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 March 31, 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 April 25, 2011, there were 119,697,936 shares of the Registrant’s Class A common stock (including 2,675,305 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 March 31, 2011 of approximately 94.0% 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

     37   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     65   

Item 4. Controls and Procedures

     65   

Part II. Other Information

        

Item 1. Legal Proceedings

     66   

Item 1A. Risk Factors

     66   

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

     66   

Item 3. Defaults Upon Senior Securities

     67   

Item 4. (Removed and Reserved)

     67   

Item 5. Other Information

     67   

Item 6. Exhibits

     69   

Signatures

     74   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

    Page  

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

    2   

Condensed Consolidated Statements of Operations for the three month periods ended  March 31, 2011 and 2010

    4   

Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2011 and 2010

    5   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three month periods ended March 31, 2011 and 2010

    6   

Notes to Condensed Consolidated Financial Statements

    8   

 

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Table of Contents

LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

MARCH 31, 2011 AND DECEMBER 31, 2010

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     March 31,
2011
     December 31,
2010
 

ASSETS

     
Cash and cash equivalents      $1,015,934         $1,209,695   
Deposits with banks      307,181         356,539   
Cash deposited with clearing organizations and other segregated cash     
99,533
  
     92,911   
Receivables-net:      

Fees

    
424,827
  
     480,340   

Customers and other

    
93,850
  
     63,490   

Related parties

    
12,200
  
     24,874   
                 
    
530,877
  
     568,704   

Investments

    
407,147
  
     417,410   
     

Property (net of accumulated amortization and depreciation of $264,238 and $250,898 at March 31, 2011 and December 31, 2010, respectively)

  

 

153,572

  

     150,524   

Goodwill and other intangible assets (net of accumulated amortization of $16,481 and $15,007 at March 31, 2011 and December 31, 2010, respectively)

  

 

362,837

  

     361,439   
Other assets     
282,279
  
     265,310   
                 

Total assets

   $ 3,159,360       $ 3,422,532   
                 

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

MARCH 31, 2011 AND DECEMBER 31, 2010

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     March 31,
2011
    December 31,
2010
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits and other customer payables

   $ 330,390      $ 361,553   

Accrued compensation and benefits

     134,836        498,880   

Senior debt

    
1,076,850
  
    1,076,850   

Capital lease obligations

    
23,464
  
    22,903   

Related party payables

    
2,392
  
    2,819   

Other liabilities

    
600,967
  
    513,410   

Subordinated debt

    
150,000
  
    150,000   
                

Total liabilities

    
2,318,899
  
    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 March 31, 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; 119,697,936 shares issued at March 31, 2011 and December 31, 2010, including shares held by a subsidiary as indicated below)

  

 

1,197

  

    1,197   

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

  

 

  

      

Additional paid-in-capital

    
612,101
  
    758,841   

Retained earnings

    
204,666
  
    166,468   

Accumulated other comprehensive loss, net of tax

    
(26,567

    (46,158
                
    
791,397
  
    880,348   

Class A common stock held by a subsidiary, at cost (2,725,147 and 6,847,508 shares at March 31, 2011 and December 31, 2010, respectively)

    
(97,671

    (227,950
                

Total Lazard Ltd stockholders’ equity

    
693,726
  
    652,398   

Noncontrolling interests

     146,735        143,719   
                

Total stockholders’ equity

     840,461        796,117   
                

Total liabilities and stockholders’ equity

   $ 3,159,360      $ 3,422,532   
                

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     Three Months Ended
March 31,
 
     2011      2010  

REVENUE

     

Investment banking and other advisory fees

   $ 220,327       $ 269,209   

Money management fees

     214,692         177,103   

Interest income

     3,492         5,107   

Other

     22,830         12,389   
                 

Total revenue

     461,341         463,808   

Interest expense

     23,318         25,597   
                 

Net revenue

     438,023         438,211   
                 

OPERATING EXPENSES

     

Compensation and benefits

     269,999         300,377   

Occupancy and equipment

     22,708         21,270   

Marketing and business development

     18,111         15,603   

Technology and information services

     19,567         17,652   

Professional services

     9,841         8,171   

Fund administration and outsourced services

     13,251         11,374   

Amortization of intangible assets related to acquisitions

     1,474         1,770   

Restructuring

             87,108   

Other

     9,626         9,367   
                 

Total operating expenses

     364,577         472,692   
                 

OPERATING INCOME (LOSS)

     73,446         (34,481

Provision for income taxes

     13,463         6,413   
                 

NET INCOME (LOSS)

     59,983         (40,894

LESS - NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     4,976         (7,360
                 

NET INCOME (LOSS) ATTRIBUTABLE TO LAZARD LTD

   $ 55,007       $ (33,534
                 

ATTRIBUTABLE TO LAZARD LTD CLASS A COMMON STOCKHOLDERS:

     

WEIGHTED AVERAGE SHARES OF COMMON STOCK
OUTSTANDING:

     

Basic

     115,334,754         89,736,137   

Diluted

     138,590,593         89,736,137   

NET INCOME (LOSS) PER SHARE OF COMMON STOCK:

     

Basic

     $0.48         $(0.38
                 

Diluted

     $0.43         $(0.38
                 

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

     $0.125         $0.125   
                 

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

(UNAUDITED)

(dollars in thousands)

 

     Three Months Ended
March  31,
 
    2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

   

Net income (loss)

  $ 59,983      $ (40,894

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

   

Noncash items included in net income (loss):

   

Depreciation and amortization of property

    5,916        5,221   

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

    100,113        153,865   

Amortization of intangible assets related to acquisitions

    1,474        1,770   

(Increase) decrease in operating assets:

   

Deposits with banks

    69,199        (35,278

Cash deposited with clearing organizations and other segregated cash

    (1,518     109   

Receivables-net

    47,125        (42,850

Investments

    13,363        (4,597

Other assets

    (11,722     656   

Increase (decrease) in operating liabilities:

   

Deposits and other payables

    (51,497     33,759   

Accrued compensation and benefits and other liabilities

    (302,122     (302,608
               

Net cash used in operating activities

    (69,686     (230,847
               

CASH FLOWS FROM INVESTING ACTIVITIES:

   

Distribution relating to equity method investment

           50,319   

Additions to property

    (1,954     (2,444

Disposals of property

    44        139   

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

           29,021   
               

Net cash provided by (used in) investing activities

    (1,910     77,035   
               

CASH FLOWS FROM FINANCING ACTIVITIES:

   

Proceeds from:

   

Contribution from noncontrolling interests

    884        2,000   

Other financing activities

    1,374          

Payments for:

   

Capital lease obligations

    (675     (575

Distributions to noncontrolling interests

    (2,886     (5,074

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

    (794       

Purchase of Class A common stock

    (32,689     (980

Class A common stock dividends

    (14,115     (10,791

Settlement of vested share-based incentive compensation

    (83,016     (32,263

Other financing activities

    (19     (17
               

Net cash used in financing activities

    (131,936     (47,700
               

EFFECT OF EXCHANGE RATE CHANGES ON CASH

    9,771        (11,710
               

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (193,761     (213,222

CASH AND CASH EQUIVALENTS—January 1

    1,209,695        917,329   
               

CASH AND CASH EQUIVALENTS—March 31

  $ 1,015,934      $ 704,107   
               

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 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

              55,007              55,007        4,976        59,983   

Other comprehensive income (loss) - net of tax:

                       

Currency translation adjustments

                22,297            22,297        1,441        23,738   

Amortization of interest rate hedge

                248            248        16        264   

Employee benefit plans:

                       

Net actuarial loss

                (3,464         (3,464     (221     (3,685

Adjustments for items reclassified to earnings

                515            515        33        548   
                                         

Comprehensive income

                      74,603        6,245        80,848   
                                         

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

            2,416                2,416        154        2,570   

Amortization of share-based incentive compensation

            87,948                87,948        5,609        93,557   

Dividend-equivalents

            2,680        (2,694           (14     (1     (15

Class A common stock dividends

              (14,115           (14,115       (14,115

Purchase of Class A common stock

                  766,814        (32,689     (32,689       (32,689

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

            (245,984         (4,889,175     162,968        (83,016       (83,016

Repurchase of common membership interests from LAZ-MD Holdings

            (746             (746     (48     (794

Distributions to noncontrolling interests, net

                        (2,002     (2,002

Adjustments related to noncontrolling interests

            6,946          (5         6,941        (6,941       
                                                                                               

Balance – March 31, 2011

    22,021      $  –        119,697,937      $ 1,197      $ 612,101      $ 204,666      $ (26,567     2,725,147      $ (97,671   $ 693,726      $ 146,735      $ 840,461   
                                                                                               

 

(*)

Includes 119,697,936 shares of the Company’s Class A common stock issued at January 1, 2011 and March 31, 2011 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

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 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 loss

              (33,534           (33,534     (7,360     (40,894

Other comprehensive income (loss)-net of tax:

                       

Currency translation adjustments

                (21,367         (21,367     (5,276     (26,643

Amortization of interest rate hedge

                216            216        53        269   

Available-for-sale securities:

                       

Net unrealized gain

                4,019            4,019        1,004        5,023   

Adjustments for items reclassified to earnings

                1,968            1,968        491        2,459   

Employee benefit plans:

                       

Adjustments for items reclassified to earnings

                280            280        71        351   
                                         

Comprehensive loss

                      (48,418     (11,017     (59,435
                                         

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

            1,291                1,291        322        1,613   

Amortization of share-based incentive compensation

            120,672                120,672        30,097        150,769   

Dividend-equivalents

            2,228        (2,241           (13       (13

Class A common stock dividends

              (10,791           (10,791       (10,791

Purchase of Class A common stock

                  25,650        (980     (980       (980

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

            (199,902         (4,874,318     167,639        (32,263       (32,263

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

        6,217,768        62        (62                        

Distributions to noncontrolling interests, net

                             (3,074     (3,074

Adjustments related to noncontrolling interests

            16,164          (3,241         12,923        (12,923       
                                                                                               

Balance – March 31, 2010

    26,883      $        101,383,681      $ 1,014      $ 606,392      $ 6,160      $ (75,173     4,002,107      $ (140,581   $ 397,812      $ 171,111      $ 568,923   
                                                                                               

 

(*)

Includes 92,165,912 and 101,383,680 shares of the Company’s Class A common stock issued at January 1, 2010 and March 31, 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” 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 94.0% of all outstanding Lazard Group common membership interests as of March 31, 2011 and December 31, 2010. 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 6.0% of the outstanding Lazard Group common membership interests as of March 31, 2011 and December 31, 2010. 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 6.0% of the voting power but no economic rights in the Company as of such 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 period ended March 31, 2011 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

 

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.

 

3.    RECEIVABLES - NET

 

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

 

Customers and other receivables at March 31, 2011 and December 31, 2010 include $2,046 and $2,121, respectively, of loans by LFB to managing directors and employees in France 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)

 

Receivables are stated net of an estimated allowance for doubtful accounts of $15,497 and $15,017 at March 31, 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 $967 and $6,868 for the three month periods ended March 31, 2011 and 2010, respectively. In addition, the Company recorded charge-offs, foreign currency translation and other adjustments, with these items resulting in a net decrease to the allowance for doubtful accounts of $487 and $957 for the three month periods ended March 31, 2011 and 2010, respectively. At March 31, 2011 and December 31, 2010, the Company had receivables deemed past due or uncollectible of $18,189 and $17,101, respectively.

 

4.    INVESTMENTS

 

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

 

     March  31,
2011
     December  31,
2010
 
       

Debt:

     

U.S. Government and agencies

   $ 31,913       $ 31,900   

Fixed income funds

     36,292         33,951   

Corporate and other debt and interest-bearing deposits

     26,910         29,693   
                 
     95,115         95,544   
                 

Equities

    
89,124
  
     88,437   
                 

Other:

     

Interest in LAM alternative asset management funds:

     

General Partner (“GP”) interests owned

     34,356         50,437   

GP interests consolidated, but owned by noncontrolling interests

    
5,799
  
     8,219   

Private equity:

     

Investments owned

     101,503         96,276   

Investments consolidated, but owned by noncontrolling interests

     69,984         67,206   

Equity method investments

     11,266         11,291   
                 
    
222,908
  
     233,429   
                 

Total investments

     407,147         417,410   

Less:

     

Interest-bearing deposits

     4,740         7,754   

Equity method investments

     11,266         11,291   
                 

Investments, at fair value

   $ 391,141       $ 398,365   
                 

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

     $1,403         $2,897   
                 

 

The Company’s debt securities included in the table above are categorized as trading securities. 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.

 

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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)

 

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. 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 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 are related 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. The acquisition was structured as a purchase by Lazard of interests in a holding company that owns interests in the general partner and management company entities of the current Edgewater private equity funds (the “Edgewater Acquisition”). Edgewater is focused on buyout and growth equity investments in middle market companies. The economic interests that the Company does not own are owned by the current 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 that it had not completed the Business Combination and it would dissolve and distribute the funds in the Trust Account to all 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.

 

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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)

 

During the three month periods ended March 31, 2011 and 2010, the Company recognized gross investment gains and losses in “revenue-other” on its condensed consolidated statements of operations as follows:

 

     Three Months Ended
March 31,
 
     2011      2010  

Gross investment gains

     $6,375         $9,758   

Gross investment losses

     $1,016         $4,761   

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

 

   

     Three Months Ended
March 31,
 
     2011      2010  

Gross unrealized investment gains

     $573         $361   

Gross unrealized investment losses

     $120         $  88   

 

During the three month period ended March 31, 2010, the Company recorded within “accumulated other comprehensive loss, net of tax” (“AOCI”) gross pre-tax unrealized investment gains of $10,519 and gross pre-tax unrealized investment losses of $350 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. In addition, there were no other-than-temporary impairment charges recognized during the three month period ended March 31, 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 three month period ended March 31, 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

 

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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)

 

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 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 March 31, 2011 and December 31, 2010 into the three-level fair value hierarchy in accordance with fair value measurement disclosure requirements:

 

    March 31, 2011  
    Level 1     Level 2     Level 3     Total  

Assets:

       

Investments:

       

Debt:

       

U.S. Government and agencies

  $ 31,913      $      $      $ 31,913   

Fixed income funds

    5,322        30,970               36,292   

Corporate and other debt

    22,170                      22,170   

Equities

    66,960        22,035        129        89,124   

Other (excluding equity method investments):

       

Interest in LAM alternative asset management funds:

       

GP interests owned

           34,356               34,356   

GP interests consolidated, but owned by noncontrolling interests

           5,799               5,799   

Private equity:

       

Investments owned

                  101,503        101,503   

Investments consolidated, but owned by noncontrolling interests

                  69,984        69,984   

Derivatives

           1,053               1,053   
                               

Total Assets

  $ 126,365      $ 94,213      $ 171,616      $ 392,194   
                               

Liabilities:

       

Securities sold, not yet purchased

  $ 1,403      $      $      $ 1,403   

Derivatives

           9,297               9,297   
                               

Total Liabilities

  $ 1,403      $ 9,297      $      $ 10,700   
                               

 

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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:

       

GP interests owned

           50,437               50,437   

GP interests consolidated, but owned by noncontrolling interests

           8,219               8,219   

Private equity:

       

Investments owned

                  96,276        96,276   

Investments consolidated, but owned by noncontrolling interests

                  67,206        67,206   

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 periods ended March 31, 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 periods ended March 31, 2011 and 2010:

 

     Three Months Ended March 31, 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      $      $      $ (195   $ 8      $ 129   

Private equity:

            

Investments owned

     96,276        279        2,277        (10     2,681        101,503   

Investments consolidated, but owned by noncontrolling interests

     67,206               9,876        (7,098            69,984   
                                                

Total Level 3 Assets

   $ 163,798      $      279      $ 12,153      $ (7,303   $ 2,689      $ 171,616   
                                                

 

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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 March 31, 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      $ (8   $       1      $       –      $           –      $ 298   

Private equity:

           

Investments owned

    100,171        734               (3     (2,865     98,037   

Investments consolidated, but owned by noncontrolling interests

    35,743        2,484                             38,227   
                                               

Total Level 3 Assets

  $ 136,219      $ 3,210      $  1      $  (3   $ (2,865   $ 136,562   
                                               

 

With respect to Level 3 assets held at March 31, 2011 and 2010, net gains included in earnings for the three month periods ended March 31, 2011 and 2010 were $279 and $3,210, respectively, in connection with the change in unrealized gains and losses relating to such assets.

 

6.     DERIVATIVES

 

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

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

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 March 31, 2011 and December 31, 2010:

 

    March 31,
2011
    December 31,
     2010     
 

Derivative Assets:

   

Forward foreign currency exchange rate contracts

  $ 998      $ 1,432   

Interest rate swaps

    55        57   

Equity and fixed income swaps

           385   
               
  $ 1,053      $ 1,874   
               

Derivative Liabilities:

   

Forward foreign currency exchange rate contracts

  $ 6,720      $ 2,151   

Interest rate swaps

    327        326   

Equity and fixed income swaps

    2,250        753   
               
  $ 9,297      $ 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 periods ended March 31, 2011 and 2010 (predominantly reflected in “revenue-other”), by type of derivative, were as follows:

 

     Three Months
Ended

March 31,
 
     2011     2010  

Forward foreign currency exchange rate contracts

   $ (6,258   $ 5,218   

Interest rate swaps

     (2     44   

Equity and fixed income swaps

     (2,287     (1,332
                
   $ (8,547   $ 3,930   
                

 

Derivatives designated as hedging instruments relate to interest rate swaps that hedged “available-for-sale” securities and had been accounted for as fair value hedges. For the three month period ended March 31, 2010, the Company recognized pre-tax losses pertaining to interest rate swaps of $1,991. These losses were substantially offset by gains recognized on the hedged risk portion of such “available-for-sale” securities.

 

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 a 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 Lazard Ltd’s 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 $15,327 and $72,573, respectively, as of March 31, 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, a private equity firm based in Chicago, Illinois, through the Edgewater Acquisition. Following such acquisition, Edgewater’s current leadership team retained a substantial economic interest in such entities. Edgewater primarily manages middle market funds. 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 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 March 31, 2011 and December 31, 2010, 1,295,029 shares of Class A common stock were issuable on a non-contingent basis. Additionally, at March 31, 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 March 31, 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 issuable over multi-year periods.

 

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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 March 31, 2011 and December 31, 2010 are presented below:

 

    March 31,
2011
    December 31,
2010
 

Goodwill

  $ 316,101      $ 313,229   

Other intangible assets (net of accumulated amortization)

    46,736        48,210   
               
  $ 362,837      $ 361,439   
               

 

At March 31, 2011 and December 31, 2010, goodwill of $254,471 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 three month periods ended March 31, 2011 and 2010 are as follows:

 

    Three Months Ended
March 31,
 
    2011       2010    

Balance, January 1

  $ 313,229      $ 261,703   

Foreign currency translation adjustments

    2,872       
287
  
               

Balance, March 31

  $ 316,101      $ 261,990   
               

 

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

 

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

Success/performance fees

  $ 30,740      $ 890      $ 29,850      $ 30,740      $ 890      $ 29,850   

Management fees, customer relationships and non-compete agreements

    32,477        15,591        16,886        32,477        14,117        18,360   
                                               
  $ 63,217      $ 16,481      $ 46,736      $ 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 periods ended March 31, 2011 and 2010 was $1,474 and $1,770, respectively. Estimated future amortization expense is as follows:

 

Year Ending December 31,

   Amortization
Expense (a)
 

2011 (April 1 through December 31)

   $ 4,253   

2012

     6,302   

2013

     12,800   

2014

     9,861   

2015

     7,278   

Thereafter

     6,242   
        

Total amortization expense

   $ 46,736   
        

 

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

 

10.    SENIOR AND SUBORDINATED DEBT

 

Senior Debt—Senior debt is comprised of the following as of March 31, 2011 and December 31, 2010:

 

      Initial
Principal

Amount
    Maturity
Date
     Annual
Interest
Rate
     Outstanding As Of  
             March 31,
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         2.13                
                         

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 March 31, 2011, the annual interest rate for a loan accruing interest (based on the Federal Funds overnight rate), including the applicable margin, was 2.13%. As of March 31, 2011, and December 31, 2010, no amounts were outstanding under the Credit Facility.

 

Subordinated Debt—Subordinated debt at March 31, 2011 and December 31, 2010 amounted to $150,000 at each date and represents a note which is convertible into a maximum of 2,631,570 shares of Class A common stock at an effective conversion price of $57 per share. The note matures on September 30, 2016, and has a fixed interest rate of 3.25% per annum. One-third in principal amount became convertible on and after each of July 1, 2008, July 1, 2009 and July 1, 2010, and no principal amount is convertible after June 30, 2011. As of March 31, 2011, there have been no conversions of the note.

 

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, as well as its subordinated convertible note, contain certain covenants (none of which relate to financial condition), events of default and other customary provisions, including a customary make-whole provision in the event of early redemption where applicable. As of March 31, 2011, the Company was in compliance with all of these provisions. All of the Company’s senior and subordinated debt obligations are unsecured.

 

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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 March 31, 2011, the Company had approximately $298,000 in unused lines of credit available to it, including the Credit Facility, and approximately $105,000 and $20,000 of unused lines of credit available to LFB and Edgewater, respectively. 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 March 31, 2011 and December 31, 2010, the fair value of the Company’s senior and subordinated debt was approximately $1,301,000 and $1,271,000, respectively, and exceeded the aggregate carrying value by approximately $74,000 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

 

Leases—Lazard has various leases and other contractual commitments arising in the ordinary course of business. At March 31, 2011, minimum rental commitments under non-cancelable operating leases, net of sublease income, are approximately as follows:

 

Year Ending December 31,

      

2011 (April 1 through December 31)

   $ 54,145   

2012

     54,139   

2013

     56,676   

2014

     64,127   

2015

     60,442   

Thereafter

     766,828   
        

Total minimum lease payments

     1,056,357   

Sublease proceeds

     95,184   
        

Net lease payments

   $ 961,173   
        

 

Guarantees—In the normal course of business, LFB provides indemnifications to third parties to protect them in the event of non-performance by its clients. At March 31, 2011, LFB had $4,674 of such indemnifications and held $3,163 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 Commitments—At March 31, 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 $3,442 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 Commitments—In the normal course of business, LFB enters into commitments to extend credit, predominately at variable interest rates. Such commitments at March 31, 2011 aggregated $15,946. These commitments have varying expiration dates and are fully collateralized and generally contain requirements for the counterparty to maintain a minimum collateral level. These commitments may not represent future cash requirements as they may expire without being drawn upon.

 

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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)

 

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.

 

Legal—The Company’s businesses, as well as the financial services industry generally, are subject to extensive regulation throughout the world. The 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 reserves if a loss is probable and the amount of such loss can be reasonably estimated. Management believes, based on currently available information, that the results of such matters, in the aggregate, will not have a material adverse effect on its financial condition but might be material to its operating results or cash flows for any particular period, depending upon the operating results for such period.

 

12.    STOCKHOLDERS’ EQUITY

 

Issuance of Class A Common Shares—During 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 Offerings—Pursuant to the applicable Prospectus Supplements, during 2010, 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), offered 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 March 31, 2011).

 

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

 

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

 

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LAZARD LTD

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

Lazard Group Distributions—As 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 three month periods ended March 31, 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):

 

     Three Months Ended
March 31,
 
     2011      2010  

LAZ-MD Holdings

   $ 955       $ 3,941   

Subsidiaries of Lazard Ltd

     14,115         10,791   
                 
   $ 15,070       $ 14,732   
                 

 

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 Interests—In addition to the simultaneous exchanges that occurred in connection with the March 2010 Secondary Offering, during the three month period ended March 31, 2010, Lazard Ltd issued 37,129 shares of Class A common stock 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 Program—In 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 transactions, and since inception of the program in February 2006 through March 31, 2011, purchases by Lazard Group with respect to such program are set forth in the table below (including, in the three month period ended March 31, 2011, purchases of 766,814 Class A common shares, at an aggregate cost of $32,689, and the purchase of 19,032 Lazard Group common membership interests, at an aggregate cost of $794):

 

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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)

 

     Number  of
Shares/Common

Membership
Interests Purchased
     Average
Price  Per
Share/Common
Membership
Interest
 

Class A common stock

     17,540,473         $33.21   

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 three month period ended March 31, 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 2,725,147 and 6,847,508 shares of Class A common stock held by Lazard Group at March 31, 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 March 31, 2011, $259,288 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 Stock—Lazard 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 March 31, 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 March 31, 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 March 31, 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.

 

Accumulated Other Comprehensive Income (Loss), Net of Tax—The components of AOCI at March 31, 2011 and December 31, 2010 are as follows:

 

     March 31,
2011
    December 31,
         2010        
 
      

Currency translation adjustments

   $ 36,931      $ 13,193   

Interest rate hedge

     (4,347     (4,611

Employee benefit plans

     (59,732     (56,595
                

Total AOCI

     (27,148     (48,013

Less amount attributable to noncontrolling interests

     (581     (1,855
                

Total Lazard Ltd AOCI

   $ (26,567   $ (46,158
                

 

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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)

 

Noncontrolling Interests—Noncontrolling 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 March 31, 2011 and December 31, 2010, LAZ-MD Holdings held approximately 6.0% 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 three month periods ended March 31, 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 March 31, 2010:

         

Common membership interest activity in connection with:

         

Equity compensation

    3,000,000                   3,000,000   

2010 Secondary Offering

    6,180,639          (6,180,639         

Exchanges for Class A common stock

    37,129          (37,129         
                           

Balance, March 31, 2010

    101,383,680        80.0     25,302,658        20.0     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 March 31, 2011:

         

Repurchase of common membership interests from LAZ-MD Holdings

             (19,032)          (19,032)   
                           

Balance, March 31, 2011

    119,697,936        94.0     7,633,593        6.0     127,331,529   
                           

 

The change in Lazard Ltd’s ownership in Lazard Group in the three month periods ended March 31, 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 periods ended March 31, 2011 and 2010 and noncontrolling interests as of March 31, 2011 and December 31, 2010 in the Company’s condensed consolidated financial statements:

 

     Net Income (Loss) Attributable
To Noncontrolling Interests

Three Months Ended
March 31,
 
     2011      2010  

LAZ-MD Holdings

     $3,734         $(9,719

Edgewater

     1,023         2,607   

LAM GPs

     172         (130

Other

     47         (118
                 

Total

     $4,976         $(7,360
                 

 

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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)

 

     Noncontrolling Interests
As Of
 
     March 31,
2011
     December 31,
2010
 

LAZ-MD Holdings

   $ 24,973       $ 22,167   

Edgewater

     110,605         111,289   

LAM GPs

     9,049         8,219   

Other

     2,108         2,044   
                 

Total

   $ 146,735       $ 143,719   
                 

 

Dividend Declared, April 2011—On April 26, 2011, the Board of Directors of Lazard Ltd declared a quarterly dividend of $0.16 per share on its Class A common stock, payable on May 27, 2011, to stockholders of record on May 6, 2011.

 

13.    INCENTIVE PLANS

 

Share-Based Incentive Plan Awards

 

A description of Lazard Ltd’s 2005 Plan and 2008 Plan, and activity with respect thereto during the three month periods ended March 31, 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.

 

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:

 

 

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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
March 31,
 
          2011          2010  

Compensation and benefits (*)

   $ 84,858       $ 103,813   

Restructuring

             46,880   
                 

Total

   $ 84,858       $ 150,693   
                 

 

(*) Includes, during the three month period ended March 31, 2010, $24,860 relating to the 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 three month periods ended March 31, 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:

 

      Three Months Ended
March 31,
 
         2011              2010      

Issuance of RSUs

     60,223         72,335   

Charges to retained earnings, net of estimated forfeitures

     $2,409         $2,004   

 

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 first quarter of 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. There were no such DSUs granted during the three month periods ended March 31, 2011 and 2010. 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 three month periods ended March 31, 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 three month periods ended March 31, 2011 and 2010, 1,249 and 2,131 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 $56 and $76 during the three month periods ended March 31, 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)

 

The following is a summary of activity relating to RSUs and DSUs during the three month periods ended March 31, 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 60,223 RSUs relating to dividend participation)

    6,038,286      $ 45.12        1,249      $ 45.55   

Forfeited

    (122,774   $ 38.24                 

Vested

    (6,678,444   $ 39.45                 
                   

Balance, March 31, 2011

    21,345,703      $ 37.15        122,986      $ 34.57   
                   
       

Balance, January 1, 2010

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

Granted (including 72,335 RSUs relating to dividend participation)

    6,612,812      $ 36.10        2,131      $ 35.92   

Forfeited

    (175,734   $ 35.96                 

Vested

    (5,767,912   $ 40.50                 
                   

Balance, March 31, 2010

    24,036,979      $ 35.94        105,277      $ 35.76   
                   

 

During the three month periods ended March 31, 2011 and 2010, 6,678,444 RSUs and 5,767,912 RSUs vested, respectively. In connection with such vested RSUs, the Company satisfied certain employees’ tax obligations in lieu of issuing 1,947,471 and 893,594 shares of Class A common stock in the three month periods ended March 31, 2011 and 2010, respectively. Accordingly, 4,730,973 and 4,874,318 shares of Class A common stock held by Lazard Group were delivered during the three month periods ended March 31, 2011 and 2010, respectively.

 

As of March 31, 2011, unrecognized RSU compensation expense, adjusted for estimated forfeitures, was approximately $390,000, with such unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.9 years subsequent to March 31, 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 three month period ended March 31, 2011:

 

     Restricted
Shares
    Weighted
Average
Grant Date
Fair Value
 

Balance, January 1, 2011

     95,332        $37.63   

Granted

     183,422        $45.26   

Vested

     (183,422     $45.26   
          

Balance, March 31, 2011

     95,332        $37.63   
          

 

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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)

 

During the three month period ended March 31, 2011, 183,422 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 25,220 shares of Class A common stock by Lazard Group. Accordingly, 158,202 shares of Class A common stock held by Lazard Group were delivered during the three month period ended March 31, 2011.

 

Expense relating to restricted stock awards is charged to “compensation and benefits” expense within the Company’s consolidated statements of operations, and amounted to $8,643 for the three month period ended March 31, 2011 (there were no restricted stock awards granted or outstanding during the three month period ended March 31, 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 March 31, 2011, unrecognized restricted stock expense was approximately $2,000, with such expense to be recognized over a weighted average period of approximately 1.5 years subsequent to March 31, 2011.

 

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

 

Other Incentive Awards

 

In February 2011, the Company granted to eligible employees actual or notional interests in several Lazard managed investment funds (“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.

 

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 $2,641 in the three month period ended March 31, 2011, and is being recognized over the vesting period, with an offset recorded as an incentive compensation liability, the ultimate value 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 2.6 years subsequent to March 31, 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.

 

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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, 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 ($3,698 at March 31, 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 three month period ended March 31, 2011, no contribution to these U.K. pension plans was required, and no contributions were required to be made to other pension plans.

 

The following table summarizes the components of total benefit cost (credit) for the three month periods ended March 31, 2011 and 2010:

 

    Pension Plans     Post-Retirement
Medical Plans
 
    Three Months Ended March 31,  
      2011         2010           2011             2010      

Components of Net Periodic Benefit Cost (Credit):

       

Service cost

  $ 163      $ 348      $       15      $ 18   

Interest cost

    7,067        7,085        70        73   

Expected return on plan assets

    (7,622     (7,373              

Amortization of:

       

Prior service cost (credit)

    740        751               (256

Net actuarial loss

    63        201                 
                               

Net periodic benefit cost (credit)

  $ 411      $ 1,012      $  85      $ (165
                               

 

15.    RESTRUCTURING PLANS

 

In the first quarter of 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 March 31, 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 March 31, 2011 and December 31, 2010, the remaining liability associated with the 2009 Restructuring Plan was $5,128 and $5,427, respectively. During the three month period ended March 31,

 

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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)

 

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.

 

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 $13,463 and $6,413 for the three month periods ended March 31, 2011 and 2010, respectively, representing effective tax rates of 18.3% and (18.6)%, 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.

 

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 three month periods ended March 31, 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.

 

17.    NET INCOME (LOSS) PER SHARE OF CLASS A COMMON STOCK

 

The Company’s basic and diluted net income (loss) per share calculations for the three month periods ended March 31, 2011 and 2010 are computed as described below.

 

Basic Net Income (Loss) Per Share

 

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

 

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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)

 

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 (Loss) Per Share

 

Numerator—utilizes net income (loss) attributable to Lazard Ltd for the respective periods as in the basic net income (loss) per share calculation described above, plus, to the extent applicable and dilutive, (i) interest expense on convertible debt, (ii) changes in net income (loss) 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 (loss) 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.

 

The calculations of the Company’s basic and diluted net income (loss) per share and weighted average shares outstanding for the three month periods ended March 31, 2011 and 2010 are presented below:

 

     Three Months Ended
March 31,
 
     2011      2010  

Net income (loss) attributable to Lazard Ltd

     $55,007         $(33,534

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

     97         (214
                 

Net income (loss) attributable to Lazard Ltd - basic

     55,104         (33,748

Add - dilutive effect, as applicable, of:

     

Adjustments to income relating to interest expense and changes in net income (loss) 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

     4,424           
                 

Net income (loss) attributable to Lazard Ltd - diluted

     $59,528         $(33,748
                 

Weighted average number of shares of Class A common stock outstanding

     111,681,448         86,826,411   

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

     3,653,306         2,909,726   
                 

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

     115,334,754         89,736,137   

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

     23,255,839           
                 

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

     138,590,593         89,736,137   
                 

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

     

Basic

     $0.48         $(0.38
                 

Diluted

     $0.43         $(0.38
                 

 

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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 March 31, 2011 and December 31, 2010 are set forth below:

 

     March 31,
2011
     December 31,
2010
 

Receivables

     

LFCM Holdings

   $ 11,714       $ 24,785   

Other

     486         89   
                 

Total

   $ 12,200       $ 24,874   
                 

Payables

     

LFCM Holdings

   $ 2,392       $ 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 our 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 periods ended March 31, 2011 and 2010, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $614 and $546, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $6,947 and $3,345, 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 March 31, 2011 and December 31, 2010 primarily include $1,721 and $12,775, respectively, related to administrative and support services and reimbursement of expenses incurred on behalf of LFCM Holdings, and $9,473 and $11,413, respectively, related to referral fees for underwriting and private placement transactions. Payables to LFCM Holdings and its subsidiaries at March 31, 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 $31 and $458, respectively, principally relating to referral fees for Financial Advisory transactions.

 

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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)

 

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 periods ended March 31, 2011 and 2010, such charges amounted to $188 for each period.

 

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 Exchange Act. 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 March 31, 2011, LFNY’s regulatory net capital was $80,530, which exceeded the minimum requirement by $71,797.

 

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 March 31, 2011, the aggregate regulatory net capital of the U.K. Subsidiaries was $132,628, which exceeded the minimum requirement by $87,031.

 

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 March 31, 2011, the consolidated regulatory net capital of CFLF was $191,216, which exceeded the minimum requirement set for regulatory capital levels by $87,256.

 

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 March 31, 2011, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $94,120, which exceeded the minimum required capital by $70,164.

 

At March 31, 2011, each of these subsidiaries individually was in compliance with its regulatory capital requirements.

 

Lazard Ltd is currently subject to supervision by the SEC as a Supervised Investment Bank Holding Company (“SIBHC”). As a SIBHC, Lazard Ltd is subject to group-wide supervision, which requires it to compute allowable capital and risk allowances on a consolidated basis. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), provides for the elimination of the SEC’s SIBHC program on July 21, 2011. Following this elimination, we will be required to be regulated by another regulatory body, either in the U.S. or Europe, pursuant to relevant rules in Europe. The Dodd-Frank Act allows certain securities holding companies seeking consolidated supervision to elect to be regulated by the Board of Governors of the Federal Reserve. The Dodd-Frank Act could have other effects on us, which we are currently in the process of examining, including the impact of the elimination of the SIBHC program and the effects of various new regulations mandated by the Dodd-Frank Act.

 

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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)

 

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 periods ended March 31, 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
March 31,
 
         2011     2010  

Financial Advisory

      
  Net Revenue    $ 228,845      $ 268,496   
  Operating Expenses      213,566        237,800   
                  
  Operating Income (a)    $ 15,279      $ 30,696   
                  

Asset Management

      
  Net Revenue    $ 226,853      $ 187,753   
  Operating Expenses      149,204        129,440   
                  
  Operating Income (a)    $ 77,649      $ 58,313   
                  

Corporate

      
  Net Revenue    $ (17,675   $ (18,038
  Operating Expenses      1,807        105,452   
                  
  Operating Loss (a)    $ (19,482   $ (123,490
                  

Total

      
  Net Revenue    $ 438,023      $ 438,211   
  Operating Expenses      364,577        472,692   
                  
  Operating Income (Loss) (a)    $ 73,446      $ (34,481
                  

 

     As Of  
     March 31,
2011
     December 31,
2010
 

Total Assets

     

Financial Advisory

   $ 757,932       $ 799,090   

Asset Management

     650,956         687,323   

Corporate

     1,750,472         1,936,119   
                 

Total

   $ 3,159,360       $ 3,422,532   
                 

 

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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)

 

 

(a) Operating income (loss) for the three month period ended March 31, 2010 was significantly impacted by certain charges. 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

   $ 30,696   

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

   $ 50,267   
        

Asset Management

  

Operating income, as reported above

   $ 58,313   

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

   $ 61,215   
        

Corporate

  

Operating loss, as reported above

   $ (123,490

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

   $ (33,995
        

Consolidated

  

Operating loss, as reported above

   $ (34,481

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

   $ 77,487   
        

 

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

 

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

 

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

 

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

 

   

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

 

   

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

 

   

losses due to unidentified or unanticipated risks,

 

   

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

 

   

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

 

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

 

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

 

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

 

   

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

 

   

business’ strategies and investment policies,

 

   

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

 

   

business’ competitive position,

 

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

 

   

potential growth opportunities available to our businesses,

 

   

recruitment and retention of our managing directors and employees,

 

   

target levels of compensation expense,

 

   

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

 

   

likelihood of success and impact of litigation,

 

   

expected tax rates,

 

   

changes in interest and tax rates,

 

   

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

 

   

effects of competition on our business, and

 

   

impact of future legislation and regulation on our business.

 

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

 

Business Summary

 

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

 

   

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

 

   

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

 

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

 

LFB is a registered bank regulated by the 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 engages in underwritten offerings of securities in France and we expect that it may expand its scope to include placements elsewhere in Europe.

 

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

 

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Corporate Partners II Limited (“CP II”) and Lazard Senior Housing Partners LP (“Senior Housing”), consistent with our obligations to LFCM Holdings LLC (“LFCM Holdings”) and through The Edgewater Funds (“Edgewater”), our Chicago-based private equity firm (see Note 8 of Notes to Condensed Consolidated Financial Statements). We continue to explore and discuss opportunities to expand the scope of our alternative investment and private equity activities in Europe, the U.S. and elsewhere. These opportunities could include internal growth of new funds and direct investments by us, partnerships or strategic relationships, investments with third parties or acquisitions of existing funds or management companies. Also, consistent with our obligations to LFCM Holdings, we may explore discrete capital markets opportunities.

 

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

 

      Three Months Ended
March 31,
 
     2011      2010  

Financial Advisory

     52      61

Asset Management

     52         43   

Corporate

     (4      (4
                 

Total

     100      100
                 

 

Business Environment

 

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

 

Global market performance, capital-raising and M&A activity were mixed during the first quarter of 2011. In the early part of the quarter, global markets showed overall strength on expectations of continued growth in corporate profits. However, the month of March was volatile, as unrest in the Middle East as well as the impact of the earthquake and nuclear disaster in Japan resulted in a degree of uncertainty in the equity and commodity markets. By the end of March, the global markets showed resiliency and recaptured earlier month losses. Also, capital-raising and M&A activity slowed as companies evaluated the implications of the Japanese disaster, but strengthened significantly by the end of March and early April as a number of high value M&A transactions were announced. Restructuring activity continued at low levels due to the decline in corporate defaults.

 

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

 

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

 

 

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Financial Advisory

 

As shown in the following table, the value of global completed and announced M&A transactions increased significantly during the first quarter of 2011, albeit with a lower number of transactions, as compared to the corresponding prior year period. Announced trans-atlantic transactions increased both in value and number, while the value of completed trans-atlantic transactions declined, and the number of transactions remained substantially unchanged versus the corresponding prior period.

 

      Three Months Ended March 31,  
      2011      2010      %
Incr /  (Decr)
 
    

($ in billions)

 

Completed M&A Transactions:

        

Global:

        

Value

     $567         $412         38

Number

     6,954         7,916         (12 )% 

Trans-Atlantic:

        

Value

     $19         $34         (44 )% 

Number

     295         294         0

Announced M&A Transactions:

        

Global:

        

Value

     $644         $510         26

Number

     9,736         10,046         (3 )% 

Trans-Atlantic:

        

Value

     $63         $39         62

Number

     360         329         9

 

Source: Thomson Financial as of April 11, 2011.

 

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

 

Global restructuring activity during the 2011 period decreased from the corresponding prior year quarter due to the decelerating pace of corporate debt defaults. According to Moody’s Investors Service, Inc., in the first quarter of 2011, a total of 8 issuers defaulted as compared to 17 in the first quarter of 2010. We believe however that the number and value of corporate defaults for the full year of 2011 will be lower as compared to 2010, but due to our Restructuring assignments currently in progress, we expect that our Restructuring business will remain active, albeit at a lower level as compared to the prior year, from advising companies on matters relating to debt and financing restructuring and other on- and off-balance sheet assignments. Our Restructuring assignments are generally executed over a six- to eighteen-month period.

 

Our Private Fund Advisory Group, which is part of our Financial Advisory segment and is conducted in the U.S. through Lazard Freres & Co. LLC (“LFNY”), an SEC-registered broker-dealer and municipal advisor and member of the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board (the “MSRB”), acts as placement agent for investment funds, including investment funds that have historically received capital from certain public pension funds. In April 2009, governmental officials in New York announced a new policy banning the use of placement agents by funds seeking investment contributions from the New York State and New York City public pension funds. The use of placement agents has also been prohibited or otherwise restricted with respect to investments by public pension funds in Illinois, Ohio, California and New Mexico, and similar measures are being considered or have been implemented in other jurisdictions. On June 30, 2010, the SEC approved a rule that, among other things, will prohibit investment advisors from paying a third-party placement agent for soliciting investment advisory business from a U.S. governmental entity, unless the placement agent is (i) an SEC-registered investment advisor or (ii) an SEC-registered broker-dealer that is a member of FINRA and thus subject to FINRA’s forthcoming “pay-to-play” rule. On November 19, 2010, the SEC released a proposed amendment to that rule that, if approved, will prohibit investment advisors from paying

 

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a third-party placement agent for soliciting investment advisory business from a U.S. governmental entity, unless the placement agent is a “municipal advisor” that is registered with the SEC under Section 15B of the Securities Exchange Act of 1934, as amended, and subject to the “pay-to-play” rules that will be adopted by the MSRB. We are continuing to evaluate the potential impact of state, local and other restrictions on our Private Fund Advisory business.

 

Asset Management

 

As shown in the table below, major global market indices at March 31, 2011 increased modestly in most markets as compared to such indices at December 31, 2010 and increased more significantly as compared to March 31, 2010.

 

      Percentage Change
March 31, 2011 vs.
 
     December 31, 2010     March 31, 2010  

MSCI World Index

     4     11

CAC 40

     5     0

DAX

         2     14

FTSE 100

     0     4

TOPIX 100

     (4 )%      (13 )% 

MSCI Emerging Market

     2     16

Dow Jones Industrial Average

     6     14

NASDAQ

     5     16

S&P 500

     5     13

 

The fees that we receive for providing investment management and advisory services are primarily driven by the level of AUM. Accordingly, since market movements and foreign currency volatility impact the level of our AUM, such items will impact the level of revenues we receive from our Asset Management business. A substantial portion of our AUM is invested in equities, and market movements reflected in the changes in Lazard’s AUM during the period generally corresponded to the changes in global market indices. Our AUM at March 31, 2011 increased 3% versus AUM at December 31, 2010, with average AUM for the first quarter of 2011 increasing 19% as compared to our average AUM for the first quarter of 2010, reflecting significant market appreciation as well as net inflows in the nine month period ended December 31, 2010, and, to a lesser extent, during the first quarter of 2011. Such increased AUM contributed to significantly higher management fee revenues in the 2011 period.

 

Financial Statement Overview

 

Net Revenue

 

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

 

 

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

 

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

 

For hedge funds, incentive fees are calculated based on a specified percentage of a fund’s net appreciation, in some cases in excess of established benchmarks. The Company records incentive fees on traditional products and hedge funds at the end of the relevant performance measurement period, when potential uncertainties regarding the ultimate realizable amounts have been determined. The incentive fee measurement period is generally an annual period (unless an account terminates during the year), and therefore such incentive fees are usually recorded in the fourth quarter of Lazard’s fiscal year. These incentive fees received at the end of the measurement period are not subject to reversal or payback. Incentive fees on hedge funds generally are subject to loss carryforward provisions in which losses incurred by the funds in any year are applied against certain future period net appreciation before any incentive fees can be earned.

 

For private equity funds, incentive fees may be earned in the form of a “carried interest” if profits arising from realized investments exceed a specified threshold. Typically, such carried interest is ultimately calculated on a whole-fund basis and, therefore, clawback of carried interests during the life of the fund can occur. As a result, incentive fees earned on our private equity funds are not recognized until potential uncertainties regarding the ultimate realizable amounts have been determined, including any potential for clawback.

 

Corporate segment net revenue consists primarily of interest income and interest expense, including amounts earned at LFB, investment gains and losses on the Company’s “seed investments” in LAM equity funds and principal investments in equities and alternative investment funds, investments at LFB, and “equity method” investments. Corporate net revenue can fluctuate due to changes in the fair value of investments classified as “trading”, and with respect to “available-for-sale” investments, when realized, or, with respect to “available-for-sale” and “held-to-maturity” investments, when a decline is determined to be other than temporary, as well as due to changes in interest and currency exchange rates and in the levels of cash, investments and indebtedness. As of December 31, 2010, the Company no longer holds “available-for-sale” or “held-to-maturity” investments.

 

Although Corporate segment net revenue during the year ended the 2011 period represented (4)% of Lazard’s net revenue, total assets in Corporate represented 55% of Lazard’s consolidated total assets as of March 31, 2011, which is attributable to assets associated with LFB, investments in government bonds, fixed income funds, LAM-managed funds and other securities, private equity investments and cash.

 

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Operating Expenses

 

The majority of Lazard’s operating expenses relate to compensation and benefits for employees and managing directors. Our compensation and benefits expense includes (i) salaries and benefits, (ii) amortization of the relevant portion of (a) share-based incentive compensation under the Lazard Ltd 2005 Equity Incentive Plan (“2005 Plan”) and the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”) and (b) Lazard Fund Interests, with such aggregate amortization generally determined on a straight-line basis over the applicable vesting periods, and not on the basis of revenue recognition (see Note 13 of Notes to Condensed Consolidated Financial Statements) and (iii) a provision for discretionary bonuses and profit pools. Compensation expense in any given period is dependent on many factors, including general economic and market conditions, our operating and financial performance, staffing levels, competitive pay conditions, the nature of revenues earned, as well as the mix between current and deferred compensation. Our compensation expense-to-operating revenue ratio for the 2011 and 2010 periods was 59.1% and 60.3%, respectively (with such ratios excluding in 2010, the compensation charge of approximately $25 million in connection with the accelerated vesting of share-based incentive awards related to the Company’s change in retirement policy).

 

Lazard’s operating expenses also include “non-compensation expense” (which includes costs for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourced services and other expenses), amortization of intangible assets related to acquisitions and, in 2010, restructuring expense. Amortization of intangible assets relates primarily to the acquisition of Edgewater. Restructuring expense relates to certain staff reductions and realignment of personnel in the first quarter of 2010, and includes severance and related benefits expense, the acceleration of unrecognized expense pertaining to restricted stock unit awards denominated in shares of Lazard Ltd Class A common stock (“RSUs”) previously granted to individuals who were terminated and certain other costs related to these initiatives.

 

Provision for 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 pertaining to the limited liability company is not subject to U.S. federal income taxes because taxes associated with such income represent obligations of the individual partners. Outside the U.S., Lazard Group operates principally through corporations and is subject to local income taxes. Income taxes shown on Lazard’s consolidated statements of operations are related to non-U.S. entities and to New York City Unincorporated Business Tax (“UBT”) attributable to Lazard’s operations apportioned to New York City. The Company’s provision for income taxes also includes a U.S. income tax provision attributable to Lazard Ltd’s ownership interest in Lazard Group’s operating income.

 

Noncontrolling Interests

 

Noncontrolling interests primarily relate to the charge (credit) attributable to LAZ-MD Holdings’ ownership interest in the net income (loss) attributable to Lazard Group, amounts related to Edgewater and various LAM-related general partnership interests (“GPs”) in limited partnerships held directly by certain of our LAM managing directors. See Note 12 of Notes to Condensed Consolidated Financial Statements for information regarding the Company’s noncontrolling interests.

 

Consolidated Results of Operations

 

Lazard’s consolidated financial statements are presented in U.S. dollars. Many of our non-U.S. subsidiaries have a functional currency (i.e., the currency in which operational activities are primarily conducted) that is other than the U.S. dollar, generally the currency of the country in which the subsidiaries are domiciled. Such subsidiaries’ assets and liabilities are translated into U.S. dollars using exchange rates as of the respective balance sheet date, while revenue and expenses are translated at average exchange rates during the respective periods based on the daily closing exchange rates. Adjustments that result from translating amounts from a subsidiary’s functional currency are reported as a component of stockholders’ equity. Foreign currency remeasurement gains and losses on transactions in non-functional currencies are included in the consolidated statements of operations.

 

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During the 2010 period, the Company reported certain charges (the “2010 special items”), that adversely impacted operating results for that period. The impact of such special items on the Company’s condensed consolidated statements of operations is described in more detail in the table below. There were no special items recorded in the 2011 period.

 

     Three Months Ended
March 31, 2010
 
     Restructuring
(a)
    RSU
Retirement

Amendment
(b)
    Total  
    

($ in thousands)

 

Compensation

     $ 24,860      $ 24,860   

Restructuring

   $ 87,108          87,108   
                        

Operating Loss

     (87,108     (24,860     (111,968

Income Tax Benefit

     5,680        1,363        7,043   

Noncontrolling Interest Benefit

     18,400        5,988        24,388   
                        

Net Loss Attributable to Lazard Ltd

   $ (63,028   $ (17,509   $ (80,537
                        

 

(a) Restructuring plan announced in the first quarter of 2010.
(b) Accelerated amortization expense recognized in connection with the vesting of share-based incentive awards related to the amendment of the Company’s retirement policy.

 

A discussion of the Company’s consolidated results of operations for the 2011 and 2010 periods is set forth below, followed by a more detailed discussion of business segment results. For comparability purposes in the discussion that follows, the results for 2010 are shown in the table below, on both an “as reported” U.S. GAAP and “excluding special items” non-U.S. GAAP basis that management believes provides the most meaningful comparison between historical, present and future periods. There were no special items in the 2011 period.

 

    Three Months Ended March 31,  
    2011     2010  
    U.S. GAAP
As
Reported
    U.S. GAAP
As  Reported
    Impact of
Special
Items (a)
    Non-U.S.  GAAP
Excluding
Special Items (b)
 
    ($ in thousands)  

Net Revenue

  $ 438,023      $ 438,211        $ 438,211   
                         

Operating Expenses:

       

Compensation and benefits

    269,999        300,377      $ 24,860        275,517   

Non-compensation expense

    93,104        83,437          83,437   

Amortization of intangible assets related to acquisitions

    1,474        1,770          1,770   

Restructuring

           87,108        87,108          
                         

Total operating expenses

    364,577        472,692          360,724   
                         

Operating Income (Loss)

    73,446        (34,481       77,487   

Provision (benefit) for income taxes

    13,463        6,413        (7,043     13,456   
                         

Net Income (Loss)

    59,983        (40,894       64,031   

Less – Net Income (Loss) Attributable to Noncontrolling Interests

    4,976        (7,360     (24,388     17,028   
                         

Net Income (Loss) Attributable to Lazard Ltd

  $ 55,007      $ (33,534     $ 47,003   
                         

Operating Income (Loss), As A % Of Net Revenue

    17     (8 )%        18
                         

 

(a) Represents charges related to the previously described special items. See Notes 13, 15 and 20 of Notes to Condensed Consolidated Financial Statements.

 

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The table below describes the components of operating revenue, a non-U.S. GAAP measure used by the Company to manage total compensation and benefits expense to managing directors and employees. Management believes operating revenue provides the most meaningful basis for comparison between present, historical and future periods.

 

     Three Months Ended
March 31,
 
     2011     2010  
    

($ in thousands)

 

Operating revenue

    

Total revenue

     $461,341        $463,808   

Add (deduct):

    

LFB interest expense (a)

     (1,064     (2,559

Revenue related to noncontrolling interests (b)

     (3,426     (4,339
                

Operating revenue

     $456,851        $456,910   
                

 

(a) The interest expense incurred by LFB is reported as a charge in determining operating revenue because LFB is a commercial bank and we consider its interest expense to be a cost directly related to the revenues of its business.
(b) Revenue related to the consolidation of noncontrolling interests is excluded from operating revenue because the Company has no economic interest in such amount. Further, such results are offset by a charge or credit to noncontrolling interests, as applicable.

 

Certain key ratios, statistics and headcount information for the 2011 and 2010 periods are set forth below:

 

     Three Months Ended
March 31,
     2011   2010

As a % of Net Revenue, by Revenue Category:

        

Investment banking and other advisory fees

       50 %       62 %

Money management fees

       49         40  

Interest income

       1         1  

Other

       5         3  

Interest expense

       (5 )       (6 )
                    

Net Revenue

       100 %       100 %
                    

 

     As Of
     March  31,
2011
   December  31,
2010
   March  31,
2010

Headcount:

              

Managing Directors:

              

Financial Advisory

       140          129          145  

Asset Management

       68          64          64  

Corporate

       11          9          9  

Other Employees:

              

Business segment professionals

       999          999          975  

All other professionals and support staff

       1,136          1,131          1,099  
                                

Total

       2,354          2,332          2,292  
                                

 

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Operating Results

 

The Company’s quarterly revenue and profits can fluctuate materially depending on the number, size and timing of completed transactions on which it advised, as well as seasonality and other factors. Accordingly, the revenue and profits in any particular quarter may not be indicative of future results. Lazard management believes that annual results are the most meaningful basis for comparison among present, historical and future periods. As reflected in the table of consolidated results of operations above, charges related to the 2010 special items had a significant impact on the Company’s reported operating results for the 2010 period. Lazard management believes that comparisons between periods are most meaningful after excluding the impact of such items.

 

Three Months Ended March 31, 2011 versus March 31, 2010

 

The Company reported net income attributable to Lazard Ltd of $55 million, as compared to a net loss of $34 million in the 2010 period. The Company’s results in the 2010 period were adversely affected by the 2010 special items, which served to increase the net loss attributable to Lazard Ltd in the 2010 period by $81 million. Excluding the after-tax impact of the 2010 special items, net income attributable to Lazard Ltd in the 2011 period increased $8 million, or 17%, as compared to the 2010 period. The changes in the Company’s operating results during these periods are described below.

 

Net and operating revenue remained substantially unchanged, as compared to the 2010 period. Fees from investment banking and other advisory activities declined $49 million, or 18%, and were principally driven by a decline in Restructuring fee revenues, partially offset by increases in M&A and Strategic Advisory and Capital Markets & Other revenues. The decline in Restructuring revenue reflects a reduction in restructuring activity as the economy improved and the number of corporate debt defaults declined. Money management fees, including incentive fees, increased $38 million, or 21%, principally due to a $26 billion, or 19%, increase in average AUM for the 2011 period, which resulted from market appreciation and net inflows during the last twelve months, and a favorable change in the mix of AUM into higher margin equity products, partially offset by lower incentive fees earned in the 2011 period. Interest income decreased $2 million, or 32%, due primarily to a shift in asset allocation at LFB (with a corresponding decrease in interest expense). Other revenue increased $10 million, or 84%, primarily due to a $5 million increase in underwriting fees, with the balance due to foreign exchange gains, as compared to losses in the 2010 period, and higher commission revenue. Interest expense decreased $2 million, or 9%.

 

Compensation and benefits expense was $270 million as compared to $300 million in the 2010 period. When excluding the 2010 special item of $25 million, compensation and benefits expense declined $6 million, or 2%. Compensation and benefits expense, excluding the 2010 special item, was 59.1% and 60.3% of operating revenue for 2011 and 2010 periods, respectively.

 

Non-compensation expense increased $10 million, or 12%. The increase in non-compensation expense was primarily due to increases in expenses in our Asset Management segment, principally relating to fund administration expenses and business development expenses for travel and market related data due to the increased level of business activity and AUM, as well as increased technology-related costs. Also contributing to the increase were higher industry-wide fees assessed by the U.K. regulators. The ratio of non-compensation expense to operating revenue was 20.4%, as compared to 18.3% of operating revenue for the 2010 period.

 

Amortization of intangible assets remained substantially unchanged as compared to the 2010 period.

 

In the first quarter of 2010, the Company announced plans to reduce certain staff and realign personnel. As a result, the 2010 special items include a restructuring charge of $87 million in connection with severance and benefit payments, the acceleration of unrecognized expense pertaining to share-based incentive compensation previously granted to individuals who were terminated and certain other costs related to the restructuring initiatives.

 

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Operating income was $73 million, an increase of $108 million, as compared to an operating loss of $35 million in the 2010 period (with such latter amount including the impact of the 2010 special items) and, as a percentage of net revenue, was 17% as compared to (8)% in the 2010 period. Excluding the impact of the 2010 special items, operating income in the 2011 period decreased $4 million, or 5%, as compared to operating income of $77 million in the 2010 period, and, as a percentage of net revenue, was 17%, as compared to 18% in the 2010 period.

 

The provision for income taxes was $13 million, an increase of $7 million as compared to the 2010 period. When excluding the tax benefit of $7 million related to the 2010 special items, the income tax provision in the 2011 period was substantially unchanged as compared to the 2010 period.

 

Net income attributable to noncontrolling interests increased $12 million as compared to the 2010 period. When excluding the impact of the 2010 special items of $24 million, net income attributable to noncontrolling interests decreased $12 million, with such decrease principally reflecting LAZ-MD Holdings’ reduced ownership interest in Lazard Group in the 2011 period.

 

Business Segments

 

The following is a discussion of net revenue and operating income for the Company’s business segments - Financial Advisory, Asset Management and Corporate. Each segment’s operating expenses include (i) compensation and benefits expenses that are incurred directly in support of the segment 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 outsourcing, and indirect support costs (including compensation and benefits expense 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. Such support costs are allocated to the relevant segments based on various statistical drivers such as, among other items, headcount, square footage and transactional volume. As reflected in the tables below, each segment’s operating results for the 2010 period are presented, as applicable, on an “as reported” and “excluding special items” basis (see Note 20 of Notes to Condensed Consolidated Financial Statements).

 

Financial Advisory

 

The following table summarizes the operating results of the Financial Advisory segment for the 2011 and 2010 periods. Operating results for 2010 are shown before and after the charge attributable to the Financial Advisory segment related to the 2010 special item.

 

    Three Months Ended March 31,  
    2011     2010  
    U.S. GAAP
As  Reported
    U.S. GAAP
As  Reported
    Impact of
Special
Item (a)
    Non-U.S. GAAP
Excluding
Special Item (b)
 
   

($ in thousands)

 

M&A and Strategic Advisory

  $ 163,752      $ 147,557          $147,557   

Restructuring

    35,557        100,188          100,188   

Capital Markets and Other Advisory

    29,536        20,751          20,751   
                         

Net Revenue

    228,845        268,496          268,496   

Operating Expenses (c)

    213,566        237,800      $ 19,571        218,229   
                         

Operating Income

  $ 15,279      $ 30,696        $ 50,267   
                         

Operating Income, As A Percentage Of Net Revenue

    7     11       19
                         

 

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     As Of
     March 31,
     2011    
   December 31,
2010
   March 31,
     2010    

Headcount (d):

              

Managing Directors

       140          129          145  

Other Employees:

              

Business segment professionals

       669          673          671  

All other professionals and support staff

       227          222          215  
                                

Total

       1,036          1,024          1,031  
                                

 

(a) Represents the portion of the 2010 special item attributable to the Financial Advisory segment (see Note 20 of Notes to Condensed Consolidated Financial Statements).
(b) A non-U.S. GAAP measure that management believes provides the most meaningful comparison between historical, present and future periods.
(c) Includes indirect support costs (including compensation and benefits expense and other operating expenses related thereto).
(d) Excludes headcount related to indirect support functions, with such headcount being included in the Corporate segment.

 

Net revenue trends in Financial Advisory for M&A and Strategic Advisory and Restructuring are generally correlated to the volume of completed industry-wide M&A transactions and restructurings occurring subsequent to corporate debt defaults, respectively. However, deviations from this relationship can occur in any given year for a number of reasons. For instance, our results can diverge from industry-wide activity where there are material variances from the level of industry-wide M&A activity in a particular market where Lazard has significant market share, or regarding the relative number of our advisory engagements with respect to larger-sized transactions, and where we are involved in significant non-public assignments. Certain Lazard client statistics and global industry statistics are set forth below:

 

     Three Months Ended March 31,  
         2011             2010      

Lazard Statistics:

    

Number of Clients With Fees Greater than $1 million

     39        33   

Percentage of Total Financial Advisory Revenue from Top 10 Clients

     32     37

Number of M&A Transactions Completed With Values Greater than $1 billion (a)

     10        4   

 

(a) Source: Thomson Financial as of April 11, 2011.

 

The geographical distribution of Financial Advisory net revenue is set forth below in percentage terms and is based on the Lazard offices that generate Financial Advisory net revenue, which are located in the U.S., Europe (principally in the U.K., France, Italy, Spain and Germany) and the rest of the world (principally in Australia) and therefore may not be reflective of the geography in which the clients are located.

 

     Three Months Ended March 31,  
         2011             2010      

United States

     48     54

Europe

     41        44   

Rest of World

     11        2   
                

Total

     100     100
                

 

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The Company’s managing directors and many of its professionals have significant experience, and many of them are able to use this experience to advise on M&A, strategic advisory matters and restructuring transactions, depending on clients’ needs. This flexibility allows Lazard to better match its professionals with the counter-cyclical business cycles of mergers and acquisitions and restructurings. While Lazard measures revenue by practice area, Lazard does not separately measure the costs or profitability of M&A services as compared to restructuring services. Accordingly, Lazard measures performance in its Financial Advisory segment based on overall segment net revenue and operating income margins.

 

Financial Advisory Results of Operations

 

Financial Advisory’s quarterly revenue and profits can fluctuate materially depending on the number, size and timing of completed transactions on which it advised, as well as seasonality and other factors. Accordingly, the revenue and profits in any particular quarter or period may not be indicative of future results. Lazard management believes that annual results are the most meaningful basis for comparison among present, historical and further periods. As reflected in the table of operating results of the Financial Advisory segment above, the portion of the 2010 special item attributable to the Financial Advisory segment had a significant impact on the segment’s reported operating results for the 2010 period. Lazard management believes that comparisons between periods are most meaningful after excluding the impact of such item.

 

Three Months Ended March 31, 2011 versus March 31, 2010

 

Financial Advisory net revenue declined $40 million, or 15%, as compared to the 2010 period, reflecting a decline in Restructuring revenue of $65 million, or 65%, partially offset by an increase of $16 million, or 11%, in M&A and Strategic Advisory revenue and an increase of $9 million, or 42%, in Capital Markets and Other Advisory net revenue.

 

The increase in M&A and Strategic Advisory revenue was principally due to an increase in the number of clients with fees greater than $1 million. Our major clients, which in the aggregate represented a significant portion of our M&A and Strategic Advisory revenue for the first quarter of 2011, included AREVA, Caja Madrid, New South Wales Government, Progress Energy, Qwest Communications International, Rhein-Ruhr, Sigma Pharmaceuticals, Veolia Environnement and Wind Telecom.

 

Restructuring revenue is derived from various activities including bankruptcy assignments, global debt and financing restructurings, distressed asset sales and advice on complex on- and off-balance sheet assignments. The decrease in Restructuring revenue was driven by a reduction in restructuring activity as the economy improved, resulting in a decline in the number of active assignments in the 2011 period as compared to the corresponding prior year period, and a corresponding decrease in success fees. Notable assignments completed in the first quarter of 2011 included Alinta Energy Group, Highland Hospitality, Consolis, iStar Financial and Sacyr-Vallehermoso.

 

The increase in Capital Markets and Other Advisory revenue principally reflected increased underwriting fees from public offerings and the value of fund closings by our Private Fund Advisory Group.

 

Operating expenses decreased $24 million, or 10%, as compared to the 2010 period. Excluding the impact of the 2010 special item attributable to the Financial Advisory segment, operating expenses decreased $5 million, or 2%. The principal contributor to the decrease was a decline in compensation expense, partially offset by higher costs related to travel and other business development expenses.

 

Financial Advisory operating income was $15 million, a decrease of $15 million, as compared to operating income of $30 million in the 2010 period (with such latter amount including the impact of the 2010 special item) and, as a percentage of net revenue, was 7% as compared to 11% in 2010. Excluding the impact of the 2010 special item, operating income in the 2011 period decreased $35 million, as compared to operating income of $50 million in the 2010 period, and, as a percentage of net revenue, was 7%, as compared to 19% in the 2010 period.

 

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Asset Management

 

The following table shows the composition of AUM for the Asset Management segment:

 

     As of  
     March 31,
2011
     December 31,
2010
 
     ($ in millions)  

AUM:

     

International Equities

   $ 33,046       $ 32,037   

Global Equities

     79,863         77,965   

U.S. Equities

     22,840         21,298   
                 

Total Equities

     135,749         131,300   
                 

European and International Fixed Income

     12,380         12,249   

Global Fixed Income

     1,689         1,705   

U.S. Fixed Income

     3,186         3,190   
                 

Total Fixed Income

     17,255         17,144   
                 

Alternative Investments

     6,041         5,524   

Private Equity

     1,333         1,294   

Cash Management

     73         75   
                 

Total AUM

   $ 160,451       $ 155,337   
                 

 

Average AUM for the 2011 and 2010 periods is set forth below. Average AUM is based on an average of quarterly ending balances for the respective periods.

 

     Three Months Ended
March 31,
 
         2011              2010      
    

($ in millions)

 

Average AUM

   $ 157,894       $ 132,256   
                 

 

Total AUM at March 31, 2011 increased $5 billion, or 3%, as compared to that at December 31, 2010. Average AUM for the 2011 period was 19% higher than the average AUM for the 2010 period, principally the result of market appreciation (which was generally consistent with the industry as a whole) and net inflows occurring during the nine month period ended December 31, 2010, and, to a lesser extent, during the first quarter of 2011. International, Global and U.S. equities represented 21%, 50% and 14% of total AUM at March 31, 2011, unchanged versus December 31, 2010.

 

As of March 31, 2011 and December 31, 2010, approximately 90% of our AUM was managed on behalf of institutional clients, including corporations, labor unions, public pension funds, insurance companies and banks, and through sub-advisory relationships, mutual fund sponsors, broker-dealers and registered advisors, and, as of such dates, 10% of our AUM was managed on behalf of individual client relationships, which are principally with family offices and high-net worth individuals.

 

As of March 31, 2011, AUM denominated in foreign currencies represented approximately 46% of our total AUM, as compared to 45% at December 31, 2010. Foreign denominated AUM declines in value with the strengthening of the U.S. dollar and increases in value as the U.S. dollar weakens.

 

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The following is a summary of changes in AUM for the 2011 and 2010 periods.

 

     Three Months Ended
March 31,
 
     2011      2010  
    

($ in millions)

 

AUM—Beginning of Period

   $ 155,337       $ 129,543   

Net Flows(a)

     695         2,967   

Market and Foreign Exchange Appreciation

     4,419         2,462   
                 

AUM—End of Period

   $ 160,451       $ 134,972   
                 

 

(a) Includes inflows of $5,813 and $9,006 and outflows of $5,118 and $6,039 for the 2011 and 2010 periods, respectively.

 

During the 2011 period, inflows were principally in Global Equities due to increased investments in existing accounts, as well as new accounts gained. Outflows in the 2011 period occurred primarily in Global and International Equity and certain Fixed Income products.

 

As of April 21, 2011, AUM was $164.5 billion, a $4.0 billion increase since March 31, 2011. The change in AUM was due to market/foreign exchange appreciation of $3.7 billion and net inflows of $0.3 billion. Market appreciation was approximately 2% of AUM since March 31, 2011, which was generally consistent with the increase in global market indices during that period.

 

The following table summarizes the operating results of the Asset Management segment. Operating results for the 2010 period are shown before and after the charge attributable to the Asset Management segment related to the 2010 special items.

 

     Three Months Ended March 31,  
     2011     2010  
     U.S. GAAP
As Reported
    U.S. GAAP
As Reported
    Impact of
Special
Item (a)
     Non-U.S. GAAP
Excluding
Special Item (b)
 
    

($ in thousands)

 

Revenue:

         

Management Fees

   $ 206,768      $ 161,796         $ 161,796   

Incentive Fees

     5,146        13,787           13,787   

Other Income

     14,939        12,170           12,170   
                           

Net Revenue

     226,853        187,753           187,753   

Operating Expenses (c)

     149,204        129,440      $ 2,902         126,538   
                           

Operating Income

   $ 77,649      $ 58,313