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Lazard 10-Q 2011
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 June 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 July 25, 2011, there were 120,426,321 shares of the Registrant’s Class A common stock (including 4,339,875 shares held by a subsidiary) 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 June 30, 2011 of approximately 94.6% 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

     40   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     72   

Item 4. Controls and Procedures

     72   

Part II. Other Information

        

Item 1. Legal Proceedings

     73   

Item 1A. Risk Factors

     73   

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

     73   

Item 3. Defaults Upon Senior Securities

     74   

Item 4. (Removed and Reserved)

     74   

Item 5. Other Information

     74   

Item 6. Exhibits

     76   

Signatures

     81   

 

i


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

    Page  

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

    2   

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

    4   

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

    5   

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

    6   

Notes to Condensed Consolidated Financial Statements

    8   

 

1


Table of Contents

LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

JUNE 30, 2011 AND DECEMBER 31, 2010

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     June 30,
2011
     December 31,
2010
 

ASSETS

     
Cash and cash equivalents    $ 984,012         $1,209,695   
Deposits with banks      248,944         356,539   
Cash deposited with clearing organizations and other segregated cash     
100,162
  
     92,911   
Receivables-net:      

Fees

    
418,126
  
     480,340   

Customers and other

    
100,513
  
     63,490   

Related parties

    
13,502
  
     24,874   
                 
    
532,141
  
     568,704   

Investments

    
435,139
  
     417,410   
     

Property (net of accumulated amortization and depreciation of $272,369 and $250,898 at June 30, 2011 and December 31, 2010, respectively)

  

 

153,006

  

     150,524   

Goodwill and other intangible assets (net of accumulated amortization of $18,187 and $15,007 at June 30, 2011 and December 31, 2010, respectively)

  

 

365,441

  

     361,439   
Other assets     
262,169
  
     265,310   
                 

Total assets

   $ 3,081,014       $ 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)

JUNE 30, 2011 AND DECEMBER 31, 2010

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     June 30,
2011
    December 31,
2010
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits and other customer payables

   $ 273,465      $ 361,553   

Accrued compensation and benefits

     183,660        498,880   

Senior debt

     1,076,850        1,076,850   

Capital lease obligations

     23,101        22,903   

Related party payables

     3,464        2,819   

Other liabilities

     512,682        513,410   

Subordinated debt

     150,000        150,000   
                

Total liabilities

    
2,223,222
  
    2,626,415   
                

Commitments and contingencies

    

STOCKHOLDERS’ EQUITY

    

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

    

Series A - 22,021 shares issued and outstanding at June 30, 2011 and December 31, 2010

    

  
      

Series B - no shares issued and outstanding

    

  
      

Common stock:

    

Class A, par value $.01 per share (500,000,000 shares authorized; 120,426,321 and 119,697,936 shares issued at June 30, 2011 and December 31, 2010, respectively, including shares held by a subsidiary as indicated below)

  

 

1,204

  

    1,197   

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

  

 

  

      

Additional paid-in-capital

    
642,269
  
    758,841   

Retained earnings

    
244,633
  
    166,468   

Accumulated other comprehensive loss, net of tax

    
(17,827

    (46,158
                
    
870,279
  
    880,348   

Class A common stock held by a subsidiary, at cost (4,339,875 and 6,847,508 shares at June 30, 2011 and December 31, 2010, respectively)

    
(159,763

    (227,950
                

Total Lazard Ltd stockholders’ equity

    
710,516
  
    652,398   

Noncontrolling interests

     147,276        143,719   
                

Total stockholders’ equity

     857,792        796,117   
                

Total liabilities and stockholders’ equity

   $ 3,081,014      $ 3,422,532   
                

 

See notes to condensed consolidated financial statements.

 

3


Table of Contents

LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2011 AND 2010

(UNAUDITED)

(dollars in thousands, except for per share data)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
        2011         2010         2011         2010  

REVENUE

       

Investment banking and other advisory fees

    $243,096        $245,282        $463,423        $514,491   

Money management fees

    230,906        180,899        445,598        358,002   

Interest income

    4,363        5,500        7,855        10,607   

Other

    22,240        11,472        45,070        23,861   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    500,605        443,153        961,946        906,961   

Interest expense

    23,313        24,118        46,631        49,715   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    477,292        419,035        915,315        857,246   
 

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES

       

Compensation and benefits

    286,480        263,021        556,479        563,398   

Occupancy and equipment

    22,977        21,320        45,685        42,590   

Marketing and business development

    20,879        18,252        38,990        33,855   

Technology and information services

    20,582        16,996        40,149        34,648   

Professional services

    13,120        10,814        22,961        18,985   

Fund administration and outsourced services

    13,507        10,996        26,758        22,370   

Amortization of intangible assets related to acquisitions

    1,706        1,769        3,180        3,539   

Restructuring

    –          –          –          87,108   

Other

    8,839        8,816        18,465        18,183   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    388,090        351,984        752,667        824,676   
 

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

    89,202        67,051        162,648        32,570   

Provision for income taxes

    17,636        13,523        31,099        19,936   
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

    71,566        53,528        131,549        12,634   

LESS - NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

    9,562        8,956        14,538        1,596   
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO LAZARD LTD

    $  62,004        $  44,572        $117,011        $  11,038   
 

 

 

   

 

 

   

 

 

   

 

 

 

ATTRIBUTABLE TO LAZARD LTD CLASS A COMMON STOCKHOLDERS:

       

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

       

Basic

    119,107,386        103,527,014        117,221,070        96,631,576   

Diluted

    139,347,933        139,944,310        138,969,263        108,995,837   

NET INCOME PER SHARE OF COMMON STOCK:

       

Basic

    $0.52        $0.43        $1.00        $0.11   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    $0.48        $0.39        $0.91        $0.10   
 

 

 

   

 

 

   

 

 

   

 

 

 

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

    $0.16        $0.125        $0.285        $0.25   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

See notes to condensed consolidated financial statements.

 

4


Table of Contents

LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2011 AND 2010

(UNAUDITED)

(dollars in thousands)

 

     Six Months Ended
June 30,
 
        2011             2010      

CASH FLOWS FROM OPERATING ACTIVITIES:

   

Net income

  $ 131,549      $ 12,634   

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

    11,820        10,122   

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

    164,713        207,786   

Amortization of intangible assets related to acquisitions

    3,180        3,539   

Loss on extinguishment of debt

    –          424   

(Increase) decrease in operating assets:

   

Deposits with banks

    132,672        (44,179

Cash deposited with clearing organizations and other segregated cash

    (845     (2,190

Receivables-net

    52,477        45,832   

Investments

    (13,164     (17,312

Other assets

    12,237        (3,589

Increase (decrease) in operating liabilities:

   

Deposits and other payables

    (112,956     (3,421

Accrued compensation and benefits and other liabilities

    (366,816     (301,056
               

Net cash provided by (used in) operating activities

    14,867        (91,410
               

CASH FLOWS FROM INVESTING ACTIVITIES:

   

Distributions relating to equity method investments

    –          51,437   

Additions to property

    (5,676     (5,465

Disposals of property

    199        254   

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

    –          52,786   
               

Net cash provided by (used in) investing activities

    (5,477     99,012   
               

CASH FLOWS FROM FINANCING ACTIVITIES:

   

Proceeds from:

   

Contribution from noncontrolling interests

    980        2,000   

Excess tax benefits from share-based incentive compensation

   
2,848
  
   
–  
  

Other financing activities

    1,688        5,554   

Payments for:

   

Senior borrowings

    –          (10,375

Capital lease obligations

    (1,397     (1,096

Distributions to noncontrolling interests

    (8,034     (9,491

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

    (794     –     

Purchase of Class A common stock

    (126,237     (22,733

Class A common stock dividends

    (32,855     (23,022

Settlement of vested share-based incentive compensation

    (90,635     (44,536

Other financing activities

    (46     (34
               

Net cash used in financing activities

    (254,482     (103,733
               

EFFECT OF EXCHANGE RATE CHANGES ON CASH

    19,409        (23,766
               

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (225,683     (119,897

CASH AND CASH EQUIVALENTS—January 1

    1,209,695        917,329   
               

CASH AND CASH EQUIVALENTS—June 30

  $ 984,012     $ 797,432   
               

 

See notes to condensed consolidated financial statements.

 

5


Table of Contents

LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTH PERIOD ENDED JUNE 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

              117,011              117,011        14,538        131,549   

Other comprehensive income (loss) - net of tax:

                       

Currency translation adjustments

                30,418            30,418        1,756        32,174   

Amortization of interest rate hedge

                498            498        29        527   

Employee benefit plans:

                       

Net actuarial loss

                (3,434         (3,434     (196     (3,630

Adjustments for items reclassified to earnings

                1,054            1,054        60        1,114   
                   

 

 

   

 

 

   

 

 

 

Comprehensive income

                      145,547        16,187        161,734   
                   

 

 

   

 

 

   

 

 

 

Class A common stock issued/issuable in connection with business acquisitions and LAM Merger and related amortization

            4,180                4,180        240        4,420   

Amortization of share-based incentive compensation

            144,261                144,261        8,272        152,533   

Dividend-equivalents

            5,958        (5,991           (33     (2     (35

Class A common stock dividends

              (32,855           (32,855       (32,855

Purchase of Class A common stock

                  3,156,416        (126,237     (126,237       (126,237

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

            (282,956         (5,664,049     194,424        (88,532     75        (88,457

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

        728,385        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

                             (7,054     (7,054

Adjustments related to noncontrolling interests

            14,323          (205         14,118        (14,118       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – June 30, 2011

    22,021      $        120,426,322      $ 1,204      $ 642,269      $ 244,633      $ (17,827     4,339,875      $ (159,763   $ 710,516      $ 147,276      $ 857,792   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

Includes 119,697,936 and 120,426,321 shares of the Company’s Class A common stock issued at January 1, 2011 and June 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 SIX MONTH PERIOD ENDED JUNE 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

              11,038              11,038        1,596        12,634   

Other comprehensive income (loss) - net of tax:

                       

Currency translation adjustments

                (51,932         (51,932     (6,397     (58,329

Amortization of interest rate hedge

                480            480        59        539   

Available-for-sale securities:

                       

Net unrealized loss

                (755         (755     (93     (848

Adjustments for items reclassified to earnings

                2,102            2,102        259        2,361   

Employee benefit plans:

                       

Net actuarial loss

                (2,556         (2,556     (315     (2,871

Adjustments for items reclassified to earnings

                460            460        57        517   
                                         

Comprehensive income (loss)

                      (41,163     (4,834     (45,997
                                         

Class A common stock issued/issuable in connection with business acquisitions and LAM Merger and related amortization

            2,800                2,800        345        3,145   

Amortization of share-based incentive compensation

            180,443                180,443        22,055        202,498   

Dividend-equivalents

            5,232        (5,255           (23       (23

Class A common stock dividends

              (23,022           (23,022       (23,022

Purchase of Class A common stock

                  712,950        (22,733     (22,733       (22,733

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

            (242,352         (5,738,601     197,816        (44,536       (44,536

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 offering

        17,645,747        176        (176             –            –     

Distributions to noncontrolling interests, net

                      –          (7,491     (7,491

Adjustments related to noncontrolling interests

            31,973          (8,545         23,428        (23,428     –     
                                                                                               

Balance – June 30, 2010

    26,883        $    –          112,811,660        $1,128        $643,921        $35,487        $(117,794     3,825,124        $(132,157     $430,585        $154,353        $584,938   
                                                                                               

  

 

(*)

Includes 92,165,912 and 112,811,659 shares of the Company’s Class A common stock issued at January 1, 2010 and June 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.

 

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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 94.6% and 94.0% of all outstanding Lazard Group common membership interests as of June 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 5.4% and 6.0% of the outstanding Lazard Group common membership interests as of June 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 5.4% 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 Banque de France and its primary operations include asset and liability management for Lazard Group’s businesses in France through its money market desk and commercial banking operations, deposit taking and, to a lesser extent, financing activities and custodial oversight over assets of various clients. LFB also engages in underwritten offerings of securities in France.

 

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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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 six month periods ended June 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 Lazard Frères Gestion SAS (“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 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.

 

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 $16,525 and $15,017 at June 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 $2,463 and $3,430 for the three month and six month periods ended June 30, 2011, respectively, and $2,322 and $9,190 for the three month and six month periods ended June 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 $1,435 and $1,922 for the three month and six month periods ended June 30, 2011, respectively, and $937 and $1,894 for the three month and six month periods ended June 30, 2010, respectively. At June 30, 2011 and December 31, 2010, the Company had receivables deemed past due or uncollectible of $18,023 and $17,101, respectively.

 

Customers and other receivables at June 30, 2011 and December 31, 2010 include $1,534 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 June 30, 2011 and December 31, 2010:

 

     June 30,
2011
     December  31,
2010
 
       

Debt:

     

U.S. Government and agencies

   $ 31,889       $ 31,900   

Fixed income funds (a)

     40,403         33,951   

Corporate and other debt and interest-bearing deposits

     26,868         29,693   
                 
     99,160         95,544   
                 

Equities (a)

     110,634         88,437   
                 

Other:

     

Interests in LAM alternative asset management funds

     39,360         58,656   

Private equity

     174,704         163,482   

Equity method investments

     11,281         11,291   
                 
     225,345         233,429   
                 

Total investments

     435,139         417,410   

Less:

     

Interest-bearing deposits

     7,660         7,754   

Equity method investments

     11,281         11,291   
                 

Investments, at fair value

   $ 416,198       $ 398,365   
                 

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

   $ 1,262         $2,897   
                 

 

(a) At June 30, 2011 fixed income funds and equities include investments with fair values of $2,051 and $23,051, respectively, held in connection with previously granted Lazard Fund Interest awards (“Lazard Fund Interests”), which will serve to satisfy the Company’s liability upon vesting. Lazard Fund Interests represent grants by the Company to eligible employees of actual or notional interests in several Lazard managed fixed income and equity investment 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, as well as amounts held in connection with Lazard Fund Interests. 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, as well as amounts held in connection with Lazard Fund Interests.

 

Interests in LAM alternative asset management funds represent (i) GP interests owned by Lazard in LAM-managed alternative asset management funds and (ii) GP interests consolidated by the Company pertaining to noncontrolling interests in LAM alternative asset management funds, the latter of which aggregated $5,735 and $8,219

 

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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)

 

at June 30, 2011 and December 31, 2010, respectively. Such noncontrolling interests in LAM alternative asset management funds, which represent GP interests held directly by certain of our LAM managing directors or employees of the Company, are 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; (ii) Corporate Partners II Limited (“CP II”), a private equity fund targeting significant noncontrolling-stake investments in established public and private companies and (iii) Lazard Senior Housing Partners LP (“Senior Housing”), which acquires companies and assets in the senior housing, extended-stay hotel and shopping center sectors. Private equity investments consolidated but not owned by Lazard 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 $74,505 and $67,206 at June 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 six month periods ended June 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 June 30,
     Six Month Period Ended
June 30,
 
         2011          2010      2011      2010  

Gross investment gains

   $ 8,830       $ 3,724       $ 15,205       $ 13,482   

Gross investment losses

   $ 2,235       $ 6,368       $ 3,251       $ 11,129   

 

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

 

   

     Three Month Period
Ended June 30,
     Six Month Period Ended
June 30,
 
         2011          2010      2011      2010  

Gross unrealized investment gains

   $ 641       $ –         $ 1,214       $ 101   

Gross unrealized investment losses

   $ 193       $ 1,497       $ 313       $ 1,325   

 

During the six month period ended June 30, 2010, the Company recorded within “accumulated other comprehensive loss, net of tax” (“AOCI”) gross pre-tax unrealized investment gains of $5,456 and gross pre-tax unrealized investment losses of $6,013 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 six month period ended June 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 six month period ended June 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 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.

 

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 security; public asset management funds are classified as Level 1 and are valued based on the reported closing

 

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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)

 

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 LAM alternative asset management funds is classified as Level 2, 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 financial statements 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 June 30, 2011 and December 31, 2010 into the three-level fair value hierarchy in accordance with fair value measurement disclosure requirements:

 

    June 30, 2011  
    Level 1     Level 2     Level 3     Total  

Assets:

       

Investments:

       

Debt:

       

U.S. Government and agencies

  $ 31,889      $      $      $ 31,889   

Fixed income funds

    3,157        37,246               40,403   

Corporate and other debt

    19,208                      19,208   

Equities

    88,896        21,603        135        110,634   

Other (excluding equity method investments):

       

Interest in LAM alternative asset management funds

           39,360               39,360   

Private equity

                  174,704        174,704   

Derivatives

           2,328               2,328   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 143,150      $ 100,537      $ 174,839      $ 418,526   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Securities sold, not yet purchased

  $ 1,262      $      $      $ 1,262   

Derivatives

           2,200               2,200   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

  $ 1,262      $ 2,200      $      $ 3,462   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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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)

 

    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 LAM 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 six month periods ended June 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 six month periods ended June 30, 2011 and 2010:

 

    Three Months Ended June 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

  $ 129      $ 3      $      $      $ 3      $ 135   

Private equity

    171,487        3,545        922        (2,052     802        174,704   
                                               

Total Level 3 Assets

  $ 171,616      $ 3,548      $ 922      $ (2,052   $ 805      $ 174,839   
                                               

 

    Six Months Ended June 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     $     11      $       135   

Private equity

    163,482        3,824        13,075        (9,160     3,483        174,704   
                                               

Total Level 3 Assets

  $ 163,798      $ 3,827      $ 13,075      $ (9,355     $3,494      $ 174,839   
                                               

 

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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 June 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

  $        298      $ (4     $       5      $         –        $        –      $       299   

Private equity

    136,264        1,535        5,554        (1,190     (3,754     138,409   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 136,562      $ 1,531        $5,559      $ (1,190     $(3,754   $ 138,708   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Six Months Ended June 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      $ (12     $       6      $  –        $        –      $ 299   

Private equity

    135,914        4,753        5,554        (1,193     (6,619     138,409   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 136,219      $ 4,741        $5,560      $ (1,193     $(6,619   $ 138,708   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

With respect to Level 3 assets held at June 30, 2011 and 2010, net gains (losses) included in earnings for the three month and six month periods ended June 30, 2011 and the three month and six month periods ended June 30, 2010 in connection with the change in unrealized gains and losses relating to such assets were $3,538, $3,817, $1,531 and $4,741, 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.

 

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 not any derivatives designated as hedging instruments for the three month and six month periods ended June 30, 2011. During the three month and six month periods ended June 30, 2010,

 

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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 Company recognized pre-tax losses pertaining to interest rate swaps designated as hedging instruments of $1,765 and $3,756, 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 assets and liabilities reported within “other assets” and “other liabilities” on the accompanying condensed consolidated statements of financial condition as of June 30, 2011 and December 31, 2010:

 

    June 30,
2011
    December 31,
     2010     
 

Derivative Assets:

   

Forward foreign currency exchange rate contracts

  $ 242      $ 1,432   

Interest rate swaps

    51        57   

Equity swaps

    2,035        385   
 

 

 

   

 

 

 
  $ 2,328      $ 1,874   
 

 

 

   

 

 

 

Derivative Liabilities:

   

Forward foreign currency exchange rate contracts

  $ 1,507      $ 2,151   

Interest rate swaps

    323        326   

Equity and fixed income swaps

    370        753   
 

 

 

   

 

 

 
  $ 2,200      $ 3,230   
 

 

 

   

 

 

 

 

Gains (losses) with respect to derivatives not designated as hedging instruments on the accompanying condensed consolidated statements of operations for the three month and six month periods ended June 30, 2011 and 2010 (predominantly reflected in “revenue-other”), by type of derivative, were as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2011             2010             2011             2010      

Forward foreign currency exchange rate contracts

   $ (3,139   $ 7,133      $ (9,397   $ 12,351   

Interest rate swaps

     (1     (10     (3     34   

Equity and fixed income swaps

     (431     5,382        (2,718     4,050   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (3,571   $ 12,505      $ (12,118   $ 16,435   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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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)

 

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 merger agreement also generally provides that if there is a change in control of the Company or a sale of LAM, any and all of the Transaction Consideration will be payable as of the date of such change in control. 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 $15,473 and $73,752, respectively, as of June 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.

 

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 June 30, 2011 and December 31, 2010, 1,295,029 shares of Class A common stock were issuable on a non-contingent basis. Additionally, at June 30, 2011 and 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, in part, upon future prices of the Class A common stock. Depending upon the future performance of such businesses acquired, at June 30, 2011 and December 31, 2010, 17,159 shares of Series A preferred stock were contingently convertible into shares of Class A common stock. The Class A common stock described above related to such acquisitions is primarily issuable during the remainder of 2011.

 

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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)

 

9.    GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

    June 30,
2011
    December 31,
2010
 

Goodwill

  $ 320,411      $ 313,229   

Other intangible assets (net of accumulated amortization)

    45,030        48,210   
               
  $ 365,441      $ 361,439   
               

 

At June 30, 2011 and December 31, 2010, goodwill of $258,781 and $251,599, respectively, was attributable to the Company’s Financial Advisory segment and, at each such date, $61,630 of goodwill was attributable to the Company’s Asset Management segment.

 

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

 

    Six Months Ended
June 30,
 
    2011     2010  

Balance, January 1

  $ 313,229      $ 261,703   

Foreign currency translation adjustments

    7,182        (7,408
               

Balance, June 30

  $ 320,411      $ 254,295   
               

 

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

 

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

Success/performance fees

  $ 30,740      $ 1,121      $ 29,619      $ 30,740      $ 890      $ 29,850   

Management fees, customer relationships and non-compete agreements

    32,477        17,066        15,411        32,477        14,117        18,360   
                                               
  $ 63,217      $ 18,187      $ 45,030      $ 63,217      $ 15,007      $ 48,210   
                                               

 

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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)

 

Amortization expense of intangible assets for the three month and six month periods ended June 30, 2011 was $1,706 and $3,180, respectively, and for the three month and six month periods ended June 30, 2010 was $1,769 and $3,539, respectively. Estimated future amortization expense is as follows:

 

Year Ending December 31,

   Amortization
Expense (a)
 

2011 (July 1 through December 31)

   $ 2,778   

2012

     6,302   

2013

     12,742   

2014

     9,803   

2015

     7,220   

Thereafter

     6,185   
  

 

 

 

Total amortization expense

   $ 45,030   
  

 

 

 

 

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

 

10.    SENIOR AND SUBORDINATED DEBT

 

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

 

     Initial
Principal
Amount
    Maturity
Date
    Annual
Interest
Rate
    Outstanding As Of  
          June 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 (a)

    150,000        4/29/13        1.88              
       

 

 

   

 

 

 

Total

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

 

 

   

 

 

 
(a) 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 June 30, 2011, the annual interest rate for a loan accruing interest (based on the Federal Funds overnight rate), including the applicable margin, was 1.88%. As of June 30, 2011 and December 31, 2010, no amounts were outstanding under the Credit Facility.

 

Subordinated DebtSubordinated debt at June 30, 2011 and December 31, 2010 represents a note amounting to $150,000 at each date. 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 3.25% subordinated note, at a cost, excluding accrued interest, of $131,829. Such repurchase resulted in a pre-tax gain of $18,171, which is being recognized by the Company in the third quarter of 2011.

 

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

 

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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)

 

provisions, including a customary make-whole provision in the event of early redemption where applicable. As of June 30, 2011, the Company was in compliance with all of these provisions. All of the Company’s senior and subordinated debt obligations are unsecured.

 

As of June 30, 2011, the Company had approximately $285,000 in unused lines of credit available to it, including the Credit Facility, and unused lines of credit available to LFB of approximately $107,000 (at June 30, 2011 exchange rates) and Edgewater of $20,000. In addition, LFB has access to the Eurosystem Covered Bond Purchase Program of the Banque de France.

 

The Company’s senior and subordinated debt are recorded at historical amounts. At June 30, 2011 and December 31, 2010, the fair value of the Company’s senior and subordinated debt was approximately $1,338,000 and $1,271,000, respectively, and exceeded the aggregate carrying value by approximately $111,000 and $44,000, respectively. The fair value of the Company’s senior and subordinated 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.

 

11.    COMMITMENTS AND CONTINGENCIES

 

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

 

Year Ending December 31,

      

2011 (July 1 through December 31)

   $ 36,267   

2012

     54,468   

2013

     57,671   

2014

     66,289   

2015

     62,559   

Thereafter

     808,662   
        

Total minimum lease payments

     1,085,916   

Sublease proceeds

     185,784   
        

Net lease payments

   $ 900,132   
        

 

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 June 30, 2011, LFB had $4,671 of such indemnifications and held $3,144 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.

 

Private Equity Funding CommitmentsAt June 30, 2011, the principal unfunded commitment by the Company for capital contributions to private equity investment funds related to CP II, and is an amount not to exceed $3,022 for potential “follow-on investments” and/or for CP II expenses through the earlier of February 25, 2017 or the liquidation of the fund.

 

Other CommitmentsIn the normal course of business, LFB enters into commitments to extend credit, predominately at variable interest rates. Such commitments at June 30, 2011 aggregated $27,103. These

 

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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)

 

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.

 

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”).

 

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 three month period ended March 31, 2010 one such secondary offering occurred, which is described below (no secondary offerings occurred during the three month period ended June 30, 2010 or during the six month period ended June 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

 

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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)

 

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”).

 

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

 

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 six month periods ended June 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):

 

     Six Months Ended
June 30,
 
     2011      2010  

LAZ-MD Holdings

   $ 2,174       $ 7,103   

Subsidiaries of Lazard Ltd

     32,855         23,022   
                 
   $ 35,029       $ 30,125   
                 

 

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 March 2010 Secondary Offering, during the six month periods ended June 30, 2011 and 2010, Lazard Ltd issued 728,385 and 11,465,108 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 Lazard Ltd 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 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

 

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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)

 

transactions, and since the inception of the program in February 2006 through June 30, 2011, purchases by Lazard Group with respect to such program are set forth in the table below (including, in the six month period ended June 30, 2011, purchases of 3,156,416 Class A common shares, at an aggregate cost of $126,237, 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

     19,930,075         $33.92   

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 six month period ended June 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, there were 4,339,875 and 6,847,508 shares of Class A common stock held by Lazard Group at June 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 June 30, 2011, $165,740 of the current $450,000 share repurchase authorization remained available under the share repurchase program. 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 June 30, 2011 and December 31, 2010, 22,021 shares of Series A preferred stock were outstanding, and no shares of Series B preferred stock were outstanding at such dates.

 

At June 30, 2011 and December 31, 2010, 4,862 shares of the Series A preferred shares outstanding were convertible into shares of Class A common stock. The remaining 17,159 shares of Series A preferred stock outstanding at June 30, 2011 and December 31, 2010 may become convertible into shares of Class A common stock upon completion or satisfaction of specified obligations in the applicable acquisition agreement (see Note 8 of Notes to Condensed Consolidated Financial Statements). The initial conversion rate, at the time of the acquisition, was 100 shares of Class A common stock to one share of Series A preferred stock, 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 June 30, 2011 and December 31, 2010 are as follows:

 

     June 30,
2011
    December 31,
         2010        
 
      

Currency translation adjustments

   $ 45,367      $ 13,193   

Interest rate hedge

     (4,084     (4,611

Employee benefit plans

     (59,111     (56,595
                

Total AOCI

     (17,828     (48,013

Less amount attributable to noncontrolling interests

     (1     (1,855
                

Total Lazard Ltd AOCI

   $ (17,827   $ (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 LAM-related GP interests which are deemed to be controlled by the Company.

 

As of June 30, 2011 and December 31, 2010, LAZ-MD Holdings held approximately 5.4% 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.

 

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

         

Common membership interest activity in connection with:

         

Equity compensation

    3,000,000                   3,000,000   

March 2010 Secondary Offering

    6,180,639          (6,180,639         

Exchanges for Class A common stock

    11,465,108          (11,465,108         
                           

Balance, June 30, 2010

    112,811,659        89.0     13,874,679        11.0     126,686,338   
                           

Balance, January 1, 2011

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

Activity January 1, 2011 to June 30, 2011:

         

Common membership interest activity in connection with:

         

Exchanges for Class A common stock

    728,385          (728,385       –     

Repurchase of common membership interests from LAZ-MD Holdings

    –            (19,032       (19,032
                           

Balance, June 30, 2011

    120,426,321        94.6     6,905,208        5.4     127,331,529   
                           

 

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

 

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

 

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

LAZ-MD Holdings

   $ 4,012      $ 8,476      $ 7,746      $ (1,243

Edgewater

     5,882        1,270        6,905        3,877   

LAM GPs

    
(159

    (598     13        (728

Other

    
(173

    (192     (126     (310
                                

Total

   $ 9,562      $ 8,956      $ 14,538      $ 1,596   
                                

 

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

LAZ-MD Holdings

   $ 23,803       $ 22,167   

Edgewater

     115,808         111,289   

LAM GPs

     5,735         8,219   

Other

     1,930         2,044   
                 

Total

   $ 147,276       $ 143,719   
                 

 

Dividend Declared, July 2011On July 27, 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 August 26, 2011, to stockholders of record on August 8, 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 six month periods ended June 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 Lazard Ltd’s Class A common stock at the date of grant.

 

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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 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 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
June 30,
     Six Months Ended
June 30,
 
      2011      2010      2011      2010  

Compensation and benefits (*)

   $ 57,552       $ 50,530       $ 142,410       $ 154,343   

Restructuring

     -           -           -           46,880   
                                   

Total

   $ 57,552       $ 50,530       $ 142,410       $ 201,223   
                                   

 

(*) Includes, during the six month period ended June 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 six month periods ended June 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:

 

      Six Months Ended
June 30
 
         2011             2010      

Issuance of RSUs

     140,613        163,146   

Charges to retained earnings, net of estimated forfeitures

     $5,337        $4,732   

 

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

 

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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)

 

31,588 DSUs granted during the six month periods ended June 30, 2011 and 2010, respectively. Their 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 six month periods ended June 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 six month periods ended June 30, 2011 and 2010, 2,942 and 4,120 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 $1,068 and $1,124 during the three month and six month periods ended June 30, 2011, respectively, and $1,039 and $1,115 during the three month and six month periods ended June 30, 2010, respectively.

 

The following is a summary of activity relating to RSUs and DSUs during the six month periods ended June 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 140,613 RSUs relating to dividend participation)

    6,309,310      $ 44.93        29,801      $ 37.72   

Forfeited

    (223,365   $ 37.90        –          –     

Vested/Converted

    (7,616,386   $ 39.21        (16,120   $ 34.76   
                   

Balance, June 30, 2011

    20,578,194      $ 37.18        135,418      $ 35.14   
                   
       

Balance, January 1, 2010

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

Granted (including 163,146 RSUs relating to dividend participation)

    6,853,747      $ 35.98        35,708      $ 31.25   

Forfeited

    (315,002   $ 34.57        –          –     

Vested/Converted

    (6,952,061   $ 39.88        (20,435   $ 35.38   
                   

Balance, June 30, 2010

    22,954,497      $ 35.88        118,419      $ 34.46   
                   

 

During the six month periods ended June 30, 2011 and 2010, 7,616,386 RSUs and 6,952,061 RSUs vested, respectively. In connection with such vested RSUs, the Company satisfied certain employees’ tax obligations in lieu of issuing 2,226,829 and 1,288,331 shares of Class A common stock in the respective periods. Accordingly, 5,389,557 and 5,663,730 shares of Class A common stock held by Lazard Group were delivered during the six month periods ended June 30, 2011 and 2010, respectively.

 

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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)

 

As of June 30, 2011, unrecognized RSU compensation expense, adjusted for estimated forfeitures, was approximately $348,000, with such unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.8 years subsequent to June 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 six month periods ended June 30, 2011 and 2010:

 

     Restricted
Shares
    Weighted
Average
Grant Date
Fair Value
 

Balance, January 1, 2011

     95,332      $ 37.63   

Granted (a)

     327,238      $ 43.70   

Vested (a)

     (327,238   $ 43.70   
          

Balance, June 30, 2011

     95,332      $ 37.63   
          

Balance, January 1, 2010

     –          –     

Granted

     54,437      $ 38.78   

Vested

     –          –     
          

Balance, June 30, 2010

     54,437      $ 38.78   
          

 

(a) Includes 143,816 restricted shares pertaining to an award that was accounted for as a liability award through its vesting date.

 

During the six month period ended June 30, 2011, 327,238 shares of restricted Class A common stock vested. In connection with such vested shares of restricted Class A common stock, the Company satisfied certain employees’ tax obligations in lieu of delivering 68,866 shares of Class A common stock by Lazard Group. Accordingly, 258,372 shares of Class A common stock held by Lazard Group were delivered during the six month period ended June 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 $356 and $8,999 for the three month and six month periods ended June 30, 2011, respectively, and $160 for the three month and six month periods ended June 30, 2010. 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 June 30, 2011, unrecognized restricted stock expense was approximately $1,600, with such expense to be recognized over a weighted average period of approximately 1.2 years subsequent to June 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.

 

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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)

 

Other Incentive Awards

 

As described above, in February 2011, the Company granted to eligible employees Lazard Fund Interests, which had an aggregate fair value on the date of grant of approximately $26,000, with such aggregate fair values excluding potential forfeitures. At June 30, 2011, the aggregate fair value of such liability amounted to $25,102.

 

The Lazard Fund Interests granted provide for one-third vesting on March 1, 2013 and two-thirds vesting on March 3, 2014. Compensation expense with respect to the Lazard Fund Interests amounted to $2,413 and $5,054 for the three month and six month periods ended June 30, 2011, respectively, and is being recognized over the applicable vesting periods or requisite service periods, the ultimate amount of which will vary based on the then vested value of the underlying Lazard Fund Interests, with such compensation expense to be recognized over a weighted average period of approximately 2.3 years subsequent to June 30, 2011.

 

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 (the “measurement date”) and subsequently remeasured on June 1, 2010 (the “remeasurement date”). 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 ($3,683 at June 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 six month period ended June 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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LAZARD LTD

 

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 six month periods ended June 30, 2011 and 2010:

 

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

Components of Net Periodic Benefit Cost (Credit):

       

Service cost

  $ 169      $ (88   $ 19      $ 22   

Interest cost

    7,092        6,702        69        73   

Expected return on plan assets

    (7,644     (7,056     -          -     

Amortization of:

       

Prior service cost (credit)

    762        725        -          (435

Net actuarial loss

    66        198        -          -     
                               

Net periodic benefit cost (credit)

  $ 445      $ 481      $ 88      $ (340
                               

 

    Pension Plans     Post-Retirement
Medical Plans
 
    Six Months Ended June 30,  
      2011         2010           2011             2010      

Components of Net Periodic Benefit Cost (Credit):

       

Service cost

  $ 332      $ 260      $ 34      $ 40   

Interest cost

    14,159        13,787        139        146   

Expected return on plan assets

    (15,266     (14,429     -          -     

Amortization of:

       

Prior service cost (credit)

    1,502        1,476        -          (691

Net actuarial loss

    129        399        -          -     
                               

Net periodic benefit cost (credit)

  $ 856      $ 1,493      $ 173      $ (505
                               

 

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 June 30, 2011 and December 31, 2010, the remaining liability associated with the 2010 Restructuring Plan was $13,145 and $21,381, respectively. In the first quarter of 2009 the Company also announced a restructuring plan (the “2009 Restructuring Plan”). As of June 30, 2011 and December 31, 2010, the remaining liability associated with the 2009 Restructuring Plan was $5,128 and $5,427, respectively. During the six month period ended June 30, 2011, other than cash payments of $8,236 and $299 for the 2010 Restructuring Plan and the 2009 Restructuring Plan, respectively, there were no adjustments to the amounts relating to the 2010 and 2009 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.

 

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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)

 

16.    INCOME TAXES

 

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 $17,636 and $31,099 for the three month and six month periods ended June 30, 2011, respectively, and $13,523 and $19,936 for the three month and six month periods ended June 30, 2010, respectively, representing effective tax rates of 19.8%, 19.1%, 20.2% and 61.2%, 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) valuation allowance changes 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 six month periods ended June 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 six month periods ended June 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 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 six month periods ended June 30, 2011 and 2010 are presented below:

 

    Three Months Ended June 30,     Six Months Ended June 30,  
          2011           2010           2011           2010  

Net income attributable to Lazard Ltd

    $62,004        $44,572        $117,011        $11,038   

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

    103        192       
199
  
 

 

(20

 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Lazard Ltd - basic

    62,107       
44,764
  
    117,210       
11,018
  

Add (deduct) - 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

    4,649        9,258       
9,074
  
 

 

(212

 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Lazard Ltd - diluted

    $66,756        $54,022        $126,284        $10,806   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of Class A common stock outstanding

    115,326,051        100,608,379     

 

113,503,750

  

 

 

93,717,395

  

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

    3,781,335        2,918,635       
3,717,320
  
 

 

2,914,181

  

 

 

 

   

 

 

   

 

 

   

 

 

 

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

    119,107,386        103,527,014       
117,221,070
  
 

 

96,631,576

  

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

    20,240,547     

 

36,417,296

  

   
21,748,193
  
 

 

12,364,261

  

 

 

 

   

 

 

   

 

 

   

 

 

 

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

    139,347,933       
139,944,310
  
   
138,969,263
  
 

 

108,995,837

  

 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Basic

    $0.52        $0.43        $1.00        $0.11   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    $0.48        $0.39        $0.91        $0.10   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 June 30, 2011 and December 31, 2010 are set forth below:

 

     June 30,
2011
     December 31,
2010
 

Receivables

     

LFCM Holdings

   $ 12,764       $ 24,785   

Other

     738         89   
                 

Total

   $ 13,502       $ 24,874   
                 

Payables

     

LFCM Holdings

   $ 2,479       $ 2,819   

Other

     985         –     
                 

Total

   $ 3,464       $ 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 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 six month periods ended June 30, 2011, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $578 and $1,192, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $6,200 and $13,147, respectively. For the three month and six month periods ended June 30, 2010, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $513 and $1,059, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $3,384 and $6,729, 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 June 30, 2011 and December 31, 2010 primarily include $1,616 and $12,775, respectively, related to administrative and support services and reimbursement of expenses incurred on behalf of LFCM Holdings, and $10,397 and $11,413, respectively, related to referral fees for underwriting and private placement transactions. Payables to LFCM Holdings and its subsidiaries at June 30, 2011 and December 31, 2010 relate primarily to obligations pursuant to the tax receivable agreement of $2,361 (see Note 16 of Notes to Condensed Consolidated Financial Statements) and $118 and $458, respectively, principally relating to referral fees for Financial Advisory transactions.

 

35


Table of Contents

LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

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 the three month and six month periods ended June 30, 2011, such charges amounted to $187 and $375, respectively. For the three month and six month periods ended June 30, 2010, such charges amounted to $187 and $375, respectively.

 

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 June 30, 2011, LFNY’s regulatory net capital was $142,556, which exceeded the minimum requirement by $135,750.

 

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 June 30, 2011, the aggregate regulatory net capital of the U.K. Subsidiaries was $128,624, which exceeded the minimum requirement by $83,099.

 

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 June 30, 2011, the consolidated regulatory net capital of CFLF was $196,350, which exceeded the minimum requirement set for regulatory capital levels by $90,589.

 

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 June 30, 2011, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $80,680, which exceeded the minimum required capital by $55,686.

 

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

 

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

 

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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)

 

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 six month periods ended June 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
June 30,
    Six Months Ended
June 30,
 
         2011     2010     2011     2010  

Financial Advisory

          
  Net Revenue    $ 249,191      $ 245,973      $ 478,036      $ 514,469   
  Operating Expenses      214,217        213,900        427,783        451,700   
                                  
  Operating Income (a)    $ 34,974      $ 32,073      $ 50,253      $ 62,769   
                                  

Asset Management

          
  Net Revenue    $ 244,855      $ 189,414      $ 471,708      $ 377,167   
  Operating Expenses      160,914        136,886        310,118        266,326   
                                  
  Operating Income (a)    $ 83,941      $ 52,528      $ 161,590      $ 110,841   
                                  

Corporate

          
  Net Revenue    $ (16,754   $ (16,352   $ (34,429   $ (34,390
  Operating Expenses      12,959        1,198        14,766        106,650   
                                  
  Operating Loss (a)    $ (29,713   $ (17,550   $ (49,195   $ (141,040
                                  

Total

          
  Net Revenue    $ 477,292      $ 419,035      $ 915,315      $ 857,246   
  Operating Expenses      388,090        351,984        752,667        824,676   
                                  
  Operating Income (a)    $ 89,202      $ 67,051      $ 162,648      $ 32,570   
                                  

 

     As Of  
     June 30,
2011
     December 31,
2010
 

Total Assets

     

Financial Advisory

   $ 731,184       $ 799,090   

Asset Management

     689,118         687,323   

Corporate

     1,660,712         1,936,119   
                 

Total

   $ 3,081,014       $ 3,422,532   
                 

 

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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)

 

 

(a) Operating income (loss) for the six month period ended June 30, 2010 was significantly impacted by certain charges related to the three month period ended March 31, 2010. Such impact, including the amounts attributable to each of the Company’s business segments, is described in the table below:

 

Financial Advisory

  

Operating income, as reported above

   $ 62,769   

Special item:

  

Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards

     19,571   
        

Operating income, excluding impact of special item

   $ 82,340   
        

Asset Management

  

Operating income, as reported above

   $ 110,841   

Special item:

  

Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards

     2,902   
        

Operating income, excluding impact of special item

   $ 113,743   
        

Corporate

  

Operating loss, as reported above

   $ (141,040

Special items:

  

Restructuring expense

     87,108   

Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards

     2,387   
        

Operating loss, excluding impact of special items

   $ (51,545
        

Consolidated

  

Operating income, as reported above

   $ 32,570   

Special items:

  

Restructuring expense

     87,108   

Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards

     24,860   
        

Operating income, excluding impact of special items

   $ 144,538   
        

 

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Table of Contents
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”, “second quarter”, “first half”, or “the period” refer to, as the context requires, the three month and six month periods ended June 30, 2011 and June 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,