,712     4,098,431      $ (141,593   $ 773,299      $ 144,683      $ 917,982   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

Includes 119,697,936 and 122,871,152 shares of the Company’s Class A common stock issued at January 1, 2011 and September 30, 2011, respectively, and 1 share of the Company’s Class B common stock at each such date.

 

See notes to condensed consolidated financial statements.

 

6


Table of Contents

LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2010

(UNAUDITED)

(dollars in thousands)

 

    Series A
Preferred
Stock
    Common Stock     Additional
Paid-In-
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
    Class A
Common Stock
Held by a Subsidiary
    Total
Lazard Ltd
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Stockholders’
Equity
 
    Shares       $       Shares (*)         $               Shares       $          

Balance – January 1, 2010

    26,883        $    –          92,165,913        $922        $549,931        $52,726        $(57,048     5,850,775        $(191,140)        $355,391        $167,706        $523,097   
                   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss):

                       

Net income

              75,129              75,129        7,859        82,988   

Other comprehensive income (loss) - net of tax:

                       

Currency translation adjustments

                (3,829         (3,829     (292     (4,121

Amortization of interest rate hedge

                823            823        76        899   

Available-for-sale securities:

                       

Net unrealized gain

                2,272            2,272        211        2,483   

Adjustments for items reclassified to earnings

                2,372            2,372        219        2,591   

Employee benefit plans:

                       

Net actuarial loss

                (5,999         (5,999     (556     (6,555

Adjustments for items reclassified to earnings

                888            888        82        970   
                   

 

 

   

 

 

   

 

 

 

Comprehensive income

                      71,656        7,599        79,255   
                   

 

 

   

 

 

   

 

 

 

Business acquisitions:

                       

Class A common stock issued/issuable (including in connection with LAM Merger and related amortization)

        315,617        3        2,064                2,067        2,119        4,186   

Conversion of Series A preferred stock into Class A common stock

    (4,862     –          572,988        6        (6             –            –     

Amortization of share-based incentive compensation

            228,668                228,668        21,185        249,853   

Dividend-equivalents

            7,758        (7,793           (35     (3     (38

Class A common stock dividends

              (36,714           (36,714       (36,714

Purchase of Class A common stock

                  3,466,178        (106,316     (106,316       (106,316

Delivery of Class A common stock in connection with share-based incentive compensation

            (276,374         (6,451,373     221,427        (54,947       (54,947

Repurchase of common membership interests from LAZ-MD Holdings

            (4,642             (4,642     (430     (5,072

Issuance of Class A common stock

        3,000,000        30        116,070            3,000,000        (116,100     –            –     

Class A common stock issued in exchange for Lazard Group common membership interests, including in connection with secondary offerings

        20,549,950        205        (205             –            –     

Distributions to noncontrolling interests, net

                      –          (17,310     (17,310

Adjustments related to noncontrolling interests

            43,441          (9,998         33,443        (33,443     –     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30, 2010

    22,021        $    –          116,604,468        $1,166        $666,705        $83,348        $(70,519     5,865,580        $(192,129     $488,571        $147,423        $635,994   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(*)

Includes 92,165,912 and 116,604,467 shares of the Company’s Class A common stock issued at January 1, 2010 and September 30, 2010, respectively, and 1 share of the Company’s Class B common stock at each such date.

 

See notes to condensed consolidated financial statements.

 

7


Table of Contents

LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

1.    ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

Lazard Ltd, a Bermuda holding company, and its subsidiaries (collectively referred to as “Lazard Ltd”, “Lazard”, “we” or the “Company”), including Lazard Ltd’s indirect investment in Lazard Group LLC, a Delaware limited liability company (collectively referred to, together with its subsidiaries, as “Lazard Group”), is one of the world’s preeminent financial advisory and asset management firms and has long specialized in crafting solutions to the complex financial and strategic challenges of our clients. We serve a diverse set of clients around the world, including corporations, partnerships, institutions, governments and high net worth individuals.

 

Lazard Ltd indirectly held approximately 94.7% and 94.0% of all outstanding Lazard Group common membership interests as of September 30, 2011 and December 31, 2010, respectively. Lazard Ltd, through its control of the managing members of Lazard Group, controls Lazard Group. LAZ-MD Holdings LLC (“LAZ-MD Holdings”), an entity owned by Lazard Group’s current and former managing directors, held approximately 5.3% and 6.0% of the outstanding Lazard Group common membership interests as of September 30, 2011 and December 31, 2010, respectively. Additionally, LAZ-MD Holdings was the sole owner of the one issued and outstanding share of Lazard Ltd’s Class B common stock (the “Class B common stock”) which provided LAZ-MD Holdings with approximately 5.3% and 6.0% of the voting power but no economic rights in the Company as of such respective dates. Subject to certain limitations, LAZ-MD Holdings’ interests in Lazard Group are exchangeable for Lazard Ltd Class A common stock, par value $0.01 per share (“Class A common stock”). Lazard Group is governed by an Operating Agreement dated as of May 10, 2005, as amended (the “Operating Agreement”).

 

The Company’s sole operating asset is its indirect ownership of common membership interests of Lazard Group and its managing member interest of Lazard Group, whose principal operating activities are included in two business segments:

 

   

Financial Advisory, which includes providing general strategic and transaction-specific advice on mergers and acquisitions (“M&A”) and other strategic matters, restructurings, capital structure, capital raising and various other corporate finance matters, and

 

   

Asset Management, which includes strategies for the management of equity and fixed income securities and alternative investment and private equity funds, as well as wealth management.

 

In addition, the Company records selected other activities in its Corporate segment, including management of cash, certain investments and the commercial banking activities of Lazard Group’s Paris-based Lazard Frères Banque SA (“LFB”). The Company also allocates outstanding indebtedness to its Corporate segment.

 

LFB is a registered bank regulated by the Autorité de Contrôle Prudentiel. It is engaged primarily in commercial and private banking services for clients and funds managed by Lazard Frères Gestion SAS (“LFG”) and other clients, investment banking activities, including participation in underwritten offerings of securities in France, asset-liability management and limited trading in securities and foreign exchange. LFB also provides support services for certain European subsidiaries of Lazard Group.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements of Lazard Ltd have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting

 

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Table of Contents

LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in Lazard Ltd’s annual report on Form 10-K for the year ended December 31, 2010 (the “Form 10-K”). The accompanying December 31, 2010 unaudited condensed consolidated statement of financial condition data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. Although these estimates are based on management’s knowledge of current events and actions that Lazard may undertake in the future, actual results may differ materially from the estimates. The consolidated results of operations for the three month and nine month periods ended September 30, 2011 are not necessarily indicative of the results to be expected for any future interim or annual period.

 

The condensed consolidated financial statements include Lazard Ltd, Lazard Group and Lazard Group’s principal operating subsidiaries: Lazard Frères & Co. LLC (“LFNY”), a New York limited liability company, along with its subsidiaries, including Lazard Asset Management LLC and its subsidiaries (collectively referred to as “LAM”); its French limited liability companies Compagnie Financière Lazard Frères SAS (“CFLF”) along with its subsidiaries, LFB and LFG, and Maison Lazard SAS and its subsidiaries; and Lazard & Co., Limited (“LCL”), through Lazard & Co., Holdings Limited, an English private limited company (“LCH”), together with their jointly owned affiliates and subsidiaries.

 

The Company’s policy is to consolidate (i) entities in which it has a controlling financial interest, (ii) variable interest entities (“VIEs”) where the Company has a variable interest and is deemed to be the primary beneficiary and (iii) limited partnerships where the Company is the general partner, unless the presumption of control is overcome. When the Company does not have a controlling interest in an entity, but exerts significant influence over the entity’s operating and financial decisions, the Company applies the equity method of accounting in which it records in earnings its share of earnings or losses of the entity. All material intercompany transactions and balances have been eliminated.

 

Certain prior period amounts have been reclassified to conform to the manner of presentation in the current period.

 

2.    RECENT ACCOUNTING DEVELOPMENTS

 

On January 1, 2011, the Company adopted the fair value measurement disclosure guidance regarding presenting purchases, sales, issuances and settlements on a gross basis in the roll forward of activities in Level 3 of the hierarchy of fair value measurements, which did not have a material impact on the Company’s condensed consolidated financial statements.

 

During May 2011, the FASB amended its fair value measurement guidance, which it states was designed to achieve common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards (“IFRS”). Although many of the changes for U.S. GAAP purposes are clarifications of existing guidance or wording changes to align with IFRS, additional disclosures about fair value measurements would be required, including (i) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (ii) the valuation processes used and the sensitivity of fair value measurements related to investments categorized within Level 3 of the hierarchy of fair value measurements to

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

changes in unobservable inputs and the interrelationships between those unobservable inputs, if any, and (iii) the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial condition but for which the fair value is required to be disclosed. The amended fair value measurement guidance will become effective for interim and annual periods beginning after December 15, 2011 and is to be applied prospectively. Early application is not permitted. The Company does not anticipate that the adoption of the amended fair value measurement guidance will have a material impact on the Company’s consolidated financial statements.

 

During June 2011, the FASB amended its guidance regarding the presentation of comprehensive income, which it states was designed to improve comparability, consistency and transparency. The amendment requires that all changes in comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the one-statement approach, the Company would present total net income, including its components, followed by other comprehensive income, including its components, and a total of comprehensive income. In the two-statement approach, the first statement would present total net income and its components as currently presented by the Company in its consolidated statement of operations, followed consecutively by a second statement that would present the components of other comprehensive income, total other comprehensive income and the total of comprehensive income. The amendment is to be applied retrospectively and is effective with interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Company has not yet determined whether it will adopt the amendment prior to its effective date.

 

During September 2011, the FASB amended its guidance regarding goodwill impairment testing and the amount of impairment loss, if any, by allowing an entity the option to make a qualitative evaluation about whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount in lieu of actually calculating the fair value of a reporting unit. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company has not yet determined whether it will adopt the amendment prior to its effective date. The Company does not anticipate that the adoption of the amended guidance regarding goodwill impairment testing will have a material impact on the Company’s consolidated financial statements.

 

3.    RECEIVABLES - NET

 

The Company’s “receivables - net” represents receivables from fees, customers and other, and related parties.

 

Receivables are stated net of an allowance for doubtful accounts of $17,457 and $15,017 at September 30, 2011 and December 31, 2010, respectively, for accounts deemed past due and for specific accounts deemed uncollectible, which may include situations where a fee is in dispute. The Company recorded bad debt expense of $1,445 and $4,875 for the three month and nine month periods ended September 30, 2011, respectively, and $226 and $9,416 for the three month and nine month periods ended September 30, 2010, respectively. In addition, the Company recorded charge-offs, foreign currency translation and other adjustments, resulting in a net decrease to the allowance for doubtful accounts of $513 and $2,435 for the three month and nine month periods ended September 30, 2011, respectively, and $2,097 and $3,991 for the three month and nine month periods ended September 30, 2010, respectively. At September 30, 2011 and December 31, 2010, the Company had receivables deemed past due or uncollectible of $21,255 and $17,101, respectively.

 

Customers and other receivables at September 30, 2011 and December 31, 2010 include $1,433 and $2,121, respectively, of loans to managing directors and employees of the Company that are made in the ordinary course of business at market terms.

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

4.    INVESTMENTS

 

The Company’s investments and securities sold, not yet purchased, consist of the following at September 30, 2011 and December 31, 2010:

 

     September  30,
2011
     December  31,
2010
 
       

Debt:

     

U.S. Government and agencies

   $ 1,017       $ 31,900   

Fixed income funds (a)

     36,097         33,951   

Corporate and other debt and interest-bearing deposits

     21,874         29,693   
  

 

 

    

 

 

 
     58,988         95,544   
  

 

 

    

 

 

 

Equities (a)

     89,326         88,437   
  

 

 

    

 

 

 

Other:

     

Interests in alternative asset management funds (a)

     44,737         58,656   

Private equity

     142,778         163,482   

Equity method investments

     11,083         11,291   
  

 

 

    

 

 

 
     198,598         233,429   
  

 

 

    

 

 

 

Total investments

     346,912         417,410   

Less:

     

Interest-bearing deposits

     4,437         7,754   

Equity method investments

     11,083         11,291   
  

 

 

    

 

 

 

Investments, at fair value

   $ 331,392       $ 398,365   
  

 

 

    

 

 

 

Securities sold, not yet purchased, at fair value (included in “other liabilities”)

     $1,281         $2,897   
  

 

 

    

 

 

 

 

(a) At September 30, 2011, fixed income funds, equities and interests in alternative asset management funds include investments with fair values of $5,128, $18,999 and $4,861, respectively, held in order to satisfy the Company’s liability upon vesting of previously granted Lazard Fund Interest awards (“Lazard Fund Interests”) and other similar arrangements. Lazard Fund Interests represent grants by the Company to eligible employees of actual or notional interests in several Lazard-managed funds (see Note 13 of Notes to Condensed Consolidated Financial Statements).

 

The Company’s debt securities included in the table above are categorized as trading securities. Fixed income funds primarily consist of amounts seeding products of our Asset Management segment. Corporate and other debt primarily consist of United Kingdom (the “U.K.”) government and U.S. state and municipal debt securities.

 

Equities principally represent the Company’s investments in marketable equity securities of large-, mid- and small-cap domestic, international and global companies to seed new Asset Management products and includes investments in public and private asset management funds managed both by LAM and third-party asset managers.

 

Interests in alternative asset management funds represent (i) GP interests owned by Lazard in various Lazard-managed alternative asset management funds and (ii) GP interests consolidated by the Company pertaining to noncontrolling interests in such alternative asset management funds, the latter of which aggregated $7,037 and $8,219 at September 30, 2011 and December 31, 2010, respectively. Such noncontrolling interests, which represent GP interests held directly by certain of our asset management managing directors or employees of the Company, are

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

deemed to be controlled by, and therefore consolidated by, the Company in accordance with U.S. GAAP. Noncontrolling interests are presented within “stockholders’ equity” on the consolidated statements of financial condition (see Note 12 of Notes to Condensed Consolidated Financial Statements).

 

Private equity investments include those owned by Lazard and those consolidated but not owned by Lazard. Private equity investments owned by Lazard are primarily comprised of investments in private equity funds and direct private equity interests. Such investments primarily include (i) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small- to mid-cap European companies and (ii) Corporate Partners II Limited (“CP II”), a private equity fund targeting significant noncontrolling-stake investments in established public and private companies. Private equity investments also include investments consolidated but not owned by Lazard which relate solely to Lazard’s establishment of a private equity business with the Edgewater Funds (“Edgewater”), a Chicago-based private equity firm, through the acquisition of Edgewater’s management vehicles on July 15, 2009, and aggregated $37,610 and $67,206 at September 30, 2011 and December 31, 2010, respectively. The economic interests that the Company does not own are owned by the leadership team and other investors in the Edgewater management vehicles (see Note 8 of Notes to Condensed Consolidated Financial Statements).

 

On January 24, 2008, Sapphire Industrials Corp. (“Sapphire”), a then newly-organized special purpose acquisition company formed by the Company, completed an initial public offering (the “Sapphire IPO”). Sapphire had been included in equity method investments prior to its dissolution discussed below. Sapphire was formed for the purpose of effecting a business combination within a 24-month period (the “Business Combination”) and net proceeds from the Sapphire IPO were placed in a trust account by Sapphire (the “Trust Account”) pending consummation of the Business Combination. In connection with the Sapphire IPO, the Company purchased warrants from Sapphire for a total purchase price of $12,500 and Sapphire common stock for an aggregate purchase price of $50,000. The Company’s investment in Sapphire had been accounted for using the equity method of accounting. On January 6, 2010, Sapphire announced it had not completed the Business Combination and it would dissolve and distribute the funds in the Trust Account to all of its public shareholders, to the extent they were holders of shares issued in the Sapphire IPO. Pursuant to such dissolution, on January 26, 2010, Sapphire made an initial distribution to the Company aggregating $50,319. All Sapphire warrants expired without value.

 

During the three month and nine month periods ended September 30, 2011 and 2010, the Company recognized gross investment gains and losses in “revenue-other” on its condensed consolidated statements of operations as follows:

 

     Three Month Period Ended
September 30,
     Nine Month Period Ended
September 30,
 
         2011          2010      2011      2010  

Gross investment gains

   $       $ 17,306       $ 12,226       $ 26,690   

Gross investment losses

   $ 23,873       $       $ 24,145       $ 7,031   

 

12


Table of Contents

LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The table above includes gross unrealized investment gains and losses pertaining to “trading” securities as follows:

 

   

     Three Month Period Ended
September 30,
     Nine Month Period Ended
September 30,
 
         2011          2010      2011      2010  

Gross unrealized investment gains

   $       $ 1,187       $ 35       $   

Gross unrealized investment losses

   $ 2,536       $ 101       $ 1,670       $ 138   

 

During the nine month period ended September 30, 2010, the Company recorded within “accumulated other comprehensive loss, net of tax” (“AOCI”) gross pre-tax unrealized investment gains of $8,672 and gross pre-tax unrealized investment losses of $1,950 pertaining to debt securities held at LFB that were designated as “available-for-sale.” With respect to adjustments for items reclassified to earnings, the average cost basis was utilized for purposes of calculating realized investment gains and losses. There were no other-than-temporary impairment charges recognized during the nine month period ended September 30, 2010.

 

During the fourth quarter of 2010, the Company sold its remaining “available-for-sale” debt securities. Accordingly, there were no gross pre-tax investment gains or losses recorded within AOCI during the nine month period ended September 30, 2011.

 

5.    FAIR VALUE MEASUREMENTS

 

Lazard categorizes its investments and certain other assets and liabilities recorded at fair value into a three-level fair value hierarchy as follows:

 

Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that Lazard has the ability to access.

 

Level 2. Assets and liabilities whose values are based on quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in non-active markets or assets valued based on net asset value (“NAV”) redeemable at the measurement date or within the near term without redemption restrictions, or inputs other than quoted prices that are directly observable or derived principally from, or corroborated by, market data.

 

Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. Items included in Level 3 include securities or other financial assets whose volume and level of activity have significantly decreased when compared with normal market activity and there is no longer sufficient frequency or volume to provide pricing information on an ongoing basis, as well as assets valued based on NAV not redeemable within the near term.

 

The Company’s investments in U.S. Government and agency debt securities as well as its corporate and other debt securities are considered Level 1 assets with the respective fair values based on unadjusted quoted prices in active markets. The Company’s investments in fixed income funds are considered Level 1 assets when their fair values are based on the reported closing price for the fund or Level 2 assets when their fair values are primarily based on broker quotes as provided by external pricing services.

 

The fair value of equities is principally classified as Level 1 or Level 2 as follows: marketable equity securities are classified as Level 1 and are valued based on the last trade price on the primary exchange for that

 

13


Table of Contents

LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

security; public asset management funds are classified as Level 1 and are valued based on the reported closing price for the fund; and investments in private asset management funds are classified as Level 2 and are primarily valued based on information provided by fund managers and, secondarily, from external pricing services to the extent managed by LAM.

 

The fair value of interests in alternative asset management funds is classified as either Level 2 or Level 3 depending on the time frame of any applicable redemption restrictions, and is based on information provided by external pricing services.

 

The fair value of private equity investments is classified as Level 3, and is based on the financial statements of the underlying fund provided by fund managers, appraisals and internal valuations.

 

Where information reported is based on broker quotes, the Company generally obtains one quote/price per instrument. In some cases, quotes related to corporate bonds obtained through external pricing services represent the average of several broker quotes. Where information reported is based on data received from fund managers or from external pricing services, the Company reviews such information to ascertain at which level within the fair value hierarchy to classify the investment.

 

The following tables present the categorization of investments and certain other assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 into the three-level fair value hierarchy in accordance with fair value measurement disclosure requirements:

 

    September 30, 2011  
    Level 1     Level 2     Level 3     Total  

Assets:

       

Investments:

       

Debt:

       

U.S. Government and agencies

  $ 1,017      $      $      $ 1,017   

Fixed income funds

    4,173        31,924               36,097   

Corporate and other debt

    17,437                      17,437   

Equities

    71,287        17,913        126        89,326   

Other (excluding equity method investments):

       

Interest in alternative asset management funds

           36,209        8,528        44,737   

Private equity

                  142,778        142,778   

Derivatives

           19,603               19,603   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 93,914      $ 105,649      $ 151,432      $ 350,995   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Securities sold, not yet purchased

  $ 1,281      $      $      $ 1,281   

Derivatives

           29,654               29,654   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

  $ 1,281      $ 29,654      $      $ 30,935   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

14


Table of Contents

LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

    December 31, 2010  
    Level 1     Level 2     Level 3     Total  

Assets:

       

Investments:

       

Debt:

       

U.S. Government and agencies

  $ 31,900      $      $      $ 31,900   

Fixed income funds

           33,951               33,951   

Corporate and other debt

    21,939                      21,939   

Equities

    66,269        21,852        316        88,437   

Other (excluding equity method investments):

       

Interest in alternative asset management funds

           58,656               58,656   

Private equity

                  163,482        163,482   

Derivatives

           1,874               1,874   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 120,108      $ 116,333      $ 163,798      $ 400,239   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Securities sold, not yet purchased

  $ 2,897      $      $      $ 2,897   

Derivatives

           3,230               3,230   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

  $ 2,897      $ 3,230      $      $ 6,127   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy during the three month and nine month periods ended September 30, 2011 and 2010.

 

The following tables provide a summary of changes in fair value of the Company’s Level 3 assets for the three month and nine month periods ended September 30, 2011 and 2010:

 

    Three Months Ended September 30, 2011  
    Beginning
Balance
    Net  Unrealized/
Realized
Gains (Losses)
Included

In Revenue-
Other
    Purchases/
Acquisitions
    Sales/
Dispositions
    Foreign
Currency
Translation
Adjustments
    Ending
Balance
 
           

Investments:

           

Equities

  $ 135      $      $      $      $ (9   $ 126   

Interests in alternative asset management funds

                  8,528                      8,528   

Private equity

    174,704        (963     17,158        (45,058     (3,063     142,778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 174,839      $ (963   $ 25,686      $ (45,058   $ (3,072   $ 151,432   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Nine Months Ended September 30, 2011  
    Beginning
Balance
    Net  Unrealized/
Realized
Gains (Losses)
Included

In Revenue-
Other
    Purchases/
Acquisitions
    Sales/
Dispositions
    Foreign
Currency
Translation
Adjustments
    Ending
Balance
 
           

Investments:

           

Equities

  $        316      $ 3      $      $ (195)      $            2      $ 126   

Interests in alternative asset management funds

                  8,528                      8,528   

Private equity

    163,482        2,861        30,233        (54,218     420        142,778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 163,798      $ 2,864      $ 38,761      $ (54,413)      $ 422      $ 151,432   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

    Three Months Ended September 30, 2010  
    Beginning
Balance
    Net  Unrealized/
Realized
Gains (Losses)
Included In
Revenue-Other
    Purchases/
Acquisitions
    Sales/
Dispositions
    Foreign
Currency
Translation
Adjustments
    Ending
Balance
 
           

Investments:

           

Equities

  $ 299      $ 18      $ 2      $      $ (6   $ 313   

Private equity

    138,409        599        1,486        (869     4,188        143,813   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 138,708      $ 617      $ 1,488      $ (869   $ 4,182      $ 144,126   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

    Nine Months Ended September 30, 2010    

 

 
    Beginning
Balance
    Net  Unrealized/
Realized
Gains (Losses)
Included In
Revenue-Other
    Purchases/
Acquisitions
    Sales/
Dispositions
    Foreign
Currency
Translation
Adjustments
    Ending
Balance
 
           

Investments:

           

Equities

  $ 305      $ 6      $ 8      $      $ (6   $ 313   

Private equity

    135,914        5,352        7,040        (2,062     (2,431     143,813   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 136,219      $ 5,358      $ 7,048      $ (2,062   $ (2,437   $ 144,126   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Sales/dispositions of private equity investments for the three month and nine month periods ended September 30, 2011 include $42,800 and $49,500, respectively, in connection with a reduction of interests in certain funds of Edgewater as such funds are no longer consolidated by Lazard.

 

With respect to Level 3 assets held at September 30, 2011 and 2010, net gains (losses) included in earnings for the three month and nine month periods ended September 30, 2011 and the three month and nine month periods ended September 30, 2010 in connection with the change in unrealized gains and losses relating to such assets were $(829), $2,988, $617 and $5,358, respectively.

 

6.     DERIVATIVES

 

The Company enters into forward foreign currency exchange rate contracts, interest rate swaps, interest rate futures, equity and fixed income swaps and other derivative contracts to hedge exposures to fluctuations in interest rates, currency exchange rates and equity and debt markets. The Company reports its derivative instruments separately as assets and liabilities unless a legal right of set-off exists under a master netting agreement enforceable by law. The Company’s derivative instruments are recorded at their fair value, and are included in “other assets” and “other liabilities” on the consolidated statements of financial condition. Except for derivatives hedging “available-for-sale” debt securities, which were sold in the fourth quarter of 2010 (see Note 4 of Notes to Condensed Consolidated Financial Statements), the Company elected to not apply hedge accounting to its other derivative instruments held. Gains and losses on the Company’s derivatives not designated as hedging instruments, as well as gains and losses on derivatives then accounted for as fair value hedges, are included in “interest income” and “interest expense”, respectively, or “revenue-other”, depending on the nature of the underlying item, on the consolidated statements of operations. Furthermore, with respect to derivatives then designated as fair value hedges, the hedged item was required to be adjusted for changes in fair value of the risk being hedged, with such adjustment accounted for in the consolidated statements of operations.

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

In addition to the derivative instruments above, the Company has recognized a derivative liability relating to its obligation pertaining to Lazard Fund Interests and other similar arrangements, the fair value of which is based on the value of the underlying investments and is included in “accrued compensation and benefits” on the consolidated statement of financial condition as of September 30, 2011. Changes in the fair value of the derivative liability are included in “compensation and benefits” expense on the condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2011, the impact of which directly offsets the changes in the fair value of the underlying investments owned and is reported in “revenue-other” in the condensed consolidated statements of operations.

 

As a result of the sale of the Company’s “available-for-sale” debt securities during the fourth quarter of 2010 as discussed above, there were no derivatives designated as hedging instruments for the three month and nine month periods ended September 30, 2011. During the three month and nine month periods ended September 30, 2010, the Company recognized pre-tax losses pertaining to interest rate swaps designated as hedging instruments of $332 and $4,088, respectively. These losses were substantially offset by gains recognized on the hedged risk portion of such “available-for-sale” securities.

 

The table below represents the fair values of the Company’s derivative instruments reported within “other assets” and “other liabilities” and the Company’s derivative liability relating to its obligation pertaining to Lazard Fund Interests and other similar arrangements reported within “accrued compensation and benefits” on the accompanying condensed consolidated statements of financial condition as of September 30, 2011 and December 31, 2010:

 

    September 30,
2011
    December 31,
     2010     
 

Derivative Assets:

   

Forward foreign currency exchange rate contracts

  $ 7,963      $ 1,432   

Interest rate swaps

    44        57   

Equity and fixed income swaps and other

    11,596        385   
 

 

 

   

 

 

 
  $ 19,603      $ 1,874   
 

 

 

   

 

 

 

Derivative Liabilities:

   

Forward foreign currency exchange rate contracts

  $ 367      $ 2,151   

Interest rate swaps

    299        326   

Equity and fixed income swaps

           753   

Lazard Fund Interests and other similar arrangements

    28,988        –     
 

 

 

   

 

 

 
  $ 29,654      $ 3,230   
 

 

 

   

 

 

 

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Net gains (losses) with respect to derivative instruments not designated as hedging instruments (predominantly reflected in “revenue-other”) and the Company’s derivative liability relating to its obligation pertaining to Lazard Fund Interests and other similar arrangements (reported in “compensation and benefits” expense, which directly offsets corresponding amounts reported in “revenue-other” as described above) as reflected on the accompanying condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2011 and 2010, by type of derivative, were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2011             2010             2011             2010      

Forward foreign currency exchange rate contracts

   $ 6,541      $ (11,884   $ (2,856   $ 467   

Interest rate swaps

     16        2        13        36   

Equity and fixed income swaps and other

     12,014        (6,900     9,296        (2,850

Lazard Fund Interests and other similar arrangements

     (3,961     –          (3,961     –     
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 14,610      $ (18,782   $ 2,492      $ (2,347
  

 

 

   

 

 

   

 

 

   

 

 

 

 

7.    LAM MERGER TRANSACTION

 

On September 25, 2008, the Company, LAM and LAZ Sub I, LLC, a then newly-formed subsidiary of LFNY, completed the merger of LAZ Sub I, LLC with and into LAM (the “LAM Merger”). Prior to the LAM Merger, the common equity interests of LAM were held by LFNY, and certain other equity interests of LAM, representing contingent payments should certain specified fundamental transactions occur, were held by present and former employees of LAM. Following the LAM Merger, all equity interests of LAM are owned directly or indirectly by LFNY.

 

The aggregate non-contingent consideration relating to the equity interests of LAM held by present and former employees of LAM and its subsidiaries (the “Transaction Consideration”) consists of (i) cash payments made from the closing of the LAM Merger through January 2, 2009 of approximately $60,100, (ii) a cash payment on October 31, 2011 of approximately $90,300 and (iii) an issuance on October 31, 2011 of 2,201,457 shares of Class A common stock (plus additional shares of Class A common stock in an amount determined by reference to the cash dividends paid on Class A common stock since the closing of the LAM Merger), subject, in the case of clause (ii) and (iii) and, with respect to certain present employees of LAM and its subsidiaries, to delayed payment/issuance until the eighth anniversary of the closing of the LAM Merger if the applicable employee is no longer employed by Lazard or its affiliates on October 31, 2011, subject to certain exceptions. The related liabilities for the present value of the unpaid cash consideration have been recorded in the accompanying condensed consolidated statements of financial condition in “accrued compensation and benefits” and “other liabilities”, and amounted to $15,649 and $74,930, respectively, as of September 30, 2011, and $15,152 and $71,394, respectively, as of December 31, 2010.

 

8.    BUSINESS ACQUISITIONS

 

On July 15, 2009, the Company established a private equity business with Edgewater. Edgewater manages funds primarily focused on buy-out and growth equity investments in middle market companies. The acquisition was structured as a purchase by Lazard Group of interests in a holding company that in turn owns interests in the general partner and management company entities of the current Edgewater private equity funds (the “Edgewater Acquisition”). Following the Edgewater Acquisition, Edgewater’s current leadership team retained a substantial economic interest in such entities.

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The aggregate fair value of the consideration recognized by the Company at the acquisition date was $61,624. Such consideration consisted of (i) a one-time cash payment, (ii) 1,142,857 shares of Class A common stock (the “Initial Shares”) and (iii) up to 1,142,857 additional shares of Class A common stock subject to earnout criteria and payable over time (the “Earnout Shares”). The Initial Shares are subject to forfeiture provisions that lapse only upon the achievement of certain performance thresholds and transfer restrictions during the four year period ending December 2014. The Earnout Shares will be issued only if certain performance thresholds are met.

 

In prior years, the Company made certain other business acquisitions. These purchases were affected through an exchange of a combination of cash, Class A common stock, and by Lazard Ltd issuing shares of non-participating convertible Series A and Series B preferred stock, which are or were each convertible into Class A common stock. In connection with such acquisitions, as of September 30, 2011 and December 31, 2010, 47,474 and 1,295,029 shares of Class A common stock, respectively, were issuable on a non-contingent basis. Additionally, at December 31, 2010, 4,862 shares of Series A preferred stock were convertible into Class A common shares on a non-contingent basis, with the number of Class A common shares dependent on certain variables (see Note 12 of Notes to Condensed Consolidated Financial Statements). During the nine month period ended September 30, 2011, an additional 9,238 shares became convertible, with the total of 14,100 shares of Series A preferred stock converting into 2,434,561 shares of Class A common stock during the period. Depending upon the future performance of such businesses acquired, at September 30, 2011 and December 31, 2010, 7,921 and 17,159 shares of Series A preferred stock were contingently convertible into shares of Class A common stock.

 

9.    GOODWILL AND OTHER INTANGIBLE ASSETS

 

The components of goodwill and other intangible assets as of September 30, 2011 and December 31, 2010 are presented below:

 

    September 30,
2011
    December 31,
2010
 

Goodwill

  $ 350,921      $ 313,229   

Other intangible assets (net of accumulated amortization)

    43,461        48,210   
 

 

 

   

 

 

 
  $ 394,382      $ 361,439   
 

 

 

   

 

 

 

 

At September 30, 2011 and December 31, 2010, goodwill of $286,380 and $251,599, respectively, was attributable to the Company’s Financial Advisory segment and, at such respective dates, $64,541 and $61,630 of goodwill was attributable to the Company’s Asset Management segment.

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Changes in the carrying amount of goodwill for the nine month periods ended September 30, 2011 and 2010 are as follows:

 

    Nine Months Ended
September 30,
 
    2011     2010  

Balance, January 1

  $ 313,229      $ 261,703   

Business acquisitions, including $39,654 of additional contingent consideration earned relating to prior year business acquisitions

    42,566          

Foreign currency translation adjustments

    (4,874     6,019   
 

 

 

   

 

 

 

Balance, September 30

  $ 350,921      $ 267,722   
 

 

 

   

 

 

 

 

The gross cost and accumulated amortization of other intangible assets as of September 30, 2011 and December 31, 2010, by major intangible asset category, are as follows:

 

    September 30, 2011     December 31, 2010  
    Gross
Cost
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Cost
    Accumulated
Amortization
    Net
Carrying
Amount
 

Success/performance fees

  $ 30,740      $ 1,450      $ 29,290      $ 30,740      $ 890      $ 29,850   

Management fees, customer relationships and non-compete agreements

    32,624        18,453        14,171        32,477        14,117        18,360   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 63,364      $ 19,903      $ 43,461      $ 63,217      $ 15,007      $ 48,210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Amortization expense of intangible assets for the three month and nine month periods ended September 30, 2011 was $1,716 and $4,896, respectively, and for the three month and nine month periods ended September 30, 2010 was $1,719 and $5,258, respectively. Estimated future amortization expense is as follows:

 

Year Ending December 31,

   Amortization
Expense (a)
 

2011 (October 1 through December 31)

   $ 1,399   

2012

     6,331   

2013

     12,689   

2014

     9,750   

2015

     7,167   

Thereafter

     6,125   
  

 

 

 

Total amortization expense

   $ 43,461   
  

 

 

 

 

  (a) Approximately 48% of intangible asset amortization is attributable to a noncontrolling interest.

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

10.    SENIOR AND SUBORDINATED DEBT

 

Senior DebtSenior debt is comprised of the following as of September 30, 2011 and December 31, 2010:

 

     Initial
Principal
Amount
    Maturity
Date
    Annual
Interest
Rate
    Outstanding As Of  
          September 30,
2011
    December 31,
2010
 

Lazard Group 7.125% Senior Notes

  $ 550,000        5/15/15        7.125   $ 528,500      $ 528,500   

Lazard Group 6.85% Senior Notes

    600,000        6/15/17        6.85     548,350        548,350   

Lazard Group Credit Facility

    150,000        4/29/13        1.90              
       

 

 

   

 

 

 

Total

        $ 1,076,850      $ 1,076,850   
       

 

 

   

 

 

 

 

On April 29, 2010, Lazard Group entered into a $150,000, three-year senior revolving credit facility with a group of lenders (the “Credit Facility”). The Credit Facility, as amended, replaced the prior revolving credit facility, which was terminated as a condition to effectiveness of the Credit Facility. Interest rates under the Credit Facility vary and are based on either a Federal Funds rate or a Eurodollar rate, in each case plus an applicable margin. As of September 30, 2011, the annual interest rate for a loan accruing interest (based on the Federal Funds overnight rate), including the applicable margin, was 1.90%. As of September 30, 2011 and December 31, 2010, no amounts were outstanding under the Credit Facility.

 

The Credit Facility contains customary terms and conditions, including certain financial covenants. In addition, the Credit Facility, the indenture and supplemental indentures relating to Lazard Group’s senior notes, contain certain covenants (none of which relate to financial condition), events of default and other customary provisions, including a customary make-whole provision in the event of early redemption where applicable. As of September 30, 2011, the Company was in compliance with all of these provisions. All of the Company’s senior debt obligations are unsecured.

 

As of September 30, 2011, the Company had approximately $322,000 in unused lines of credit available to it, including the Credit Facility, and unused lines of credit available to LFB of approximately $100,000 (at September 30, 2011 exchange rates) and Edgewater of $65,000. In addition, LFB has access to the Eurosystem Covered Bond Purchase Program of the Banque de France.

 

Subordinated DebtSubordinated debt at December 31, 2010 represented a promissory note amounting to $150,000. The note had a maturity date of September 30, 2016 and had a fixed interest rate of 3.25% per annum. Until June 30, 2011, the note had a conversion feature which permitted the holder to convert the note into a maximum of 2,631,570 shares of Class A common stock at an effective conversion price of $57 per share. No conversions had occurred through that date and the note was no longer convertible. On July 22, 2011, the Company repurchased its outstanding subordinated promissory note, at a cost, excluding accrued interest, of $131,829. Such repurchase resulted in a pre-tax gain of $18,171, which was recognized by the Company in the third quarter of 2011 and included in “revenue-other” on the accompanying Condensed Consolidated Statements of Operations.

 

The Company’s debt at September 30, 2011 and December 31, 2010 are recorded at historical amounts. At September 30, 2011 and December 31, 2010, the fair value of the Company’s senior and subordinated debt outstanding was approximately $1,174,000 and $1,271,000, respectively, and exceeded the aggregate carrying value by approximately $97,000 and $44,000, respectively. The fair value of the Company’s debt was estimated using a discounted cash flow analysis based on the Company’s current borrowing rates for similar types of borrowing arrangements or based on market quotations, where available.

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

11.    COMMITMENTS AND CONTINGENCIES

 

LeasesLazard has various leases and other contractual commitments arising in the ordinary course of business. At September 30, 2011, minimum rental commitments under non-cancelable operating leases, net of sublease income, are approximately as follows:

 

Year Ending December 31,

      

2011 (October 1 through December 31)

   $ 18,170   

2012

     57,491   

2013

     65,469   

2014

     67,957   

2015

     63,818   

Thereafter

     807,230   
  

 

 

 

Total minimum lease payments

     1,080,135   

Sublease proceeds

     180,647   
  

 

 

 

Net lease payments

   $ 899,488   
  

 

 

 

 

GuaranteesIn the normal course of business, LFB provides indemnifications to third parties to protect them in the event of non-performance by its clients. At September 30, 2011, LFB had $4,143 of such indemnifications and held $2,828 of collateral/counter-guarantees to secure these commitments. The Company believes the likelihood of loss with respect to these indemnities is remote. Accordingly, no liability is recorded in the consolidated statement of financial condition.

 

Investment Capital Funding CommitmentsAt September 30, 2011, the maximum principal unfunded commitments by the Company for capital contributions to investment funds related to (i) CP II, amounting to $2,692 for potential “follow-on investments” and/or for CP II expenses through the earlier of February 25, 2017 or the liquidation of the fund, (ii) Edgewater Growth Capital Partners III, L.P. (“EGCP III”), an Edgewater private equity fund, amounting to $41,753, through the earlier of October 12, 2016 (i.e., the end of the investment period) for investments and/or expenses (with a portion of the undrawn amount of such commitment as of that date remaining committed until October 12, 2023 in respect of “follow-on investments” and/or EGCP III expenses) or the liquidation of the fund and (iii) a $25,000 investment commitment to develop certain real estate investment funds until the earliest of (a) the date on which third-party assets under management in such funds reach $250,000, (b) December 31, 2013 or (c) the date on which the principal manager of such funds is no longer employed by Lazard.

 

Other CommitmentsIn the normal course of business, LFB enters into commitments to extend credit, predominately at variable interest rates. Such commitments at September 30, 2011 aggregated $16,718. These commitments have varying expiration dates and are fully collateralized and generally contain requirements for the counterparty to maintain a minimum collateral level. These commitments may not represent future cash requirements as they may expire without being drawn upon.

 

See Notes 7, 8 and 14 of Notes to Condensed Consolidated Financial Statements for information regarding commitments relating to the LAM Merger, business acquisitions and obligations to fund our pension plans, respectively.

 

The Company has various other contractual commitments arising in the ordinary course of business. In addition, from time to time, LFB enters into underwriting commitments in which it participates as a joint underwriter. The settlement of such transactions are not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

In the opinion of management, the fulfillment of the commitments described herein will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

LegalThe Company is involved from time to time in a number of judicial, regulatory and arbitration proceedings and inquiries concerning matters arising in connection with the conduct of our businesses, including proceedings initiated by former employees alleging wrongful termination. The Company reviews such matters on a case-by-case basis and establishes any required accrual if a loss is probable and the amount of such loss can be reasonably estimated. The Company does experience significant variation in its revenue and earnings on a quarterly basis. Accordingly, the results of any pending matter or matters could be significant when compared to the Company’s earnings in any particular fiscal quarter. The Company believes, however, based on currently available information, that the results of any pending matters, in the aggregate, will not have a material effect on its business or financial condition.

 

12.    STOCKHOLDERS’ EQUITY

 

Issuance of Class A Common SharesDuring the three month period ended March 31, 2010, 3,000,000 shares of Class A common stock were newly issued by Lazard Ltd to Lazard Group in connection with the settlement of vested restricted stock unit grants denominated in shares of Class A common stock (“RSUs”). Such shares were authorized as part of the 25,000,000 shares of Class A common stock that may be issued under the Lazard Ltd 2005 Equity Incentive Plan (the “2005 Plan”). In addition, during the third quarters of 2011 and 2010, the Company issued an aggregate of 3,682,116 shares (including 1,247,555 shares delivered from Class A common stock held by a subsidiary) and 888,605 shares of Class A common stock, respectively, in connection with certain prior year business acquisitions (see Note 8 of Notes to Condensed Consolidated Financial Statements).

 

Secondary OfferingsPursuant to the applicable Prospectus Supplements, certain selling shareholders of Lazard Ltd (which include current and former managing directors of Lazard (and, from time to time, certain of our directors, executive officers or former executive officers) and their permitted transferees (collectively, the “Selling Shareholders”) who hold LAZ-MD Holdings exchangeable interests and/or Class A common stock), may offer to sell shares of Class A common stock pursuant to applicable underwriting and pricing agreements. During the nine month period ended September 30, 2010 two such secondary offerings occurred, which are described below (no secondary offerings occurred during the nine month period ended September 30, 2011).

 

In March 2010, certain Selling Shareholders sold 7,869,311 shares of Class A common stock (including (i) 7,262 shares of Class A common stock previously received upon the exchange of a like number of LAZ-MD Holdings exchangeable interests, (ii) 6,180,639 shares of Class A common stock received upon a simultaneous exchange of a like number of LAZ-MD Holdings exchangeable interests (including 5,958,000 shares held by the Estate of Lazard’s former Chairman and Chief Executive Officer and related trusts (collectively, the “Estate”) and (iii) 1,681,410 shares held by the Estate) at a price of $35.90 per share (collectively, the “March 2010 Secondary Offering”).

 

In August 2010, certain Selling Shareholders (the “August 2010 Selling Shareholders”) sold 7,397,837 shares of Class A common stock at a price of $30.32 per share (the “August 2010 Secondary Offering”, and together with the March 2010 Secondary Offering, the “2010 Secondary Offerings”). Separately, in connection with the August 2010 Secondary Offering, Lazard Group agreed to purchase from the August 2010 Selling Shareholders 2,500,000 shares of Class A common stock for an aggregate cost of $75,800 ($30.32 per share), with such purchase being part of the share repurchase program in effect during 2010. In the aggregate, the August 2010 Selling Shareholders sold a total of 9,897,837 shares of Class A common stock (including

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

7,194,144 shares of Class A common stock previously received upon the exchange of a like number of LAZ-MD Holdings exchangeable interests and 2,703,693 shares of Class A common stock received upon a simultaneous exchange of a like number of LAZ-MD Holdings exchangeable interests).

 

Lazard Ltd did not receive any net proceeds from the sales of Class A common stock from the 2010 Secondary Offerings.

 

Lazard Group DistributionsAs previously described, Lazard Group’s common membership interests are held by subsidiaries of Lazard Ltd and by LAZ-MD Holdings. Pursuant to provisions of the Operating Agreement, Lazard Group distributions in respect of its common membership interests are allocated to the holders of such interests on a pro rata basis. Such distributions represent amounts necessary to fund (i) any dividends Lazard Ltd may declare on its Class A common stock and (ii) tax distributions in respect of income taxes that Lazard Ltd’s subsidiaries and the members of LAZ-MD Holdings incur as a result of holding Lazard Group common membership interests.

 

During the nine month periods ended September 30, 2011 and 2010, Lazard Group distributed the following amounts to LAZ-MD Holdings and the subsidiaries of Lazard Ltd (none of which related to tax distributions):

 

     Nine Months Ended
September 30,
 
     2011      2010  

LAZ-MD Holdings

   $ 3,280       $ 8,453   

Subsidiaries of Lazard Ltd

     51,409         36,714   
  

 

 

    

 

 

 
   $ 54,689       $ 45,167   
  

 

 

    

 

 

 

 

Pursuant to Lazard Group’s Operating Agreement, Lazard Group allocates and distributes to its members a substantial portion of its distributable profits in installments, as soon as practicable after the end of each fiscal year. Such installment distributions usually begin in February.

 

Exchange of Lazard Group Common Membership InterestsIn addition to the simultaneous exchanges that occurred in connection with the 2010 Secondary Offerings discussed above, during the nine month periods ended September 30, 2011 and 2010, Lazard Ltd issued 738,655 and 11,665,618 shares of Class A common stock, respectively, in connection with the exchange of a like number of Lazard Group common membership interests (received from members of LAZ-MD Holdings in exchange for a like number of LAZ-MD Holdings exchangeable interests).

 

See “Noncontrolling Interests” below for additional information regarding Lazard Ltd’s and LAZ-MD Holdings’ ownership interests in Lazard Group.

 

Share Repurchase ProgramIn January 2010, the Board of Directors of Lazard Ltd authorized, on a cumulative basis, the repurchase of up to $200,000 in aggregate cost of its Class A common stock and Lazard Group common membership interests through December 31, 2011. The Company’s prior share repurchase program expired on December 31, 2009. In February 2011, the Board of Directors of Lazard Ltd authorized the repurchase of up to an additional $250,000 in aggregate cost of Class A common stock and Lazard Group common membership interests through December 31, 2012. The Company expects that the share repurchase program, with respect to the Class A common stock, will continue to be used primarily to offset a portion of the shares that have been or will be

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

issued under the 2005 Plan and the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”). Pursuant to such authorizations, purchases have been made in the open market or through privately negotiated transactions, and since the inception of the program in February 2006 through September 30, 2011, purchases by Lazard Group with respect to such program are set forth in the table below (including, in the nine month period ended September 30, 2011, purchases of 4,318,916 Class A common shares, at an aggregate cost of $158,617, and the purchase of 19,032 Lazard Group common membership interests, at an aggregate cost of $794):

 

     Number  of
Shares/Common

Membership
Interests Purchased
     Average Price Per
Share/Common
Membership
Interest
 

Class A common stock

     21,092,575       $ 33.58   

Lazard Group common membership interests

     1,400,089       $ 32.66   

 

As a result of Lazard Group’s delivery of shares of Class A common stock during the four year and nine month period ended September 30, 2011 relating to (i) the settlement of vested RSUs and deferred stock unit grants (“DSUs”), (ii) the incentive plan share awards of shares of restricted Class A common stock and (iii) the issuance of shares of restricted Class A common stock in exchange for RSUs and (iv) the delivery of shares of Class A common stock in connection with business acquisitions, there were 4,098,431 and 6,847,508 shares of Class A common stock held by Lazard Group at September 30, 2011 and December 31, 2010, respectively. Such Class A common shares are reported, at cost, as “Class A common stock held by a subsidiary” on the accompanying condensed consolidated statements of financial condition.

 

As of September 30, 2011, $133,360 of the $450,000 share repurchase amount authorized as of such date remained available under the share repurchase program, which authorization expires on December 31, 2012. On October 26, 2011, Lazard Ltd’s Board of Directors authorized, on a cumulative basis, the repurchase of up to an additional $125,000 in aggregate cost of its Class A common stock and Lazard Group common membership interests, which authorization expires on December 31, 2013, and brings the total remaining repurchase authorization to $258,360, subject to expiration as set forth above. In addition, under the terms of the 2005 Plan and the 2008 Plan, upon the vesting of RSUs, shares of Class A common stock may be withheld by the Company to cover estimated income taxes (see Note 13 of Notes to Condensed Consolidated Financial Statements).

 

Preferred StockLazard Ltd has 15,000,000 authorized shares of preferred stock, par value $0.01 per share, inclusive of its Series A preferred stock and Series B preferred stock. The Series A and Series B preferred shares are each non-participating securities that are or were each convertible into Class A common stock, and have no voting or dividend rights. As of September 30, 2011 and December 31, 2010, 7,921 and 22,021 shares of Series A preferred stock, respectively, were outstanding, and no shares of Series B preferred stock were outstanding at such dates.

 

At December 31, 2010, 4,862 shares of the Series A preferred shares outstanding were convertible into shares of Class A common stock. During the nine month period ended September 30, 2011, an additional 9,238 shares became convertible, with the total of 14,100 shares of Series A preferred stock converting into shares of Class A common stock during the period. The remaining 7,921 and 17,159 shares of Series A preferred stock outstanding at September 30, 2011 and December 31, 2010, respectively, may become convertible into shares of Class A common stock upon completion or satisfaction of specified obligations in the applicable acquisition agreement. The Series A preferred stock conversion rate into shares of Class A common stock varies, with the ultimate conversion rate dependent on certain variables, including the value of the Class A common stock, as defined, and the currency exchange rate on the date of conversion.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Accumulated Other Comprehensive Income (Loss), Net of TaxThe components of AOCI at September 30, 2011 and December 31, 2010 are as follows:

 

     September 30,
2011
    December 31,
         2010        
 
      

Currency translation adjustments

   $ 6,871      $ 13,193   

Interest rate hedge

     (3,820     (4,611

Employee benefit plans

     (63,136     (56,595
  

 

 

   

 

 

 

Total AOCI

     (60,085     (48,013

Less amount attributable to noncontrolling interests

     (2,373     (1,855
  

 

 

   

 

 

 

Total Lazard Ltd AOCI

   $ (57,712   $ (46,158
  

 

 

   

 

 

 

 

Noncontrolling InterestsNoncontrolling interests principally represent interests held in (i) Lazard Group by LAZ-MD Holdings, (ii) Edgewater’s management vehicles that the Company is deemed to control, but does not own, and (iii) various GP interests which are deemed to be controlled by the Company.

 

As of September 30, 2011 and December 31, 2010, LAZ-MD Holdings held approximately 5.3% and 6.0%, respectively, of the outstanding Lazard Group common membership interests. Subject to certain limitations, LAZ-MD Holdings’ interests in Lazard Group are exchangeable for Class A common stock.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The following tables summarize the changes in ownership interests in Lazard Group held by Lazard Ltd and LAZ-MD Holdings during the nine month periods ended September 30, 2011 and 2010:

 

    Lazard Ltd     LAZ-MD Holdings     Total
Lazard
Group
Common
Membership
Interests
 
  Common
Membership
Interests
    %
Ownership
    Common
Membership
Interests
    %
Ownership
   

Balance, January 1, 2010

    92,165,912        74.5     31,520,426        25.5     123,686,338   

Activity January 1, 2010 to September 30, 2010:

         

Common membership interest activity in connection with:

         

Equity compensation

    3,000,000          –            3,000,000   

2010 Secondary Offerings

    8,884,332          (8,884,332       –     

Exchanges for Class A common stock

    11,665,618          (11,665,618       –     

Business acquisitions

    888,605          –            888,605   

Repurchase of common membership interests from LAZ-MD Holdings

    –            (167,286       (167,286
 

 

 

     

 

 

     

 

 

 

Balance, September 30, 2010

    116,604,467        91.5     10,803,190        8.5     127,407,657   
 

 

 

     

 

 

     

 

 

 

Balance, January 1, 2011

    119,697,936        94.0     7,652,625        6.0     127,350,561   

Activity January 1, 2011 to September 30, 2011:

         

Common membership interest activity in connection with:

         

Exchanges for Class A common stock

    738,655          (738,655       –     

Business acquisitions

    2,434,561          –            2,434,561   

Repurchase of common membership interests from LAZ-MD Holdings

    –            (19,032       (19,032
 

 

 

     

 

 

     

 

 

 

Balance, September 30, 2011

    122,871,152        94.7     6,894,938        5.3     129,766,090   
 

 

 

     

 

 

     

 

 

 

 

The change in Lazard Ltd’s ownership in Lazard Group in the nine month periods ended September 30, 2011 and 2010 did not materially impact Lazard Ltd’s stockholders’ equity.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The tables below summarize net income (loss) attributable to noncontrolling interests for the three month and nine month periods ended September 30, 2011 and 2010 and noncontrolling interests as of September 30, 2011 and December 31, 2010 in the Company’s condensed consolidated financial statements:

 

     Net Income (Loss) Attributable To
Noncontrolling Interests
 
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

LAZ-MD Holdings

   $ 4,209      $ 6,152      $ 11,955      $ 4,909   

Edgewater

     587        (366     7,492        3,511   

GP interests

     (192     879        (179     151   

Other

     (170     (402     (296     (712
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 4,434      $ 6,263      $ 18,972      $ 7,859   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Noncontrolling Interests
As Of
 
     September 30,
2011
     December 31,
2010
 

LAZ-MD Holdings

   $ 30,576       $ 22,167   

Edgewater

     105,461         111,289   

GP interests

     7,037         8,219   

Other

     1,609         2,044   
  

 

 

    

 

 

 

Total

   $ 144,683       $ 143,719   
  

 

 

    

 

 

 

 

Dividend Declared, October 2011On October 26, 2011, the Board of Directors of Lazard Ltd declared a quarterly dividend of $0.16 per share on its Class A common stock, payable on November 25, 2011, to stockholders of record on November 7, 2011.

 

13.    INCENTIVE PLANS

 

Share-Based Incentive Plan Awards

 

A description of Lazard Ltd’s 2005 Plan and 2008 Plan, and activity with respect thereto during the three and nine month periods ended September 30, 2011 and 2010, is presented below.

 

Shares Available Under the 2005 Plan and 2008 Plan

 

The 2005 Plan authorizes the issuance of up to 25,000,000 shares of Class A common stock pursuant to the grant or exercise of stock options, stock appreciation rights, restricted stock, stock units and other equity-based awards. Each stock unit granted under the 2005 Plan represents a contingent right to receive one share of Class A common stock, at no cost to the recipient. The fair value of such stock unit awards is determined based on the closing market price of Class A common stock at the date of grant.

 

In addition to the shares available under the 2005 Plan, additional shares of Class A common stock are available under the 2008 Plan. The maximum number of shares available under the 2008 Plan is based on a formula

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

that limits the aggregate number of shares that may, at any time, be subject to awards that are considered “outstanding” under the 2008 Plan to 30% of the then-outstanding shares of Class A common stock (treating, for this purpose, the then-outstanding exchangeable interests of LAZ-MD Holdings on a “fully-exchanged” basis as described in the 2008 Plan).

 

Restricted and Deferred Stock Units

 

RSUs require future service as a condition for the delivery of the underlying shares of Class A common stock (unless the recipient is then eligible for retirement under the Company’s retirement policy) and convert into Class A common stock on a one-for-one basis after the stipulated vesting periods. The grant date fair value of the RSUs, net of an estimated forfeiture rate, is amortized over the vesting periods or requisite service periods, and, for purposes of calculating diluted net income per share, are included in the diluted weighted average shares of Class A common stock outstanding using the treasury stock method. Expense relating to RSUs was as follows within the Company’s condensed consolidated statements of operations:

 

      Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
      2011      2010      2011      2010 (*)  

Compensation and benefits

   $ 58,489       $ 46,814       $ 200,899       $ 201,157   

Restructuring

     –           –           –           46,880   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 58,489       $ 46,814       $ 200,899       $ 248,037   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(*) Includes, during the nine month period ended September 30, 2010, $24,860 relating to the January 2010 amendment of the Company’s retirement policy (described below).

 

RSUs issued subsequent to December 31, 2005 generally include a dividend participation right that provides that during vesting periods each RSU is attributed additional RSUs (or fractions thereof) equivalent to any ordinary quarterly dividends paid on Class A common stock during such period. During the nine month periods ended September 30, 2011 and 2010, issuances of RSUs pertaining to such dividend participation rights and respective charges to “retained earnings”, net of estimated forfeitures (with corresponding credits to “additional paid-in-capital”), consisted of the following:

 

      Nine Months Ended
September 30
 
         2011              2010      

Issuance of RSUs

     251,146         244,754   

Charges to retained earnings, net of estimated forfeitures

     $8,169         $6,963   

 

In January 2010, the Company amended its retirement policy with respect to RSU awards. Such amendment served to modify the retirement eligibility vesting requirements of existing and future RSU awards, and, as noted above, Lazard accelerated the recognition of compensation expense for the affected RSU awards. Accordingly, the Company recorded a non-cash charge to “compensation and benefits” expense of $24,860 in the three month period ended March 31, 2010 relating to prior years’ awards.

 

Non-Executive members of the Board of Directors receive approximately 55% of their annual compensation for service on the Board of Directors and its committees in the form of DSUs, which resulted in 26,859 and 31,588 DSUs granted during the nine month periods ended September 30, 2011 and 2010, respectively. Their

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

remaining compensation is payable in cash, which they may elect to receive in the form of additional DSUs under the Directors’ Fee Deferral Unit Plan described below. DSUs are convertible into Class A common stock at the time of cessation of service to the Board. The DSUs include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock, and resulted in nominal cash payments for the nine month periods ended September 30, 2011 and 2010.

 

On May 9, 2006, the Board of Directors adopted the Directors’ Fee Deferral Unit Plan, which allows the Company’s Non-Executive Directors to elect to receive additional DSUs pursuant to the 2005 Plan in lieu of some or all of their cash fees. The number of DSUs that shall be granted to a Non-Executive Director pursuant to this election will equal the value of cash fees that the applicable Non-Executive Director has elected to forego pursuant to such election, divided by the market value of a share of Class A common stock on the date on which the foregone cash fees would otherwise have been paid. During the nine month periods ended September 30, 2011 and 2010, 5,371 and 5,912 DSUs, respectively, had been granted pursuant to such Plan.

 

DSU awards are expensed at their fair value on their date of grant, which, inclusive of amounts related to the Directors’ Fee Deferral Unit Plan, totaled $70 and $1,194 during the three month and nine month periods ended September 30, 2011, respectively, and $58 and $1,173 during the three month and nine month periods ended September 30, 2010, respectively.

 

The following is a summary of activity relating to RSUs and DSUs during the nine month periods ended September 30, 2011 and 2010:

 

    RSUs     DSUs  
    Units     Weighted
Average
Grant Date
Fair Value
    Units     Weighted
Average
Grant Date
Fair Value
 

Balance, January 1, 2011

    22,108,635      $ 35.67        121,737      $ 34.46   

Granted (including 251,146 RSUs relating to dividend participation)

    6,764,420      $ 43.91        32,230      $ 37.06   

Forfeited

    (287,975   $ 37.73                 

Vested/Converted

    (7,848,744   $ 39.21        (16,120   $ 34.76   
 

 

 

     

 

 

   

Balance, September 30, 2011

    20,736,336      $ 36.99        137,847      $ 35.03   
 

 

 

     

 

 

   
       

Balance, January 1, 2010

    23,367,813      $ 37.01        103,146      $ 35.75   

Granted (including 244,754 RSUs relating to dividend participation)

    7,730,444      $ 35.66        37,500      $ 31.27   

Forfeited

    (726,948   $ 36.21                 

Vested/Converted/Exchanged

    (7,979,501   $ 39.86        (20,435   $ 35.38   
 

 

 

     

 

 

   

Balance, September 30, 2010

    22,391,808      $ 35.57        120,211      $ 34.42   
 

 

 

     

 

 

   

 

The Company satisfied certain employees’ tax obligations in lieu of issuing 2,302,798 and 1,602,999 shares of Class A common stock in connection with RSUs that vested during the periods set forth in the table above. Accordingly, 5,545,946 and 6,335,607 shares of Class A common stock held by Lazard Group were delivered during the nine month periods ended September 30, 2011 and 2010, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

As of September 30, 2011, unrecognized RSU compensation expense, adjusted for estimated forfeitures, was approximately $309,000, with such unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.5 years subsequent to September 30, 2011. The ultimate amount of such expense is dependent upon the actual number of RSUs that vest. The Company periodically assesses the forfeiture rates used for such estimates. A change in estimated forfeiture rates would cause the aggregate amount of compensation expense recognized in future periods to differ from the estimated unrecognized compensation expense described herein.

 

Restricted Stock

 

The following is a summary of activity related to shares of restricted Class A common stock during the nine month periods ended September 30, 2011 and 2010:

 

     Restricted
Shares
    Weighted
Average
Grant Date
Fair Value
 

Balance, January 1, 2011

     95,332      $ 37.63   

Granted

     327,238      $ 43.70   

Vested

     (327,238   $ 43.70   
  

 

 

   

Balance, September 30, 2011

     95,332      $ 37.63   
  

 

 

   

Balance, January 1, 2010

     –          –     

Granted/Exchanged

     95,332      $ 37.63   

Vested

     –          –     
  

 

 

   

Balance, September 30, 2010

     95,332      $ 37.63   
  

 

 

   

 

The Company satisfied certain employees’ tax obligations in lieu of delivering 68,866 shares of Class A common stock in connection with shares of restricted Class A common stock that vested during the period set forth in the table above. Accordingly, 258,372 shares of Class A common stock held by Lazard Group were delivered during the nine month period ended September 30, 2011.

 

Expense relating to restricted stock awards is charged to “compensation and benefits” expense within the Company’s condensed consolidated statements of operations, and amounted to $374 and $9,373 for the three month and nine month periods ended September 30, 2011, respectively, and $483 and $643 for the three month and nine month periods ended September 30, 2010, respectively. The awards include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock during the period, which will vest concurrently with the underlying restricted stock award. At September 30, 2011, unrecognized restricted stock expense was approximately $1,300, with such expense to be recognized over a weighted average period of approximately 1.0 years subsequent to September 30, 2011.

 

For purposes of calculating diluted net income per share, such awards are included in the diluted weighted average shares of Class A common stock outstanding using the “treasury stock” method.

 

Other Incentive Awards

 

As previously described, in February 2011, the Company granted to eligible employees Lazard Fund Interests. In connection with the Lazard Fund Interests and other similar arrangements, the Company recorded a prepaid

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

compensation asset and a corresponding compensation liability at the grant date fair value. The prepaid asset is amortized on a straight-line basis over the applicable vesting periods or requisite service periods. Lazard Fund Interests that do not require future service are expensed immediately.

 

The Lazard Fund Interests granted generally provide for one-third vesting on March 1, 2013 and two-thirds vesting on March 3, 2014. The amortization of the prepaid asset is charged to “compensation and benefits” expense within the Company’s consolidated statement of operations, and amounted to $2,480 and $7,534 for the three month and nine month periods ended September 30, 2011, respectively. As of September 30, 2011, unrecognized compensation expense for Lazard Fund Interests and other similar arrangements, adjusted for estimated forfeitures, was approximately $21,000. Such compensation expense will generally be recognized over a weighted average period of approximately 2.0 years subsequent to September 30, 2011. The related compensation liability is accounted for at fair value as a derivative liability, and is adjusted for changes in the fair value of the underlying investments, with such changes in value directly offset by a corresponding amount recorded to “compensation and benefits” expense within the Company’s consolidated statements of operations (see Note 6 of Notes to Condensed Consolidated Financial Statements).

 

14.    EMPLOYEE BENEFIT PLANS

 

The Company provides retirement and other post-retirement benefits to certain of its employees through defined contribution and defined benefit pension plans and other post-retirement plans. These plans generally provide benefits to participants based on average levels of compensation. Expenses related to the Company’s employee benefit plans are included in “compensation and benefits” expense on the consolidated statements of operations.

 

Employer Contributions to Pension PlansIn accordance with agreements reached with the Trustees of certain U.K. pension plans in 2005, the Company was obligated to make further contributions to such pension plans based upon the cumulative performance of the plans’ assets against specific benchmarks as measured on June 1, 2009 and subsequently remeasured on June 1, 2010. As of December 31, 2009, the obligation related to the cumulative underperformance of the plans’ assets (the “underperformance obligation”) was payable in equal monthly installments through May 2013. During the year ended December 31, 2010, the Company contributed approximately $8,600 to settle the plans’ underperformance obligation in full.

 

In addition, on June 30, 2009 the Company and Trustees concluded the December 31, 2007 triennial valuation of the U.K. pension plans discussed above, pursuant to which: (i) the Company agreed to contribute, in addition to amounts to cover administrative expenses under the plans, 2.3 million British pounds ($3,584 at September 30, 2011 exchange rates), during each year from 2011 to 2018 inclusive, subject to adjustment resulting from the December 31, 2010 triennial valuation, which the Company expects to have concluded prior to the contribution payment scheduled for 2011, and (ii) to secure the Company’s obligations thereunder, on July 15, 2009 the Company placed in escrow 12.5 million British pounds, with a final redemption date of December 31, 2018. This amount is subject to adjustment based on the results of the December 31, 2010 triennial valuation and subsequent triennial valuations. The aggregate escrow balance has been recorded in “cash deposited with clearing organizations and other segregated cash” and “investments”, respectively, on the accompanying condensed consolidated statements of financial condition. Income on the escrow balance accretes to the Company and is recorded in interest income.

 

During the nine month period ended September 30, 2011, no contribution to these U.K. pension plans was required, and no contributions were required to be made to other pension plans.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The following tables summarize the components of total benefit cost (credit) for the three month and nine month periods ended September 30, 2011 and 2010:

 

    Pension Plans     Post-Retirement
Medical Plans
 
    Three Months Ended September 30,  
      2011         2010           2011             2010      

Components of Net Periodic Benefit Cost (Credit):

       

Service cost

  $ 163      $ 160      $   18      $ 20   

Interest cost

    7,242        6,921        70        73   

Expected return on plan assets

    (7,763     (7,372     –          –     

Amortization of:

       

Prior service cost (credit)

    756        632        –          (332

Net actuarial loss

    65        203        –          –     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (credit)

  $ 463      $ 544      $ 88      $     (239
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    Pension Plans     Post-Retirement
Medical Plans
 
    Nine Months Ended September 30,  
      2011         2010           2011             2010      

Components of Net Periodic Benefit Cost (Credit):

       

Service cost

  $ 495      $ 420      $ 52      $ 60   

Interest cost

    21,401        20,708        209        219   

Expected return on plan assets

    (23,029     (21,801     –          –     

Amortization of:

       

Prior service cost (credit)

    2,258        2,108        –          (1,023

Net actuarial loss

    194        602        –          –     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (credit)

  $ 1,319      $ 2,037      $   261      $ (744
 

 

 

   

 

 

   

 

 

   

 

 

 

 

15.    RESTRUCTURING PLANS

 

In the three month period ended March 31, 2010, the Company announced a restructuring plan which included certain staff reductions and realignments of personnel (the “2010 Restructuring Plan”). In connection with the 2010 Restructuring Plan, the Company recorded a charge in the first quarter of 2010 of $87,108, inclusive of $46,880 relating to the acceleration of RSUs (in aggregate, the “2010 Restructuring Charge”).

 

The 2010 Restructuring Charge primarily consisted of compensation-related expenses, including the acceleration of unrecognized expenses pertaining to RSUs previously granted to individuals who were terminated pursuant to the restructuring, severance and benefit payments and other costs. As of September 30, 2011 and December 31, 2010, the remaining liability associated with the 2010 Restructuring Plan was $13,036 and $21,381, respectively. In the first quarter of 2009 the Company also announced a restructuring plan (the “2009 Restructuring Plan”). As of September 30, 2011 and December 31, 2010, the remaining liability associated with the 2009 Restructuring Plan was $4,901 and $5,427, respectively. During the nine month period ended September 30, 2011, other than cash payments of $8,345 and $526 for the 2010 Restructuring Plan and the 2009 Restructuring Plan, respectively, there were no adjustments to the amounts relating to the 2010 and 2009

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Restructuring Plans. Liabilities relating to the 2010 and 2009 Restructuring Plans are reported within “accrued compensation and benefits” and “other liabilities” on the accompanying condensed consolidated statements of financial condition.

 

16.    INCOME TAXES

 

As a result of its indirect investments in Lazard Group, Lazard Ltd is subject to U.S. federal income taxes on its portion of Lazard Group’s operating income. Although a portion of Lazard Group’s income is subject to U.S. federal income taxes, Lazard Group primarily operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal income tax purposes. As a result, Lazard Group’s income from its U.S. operations is generally not subject to U.S. federal income taxes because such income is attributable to the partners. In addition, Lazard Group is subject to New York City Unincorporated Business Tax (“UBT”), which is attributable to Lazard Group’s operations apportioned to New York City. UBT is incremental to the U.S. federal statutory tax rate. Outside the U.S., Lazard Group operates principally through subsidiary corporations that are subject to local income taxes.

 

The Company recorded income tax provisions of $20,605 and $51,704 for the three month and nine month periods ended September 30, 2011, respectively, and $9,113 and $29,049 for the three month and nine month periods ended September 30, 2010, respectively, representing effective tax rates of 23.5%, 20.6%, 11.5% and 25.9%, respectively. The difference between the U.S. federal statutory rate of 35.0% and the effective tax rates described above principally relates to (i) Lazard Group primarily operating as a limited liability company in the U.S., (ii) foreign source income (loss) not subject to U.S. income taxes, (iii) Lazard Group’s income from U.S. operations attributable to noncontrolling interests, (iv) changes in the valuation allowance on deferred tax assets affecting the provision for income taxes and (v) U.S. state and local taxes (primarily UBT), which are incremental to the U.S. federal statutory tax rate.

 

Substantially all of Lazard’s foreign operations are conducted in “pass-through” entities for U.S. income tax purposes and the Company provides for U.S. income taxes on a current basis for substantially all of those earnings. The repatriation of prior earnings attributable to “non-pass-through” entities would not result in the recognition of a material amount of additional U.S. income taxes.

 

Tax Receivable Agreement

 

The redemption of historical partner interests in connection with the Company’s separation and recapitalization that occurred in May 2005 and subsequent exchanges of LAZ-MD Holdings exchangeable interests for shares of Class A common stock have resulted, and future exchanges of LAZ-MD Holdings exchangeable interests for shares of Class A common stock may result, in increases in the tax basis of the tangible and/or intangible assets of Lazard Group. The tax receivable agreement dated as of May 10, 2005 with LFCM Holdings requires the Company to pay LFCM Holdings 85% of the cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes as a result of the above-mentioned increases in tax basis. The Company calculates this provision annually and includes such amounts in operating expenses on its consolidated statements of operations once the results of operations for the full year are known. As a result, there is no provision for such payments in the nine month periods ended September 30, 2011 and 2010. If any provision is required pursuant to the tax receivable agreement, such amount would be fully offset by a reduction in the Company’s income tax expense.

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

17.    NET INCOME PER SHARE OF CLASS A COMMON STOCK

 

The Company’s basic and diluted net income per share calculations for the three month and nine month periods ended September 30, 2011 and 2010 are computed as described below.

 

Basic Net Income Per Share

 

Numerator—utilizes net income attributable to Lazard Ltd for the respective periods, plus applicable adjustments to such net income associated with the inclusion of shares of Class A common stock issuable on a non-contingent basis.

 

Denominator—utilizes the weighted average number of shares of Class A common stock outstanding for the respective periods, plus applicable adjustments to such shares associated with shares of Class A common stock issuable on a non-contingent basis.

 

Diluted Net Income Per Share

 

Numerator—utilizes net income attributable to Lazard Ltd for the respective periods as in the basic net income per share calculation described above, plus, to the extent applicable and dilutive, (i) interest expense on convertible debt, (ii) changes in net income attributable to noncontrolling interests resulting from assumed Class A common stock issuances in connection with share-based incentive compensation, convertible debt and convertible preferred stock and, on an “as-if-exchanged” basis, amounts applicable to LAZ-MD Holdings exchangeable interests and (iii) income tax related to (i) and (ii) above.

 

Denominator—utilizes the weighted average number of shares of Class A common stock outstanding for the respective periods as in the basic net income per share calculation described above, plus, to the extent applicable and dilutive, the incremental number of shares of Class A common stock to settle share-based incentive compensation, convertible debt, convertible preferred stock and LAZ-MD Holdings exchangeable interests, using the “treasury stock” method, the “if converted” method or the “as-if-exchanged” basis, as applicable.

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The calculations of the Company’s basic and diluted net income per share and weighted average shares outstanding for the three month and nine month periods ended September 30, 2011 and 2010 are presented below:

 

    Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
    2011     2010     2011     2010  

Net income attributable to Lazard Ltd

    $62,699        $64,091        $179,710        $75,129   

Add - adjustment associated with Class A common stock issuable on a non-contingent basis

    86        116        285        95   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Lazard Ltd - basic

    62,785        64,207        179,995        75,224   

Add - dilutive effect, as applicable, of:

       

Adjustments to income relating to interest expense and changes in net income attributable to noncontrolling interests resulting from assumed Class A common stock issuances in connection with share-based incentive compensation, convertible debt, convertible preferred stock and exchangeable interests, net of tax

    3,618        5,992        12,692        3,988   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Lazard Ltd - diluted

    $66,403        $70,199        $192,687        $79,212   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of Class A common stock outstanding

    115,071,470        108,302,438        114,026,323        98,579,076   

Add - adjustment for shares of Class A common stock issuable on a non-contingent basis

    3,244,474        2,756,633        3,559,705        2,861,665   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of Class A common stock outstanding - basic

    118,315,944        111,059,071        117,586,028        101,440,741   

Add - dilutive effect, as applicable, of:

       

Weighted average number of incremental shares of Class A common stock issuable from share-based incentive compensation, convertible debt, convertible preferred stock and exchangeable interests

    18,542,012        27,035,030        20,679,466        34,113,390   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of Class A common stock outstanding - diluted

    136,857,956        138,094,101        138,265,494        135,554,131   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Lazard Ltd per share of Class A common stock:

       

Basic

    $0.53        $0.58        $1.53        $0.74   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    $0.49        $0.51        $1.39        $0.58   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

18.    RELATED PARTIES

 

Amounts receivable from, and payable to, related parties as of September 30, 2011 and December 31, 2010 are set forth below:

 

     September 30,
2011
     December 31,
2010
 

Receivables

     

LFCM Holdings

   $ 12,375       $ 24,785   

Other

     1,873         89   
  

 

 

    

 

 

 

Total

   $ 14,248       $ 24,874   
  

 

 

    

 

 

 

Payables

     

LFCM Holdings

   $ 3,327       $ 2,819   

Other

     755         –     
  

 

 

    

 

 

 

Total

   $ 4,082       $ 2,819   
  

 

 

    

 

 

 

 

LFCM Holdings

 

LFCM Holdings owns and operates the capital markets business and fund management activities, as well as other specified non-operating assets and liabilities, that were transferred to it by Lazard Group (referred to as the “separated businesses”) in May 2005 and is owned by various current and former working members, including certain of Lazard’s current and former managing directors (which also include the Company’s executive officers) who were or are also members of LAZ-MD Holdings. In addition to the master separation agreement, which effected the separation and recapitalization that occurred in May 2005, LFCM Holdings entered into certain agreements that addressed various business matters associated with the separation, including agreements related to administrative and support services (the “administrative services agreement”), employee benefits, insurance matters and licensing. In addition, LFCM Holdings and Lazard Group entered into a business alliance agreement. Certain of these agreements are described in more detail in the Company’s Form 10-K.

 

For the three month and nine month periods ended September 30, 2011, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $596 and $1,788, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $5,927 and $19,074, respectively. For the three month and nine month periods ended September 30, 2010, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $557 and $1,616, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $2,779 and $9,508, respectively. Amounts relating to the administrative services agreement are reported as reductions to operating expenses. Net referral fees for underwriting transactions under the business alliance agreement are reported in “revenue-other”. Net referral fees for private placement, M&A and restructuring transactions under the business alliance agreement are reported in advisory fee revenue.

 

Receivables from LFCM Holdings and its subsidiaries as of September 30, 2011 and December 31, 2010 primarily include $1,566 and $12,775, respectively, related to administrative and support services and reimbursement of expenses incurred on behalf of LFCM Holdings, and $9,698 and $11,413, respectively, related to referral fees for underwriting and private placement transactions. Payables to LFCM Holdings and its

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

subsidiaries at September 30, 2011 and December 31, 2010 relate to obligations pursuant to the tax receivable agreement of $2,361 (see Note 16 of Notes to Condensed Consolidated Financial Statements) and $966 and $458, respectively, principally relating to certain advances and referral fees for Financial Advisory transactions.

 

Other

 

Other receivables and payables at September 30, 2011 primarily relate to referral fees for restructuring and M&A transactions with companies within the MBA Lazard Holdings S.A. group, an Argentina-based group in which the Company has a 50% ownership interest.

 

LAZ-MD Holdings

 

Lazard Group provides selected administrative and support services to LAZ-MD Holdings through the administrative services agreement as discussed above, with such services generally to be provided until December 31, 2014 unless terminated earlier because of a change in control of either party. Lazard Group charges LAZ-MD Holdings for these services based on Lazard Group’s cost allocation methodology and, for both the three month periods ended September 30, 2011 and 2010, such charges amounted to $188, and for both the nine month periods ended September 30, 2011 and 2010, such charges amounted to $563.

 

19.    REGULATORY AUTHORITIES

 

LFNY is a U.S. registered broker-dealer and is subject to the net capital requirements of Rule 15c3-1 under the Securities Exchange Act of 1934. Under the basic method permitted by this rule, the minimum required net capital, as defined, is a specified fixed percentage of total aggregate indebtedness recorded in LFNY’s Financial and Operational Combined Uniform Single (“FOCUS”) report filed with the Financial Industry Regulatory Authority (“FINRA”), or $100, whichever is greater. At September 30, 2011, LFNY’s regulatory net capital was $167,157, which exceeded the minimum requirement by $161,116.

 

Certain U.K. subsidiaries of the Company, including LCL, Lazard Fund Managers Limited and Lazard Asset Management Limited (the “U.K. Subsidiaries”), are regulated by the Financial Services Authority. At September 30, 2011, the aggregate regulatory net capital of the U.K. Subsidiaries was $152,947, which exceeded the minimum requirement by $108,653.

 

CFLF, through which non-corporate finance advisory activities are carried out in France, is subject to regulation by the Autorité de Contrôle Prudentiel for its banking activities conducted through its subsidiary, LFB. In addition, the investment services activities of the Paris group, exercised through LFB and other subsidiaries of CFLF, primarily LFG (asset management), are subject to regulation and supervision by the Autorité des Marchés Financiers. At September 30, 2011, the consolidated regulatory net capital of CFLF was $183,444, which exceeded the minimum requirement set for regulatory capital levels by $84,635.

 

Certain other U.S. and non-U.S. subsidiaries are subject to various capital adequacy requirements promulgated by various regulatory and exchange authorities in the countries in which they operate. At September 30, 2011, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $82,336, which exceeded the minimum required capital by $60,121.

 

At September 30, 2011, each of these subsidiaries individually was in compliance with its regulatory capital requirements.

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Lazard Ltd has been subject to supervision by the SEC as a Supervised Investment Bank Holding Company (“SIBHC”). As a SIBHC, Lazard Ltd was subject to group-wide supervision, which required it to compute allowable capital and risk allowances on a consolidated basis. However, pursuant to Section 617 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the SEC’s SIBHC program was eliminated on July 21, 2011. Pursuant to relevant rules in Europe, Lazard Ltd is required to be supervised by another regulatory body, either in the U.S. or Europe. The Dodd-Frank Act allows certain securities holding companies seeking consolidated supervision, including Lazard Ltd, to elect to be supervised by the Board of Governors of the Federal Reserve. Lazard Ltd anticipates that the Board of Governors of the Federal Reserve will adopt regulations pursuant to Section 618 of the Dodd-Frank Act in the near future for companies that seek to come under their consolidated supervision. Once we understand the final scope of such regulations, Lazard Ltd will determine whether it will elect to comply with such regulations and register to come under the consolidated supervision of the Federal Reserve. Until such regulations are adopted, however, we cannot determine the full impact of such regulations on us. The Dodd-Frank Act and the rules and regulations that may be adopted thereunder (including regulations that have not yet been proposed) could have other effects on us. We continue to monitor the process as such rules are proposed and adopted.

 

20.    SEGMENT INFORMATION

 

The Company’s reportable segments offer different products and services and are managed separately as different levels and types of expertise are required to effectively manage the segments’ transactions. Each segment is reviewed to determine the allocation of resources and to assess its performance. The Company’s principal operating activities are included in the two business segments as described in Note 1 above – Financial Advisory and Asset Management. In addition, as described in Note 1 above, the Company records selected other activities in its Corporate segment.

 

The Company’s segment information for the three month and nine month periods ended September 30, 2011 and 2010 is prepared using the following methodology:

 

   

Revenue and expenses directly associated with each segment are included in determining operating income.

 

   

Expenses not directly associated with specific segments are allocated based on the most relevant measures applicable, including headcount, square footage and other factors.

 

   

Segment assets are based on those directly associated with each segment, and include an allocation of certain assets relating to various segments, based on the most relevant measures applicable, including headcount, square footage and other factors.

 

The Company allocates investment gains and losses, interest income and interest expense among the various segments based on the segment in which the underlying asset or liability is reported.

 

Each segment’s operating expenses include (i) compensation and benefits expenses incurred directly in support of the businesses and (ii) other operating expenses, which include directly incurred expenses for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourced services and indirect support costs (including compensation and other operating expenses related thereto) for administrative services. Such administrative services include, but are not limited to, accounting, tax, legal, facilities management and senior management activities.

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Management evaluates segment results based on net revenue and operating income and believes that the following information provides a reasonable representation of each segment’s contribution with respect to net revenue, operating income (loss) and total assets:

 

         Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
             2011             2010             2011             2010      

Financial Advisory

          
  Net Revenue    $ 253,585      $ 254,012      $ 731,621      $ 768,481   
  Operating Expenses      213,614        215,838        641,397        667,538   
    

 

 

   

 

 

   

 

 

   

 

 

 
  Operating Income    $ 39,971      $ 38,174      $ 90,224      $ 100,943   
    

 

 

   

 

 

   

 

 

   

 

 

 

Asset Management

          
  Net Revenue    $ 219,077      $ 210,132      $ 690,785      $ 587,299   
  Operating Expenses      156,709        150,515        466,827        416,841   
    

 

 

   

 

 

   

 

 

   

 

 

 
  Operating Income    $ 62,368      $ 59,617      $ 223,958      $ 170,458   
    

 

 

   

 

 

   

 

 

   

 

 

 

Corporate

          
  Net Revenue    $ (10,243   $ (10,907   $ (44,672   $ (45,297
  Operating Expenses      4,358        7,417        19,124        114,067   
    

 

 

   

 

 

   

 

 

   

 

 

 
  Operating Loss    $ (14,601   $ (18,324   $ (63,796   $ (159,364
    

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

          
  Net Revenue    $ 462,419      $ 453,237      $ 1,377,734      $ 1,310,483   
  Operating Expenses      374,681        373,770        1,127,348        1,198,446   
    

 

 

   

 

 

   

 

 

   

 

 

 
  Operating Income    $ 87,738      $ 79,467      $ 250,386      $ 112,037   
    

 

 

   

 

 

   

 

 

   

 

 

 

 

     As Of  
     September 30,
2011
     December 31,
2010
 

Total Assets

     

Financial Advisory

   $ 808,970       $ 799,090   

Asset Management

     617,040         687,323   

Corporate

     1,710,459         1,936,119   
  

 

 

    

 

 

 

Total

   $ 3,136,469       $ 3,422,532   
  

 

 

    

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with Lazard Ltd’s condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”), as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) included in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “Form 10-K”). All references to “2011”, “2010”, “third quarter”, “nine months”, or “the period” refer to, as the context requires, the three month and nine month periods ended September 30, 2011 and September 30, 2010.

 

Forward-Looking Statements and Certain Factors that May Affect Our Business

 

Management has included in Parts I and II of this Form 10-Q, including in its MD&A, statements that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may”, “might”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, and the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. These factors include, but are not limited to, those discussed in our Form 10-K under the caption “Risk Factors,” including the following:

 

   

a decline in general economic conditions or the global financial markets,

 

   

losses caused by financial or other problems experienced by third parties,

 

   

losses due to unidentified or unanticipated risks,

 

   

a lack of liquidity, i.e., ready access to funds, for use in our businesses, and

 

   

competitive pressure on our businesses and on our ability to retain our employees.

 

These risks and uncertainties are not exhaustive. Other sections of the Form 10-K may include additional factors, which could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for our management to predict all risks and uncertainties, nor can management assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations and we do not intend to do so.

 

Forward-looking statements include, but are not limited to, statements about the:

 

   

business’ possible or assumed future results of operations and operating cash flows,

 

   

business’ strategies and investment policies,

 

   

business’ financing plans and the availability of short-term borrowing,

 

   

business’ competitive position,

 

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future acquisitions, including the consideration to be paid and the timing of consummation,

 

   

potential growth opportunities available to our businesses,

 

   

recruitment and retention of our managing directors and employees,

 

   

target levels of compensation expense,

 

   

business’ potential operating performance, achievements, productivity improvements, efficiency and cost reduction efforts,

 

   

likelihood of success and impact of litigation,

 

   

expected tax rates,

 

   

changes in interest and tax rates,

 

   

expectations with respect to the economy, securities markets, the market for mergers, acquisitions and strategic advisory and restructuring activity, the market for asset management activity and other industry trends,

 

   

effects of competition on our business, and

 

   

impact of future legislation and regulation on our business.

 

The Company is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, the Company uses its websites to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information and the posting of updates of assets under management (“AUM”) in various mutual funds, hedge funds and other investment products managed by Lazard Asset Management LLC and its subsidiaries (“LAM”). Monthly updates of these funds are posted to the LAM website (www.lazardnet.com) on the third business day following the end of each month. Investors can link to Lazard Ltd, Lazard Group and their operating company websites through http://www.lazard.com. Our websites and the information contained therein or connected thereto shall not be deemed to be incorporated into this Form 10-Q.

 

Business Summary

 

The Company’s principal sources of revenue are derived from activities in the following business segments:

 

   

Financial Advisory, which includes providing general strategic and transaction-specific advice on mergers and acquisitions (“M&A”) and other strategic matters, restructurings, capital structure, capital raising and various other corporate finance matters, and

 

   

Asset Management, which includes strategies for the management of equity and fixed income securities and alternative investment and private equity funds, as well as wealth management.

 

In addition, the Company records selected other activities in its Corporate segment, including management of cash, certain investments and the commercial banking activities of Lazard Group’s Paris-based Lazard Frères Banque SA (“LFB”). The Company also allocates outstanding indebtedness to its Corporate segment.

 

LFB is a registered bank regulated by the Autorité de Contrôle Prudentiel. It is engaged primarily in commercial and private banking services for clients and funds managed by Lazard Frères Gestion SAS (“LFG”) and other clients, investment banking activities, including participation in underwritten offerings of securities in France, asset-liability management and limited trading in securities and foreign exchange. LFB also provides support services for certain European subsidiaries of Lazard Group.

 

Lazard invests its own capital usually alongside capital of qualified institutional and individual investors in alternative investments or private equity investments and, since 2005, we have engaged in a number of alternative investments and private equity activities, including investments through the Edgewater Funds

 

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(“Edgewater”), our Chicago-based private equity firm (see Note 8 of Notes to Condensed Consolidated Financial Statements), (ii) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small-to mid cap European companies and (iii) investments in Corporate Partners II Limited (“CP II”). We continue to explore and discuss opportunities to expand the scope of our alternative investment and private equity activities in Europe, the U.S. and elsewhere. These opportunities could include internal growth of new funds and direct investments by us, partnerships or strategic relationships, investments with third parties or acquisitions of existing funds or management companies. Also, consistent with our obligations to LFCM Holdings LLC (“LFCM Holdings”), we may explore discrete capital markets opportunities.

 

The Company’s consolidated net revenue was derived from the following segments:

 

      Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2011             2010             2011             2010      

Financial Advisory

     55     56     53     59

Asset Management

     47        46        50        45   

Corporate

     (2     (2     (3     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Business Environment

 

Economic and global financial market conditions can materially affect our financial performance. As described above, the Company’s principal sources of revenue are derived from activities in our Financial Advisory and Asset Management business segments. As our Financial Advisory revenues are for the most part dependent on the successful completion of merger, acquisition, restructuring, capital raising or similar transactions, and our Asset Management revenues are primarily driven by the levels of AUM, weak economic and global financial market conditions can result in a challenging business environment for M&A and capital raising activity as well as our Asset Management business, but may provide opportunities for our restructuring business, which tends to be counter-cyclical.

 

Overall, global equity market indices at September 30, 2011 were significantly lower when compared to such indices at June 30, 2011, with periods of significant volatility during the period. For the same period, capital-raising and M&A activity was uneven due to economic uncertainty caused by concerns over the public-finance situation in Europe, the U.S. debt ceiling and related downgrade concerns and continuing high U.S. unemployment, among other matters. The announced value of M&A activity decreased in the third quarter of 2011 as compared to the corresponding period in 2010. Restructuring activity continued at low levels, reflecting a cyclical decline in restructuring activity and a decrease in the number of corporate defaults.

 

During the past few years, we have expanded our geographic reach and industry expertise. We believe that in this environment, companies, government bodies and investors will seek independent advice with a geographic perspective, deep understanding of capital structure, informed research and knowledge of global economic conditions, and that our business model as an independent adviser will continue to create opportunities for us to attract new clients and key personnel.

 

Lazard operates in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for Lazard’s management to predict all risks and uncertainties, nor can Lazard assess the impact of all potentially applicable factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. See the section entitled “Risk Factors” in our Form 10-K. Furthermore, net income and revenue in any period may not be indicative of full-year results or the results of any other period and may vary significantly from year to year and quarter to quarter.

 

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Financial Advisory

 

During the third quarter of 2011 the value and average value of completed and announced transactions generally decreased as compared to the corresponding period in 2010, despite modest increases in the number of such transactions. However, for the first nine months of 2011, the value of global completed and announced M&A transactions increased, while the number of such transactions reflected no significant change, as compared to the corresponding 2010 period, resulting in transactions with higher average values.

 

    

Three Months Ended
September 30,

        Nine Months Ended
September 30,
 
     2011     2010     %
Incr /  (Decr)
        2011     2010     %
Incr /  (Decr)
 
   

($ in billions)

 

Completed M&A Transactions:

             

Global:

             

Value

    $579        $615        (6 )%        $2,104        $1,743        21

Number

    10,285        10,218        1       32,309        31,548        2

Trans-Atlantic:

             

Value

    $50        $42        19       $172        $141        22

Number

    424        371        14       1,241        1,141        9

Announced M&A Transactions:

             

Global:

             

Value

    $636        $783        (19 )%        $2,183        $2,008        9

Number

    10,567        10,357        2       33,025        31,894        4

Trans-Atlantic:

             

Value

    $46        $62        (26 )%        $178        $154        16

Number

    431        377        14       1,275        1,141        12

 

Source: Dealogic as of October 7, 2011.

 

We continue to believe that we are relatively well positioned as our clients refinance, restructure and reposition their asset portfolios for growth.

 

Global restructuring activity during the 2011 nine month period decreased from the corresponding prior year period driven by a cyclical decline, resulting in a decelerating pace of corporate debt defaults. According to Moody’s Investors Service, Inc., in the twelve month period ended September 30, 2011 a total of 35 issuers defaulted, as compared to 72 in the twelve months ended September 30, 2010, which includes a total of 17 issuers in the nine month period ended September 30, 2011, as compared to 40 in the corresponding 2010 period. While the number and value of corporate defaults for 2011 are significantly lower as compared to 2010, we expect that our Restructuring business will remain active, albeit at a lower level as compared to the prior year. Our Restructuring activities include advising companies on matters relating to debt restructurings, refinancings and other on- and off-balance sheet assignments. Our Restructuring assignments are generally executed over a six- to eighteen-month period.

 

Our Private Fund Advisory Group, which is part of our Financial Advisory segment and is conducted in the U.S. through Lazard Frères & Co. LLC (“LFNY”), an SEC-registered broker-dealer and municipal advisor and member of the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board (the “MSRB”), acts as placement agent for investment funds, including investment funds that have historically received capital from certain public pension funds. In April 2009, governmental officials in New York announced a new policy banning the use of placement agents by funds seeking investment contributions from the New York State and New York City public pension funds. The use of placement agents has also been prohibited or otherwise restricted with respect to investments by public pension funds in Illinois, Ohio, California and New Mexico, and similar measures are being considered or have been implemented in other jurisdictions. On June 22, 2011, the SEC approved an amendment to its June 30, 2010 rule which, among other things, will place certain restrictions on the use of placement agents. As amended, the SEC rule will prohibit investment advisors

 

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from paying a third-party placement agent for soliciting investment advisory business from a U.S. governmental entity, unless the placement agent is (i) an SEC-registered investment advisor complying with the rule, (ii) an SEC-registered broker-dealer that is a member of FINRA and thus subject to FINRA’s forthcoming “pay-to-play” rule, or (iii) a “municipal advisor” that is registered with the SEC under Section 15B of the Securities Exchange Act of 1934, as amended, and subject to the “pay-to-play” rules that will be adopted by the MSRB. We are continuing to evaluate the potential impact of state, local and other restrictions on our Private Fund Advisory business.

 

Asset Management

 

As shown in the table below, the majority of selected major market indices at September 30, 2011 declined as compared to such indices at June 30, 2011, December 31, 2010 and September 30, 2010.

 

      Percentage Change
September 30, 2011 vs.
 
     June 30,
2011
    December 31,
2010
    September 30,
2010
 

MSCI World Index

     (17 )%      (14 )%      (6 )% 

CAC 40

     (25 )%      (22 )%      (20 )% 

DAX

     (25 )%      (20 )%      (12 )% 

FTSE 100

     (14 )%      (13 )%      (8 )% 

TOPIX 100

     (14 )%      (20 )%      (13 )% 

MSCI Emerging Market

     (23 )%      (24 )%      (18 )% 

Dow Jones Industrial Average

     (12 )%      (6 )%      1

NASDAQ

     (11 )%      (7 )%      5

S&P 500

     (14 )%      (10 )%      (1 )% 

 

The fees that we receive for providing investment management and advisory services are primarily driven by the level of AUM. Accordingly, since market movements and foreign currency volatility impact the level of our AUM, such items will impact the level of revenues we receive from our Asset Management business. A substantial portion of our AUM is invested in equities, and market movements reflected in the changes in Lazard’s AUM during the period generally corresponded to the changes in global market indices. Our AUM at September 30, 2011 decreased 13% versus AUM at December 31, 2010 (primarily due to market and foreign exchange depreciation), while our average AUM for the third quarter and nine months of 2011 increased 11% and 15%, respectively, as compared to our average AUM for the corresponding periods of 2010. The higher levels of average AUM contributed to increased management fee revenues in the 2011 periods.

 

Financial Statement Overview

 

Net Revenue

 

The majority of Lazard’s Financial Advisory net revenue is earned from the successful completion of M&A transactions, strategic advisory matters, restructuring and capital structure advisory services, capital raising and similar transactions. The main drivers of Financial Advisory net revenue are overall M&A activity, the level of corporate debt defaults and the environment for capital raising activities, particularly in the industries and geographic markets in which Lazard focuses. In some client engagements, often those involving financially distressed companies, revenue is earned in the form of retainers and similar fees that are contractually agreed upon with each client for each assignment and are not necessarily linked to the completion of a transaction. In addition, Lazard also earns fees from providing strategic advice to clients, with such fees not being dependent on a specific transaction, and may also earn fees in connection with public and private securities offerings and for referring opportunities to LFCM Holdings for underwriting, distribution and placement of securities. Significant fluctuations in Financial Advisory net revenue can occur over the course of any given year, because a significant portion of such net revenue is earned upon the successful completion of a transaction, restructuring or capital raising activity, the timing of which is uncertain and is not subject to Lazard’s control.

 

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Lazard’s Asset Management segment principally includes LAM, LFG, Edgewater and Lazard Wealth Management. Asset Management net revenue is derived from fees for investment management and advisory services provided to institutional and private clients. The main driver of Asset Management net revenue is the level of AUM, which is influenced by the performance of the global equity markets and, to a lesser extent, fixed income markets and Lazard’s investment performance, which impacts its ability to successfully attract and retain assets. As a result, fluctuations (including timing thereof) in financial markets and client asset inflows and outflows have a direct effect on Asset Management net revenue and operating income. Asset Management fees are generally based on the level of AUM measured daily, monthly or quarterly, and an increase or reduction in AUM, due to market price fluctuations, currency fluctuations, net client asset flows or otherwise, will result in a corresponding increase or decrease in management fees. The majority of our investment advisory contracts are generally terminable at any time or on notice of 30 days or less. Institutional and individual clients, and firms with which we have strategic alliances, can terminate their relationship with us, reduce the aggregate amount of AUM or shift their funds to other types of accounts with different rate structures for a number of reasons, including investment performance, changes in prevailing interest rates and financial market performance. In addition, as Lazard’s AUM includes significant amounts of assets that are denominated in currencies other than U.S. Dollars, changes in the value of the U.S. Dollar relative to foreign currencies will impact the value of Lazard’s AUM. Fees vary with the type of assets managed and the vehicle in which they are managed, with higher fees earned on equity assets, alternative investments (such as hedge funds) and private equity investments, and lower fees earned on fixed income and cash management products.

 

The Company earns performance-based incentive fees on various investment products, including traditional products and alternative investment funds such as hedge funds and private equity funds.

 

For hedge funds, incentive fees are calculated based on a specified percentage of a fund’s net appreciation, in some cases in excess of established benchmarks or thresholds. The Company records incentive fees on traditional products and hedge funds at the end of the relevant performance measurement period, when potential uncertainties regarding the ultimate realizable amounts have been determined. The incentive fee measurement pe