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, 2014

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, 2014, there were 129,056,081 shares of the Registrant’s Class A common stock (including 6,230,717 shares held by subsidiaries) and one share of the registrant’s Class B common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

When we use the terms “Lazard”, “we”, “us”, “our” and “the Company”, we mean Lazard Ltd, a company incorporated under the laws of Bermuda, and its subsidiaries, including Lazard Group LLC, a Delaware limited liability company (“Lazard Group”), that is the current holding company for our businesses. Lazard Ltd has no material operating assets other than indirect ownership as of March 31, 2014 of approximately 99.5% 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

     42   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     74   

Item 4. Controls and Procedures

     75   

Part II. Other Information

  

Item 1. Legal Proceedings

     76   

Item 1A. Risk Factors

     76   

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

     76   

Item 3. Defaults Upon Senior Securities

     77   

Item 4. Mine Safety Disclosures

     77   

Item 5. Other Information

     77   

Item 6. Exhibits

     78   

Signatures

     84   

 

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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, 2014 and December  31, 2013

     2   

Condensed Consolidated Statements of Operations for the three month periods ended March  31, 2014 and 2013

     4   

Condensed Consolidated Statements of Comprehensive Income for the three month periods ended March  31, 2014 and 2013

     5   

Condensed Consolidated Statements of Cash Flows for the three month periods ended March  31, 2014 and 2013

     6   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three month periods ended March 31, 2014 and 2013

     7   

Notes to Condensed Consolidated Financial Statements

     9   

 

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Table of Contents

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

MARCH 31, 2014 AND DECEMBER 31, 2013

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     March 31,
2014
     December 31,
2013
 

ASSETS

     
Cash and cash equivalents    $ 666,589       $ 841,482   
Deposits with banks      274,391         244,879   
Cash deposited with clearing organizations and other segregated cash      64,460         62,046   

Receivables (net of allowance for doubtful accounts of $31,324 and $28,777 at March 31, 2014 and December 31, 2013, respectively):

     

Fees

     401,037         452,535   

Customers and other

     117,860         52,220   

Related parties

     4,185         7,920   
  

 

 

    

 

 

 
     523,082         512,675   

Investments

     417,295         478,105   
     

Property (net of accumulated amortization and depreciation of $262,928 and $253,930 at March 31, 2014 and December 31, 2013, respectively)

     242,977         248,796   

Goodwill and other intangible assets (net of accumulated amortization of $46,599 and $45,379 at March 31, 2014 and December 31, 2013, respectively)

     366,921         363,877   
Other assets     
342,488
  
     259,277   
  

 

 

    

 

 

 

Total Assets

   $ 2,898,203       $ 3,011,137   
  

 

 

    

 

 

 

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

MARCH 31, 2014 AND DECEMBER 31, 2013

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     March 31,
2014
    December 31,
2013
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits and other customer payables

   $ 350,114      $ 275,434   

Accrued compensation and benefits

     339,162        523,063   

Senior debt

     1,048,350        1,048,350   

Capital lease obligations

     15,246        15,834   

Related party payables

     2,582        5,031   

Other liabilities

     587,108        513,427   
  

 

 

   

 

 

 

Total Liabilities

     2,342,562        2,381,139   

Commitments and contingencies

    

STOCKHOLDERS’ EQUITY

    

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

    

Series A - 7,921 shares issued and outstanding at March 31, 2014 and December 31, 2013

              

Series B - no shares issued and outstanding

              

Common stock:

    

Class A, par value $.01 per share (500,000,000 shares authorized;
129,056,081 shares issued and outstanding at March 31, 2014 and December 31, 2013, including shares held by subsidiaries as indicated below)

     1,291        1,291   

Class B, par value $.01 per share (1 share authorized, issued and outstanding at March 31, 2014 and December 31, 2013)

              

Additional paid-in-capital

     556,711        737,899   

Retained earnings

     242,818        203,236   

Accumulated other comprehensive loss, net of tax

     (126,383     (133,004
  

 

 

   

 

 

 
     674,437        809,422   

Class A common stock held by subsidiaries, at cost (6,060,439 and 8,317,065 shares at March 31, 2014 and December 31, 2013, respectively)

     (188,593     (249,213
  

 

 

   

 

 

 

Total Lazard Ltd Stockholders’ Equity

     485,844        560,209   

Noncontrolling interests

     69,797        69,789   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     555,641        629,998   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,898,203      $ 3,011,137   
  

 

 

   

 

 

 

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, 2014 AND 2013

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     Three Months Ended
March 31,
 
     2014      2013  

REVENUE

     

Investment banking and other advisory fees

   $ 272,675         $168,104   

Money management fees

     253,031         231,137   

Interest income

     1,419         1,131   

Other

     22,228         21,686   
  

 

 

    

 

 

 

Total revenue

     549,353         422,058   

Interest expense

     15,953         20,155   
  

 

 

    

 

 

 

Net revenue

     533,400         401,903   
  

 

 

    

 

 

 

OPERATING EXPENSES

     

Compensation and benefits

     321,565         277,739   

Occupancy and equipment

     28,312         29,304   

Marketing and business development

     19,233         18,192   

Technology and information services

     23,487         22,980   

Professional services

     7,591         8,613   

Fund administration and outsourced services

     15,454         13,465   

Amortization of intangible assets related to acquisitions

     1,220         877   

Other

     9,358         9,136   
  

 

 

    

 

 

 

Total operating expenses

     426,220         380,306   
  

 

 

    

 

 

 

OPERATING INCOME

     107,180         21,597   

Provision for income taxes

     21,751         3,948   
  

 

 

    

 

 

 

NET INCOME

     85,429         17,649   

LESS - NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     4,587         2,289   
  

 

 

    

 

 

 

NET INCOME ATTRIBUTABLE TO LAZARD LTD

   $ 80,842         $  15,360   
  

 

 

    

 

 

 

ATTRIBUTABLE TO LAZARD LTD CLASS A COMMON
STOCKHOLDERS:

     

WEIGHTED AVERAGE SHARES OF COMMON STOCK
OUTSTANDING:

     

Basic

     121,776,207         117,708,204   

Diluted

     134,025,991         132,815,560   

NET INCOME PER SHARE OF COMMON STOCK:

     

Basic

     $0.66         $0.13   
  

 

 

    

 

 

 

Diluted

    
$0.61
  
     $0.12   
  

 

 

    

 

 

 

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

    
$0.30
  
       
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2014 AND 2013

(UNAUDITED)

(dollars in thousands)

 

     Three Months Ended
March 31,
 
     2014     2013  

NET INCOME

   $ 85,429      $ 17,649   
  

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

    

Currency translation adjustments

     5,913        (12,433

Amortization of interest rate hedge

            264   

Employee benefit plans:

    

Actuarial loss (net of tax benefit of $50 and $1,795 for the three months ended March 31, 2014 and 2013, respectively)

     (557     (3,423

Adjustment for items reclassified to earnings (net of tax expense of $532 and $402 for the three months ended March 31, 2014 and 2013, respectively)

     1,289        1,218   
  

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

     6,645        (14,374
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

     92,074        3,275   

LESS - COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     4,611        2,132   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO LAZARD LTD

   $ 87,463      $ 1,143   
  

 

 

   

 

 

 

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, 2014 AND 2013

(UNAUDITED)

(dollars in thousands)

 

     Three Months Ended
March 31,
 
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 85,429      $ 17,649   

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

    

Depreciation and amortization of property

     8,859        8,059   

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

     83,023        88,074   

Amortization of intangible assets related to acquisitions

     1,220        877   

(Increase) decrease in operating assets:

    

Deposits with banks

     (29,370     30,635   

Cash deposited with clearing organizations and other segregated cash

     (2,284     2,812   

Receivables-net

     (9,149     11,333   

Investments

     61,090        4,954   

Other assets

     (102,518     (77,560

Increase (decrease) in operating liabilities:

    

Deposits and other payables

     71,680        (13,792

Accrued compensation and benefits and other liabilities

     (114,174     (146,126
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     53,806        (73,085
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Additions to property

     (3,153     (29,198

Disposals of property

     250        2,631   
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,903     (26,567
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from:

    

Contributions from noncontrolling interests

     384          

Excess tax benefits from share-based incentive compensation

     1,925        2,211   

Payments for:

    

Capital lease obligations

     (583     (1,004

Distributions to noncontrolling interests

     (4,312     (2,617

Purchase of Class A common stock

     (106,935     (30,168

Class A common stock dividends

     (35,917       

Settlement of vested share-based incentive compensation

     (82,021     (116,954

Other financing activities

     (332       
  

 

 

   

 

 

 

Net cash used in financing activities

     (227,791     (148,532
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     1,995        (15,895
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (174,893     (264,079

CASH AND CASH EQUIVALENTS—January 1

     841,482        850,190   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS—March 31

   $ 666,589      $ 586,111   
  

 

 

   

 

 

 

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, 2013

(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 Subsidiaries
    Total
Lazard Ltd
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Stockholders’
Equity
 
                   
    Shares       $       Shares(*)         $               Shares       $          

Balance – January 1, 2013

    7,921      $  –        128,216,424      $ 1,282      $ 846,050      $ 182,647      $ (110,541     12,802,938      $ (349,782   $ 569,656      $ 81,884      $ 651,540   
                   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss):

                       

Net income

              15,360              15,360        2,289        17,649   

Other comprehensive loss - net of tax

                (14,217         (14,217     (157     (14,374

Business acquisitions and related equity transactions:

                       

Class A common stock issuable (including related amortization)

            446                446        5        451   

Delivery of Class A common stock (including dividend-equivalents)

            (4,994     (179       (170,988)        5,173                   

Amortization of share-based incentive compensation

            69,868                69,868        844        70,712   

Purchase of Class A common stock

                  831,157        (30,168     (30,168       (30,168

Delivery of Class A common stock in connection with shared-based incentive compensation and related tax benefit of $862

            (307,883     (609       (6,658,417     192,390        (116,102     10        (116,092

Distributions to noncontrolling interests, net

                             (2,617     (2,617

Adjustments related to noncontrolling interests

            1,757                1,757        (1,757       

Other

            (78     78                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2013

    7,921      $ –          128,216,424      $ 1,282      $ 605,166      $ 197,297      $ (124,758     6,804,690      $ (182,387   $ 496,600      $ 80,501      $ 577,101   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

Includes 128,216,423 shares of the Company’s Class A common stock issued at January 1, 2013 and March 31, 2013, and 1 share of the Company’s Class B common stock issued 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, 2014

(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 Subsidiaries
    Total
Lazard Ltd
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Stockholders’
Equity
 
                   
    Shares       $       Shares(*)         $               Shares       $          

Balance – January 1, 2014

    7,921      $  –        129,056,082      $ 1,291      $ 737,899      $ 203,236      $ (133,004     8,317,065      $ (249,213   $ 560,209      $ 69,789      $ 629,998   
                   

 

 

   

 

 

   

 

 

 

Comprehensive income:

                       

Net income

              80,842              80,842        4,587        85,429   

Other comprehensive income - net of tax

                6,621            6,621        24        6,645   

Business acquisitions and related equity transactions:

                       

Class A common stock issuable (including related amortization)

            128                128        1        129   

Amortization of share-based incentive compensation

            60,464                60,464        333        60,797   

Dividend-equivalents

            5,013        (5,343           (330     (2     (332

Class A common stock dividends

              (35,917           (35,917       (35,917

Purchase of Class A common stock

                  2,392,674        (106,935)        (106,935            (106,935

Delivery of Class A common stock in connection with shared-based incentive compensation and related tax benefit of $1,776

            (247,810         (4,649,300     167,555        (80,255     10        (80,245

Distributions to noncontrolling interests, net

                             (3,928     (3,928

Adjustments related to noncontrolling interests

            1,017                1,017        (1,017       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2014

    7,921      $  –        129,056,082      $ 1,291      $ 556,711      $ 242,818      $ (126,383     6,060,439      $ (188,593   $ 485,844      $ 69,797      $ 555,641   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(*)

Includes 129,056,081 shares of the Company’s Class A common stock issued at January 1, 2014 and March 31, 2014, and 1 share of the Company’s Class B common stock issued at each such date.

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

 

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

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

Lazard Ltd indirectly held approximately 99.5% of all outstanding Lazard Group common membership interests as of March 31, 2014 and December 31, 2013. Lazard Ltd, through its control of the managing members of Lazard Group, controls Lazard Group, which is governed by an Operating Agreement dated as of May 10, 2005, as amended (the “Operating Agreement”). LAZ-MD Holdings LLC (“LAZ-MD Holdings”), an entity owned by Lazard Group’s current and former managing directors, held approximately 0.5% of the outstanding Lazard Group common membership interests as of March 31, 2014 and December 31, 2013. 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 0.6% of the voting power but no economic rights in the Company as of March 31, 2014 and December 31, 2013. 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”).

Our sole operating asset is our indirect ownership of common membership interests of Lazard Group and our managing member interest of Lazard Group, whose principal operating activities are included in two business segments:

 

   

Financial Advisory, which offers corporate, partnership, institutional, government, sovereign and individual clients across the globe a wide array of financial advisory services regarding mergers and acquisitions (“M&A”) and other strategic matters, restructurings, capital structure, capital raising and various other financial matters, and

 

   

Asset Management, which offers a broad range of global investment solutions and investment management services in equity and fixed income strategies, alternative investments and private equity funds to corporations, public funds, sovereign entities, endowments and foundations, labor funds, financial intermediaries and private clients.

In addition, we record selected other activities in our Corporate segment, including management of cash, investments and outstanding indebtedness, as well as certain commercial banking activities of Lazard Group’s Paris-based subsidiary Lazard Frères Banque SA (“LFB”).

LFB is a registered bank regulated by the Autorité de Contrôle Prudentiel et de Résolution (“ACPR”). It is engaged primarily in commercial and private banking services for clients and funds managed by Lazard Frères Gestion SAS (“LFG”) and other clients, investment banking activities, including participation in underwritten offerings of securities in France, and asset-liability management.

 

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Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

Basis of Presentation

The accompanying condensed consolidated financial statements of Lazard Ltd have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting 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, 2013 (the “Form 10-K”). The accompanying December 31, 2013 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. Discretionary compensation and benefits expense for interim periods is accrued based on the year-to-date amount of revenue earned, and an assumed annual ratio of compensation and benefits expense to revenue, with the applicable amounts adjusted for certain items. 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, 2014 are not necessarily indicative of the results to be expected for any future interim or annual period.

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

 

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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)

 

2. RECENT ACCOUNTING DEVELOPMENTS

Presentation of Unrecognized Tax Benefits—In July 2013, the Financial Accounting Standards Board (the “FASB”) issued guidance on the presentation of unrecognized tax benefits when net operating losses or tax credit carryforwards exist. The guidance requires that the unrecognized tax benefit, or a portion of such unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain situations, as defined in the guidance. The new presentation requirements are effective prospectively for interim and annual reporting periods beginning after December 15, 2013, with early adoption permitted. The Company elected to adopt this guidance in the fourth quarter of 2013, the impact of which did not have a material impact on the Company’s consolidated financial statements.

 

3. RECEIVABLES

The Company’s receivables represent receivables from fees, customers and other and related parties.

Receivables are stated net of an estimated allowance for doubtful accounts, for past due amounts and for specific accounts deemed uncollectible, which may include situations where a fee is in dispute. Activity in the allowance for doubtful accounts for the three month periods ended March 31, 2014 and 2013 was as follows:

 

      Three Months Ended
March 31,
 
         2014             2013      

Balance, January 1

   $ 28,777      $ 23,017   

Bad debt expense, net of recoveries

     9,136        148   

Charge-offs, foreign currency translation and other adjustments

     (6,589     (360
  

 

 

   

 

 

 

Balance, March 31

   $ 31,324      $ 22,805   
  

 

 

   

 

 

 

At March 31, 2014 and December 31, 2013, the Company had receivables past due or deemed uncollectible of $35,566 and $39,341, respectively.

Of the Company’s fee receivables at March 31, 2014 and December 31, 2013, $65,241 and $69,464, respectively, represented interest-bearing financing receivables. Based upon our historical loss experience, the credit quality of the counterparties, and the lack of past due or uncollectible amounts, there was no allowance for doubtful accounts required at those dates related to such receivables.

The aggregate carrying amount of our non-interest bearing receivables of $457,841 and $443,211 at March 31, 2014 and December 31, 2013, respectively, approximates fair 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)

 

4. INVESTMENTS

The Company’s investments and securities sold, not yet purchased, consist of the following at March 31, 2014 and December 31, 2013:

 

     March 31,      December 31,  
     2014      2013  

Debt (including interest-bearing deposits of $533 and $516, respectively)

   $ 7,806       $ 8,529   
  

 

 

    

 

 

 

Equities

     57,757         59,394   
  

 

 

    

 

 

 

Funds:

     

Alternative investments (a)

     36,321         37,030   

Debt (a)

     48,207         58,769   

Equity (a)

     143,115         190,702   

Private equity

     115,537         114,193   
  

 

 

    

 

 

 
     343,180         400,694   
  

 

 

    

 

 

 

Equity method

     8,552         9,488   
  

 

 

    

 

 

 

Total investments

     417,295         478,105   

Less:

     

Interest-bearing deposits

     533         516   

Equity method

     8,552         9,488   
  

 

 

    

 

 

 

Investments, at fair value

   $ 408,210       $ 468,101   
  

 

 

    

 

 

 

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

   $ 5,330       $ 4,045   
  

 

 

    

 

 

 

 

(a) Interests in alternative investment funds, debt funds and equity funds include investments with fair values of $8,626, $25,520 and $95,933, respectively, at March 31, 2014 and $7,099, $31,515 and $130,481, respectively, at December 31, 2013, held in order to satisfy the Company’s liability upon vesting of previously granted Lazard Fund Interests (“Lazard Fund Interests”) and other similar deferred compensation arrangements. Lazard Fund Interests represent grants by the Company to eligible employees of actual or notional interests in a number of Lazard-managed funds (see Notes 6 and 12 of Notes to Condensed Consolidated Financial Statements).

Debt securities primarily consist of seed investments invested in debt securities held within separately managed accounts related to our Asset Management business and non-U.S. government debt securities.

Equities primarily consist of seed investments invested in marketable equity securities of large-, mid- and small-cap domestic, international and global companies held within separately managed accounts related to our Asset Management business.

Alternative investment funds primarily consist of interests in various Lazard-managed hedge funds and funds of funds.

Debt funds primarily consist of seed investments in funds related to our Asset Management business that invest in debt securities, and amounts related to Lazard Fund Interests discussed above.

Equity funds primarily consist of seed investments in funds related to our Asset Management business that invest in equity securities, and amounts related to Lazard Fund Interests discussed above.

 

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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)

 

Private equity investments include those owned by Lazard and those consolidated but not owned by Lazard. Private equity investments owned by Lazard are primarily comprised of investments in private equity funds. 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 fund targeting significant noncontrolling-stake investments in established private companies, (iii) Edgewater Growth Capital Partners III, L.P. (“EGCP III”), a fund primarily making equity and buyout investments in middle market companies and (iv) Lazard Australia Corporate Opportunities Fund (“COF2”), a Lazard-managed Australian fund targeting Australian mid-market investments.

Private equity investments consolidated but not owned by Lazard relate to the economic interests that are owned by the management team and other investors in the Edgewater Funds (“Edgewater”) which totaled $9,286 and $9,787 at March 31, 2014 and December 31, 2013, respectively (see Note 10 of Notes to Condensed Consolidated Financial Statements).

During the three month periods ended March 31, 2014 and 2013, the Company reported in “revenue-other” on its condensed consolidated statements of operations gross unrealized investment gains and losses pertaining to “trading” securities as follows:

 

     Three Months Ended
March  31,
 
     2014      2013  

Gross unrealized investment gains

   $ 3,084       $ 8,395   

Gross unrealized investment losses

   $ 2,593       $ 1,636   

 

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 (i) quoted prices for similar assets or liabilities in an active market, or quoted prices for identical or similar assets or liabilities in non-active markets, (ii) assets valued based on net asset value (“NAV”) or its equivalent redeemable at the measurement date or within the near term without redemption restrictions, or (iii) 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 our 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 trading volume and level of activity have significantly decreased when compared with normal market activity and there is no longer sufficient frequency or volume to provide pricing information on an ongoing basis, as well as assets valued based on NAV or its equivalent, but not redeemable within the near term as a result of redemption restrictions.

The Company’s investments in non-U.S. Government and other debt securities are classified as Level 1 when their respective fair values are based on unadjusted quoted prices in active markets and are classified as Level 2 when their fair values are primarily based on prices as provided by external pricing services.

 

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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 fair value of equities is classified as Level 1 or Level 3 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 as provided by external pricing services; equity securities in private companies are generally classified as Level 3.

The fair value of investments in alternative investment funds is classified as Level 2 and is valued at NAV or its equivalent, which is primarily determined based on information provided by external fund administrators. Such investments are redeemable within the near term.

The fair value of investments in debt funds is classified as Level 1 when the fair values are primarily based on the publicly reported closing price for the fund, and classified as Level 2 when the fair values are primarily based on NAV or its equivalent and are redeemable within the near term.

The fair value of investments in equity funds is classified as Level 1 or 2 as follows: publicly traded asset management funds are classified as Level 1 and are valued based on the reported closing price for the fund; and investments in asset management funds redeemable in the near term are classified as Level 2 and are valued at NAV or its equivalent, which is primarily determined based on information provided by external fund administrators.

The fair value of investments in private equity funds is classified as Level 3, and is primarily based on NAV or its equivalent. Such investments are not redeemable within the near term.

The fair values of derivatives entered into by the Company are classified as Level 2 and are based on the values of the related underlying assets, indices or reference rates as follows - the fair value of forward foreign currency exchange rate contracts is a function of the spot rate and the interest rate differential of the two currencies from the trade date to settlement date; the fair value of total return swaps is based on the change in fair values of the related underlying equity security, financial instrument or index and a specified notional holding; the fair value of interest rate swaps is based on the interest rate yield curve; and the fair value of derivative liabilities related to Lazard Fund Interests and other similar deferred compensation arrangements is based on the value of the underlying investments, adjusted for forfeitures. See Note 6 of Notes to Condensed Consolidated Financial Statements.

Where reported information regarding an investment is based on data received from external fund administrators or pricing services, the Company reviews such information and classifies the investment at the relevant level within the fair value hierarchy.

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

The following tables present the classification of investments and certain other assets and liabilities measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013 within the fair value hierarchy:

 

    March 31, 2014  
    Level 1     Level 2     Level 3     Total  

Assets:

       

Investments:

       

Debt (excluding interest-bearing deposits)

  $ 1,720      $ 5,553      $      $ 7,273   

Equities

    56,420               1,337        57,757   

Funds:

       

Alternative investments

           36,321               36,321   

Debt

    48,203        4               48,207   

Equity

    143,074        41               143,115   

Private equity

                  115,537        115,537   

Derivatives

           275               275   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 249,417      $ 42,194      $ 116,874      $ 408,485   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Securities sold, not yet purchased

  $ 5,330      $      $      $ 5,330   

Derivatives

           219,172               219,172   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,330      $ 219,172      $      $ 224,502   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2013  
    Level 1     Level 2     Level 3     Total  

Assets:

       

Investments:

       

Debt (excluding interest-bearing deposits)

  $ 1,681      $ 6,332      $      $ 8,013   

Equities

    58,054               1,340        59,394   

Funds:

       

Alternative investments

           37,030               37,030   

Debt

    58,765        4               58,769   

Equity

    190,660        42               190,702   

Private equity

                  114,193        114,193   

Derivatives

           682               682   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 309,160      $ 44,090      $ 115,533      $ 468,783   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Securities sold, not yet purchased

  $ 4,045      $      $      $ 4,045   

Derivatives

           164,001               164,001   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,045      $ 164,001      $      $ 168,046   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

The following tables provide a summary of changes in fair value of the Company’s Level 3 assets for the three month periods ended March 31, 2014 and 2013:

 

    Three Months Ended March 31, 2014  
    Beginning
Balance
    Net  Unrealized/
Realized
Gains (Losses)
Included
In Revenue-
Other (a)
    Purchases/
Acquisitions
    Sales/
Disposition
    Foreign
Currency
Translation
Adjustments
    Ending
Balance
 
           

Investments:

           

Equities

  $ 1,340      $ 2      $      $      $ (5   $ 1,337   

Private equity funds

    114,193        5,582        347        (4,669     84        115,537   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 115,533      $ 5,584      $ 347      $ (4,669   $ 79      $ 116,874   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Three Months Ended March 31, 2013  
    Beginning
Balance
    Net  Unrealized/
Realized
Gains (Losses)
Included

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

Investments:

           

Equities

  $ 190      $      $         –      $      $ (6   $ 184   

Alternative investment funds

    3,457        94               (2,247 )            1,304   

Equity funds

    10                      (10              

Private equity funds

    112,444        682               (1,256     (1,374     110,496   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 116,101      $     776      $      $ (3,513   $ (1,380   $ 111,984   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Earnings for the three month periods ended March 31, 2014 and 2013 include net unrealized gains (losses) of $4,413 and $670, respectively.

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, 2014 and 2013.

 

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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)

 

Fair Value of Certain Investments Based on NAV—The Company’s Level 2 and Level 3 investments at March 31, 2014 and December 31, 2013 include certain investments that are valued using NAV or its equivalent as a practical expedient in determining fair value. Information with respect thereto was as follows:

 

    March 31, 2014
                % of
Fair Value
Not
Redeemable
  Estimated Liquidation Period of
Investments Not Redeemable
  Investments Redeemable
    Fair value     Unfunded
Commitments
      %
Next
5 Years
  %
5-10
Years
  %
Thereafter
  Redemption
Frequency
    Redemption
Notice Period

Alternative investment funds:

               

Hedge funds

  $ 32,210      $         –      NA   NA   NA   NA     (a)      <30-60 days

Funds of funds

    487             NA   NA   NA   NA     (b)      <30-90 days

Other

    3,624             NA   NA   NA   NA     (c)      <30-60 days

Debt funds

    4             NA   NA   NA   NA     (d)      30 days

Equity funds

    41             NA   NA   NA   NA     (e)      30-90 days

Private equity funds:

               

Equity growth

    71,408        27,156      100%   14%   61%   25%     NA      NA

Mezzanine debt

    44,129             100%   –%   –%   100%     NA      NA
 

 

 

   

 

 

             

Total

  $ 151,903      $ 27,156               
 

 

 

   

 

 

             

 

(a) weekly (17%), monthly (64%) and quarterly (19%)
(b) monthly (95%) and quarterly (5%)
(c) daily (9%), weekly (2%) and monthly (89%)
(d) daily (100%)
(e) daily (14%), monthly (58%) and quarterly (28%)

 

    December 31, 2013
                % of
Fair Value
Not
Redeemable
  Estimated Liquidation Period of
Investments Not Redeemable
  Investments Redeemable
    Fair value     Unfunded
Commitments
      %
Next
5 Years
  %
5-10
Years
  %
Thereafter
  Redemption
Frequency
    Redemption
Notice Period

Alternative investment funds:

               

Hedge funds

  $ 31,837      $      NA   NA   NA   NA     (a)      <30-90 days

Funds of funds

    475             NA   NA   NA   NA     (b)      <30-90 days

Other

    4,718             NA   NA   NA   NA     (c)      <30-60 days

Debt funds

    4             NA   NA   NA   NA     (d)      30 days

Equity funds

    42             NA   NA   NA   NA     (e)      30-90 days

Private equity funds:

               

Equity growth

    70,054        27,135      100%   17%   60%   23%     NA      NA

Mezzanine debt

    44,139             100%   –%   –%   100%     NA      NA
 

 

 

   

 

 

             

Total

  $ 151,269      $ 27,135               
 

 

 

   

 

 

             

 

(a) weekly (17%), monthly (65%) and quarterly (18%)
(b) monthly (95%) and quarterly (5%)
(c) daily (7%), weekly (1%) and monthly (92%)

 

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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)

 

(d) daily (100%)
(e) daily (13%), monthly (58%) and quarterly (29%)

See Note 4 of Notes to Condensed Consolidated Financial Statements for discussion of significant investment strategies for investments with value based on NAV.

Investment Capital Funding Commitments—At March 31, 2014, the Company’s maximum unfunded commitments for capital contributions to investment funds arose from (i) commitments to CP II, which amounted to $1,940 for potential “follow-on investments” and/or for fund expenses through the earlier of February 25, 2017 or the liquidation of the fund, (ii) commitments to EGCP III, which amounted to $18,337, through the earlier of October 12, 2016 (i.e., the end of the investment period) for investments and/or expenses (with a portion of the undrawn amount of such commitments as of that date remaining committed until October 12, 2023 in respect of “follow-on investments” and/or fund expenses) or the liquidation of the fund and (iii) commitments to COF2, which amounted to $6,879, through the earlier of November 11, 2016 (i.e., the end of the investment period) for investments and/or fund expenses (with a portion of the undrawn amount of such commitments as of that date remaining committed until November 11, 2019 in respect of “follow-on investments” and/or fund expenses) or the liquidation of the fund.

 

6. DERIVATIVES

The Company enters into forward foreign currency exchange rate contracts, interest rate swaps, interest rate futures, total return swap contracts on various equity and debt indices and other derivative contracts to economically hedge exposures to fluctuations in currency exchange rates, interest rates and equity and debt prices. 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. Gains and losses on the Company’s derivative instruments not designated as hedging instruments 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.

In addition to the derivative instruments described above, the Company records derivative liabilities relating to its obligations pertaining to Lazard Fund Interests awards and other similar deferred compensation arrangements, the fair value of which is based on the value of the underlying investments, adjusted for estimated forfeitures, and is included in “accrued compensation and benefits” in the consolidated statements of financial condition. Changes in the fair value of the derivative liabilities are included in “compensation and benefits” in the consolidated statements of operations, the impact of which equally offsets the changes in the fair value of investments which are currently expected to be delivered upon settlement of Lazard Fund Interests awards and other similar deferred compensation arrangements, which are reported in “revenue-other” 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 tables below present the fair values of the Company’s derivative instruments reported within “other assets” and “other liabilities” and the fair value of the Company’s derivative liabilities relating to its obligations pertaining to Lazard Fund Interests and other similar deferred compensation arrangements (see Note 12 of Notes to Condensed Consolidated Financial Statements) on the accompanying condensed consolidated statements of financial condition as of March 31, 2014 and December 31, 2013:

 

    March 31,
2014
    December 31,
2013
 

Derivative Assets:

   

Forward foreign currency exchange rate contracts

  $ 275      $ 250   

Total return swaps and other (a)

           432   
 

 

 

   

 

 

 
  $ 275      $ 682   
 

 

 

   

 

 

 

Derivative Liabilities:

   

Forward foreign currency exchange rate contracts

  $ 1,046      $ 1,579   

Total return swaps and other (a)

    4,688          

Lazard Fund Interests and other similar deferred compensation arrangements

    213,438        162,422   
 

 

 

   

 

 

 
  $ 219,172      $ 164,001   
 

 

 

   

 

 

 

 

(a) For total return swaps, amounts represent the netting of gross derivative assets and liabilities of $120 and $4,808 as of March 31, 2014, respectively, and $2,019 and $1,587 as of December 31, 2013, respectively, for contracts with the same counterparty under legally enforceable master netting agreements. Such amounts are recorded “net” in “other assets”, with receivables for net cash collateral under such contracts of $15,884 and $11,384 as of March 31, 2014 and December 31, 2013, respectively.

Net gains (losses) with respect to derivative instruments (predominantly reflected in “revenue-other”) and the Company’s derivative liabilities relating to its obligations pertaining to Lazard Fund Interests and other similar deferred compensation arrangements (included in “compensation and benefits” expense) as reflected on the accompanying condensed consolidated statements of operations for the three month periods ended March 31, 2014 and 2013, were as follows:

 

     Three Months Ended
March 31,
 
         2014             2013      

Forward foreign currency exchange rate contracts

   $ (1,153   $ 5,231   

Lazard Fund Interests and other similar deferred compensation arrangements

     (2,626     (3,725

Total return swaps and other

     (1,946     (4,108
  

 

 

   

 

 

 
   $ (5,725   $ (2,602
  

 

 

   

 

 

 

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

7. PROPERTY

At March 31, 2014 and December 31, 2013, property consists of the following:

 

     Estimated
Depreciable
Life in Years
     March 31,
2014
     December 31,
2013
 

Buildings

     33       $ 173,735       $ 173,772   

Leasehold improvements

     3-20         176,369         175,600   

Furniture and equipment

     3-10         151,311         149,598   

Construction in progress

        4,490         3,756   
     

 

 

    

 

 

 

Total

        505,905         502,726   

Less - Accumulated depreciation and amortization

        262,928         253,930   
     

 

 

    

 

 

 

Property

      $ 242,977       $ 248,796   
     

 

 

    

 

 

 

 

8. GOODWILL AND OTHER INTANGIBLE ASSETS

The components of goodwill and other intangible assets at March 31, 2014 and December 31, 2013 are presented below:

 

    March 31,     December 31,  
    2014     2013  

Goodwill

  $ 349,716      $ 345,453   

Other intangible assets (net of accumulated amortization)

    17,205        18,424   
 

 

 

   

 

 

 
  $ 366,921      $ 363,877   
 

 

 

   

 

 

 

At March 31, 2014 and December 31, 2013, goodwill of $285,175 and $280,912, respectively, was attributable to the Company’s Financial Advisory segment and, at each such respective date, $64,541 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, 2014 and 2013 are as follows:

 

     Three Months Ended
March  31,
 
     2014      2013  

Balance, January 1

   $ 345,453       $ 364,328   

Business acquisitions

             1,440   

Foreign currency translation adjustments

     4,263         (119
  

 

 

    

 

 

 

Balance, March 31

   $ 349,716       $ 365,649   
  

 

 

    

 

 

 

 

20


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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 gross cost and accumulated amortization of other intangible assets as of March 31, 2014 and December 31, 2013, by major intangible asset category, are as follows:

 

    March 31, 2014     December 31, 2013  
    Gross
Cost
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Cost
    Accumulated
Amortization
    Net
Carrying
Amount
 

Success/performance fees

  $ 30,740      $ 17,687      $ 13,053      $ 30,740      $ 17,173      $ 13,567   

Management fees, customer relationships and non-compete agreements

    33,064        28,912        4,152        33,063        28,206        4,857   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 63,804      $ 46,599      $ 17,205      $ 63,803      $ 45,379      $ 18,424   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortization expense of intangible assets for the three month periods ended March 31, 2014 and 2013 was $1,220 and $877, respectively. Estimated future amortization expense is as follows:

 

Year Ending December 31,

   Amortization
Expense (a)
 

2014 (April 1 through December 31)

   $ 5,591   

2015

     6,433   

2016

     5,181   
  

 

 

 

Total amortization expense

   $ 17,205   
  

 

 

 

 

  (a) Approximately 43% of intangible asset amortization is attributable to a noncontrolling interest.

 

9. SENIOR AND SUBORDINATED DEBT

Senior Debt—Senior debt is comprised of the following as of March 31, 2014 and December 31, 2013:

 

    

Initial
Principal

Amount

   

Maturity

Date

    

Annual

Interest

Rate

     Outstanding As of  
              March  31,
2014
     December  31,
2013
 
               

Lazard Group 6.85% Senior Notes

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

Lazard Group 4.25% Senior Notes

     500,000        11/14/20         4.25      500,000         500,000   

Lazard Group Credit Facility

     150,000        9/25/15         0.78                
          

 

 

    

 

 

 

Total

           $ 1,048,350       $ 1,048,350   
          

 

 

    

 

 

 

In November 2013, and in connection with Lazard Group’s redemption of $528,500 aggregate principal amount of its then outstanding 7.125% senior notes maturing on May 15, 2015 (the “2015 Notes”), Lazard Group issued $500,000 aggregate principal amount of 4.25% senior notes maturing on November 14, 2020 (the “2020 Notes”). Interest on the 2020 Notes is payable semi-annually on May 14 and November 14 of each year commencing on May 14, 2014.

On September 25, 2012, Lazard Group entered into a $150,000, three-year senior revolving credit facility with a group of lenders (the “Credit Facility”), which expires in September 2015. The Credit Facility replaced a similar 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

 

21


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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)

 

applicable margin. As of March 31, 2014, the annual interest rate for a loan accruing interest (based on the Federal Funds overnight rate), including the applicable margin, was 0.78%. At March 31, 2014 and December 31, 2013, no amounts were outstanding under the Credit Facility.

The Credit Facility contains customary terms and conditions, including certain financial covenants. In addition, the Credit Facility, the indenture and the supplemental indentures relating to Lazard Group’s senior notes contain certain covenants, 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, 2014, the Company was in compliance with such provisions. All of the Company’s senior debt obligations are unsecured.

As of March 31, 2014, the Company had approximately $258,000 in unused lines of credit available to it, including the Credit Facility, and unused lines of credit available to LFB of approximately $48,000 (at March 31, 2014 exchange rates) and Edgewater of $55,000. In addition, LFB has access to the Eurosystem Covered Bond Purchase Program of the Banque de France.

The Company’s senior debt at March 31, 2014 and December 31, 2013 is carried at historical amounts. At those dates, the fair value of such senior debt was approximately $1,140,000 and $1,117,000, respectively, and exceeded the aggregate carrying value by approximately $92,000 and $69,000, respectively. The fair value of the Company’s senior debt is based on market quotations. The Company’s senior debt would be categorized within Level 2 of the hierarchy of fair value measurements if carried at fair value.

 

10. COMMITMENTS AND CONTINGENCIES

Leases—The Company has various leases and other contractual commitments arising in the ordinary course of business. In the opinion of management, the fulfillment of such commitments, in accordance with their terms, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

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, 2014, LFB had $5,908 of such indemnifications and held $5,255 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 condensed consolidated statement of financial condition.

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

The aggregate fair value of the consideration recognized by the Company at the acquisition date was $61,624. Such consideration consisted of (i) a one-time cash payment, (ii) 1,142,857 shares of Class A common stock (the “Initial Shares”) and (iii) up to 1,142,857 additional shares of Class A common stock (the “Earnout Shares”) that are subject to earnout criteria and payable over time. 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. As of March 31, 2014 and December 31, 2013, of the Initial Shares and Earnout

 

22


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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)

 

Shares, 1,371,992 shares have been earned because applicable performance thresholds have been satisfied. Such shares are no longer subject to any contingencies. As of December 31, 2013, 1,029,006 of such shares have been settled, and no additional shares have been settled as of March 31, 2014.

Contingent Consideration Relating To Other Business Acquisitions—For a business acquired in 2012, at December 31, 2012, 170,988 shares of Class A common stock (including dividend equivalent shares) were issuable on a non-contingent basis. Such shares were delivered in the first quarter of 2013. The Company is obligated to issue a maximum of 202,650 additional shares of Class A common stock if certain performance thresholds are achieved.

Other Commitments—In the normal course of business, LFB enters into commitments to extend credit, predominately at variable interest rates. These commitments have varying expiration dates, 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. At March 31, 2014, these commitments were not material.

See Notes 5 and 13 of Notes to Condensed Consolidated Financial Statements for information regarding commitments relating to investment capital funding commitments 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. At March 31, 2014, LFB had no such underwriting commitments.

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

 

11. STOCKHOLDERS’ EQUITY

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.

 

23


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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, 2014 and 2013, 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,
 
          2014                2013       

LAZ-MD Holdings

   $ 213       $             –   

Subsidiaries of Lazard Ltd

     35,917           
  

 

 

    

 

 

 
   $ 36,130       $   
  

 

 

    

 

 

 

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.

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

Share Repurchase Program—During the years ended December 31, 2013, 2012 and 2011, the Board of Directors of Lazard Ltd authorized the repurchase of Class A common stock and Lazard Group common membership interests as set forth in the table below.

 

Date

   Share
Repurchase
Authorization
     Expiration  

February, 2011

   $ 250,000         December 31, 2012   

October, 2011

   $ 125,000         December 31, 2013   

April, 2012

   $ 125,000         December 31, 2013   

October, 2012

   $ 200,000         December 31, 2014   

October, 2013

   $ 100,000         December 31, 2015   

The Company expects that the share repurchase program, with respect to the Class A common stock, will primarily be used to offset a portion of the shares that have been or will be issued under the Lazard Ltd 2005 Equity Incentive Plan (the “2005 Plan”) and the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”). Pursuant to the share repurchase program, purchases have been made in the open market or through privately negotiated transactions. Purchases with respect to such program are set forth in the table below:

 

     Number  of
Shares/Common

Membership
Interests Purchased
     Average
Price  Per
Share/Common
Membership
Interest
 

Three Months Ended March 31:

     

2013

     831,157       $ 36.30   

2014

     2,392,674       $ 44.69   

As of March 31, 2014, a total of $14,654 of share repurchase authorization remained available under the Company’s share repurchase program, which will expire on December 31, 2015.

In April 2014, the Board of Directors of Lazard Ltd authorized the repurchase of up to an additional $200,000 in aggregate cost of Class A common stock and Lazard Group common membership interests through December 31, 2015.

 

24


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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)

 

Preferred Stock—Lazard Ltd has 15,000,000 authorized shares of preferred stock, par value $0.01 per share, inclusive of its Series A and Series B preferred stock. Series A and Series B preferred shares were issued in connection with certain prior year business acquisitions and are each non-participating securities convertible into Class A common stock, and have no voting or dividend rights. As of both March 31, 2014 and December 31, 2013, 7,921 shares of Series A preferred stock were outstanding, and no shares of Series B preferred stock were outstanding. At March 31, 2014 and December 31, 2013, no shares of Series A preferred stock were convertible into shares of Class A common stock on a contingent or a non-contingent basis.

Accumulated Other Comprehensive Income (Loss), Net of Tax (“AOCI”)The tables below reflect changes in the balances of each component of AOCI during the three month periods ended March 31, 2014 and 2013:

 

    Currency
Translation
Adjustments
    Employee
Benefit
Plans
    Total
AOCI
    Amount
Attributable to
Noncontrolling
Interests
    Total
Lazard Ltd
AOCI
 

Balance, January 1, 2014

  $ 3,869      $ (137,431   $ (133,562   $ (558   $ (133,004
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Activity January 1 to March 31, 2014:

         

Other comprehensive gain (loss) before reclassifications

    5,913        (557     5,356        17        5,339   

Adjustments for items reclassified to earnings, net of tax

           1,289        1,289        7        1,282   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income

    5,913        732        6,645        24        6,621   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

  $ 9,782      $ (136,699   $ (126,917   $ (534   $ (126,383
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Currency
Translation
Adjustments
    Interest
Rate
Hedge
    Employee
Benefit
Plans
    Total
AOCI
    Amount
Attributable to
Noncontrolling
Interests
    Total
Lazard Ltd
AOCI
 

Balance, January 1, 2013

  $ 19,405      $ (2,502   $ (128,536   $ (111,633   $ (1,092   $ (110,541
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Activity January 1 to March 31, 2013:

           

Other comprehensive loss before reclassifications

    (12,433            (3,423     (15,856     (175     (15,681

Adjustments for items reclassified to earnings, net of tax

           264        1,218        1,482        18        1,464   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

    (12,433     264        (2,205     (14,374     (157     (14,217
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

  $ 6,972      $ (2,238   $ (130,741   $ (126,007   $ (1,249   $ (124,758
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

The table below reflects adjustments for items reclassified out of AOCI, by component, for the three month periods ended March 31, 2014 and 2013:

 

      Three Months Ended
March 31,
 
     2014      2013  

Amortization of interest rate hedge (a)

   $         –       $ 264   
  

 

 

    

 

 

 

Amortization relating to employee benefit plans (b)

     1,821         1,620   

Less – related income taxes

     532         402   
  

 

 

    

 

 

 

Net of tax

     1,289         1,218   
  

 

 

    

 

 

 

Total reclassifications, net of tax

   $ 1,289       $ 1,482   
  

 

 

    

 

 

 

 

(a) Included in “interest expense” on the condensed consolidated statements of operations.
(b) Included in the computation of net periodic benefit cost (see Note 13 of Notes to Condensed Consolidated Financial Statements). Such amount is included in “compensation and benefits” expense on the condensed consolidated statement of operations.

Noncontrolling Interests—Noncontrolling interests principally represent interests held in (i) Lazard Group by LAZ-MD Holdings and (ii) Edgewater’s management vehicles that the Company is deemed to control, but does not own.

The following table summarizes the ownership interests in Lazard Group held by Lazard Ltd and LAZ-MD Holdings:

 

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

As of March 31:

  Common
Membership
Interests
    %
Ownership
    Common
Membership
Interests
    %
Ownership
   

2013

    128,216,423        98.8     1,549,667        1.2     129,766,090   

2014

    129,056,081        99.5     710,009        0.5     129,766,090   

The change in Lazard Ltd’s ownership in Lazard Group in the three month periods ended March 31, 2014 and 2013 did not materially impact Lazard Ltd’s stockholders’ equity.

The tables below summarize net income attributable to noncontrolling interests for the three month periods ended March 31, 2014 and 2013 and noncontrolling interests as of March 31, 2014 and December 31, 2013 in the Company’s condensed consolidated financial statements:

 

     Net Income
Attributable to Noncontrolling
Interests
 
   Three Months Ended
March 31,
 
          2014                2013       

Edgewater

   $ 4,120       $ 2,366   

LAZ-MD Holdings

     467         192   

Other

             (269
  

 

 

    

 

 

 

Total

   $ 4,587       $ 2,289   
  

 

 

    

 

 

 

 

26


Table of Contents

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,
2014
     December 31,
2013
 

Edgewater

   $
66,849
  
   $ 66,641   

LAZ-MD Holdings

     2,168         2,566   

Other

     780         582   
  

 

 

    

 

 

 

Total

   $ 69,797       $ 69,789   
  

 

 

    

 

 

 

Dividend Declared, April 2014—On April 30, 2014, Lazard Ltd announced a quarterly dividend of $0.30 per share on its Class A common stock, payable on May 23, 2014, to stockholders of record on May 12, 2014.

 

12. 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, 2014 and 2013, 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 units (“RSUs”) and other equity-based awards. Each stock unit or similar award 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 awards is generally determined based on the closing market price of Class A common stock at the date of grant.

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

The following reflects the amortization expense recorded with respect to share-based incentive plans within “compensation and benefits” expense (with respect to RSUs, performance-based restricted stock units (“PRSUs”) and restricted stock awards) and “professional services” expense (with respect to deferred stock units (“DSUs”)) within the Company’s accompanying condensed consolidated statements of operations for the three month periods ended March 31, 2014 and 2013:

 

     Three Months Ended March 31,  
             2014                      2013          

Share-based incentive awards:

     

RSUs (a)

   $ 52,285       $ 64,942   

PRSUs

     1,798         438   

Restricted Stock (b)

     6,612         5,261   

DSUs

     102         71   
  

 

 

    

 

 

 

Total

   $ 60,797       $ 70,712   
  

 

 

    

 

 

 

 

27


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

(a) Includes, during the three month period ended March 31, 2013, charges relating to the cost saving initiatives of $4,455 (see Note 14 of Notes to Condensed Consolidated Financial Statements).
(b) Includes, during the three month period ended March 31, 2013, charges relating to the cost saving initiatives of $233.

The ultimate amount of compensation and benefits expense relating to share-based awards is dependent upon the actual number of shares of Class A common stock that vest. The Company periodically assesses the forfeiture rates used for such estimates. A change in estimated forfeiture rates results in a cumulative adjustment to previously recorded compensation and benefits expense and also would cause the aggregate amount of compensation expense recognized in future periods to differ from the estimated unrecognized compensation expense described below.

For purposes of calculating diluted net income per share, RSU and restricted stock awards are included in the diluted weighted average shares of Class A common stock outstanding using the “treasury stock” method. PRSUs are included in the diluted weighted average shares of Class A common stock outstanding to the extent the performance conditions are met at the end of the reporting period, also using the “treasury stock” method.

The Company’s incentive plans are described below.

RSUs and DSUs

RSUs generally 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 shares of Class A common stock on a one-for-one basis after the stipulated vesting periods. PRSUs, which are RSUs that are also subject to service-based vesting conditions, have additional conditions, and are described below. The grant date fair value of the RSUs, net of an estimated forfeiture rate, is amortized over the vesting periods or requisite service periods (generally one-third after two years, and the remaining two-thirds after the third year), and is adjusted for actual forfeitures over such period.

RSUs generally include a dividend participation right that provides that during vesting periods each RSU is attributed additional RSUs (or fractions thereof) equivalent to any dividends paid on Class A common stock during such period. During the three month period ended March 31, 2014, 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, 2014
 

Number of RSUs issued

    
115,297
  

Charges to retained earnings, net of estimated forfeitures

   $
5,013
  

Non-executive members of the Board of Directors (“Non-Executive Directors”) receive approximately 55% of their annual compensation for service on the Board of Directors and its committees in the form of DSUs. No such DSUs were granted in connection with annual compensation during the three month periods ended March 31, 2014 and 2013. 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 shares of Class A common stock at the time of cessation of service to the Board and, for purposes of calculating diluted net income per share, are included in the diluted weighted average shares of Class A common stock

 

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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)

 

outstanding using the “treasury stock” method. 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 period ended March 31, 2014.

The Company’s Directors’ Fee Deferral Unit Plan permits the 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 immediately preceding the date of the grant. During the three month periods ended March 31, 2014 and 2013, 2,310 and 1,886 DSUs, respectively, had been granted pursuant to such Plan.

DSU awards are expensed at their fair value on their date of grant, inclusive of amounts related to the Directors’ Fee Deferral Unit Plan.

The following is a summary of activity relating to RSUs and DSUs during the three month periods ended March 31, 2014 and 2013:

 

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

Balance, January 1, 2014

    16,630,009      $ 34.51        251,434      $ 32.02   

Granted (including 115,297 RSUs relating to dividend participation)

    3,492,223      $ 43.00        2,310      $ 44.35   

Forfeited

    (21,301   $ 34.61                 

Vested

    (6,317,612   $ 38.04                 
 

 

 

     

 

 

   

Balance, March 31, 2014

    13,783,319      $ 35.04        253,744      $ 32.13   
 

 

 

     

 

 

   

Balance, January 1, 2013

    21,481,131      $ 33.92        204,496      $ 31.47   

Granted

    4,297,664      $ 37.33        1,886      $ 37.60   

Forfeited

    (45,907   $ 36.12                 

Vested

    (8,268,744   $ 34.97                 
 

 

 

     

 

 

   

Balance, March 31, 2013

    17,464,144      $ 34.26        206,382      $ 31.52   
 

 

 

     

 

 

   

In connection with RSUs that vested during the three month periods ended March 31, 2014 and 2013, the Company satisfied its minimum statutory tax withholding requirements in lieu of issuing 1,843,389 and 3,231,285 shares of Class A common stock in the respective three month periods. Accordingly, 4,474,223 and 5,037,459 shares of Class A common stock held by the Company were delivered during the three month periods ended March 31, 2014 and 2013, respectively.

During the fourth quarter of 2012, 958,213 RSUs were modified through forward purchase agreements into liability awards. Such liability awards were settled on March 1, 2013 for $28,612. During the three month period ended March 31, 2013, compensation expense of $1,690 was recorded for such liability awards.

 

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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, 2014, unrecognized RSU compensation expense, adjusted for estimated forfeitures, was approximately $267,421, with such expense expected to be recognized over a weighted average period of approximately 1.6 years subsequent to March 31, 2014.

Restricted Stock

The following is a summary of activity related to shares of restricted Class A common stock associated with compensation arrangements during the three month periods ended March 31, 2014 and 2013:

 

     Restricted
Shares
    Weighted
Average
Grant Date
Fair Value
 

Balance, January 1, 2014

     575,054      $ 32.72   

Granted

     449,344      $ 45.52   

Vested

     (205,075   $ 35.23   
  

 

 

   

Balance, March 31, 2014

     819,323      $ 39.11   
  

 

 

   

Balance, January 1, 2013

     1,972,609      $ 34.85   

Granted

     388,763      $ 36.73   

Forfeited

     (3,269   $ 36.64   

Vested

     (1,715,275   $ 36.04   
  

 

 

   

Balance, March 31, 2013

     642,828      $ 32.81   
  

 

 

   

In connection with shares of restricted Class A common stock that vested during the three month periods ended March 31, 2014 and 2013, the Company satisfied its minimum statutory tax withholding requirements in lieu of delivering 29,999 and 12,308 shares of Class A common stock during the respective three month periods. Accordingly, 175,076 and 1,702,967 shares of Class A common stock held by the Company were delivered during the three month periods ended March 31, 2014 and 2013, respectively.

The restricted stock 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, 2014, unrecognized restricted stock expense was approximately $20,657, with such expense to be recognized over a weighted average period of approximately 1.9 years subsequent to March 31, 2014.

PRSUs

PRSUs are subject to both performance-based and service-based vesting conditions. The number of shares of Class A common stock that a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics that relate to the Company’s performance over a three-year period. The target number of shares of Class A common stock subject to each PRSU is one; however, based on the achievement of the performance criteria, the number of shares of Class A common stock that may be received in connection with each PRSU can range from zero to two times the target number (or, for PRSUs granted in 2013, three times the target number in the event of a substantial increase in fiscal year 2014 revenue (adjusted for certain items)). The PRSUs granted in 2014 will vest on a single date three years following the date of the grant and the PRSUs granted in 2013 will vest 33% in March 2015 and 67% in March 2016, in each case provided the applicable service and performance conditions are satisfied. In addition, the performance metrics applicable to each PRSU

 

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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)

 

will be evaluated on an annual basis at the end of each fiscal year during the performance period and, if the Company has achieved a threshold level of performance with respect to the fiscal year, 25% of the target number of shares of Class A common stock subject to each PRSU will no longer be at risk of forfeiture based on the achievement of performance criteria. PRSUs include dividend participation rights that provide that during vesting periods the target number of PRSUs receive dividend equivalents at the same rate that dividends are paid on Class A common stock during such period. These dividend equivalents are credited as RSUs that are not subject to the performance-based vesting criteria but are otherwise subject to the same restrictions as the underlying PRSUs to which they relate.

The following is a summary of activity relating to PRSUs during the three month periods ended March 31, 2014 and 2013 at the target level:

 

      PRSUs      Weighted
Average
Grant Date
Fair Value
 

Balance, January 1, 2014

     448,128       $ 36.11   

Granted

     360,783       $ 44.46   
  

 

 

    

Balance, March 31, 2014

     808,911       $ 39.83   
  

 

 

    

Balance, January 1, 2013

               

Granted

     448,128       $ 36.11   
  

 

 

    

Balance, March 31, 2013

     448,128       $ 36.11   
  

 

 

    

Compensation expense recognized for PRSU awards is determined by multiplying the number of shares of Class A common stock underlying such awards that, based on the Company’s estimate, are considered probable of vesting, by the grant date fair value. As of March 31, 2014, the total estimated unrecognized compensation expense was approximately $33,673, and the Company expects to amortize such expense over a weighted-average period of approximately 2.0 years subsequent to March 31, 2014.

Lazard Fund Interests and Other Similar Deferred Compensation Arrangements

Commencing in February 2011, the Company granted Lazard Fund Interests to eligible employees. In connection with the Lazard Fund Interests and other similar deferred compensation arrangements, which generally require future service as a condition for vesting, the Company recorded a prepaid compensation asset and a corresponding compensation liability on the grant date based upon the fair value of the award. The prepaid asset is amortized on a straight-line basis over the applicable vesting periods or requisite service periods (which are generally similar to the comparable periods for RSUs), and is charged to “compensation and benefits” expense within the Company’s consolidated statement of operations. Lazard Fund Interests and similar deferred compensation arrangements that do not require future service are expensed immediately. The related compensation liability is accounted for at fair value as a derivative liability, which contemplates the impact of estimated forfeitures, and is adjusted for changes in fair value primarily related to changes in value of the underlying investments.

 

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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 Lazard Fund Interests and other similar deferred compensation arrangements during the three month periods ended March 31, 2014 and 2013:

 

    Prepaid
Compensation

Asset
      Compensation  
Liability
 

Balance, January 1, 2014

  $ 60,433      $ 162,422   

Granted

    92,711        92,711   

Settled

           (45,450

Forfeited

    (9     (2

Amortization

    (19,407       

Change in fair value related to:

   

Increase in fair value of underlying investments

           2,626   

Adjustment for estimated forfeitures

           899   

Other

    116        232   
 

 

 

   

 

 

 

Balance, March 31, 2014

  $ 133,844      $ 213,438   
 

 

 

   

 

 

 

 

    Prepaid
Compensation
Asset
      Compensation  
Liability
 

Balance, January 1, 2013

  $ 47,445      $ 97,593   

Granted

    72,182        72,182   

Settled

           (14,832

Forfeited

    (309     (396

Amortization

    (12,488       

Change in fair value related to:

   

Increase in fair value of underlying investments

           3,725   

Adjustment for estimated forfeitures

           648   

Other

    (106)        (111
 

 

 

   

 

 

 

Balance, March 31, 2013

  $ 106,724      $ 158,809   
 

 

 

   

 

 

 

The amortization of the prepaid compensation asset will generally be recognized over a weighted average period of approximately 2.2 years subsequent to March 31, 2014.

The following is a summary of the impact of Lazard Fund Interests and other similar deferred compensation arrangements on “compensation and benefits” expense within the accompanying condensed consolidated statements of operations for the three month periods ended March 31, 2014 and 2013:

 

     Three Months Ended 
March 31,
 
         2014              2013      

Amortization, net of forfeitures (a)

   $ 20,313       $ 13,049   

Change in the fair value of underlying investments

     2,626         3,725   
  

 

 

    

 

 

 

Total

   $ 22,939       $ 16,774   
  

 

 

    

 

 

 

 

(a) Includes, during the three month period ended March 31, 2013, charges relating to the cost saving initiatives of $917.

 

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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)

 

13. EMPLOYEE BENEFIT PLANS

The Company provides retirement and other post-retirement benefits to certain of its employees through defined benefit pension plans (the “pension plans”) and, in the U.S., a partially funded contributory post-retirement plan covering qualifying U.S. employees (the “medical plan” and together with the pension plans, the “post-retirement plans”). The Company also offers defined contribution plans. The post-retirement 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 condensed consolidated statements of operations.

Employer Contributions to Pension Plans—The Company’s funding policy for its U.S. and non-U.S. pension plans is to fund when required or when applicable upon an agreement with the plans’ Trustees. Management also evaluates from time to time whether to make voluntary contributions to the plans. The Company did not make a contribution to the U.S. pension plans during the three month period ended March 31, 2014.

On April 30, 2012, the Company and the Trustees of the U.K. pension plans concluded the December 31, 2010 triennial valuations of the plans. In connection with such valuations and a previously negotiated agreement with the Trustees, the Company and the Trustees agreed upon pension funding terms (the “agreement”) (which superseded the terms of an agreement reached in June 2009 with respect to the previous triennial valuation as of December 31, 2007) whereby the Company: (i) made a contribution in December 2011 to the plans of 2.3 million British pounds ($3,687 at December 31, 2011 exchange rates) from a previously established escrow account, (ii) agreed to make contributions of 1 million British pounds during each year from 2012 through 2020 inclusive and (iii) amended the previous escrow arrangement into an account security arrangement covering 10.2 million British pounds, committing to make annual contributions of 1 million British pounds into such account security arrangement during each year from 2014 through 2020 inclusive. It was further agreed that, to the extent that the value of the plans’ assets falls short of the funding target for June 1, 2020 that has been agreed upon with the Trustees, the assets from the account security arrangement would be released into the plans at that date. Additionally, the Company agreed to fund the expenses of administering the plans, including certain regulator levies and the cost of other professional advisors to the plans. The terms of the agreement are subject to adjustment based on the results of subsequent triennial valuations. The aggregate amount in the account security arrangement was approximately $17,000 and $16,900 at March 31, 2014 and December 31, 2013, respectively, and has been recorded in “cash deposited with clearing organizations and other segregated cash” on the accompanying condensed consolidated statements of financial condition. Income on the account security arrangement accretes to the Company and is recorded in interest income.

During the three month period ended March 31, 2014, no contribution to these U.K. pension plans was required to be made. Contributions were made to other non-U.S. pension plans of approximately $4,800.

 

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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 table summarizes the components of net periodic benefit cost (credit) related to the Company’s post-retirement plans for the three month periods ended March 31, 2014 and 2013:

 

    Pension Plans     Medical Plan  
    Three Months Ended March 31,  
    2014     2013     2014     2013  

Components of Net Benefit Cost (Credit):

       

Service cost

  $ 223      $ 314      $ 12      $ 10   

Interest cost

    7,531        6,753        53        47   

Expected return on plan assets

    (8,079     (6,797              

Amortization of:

       

Prior service cost

    733        706                 

Net actuarial loss

    1,111        914        (23       
 

 

 

   

 

 

   

 

 

   

 

 

 

Net benefit cost

  $ 1,519      $ 1,890      $ 42      $ 57   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

14. COST SAVING INITIATIVES

Cost Saving Initiatives—In October 2012, the Company announced cost saving initiatives (the “Cost Saving Initiatives”) relating to the Company’s operations. These initiatives include streamlining our corporate structure and consolidating support functions; realigning our investments into areas with potential for the greatest long-term return; the settlement of certain contractual obligations; reducing occupancy costs; and creating greater flexibility to retain and attract the best people and invest in new growth areas.

Expenses associated with the implementation of the Cost Saving Initiatives were completed during the second quarter of 2013. The Company incurred these expenses, by segment, as reflected in the tables below:

 

     Financial
Advisory
     Asset
Management
    Corporate      Total  

Three Month Period Ended March 31, 2013:

          

Compensation and benefits

   $ 20,394       $ 236      $ 4,041       $ 24,671   

Other

     1,621         (1     31         1,651   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 22,015       $ 235      $ 4,072       $ 26,322   
  

 

 

    

 

 

   

 

 

    

 

 

 
     Financial
Advisory
     Asset
Management
    Corporate      Total  

Cumulative October 2012 Through
March 31, 2013:

          

Compensation and benefits

   $ 96,527       $ 12,292      $ 15,839       $ 124,658   

Other

     3,020         732        488         4,240   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 99,547       $ 13,024      $ 16,327       $ 128,898   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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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)

 

Activity related to the obligations pursuant to the Cost Saving Initiatives during the three month period ended March 31, 2014 was as follows:

 

     Accrued
Compensation
and Benefits
    Other
Liabilities
     Total  

Balance, January 1, 2014

   $ 11,860      $ 5,356       $ 17,216   

Less:

       

Settlements

     (2,390             (2,390
  

 

 

   

 

 

    

 

 

 

Balance, March 31, 2014

   $ 9,470      $ 5,356       $ 14,826   
  

 

 

   

 

 

    

 

 

 

 

15. INCOME TAXES

As a result of its indirect investment in Lazard Group, Lazard Ltd, through certain of its subsidiaries, 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 its 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 $21,751 and $3,948 for the three month periods ended March 31, 2014 and 2013, respectively, representing effective tax rates of 20.3% and 18.3%, respectively. The difference between the U.S. federal statutory rate of 35.0% and the effective tax rates reflected above principally relates to (i) Lazard Group primarily operating as a limited liability company in the U.S., (ii) taxes payable to

foreign jurisdictions that are not offset against U.S. income taxes, (iii) foreign source income (loss) not subject to U.S. income taxes (including interest on intercompany financings), (iv) change in the U.S. federal valuation allowance affecting the provision for income taxes, (v) Lazard Group’s income from U.S. operations attributable to noncontrolling interests, and (vi) U.S. state and local taxes (primarily UBT), which are incremental to the U.S. federal statutory tax rate.

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

Tax Receivable Agreement

The redemption of historical partner interests in connection with the Company’s separation and recapitalization that occurred in May 2005 and the 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 LLC (“LFCM Holdings”, see Note 17 below) 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

 

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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)

 

actually realizes as a result of these 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. 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.

 

16. NET INCOME PER SHARE OF CLASS A COMMON STOCK

The Company’s basic and diluted net income per share calculations for the three month periods ended March 31, 2014 and 2013 are computed as described below.

Basic Net Income Per Share

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

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

Diluted Net Income Per Share

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

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

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

The calculations of the Company’s basic and diluted net income per share and weighted average shares outstanding for the three month periods ended March 31, 2014 and 2013 are presented below:

 

    Three Months Ended
March 31,
 
    2014     2013  

Net income attributable to Lazard Ltd

  $ 80,842      $ 15,360   

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

             
 

 

 

   

 

 

 

Net income attributable to Lazard Ltd - basic

    80,842        15,360   

Add - dilutive effect, as applicable, of:

   

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

    433        182   
 

 

 

   

 

 

 

Net income attributable to Lazard Ltd - diluted

  $ 81,275      $ 15,542   
 

 

 

   

 

 

 

Weighted average number of shares of Class A common stock outstanding

    121,361,210        116,921,983   

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

    414,997        786,221   
 

 

 

   

 

 

 

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

    121,776,207        117,708,204   

Add - dilutive effect, as applicable, of:

   

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

    12,249,784        15,107,356   
 

 

 

   

 

 

 

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

    134,025,991        132,815,560   
 

 

 

   

 

 

 

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

   

Basic

    $0.66        $0.13   
 

 

 

   

 

 

 

Diluted

    $0.61        $0.12   
 

 

 

   

 

 

 

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

17. RELATED PARTIES

Amounts receivable from, and payable to, related parties are set forth below:

 

                                           
      March 31,
2014
     December 31,
2013
 

Receivables

     

LFCM Holdings

   $ 4,067       $ 7,794   

Other

    
118
  
     126   
  

 

 

    

 

 

 

Total

   $
4,185
  
   $ 7,920   
  

 

 

    

 

 

 

Payables

     

LFCM Holdings

   $
1,663
  
   $ 4,300   

Other

    
919
  
     731   
  

 

 

    

 

 

 

Total

   $
2,582
  
   $ 5,031   
  

 

 

    

 

 

 

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 former and current managing directors (which also include the Company’s executive officers) who were or are also members of LAZ-MD Holdings. In addition to the master separation agreement, dated as of May 10, 2005, by and among Lazard Ltd, Lazard Group, LAZ-MD Holdings and LFCM Holdings (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 (the “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, 2014 and 2013, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $369 and $632, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $543 and $500, 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, 2014 and December 31, 2013 include $2,967 and $3,112, respectively, related to administrative and support services and other receivables which include sublease income and reimbursement of expenses incurred on behalf of LFCM Holdings, and $1,100 and $4,682, respectively, related to referral fees for underwriting and private placement transactions. Payables to LFCM Holdings and its subsidiaries at March 31, 2014 and December 31, 2013 include $414 and $3,051, respectively, primarily relating to referral fees for Financial Advisory transactions, and, at March 31, 2014 and December 31, 2013, $1,249 related to obligations pursuant to the tax receivable agreement (see Note 15 of Notes to Condensed Consolidated Financial Statements).

 

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)

 

Other

Other payables at March 31, 2014 and December 31, 2013 primarily relate to referral fees for M&A and restructuring transactions with MBA Lazard Holdings S.A. and its affiliates, an Argentina-based group in which the Company has a 50% ownership interest.

LAZ-MD Holdings

Lazard Group provides certain 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, 2014 and 2013, such charges amounted to $250 for each period.

 

18. 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 (6  2/3%) 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, 2014, LFNY’s regulatory net capital was $100,252, which exceeded the minimum requirement by $97,110.

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 Conduct Authority. At March 31, 2014, the aggregate regulatory net capital of the U.K. Subsidiaries was $92,574, which exceeded the minimum requirement by $75,634.

CFLF, under which asset management and commercial banking activities are carried out in France, is subject to regulation by the ACPR for its banking activities conducted through its subsidiary, LFB. The investment services activities of the Paris group, exercised through LFB and other subsidiaries of CFLF, primarily LFG (asset management), also are subject to regulation and supervision by the Autorité des Marchés Financiers. At March 31, 2014, the consolidated regulatory net capital of CFLF was $140,872, which exceeded the minimum requirement set for regulatory capital levels by $105,079. In addition, pursuant to the consolidated supervision rules in the European Union, LFB, in particular, as a French credit institution, is required to be supervised by a regulatory body, either in the U.S. or in the European Union. During the third quarter of 2013, the Company and the ACPR agreed on terms for the consolidated supervision of LFB and certain other non-financial advisory European subsidiaries of the Company (referred to herein, on a combined basis, as the “combined European regulated group”) under such rules. Under this new supervision, the combined European regulated group is required to comply with periodic financial, regulatory net capital and other reporting obligations. Additionally, the combined European regulated group, together with our European financial advisory entities, is required to perform an annual risk assessment and provide certain other information on a periodic basis, including financial reports and information relating to financial performance, balance sheet data and capital structure (which is similar to the information that the Company had already been providing informally). This new supervision under, and provision of information to, the ACPR became effective December 31, 2013.

 

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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)

 

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, 2014, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $105,753, which exceeded the minimum required capital by $77,600.

At March 31, 2014, each of these subsidiaries individually was in compliance with its regulatory capital requirements.

Any new or expanded rules and regulations that may be adopted in countries in which we operate (including regulations that have not yet been proposed) could affect us in other ways.

 

19. 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 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 months ended March 31, 2014 and 2013 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 (loss) 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,
 
          2014     2013(a)  

Financial Advisory

   Net Revenue    $ 275,496      $ 168,462   
   Operating Expenses      245,415        216,908   
     

 

 

   

 

 

 
   Operating Income (Loss)    $ 30,081      $ (48,446
     

 

 

   

 

 

 

Asset Management

   Net Revenue    $ 268,564      $ 244,025   
   Operating Expenses      175,761        155,077   
     

 

 

   

 

 

 
   Operating Income    $ 92,803      $ 88,948   
     

 

 

   

 

 

 

Corporate

   Net Revenue    $ (10,660   $ (10,584
   Operating Expenses      5,044        8,321   
     

 

 

   

 

 

 
   Operating Loss    $ (15,704   $ (18,905
     

 

 

   

 

 

 

Total

   Net Revenue    $ 533,400      $ 401,903   
   Operating Expenses      426,220        380,306   
     

 

 

   

 

 

 
   Operating Income    $ 107,180      $ 21,597   
     

 

 

   

 

 

 

 

(a) See Note 14 of Notes to Condensed Consolidated Financial Statements for information regarding the Cost Saving Initiatives, and the impact on each of the Company’s business segments during the three month period ended March 31, 2013.

 

     As Of  
     March 31,
2014
     December 31,
2013
 

Total Assets

     

Financial Advisory

   $ 702,885       $ 714,708   

Asset Management

     536,836         612,018   

Corporate

     1,658,482         1,684,411   
  

 

 

    

 

 

 

Total

   $ 2,898,203       $ 3,011,137   
  

 

 

    

 

 

 

 

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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 (“MD&A”) included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “Form 10-K”). All references to “2014”, “2013”, “first quarter”, “three months” or “the period” refer to, as the context requires, the three month periods ended March 31, 2014 and March 31, 2013.

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,” “could” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “target”, “goal” 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, business plans and initiatives 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,

 

   

a decline in our revenues, for example due to a decline in overall mergers and acquisitions (“M&A”) activity, our share of the M&A market or our assets under management (“AUM”),

 

   

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 and attract employees at current compensation levels.

These risks and uncertainties are not exhaustive. Other sections of the Form 10-K and this Form 10-Q describe additional factors that could adversely affect 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’ financial goals, including the ratio of awarded compensation and benefits expense to operating revenue,

 

   

business’ ability to deploy surplus cash through dividends, share repurchases and debt repurchases,

 

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business’ ability to offset stockholder dilution through share repurchases,

 

   

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,

 

   

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,

 

   

potential levels of compensation expense and non-compensation expense,

 

   

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

 

   

likelihood of success and impact of litigation,

 

   

expected tax rates, including effective tax rates,

 

   

changes in interest and tax rates,

 

   

expectations with respect to the economy, the securities markets, the market for mergers, acquisitions and strategic advisory and restructuring activity, the market for asset management activity and other macroeconomic and 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 AUM in various mutual funds, hedge funds and other investment products managed by Lazard Asset Management LLC and its subsidiaries (collectively referred to as “LAM”). 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

Lazard is one of the world’s preeminent financial advisory and asset management firms. We have long specialized in crafting solutions to the complex financial and strategic challenges of a diverse set of clients around the world, including corporations, governments, institutions, partnerships and individuals. Founded in 1848 in New Orleans, we currently operate from 41 cities in key business and financial centers across 26 countries throughout Europe, North America, Asia, Australia, the Middle East and Central and South America.

Our primary business purpose is to serve our clients. Our deep roots in business centers around the world form a global network of relationships with key decision-makers in corporations, governments and investing institutions. This network is both a competitive strength and a powerful resource for Lazard and our clients. As a firm that competes on the quality of our advice, we have two fundamental assets: our people and our reputation.

We operate in cyclical businesses across multiple geographies, industries and asset classes. In recent years, we have expanded our geographic reach, bolstered our industry expertise and continued to build in growth areas.

 

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Companies, government bodies and investors seek independent advice with a geographic perspective, deep understanding of capital structure, informed research and knowledge of global economic conditions. We believe that our business model as an independent advisor will continue to create opportunities for us to attract new clients and key personnel.

Our principal sources of revenue are derived from activities in the following business segments:

 

   

Financial Advisory, which offers corporate, partnership, institutional, government, sovereign and individual clients across the globe a wide array of financial advisory services regarding M&A and other strategic matters, restructurings, capital structure, capital raising and various other financial matters, and

 

   

Asset Management, which offers a broad range of global investment solutions and investment management services in equity and fixed income strategies, alternative investments and private equity funds to corporations, public funds, sovereign entities, endowments and foundations, labor funds, financial intermediaries and private clients.

In addition, we record selected other activities in our Corporate segment, including management of cash, investments and outstanding indebtedness, as well as certain commercial banking activities of Lazard Group’s Paris-based subsidiary, Lazard Frères Banque SA (“LFB”).

LFB is a registered bank regulated by the Autorité de Contrôle Prudentiel et de Résolution (“ACPR”). It is engaged primarily in commercial and private banking services for clients and funds managed by Lazard Frères Gestion SAS (“LFG”) and for other clients, investment banking activities, including participation in underwritten offerings of securities in France, and asset-liability management.

Our consolidated net revenue was derived from the following segments:

 

      Three Months Ended
March 31,
 
         2014             2013      

Financial Advisory

     52           42

Asset Management

     50        61   

Corporate

     (2     (3
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

We also invest our own capital from time to time, generally alongside capital of qualified institutional and individual investors in alternative investments or private equity investments, and, since 2005, we have engaged in a number of alternative investments and private equity activities, including investments through (i) the Edgewater Funds (“Edgewater”), our Chicago-based private equity firm (see Note 10 of Notes to Condensed Consolidated Financial Statements), (ii) Lazard Australia Corporate Opportunities Fund 2 (“COF2”), a Lazard-managed Australian fund targeting Australasian mid-market investments, (iii) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small-to mid-cap European companies and (iv) a fund targeting significant noncontrolling-stake investments in established private companies. We also make investments to seed our Asset Management strategies. We may 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 any obligations to LFCM Holdings LLC (“LFCM Holdings”), we may explore capital markets opportunities.

 

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Business Environment and Outlook

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

Equity market indices for developed markets at March 31, 2014 increased as compared to such indices at March 31, 2013, while equity market indices for emerging markets decreased as compared to March 31, 2013. On an industry-wide basis, during the first quarter of 2014, the number of completed and announced M&A transactions decreased as compared to the same period in the prior year, while the value of announced transactions increased as compared to the same period in the prior year. Global restructuring activity, as measured by the number of corporate defaults, was lower in the first quarter of 2014 as compared to the same period in the prior year, and the aggregate value of debt defaults remained low, consistent with the last several years.

In early 2014, interest rates remain low and corporate cash balances remain high. Macroeconomic conditions appear to be improving in the developed countries, particularly in North America, CEO and board confidence appears to be returning and, as such, companies based in these regions may be better positioned to make acquisitions for future growth and investors may be increasingly interested in deploying capital for investment purposes. Although market volatility may continue, we believe the long term trends appear positive.

We intend to leverage our existing infrastructure to capitalize on any global macroeconomic recovery, any upturn in the M&A cycle, and any momentum in the global equity markets. We expect to generate revenue growth by remaining adequately staffed to capitalize on any macroeconomic recovery and deploying our intellectual capital to generate new revenue streams. The cost saving initiatives that we began in 2012 are effectively complete, and through 2013, more than two-thirds of these savings were realized, with the full impact of all the savings expected to be reflected in our 2014 results. See “Cost Saving Initiatives” below and Note 14 of Notes to Condensed Consolidated Financial Statements.

Our outlook with respect to our Financial Advisory and Asset Management businesses is described below.

 

  Financial Advisory – In the near- to mid-term, we expect that the U.S. macroeconomic environment will likely be the strongest of the developed economies. Certain legal decisions in the U.S. reinforce the importance of independent advice, and the global scale and breadth of our Financial Advisory business allows us to advise on large, complex cross-border transactions across a variety of industries. We continue to develop our range of advisory capabilities, in particular in Europe, with our Sovereign Advisory, Restructuring and Capital Advisory businesses. In addition, we believe our businesses throughout the emerging markets, Japan and Australia position us for growth in these markets, while enhancing our relationships with, and the services that we can provide to, clients in developed economies. We have also established the Lazard Africa initiative, to leverage our sovereign and corporate expertise in this rapidly growing region, for our clients in both developed and developing countries.

 

 

Asset Management – Generally, we have seen increased investor demand across regions and investment platforms. In the short to intermediate term, we expect most of our growth will come from defined benefit and defined contribution plans in the developed economies because of their sheer scope and size. Over the longer term, we expect an increasing share of our AUM to come from the developing economies in Asia, Latin America and the Middle East, as their retirement systems evolve and individual wealth is increasingly deployed in the financial markets. Our global footprint is already well established in the developed economies and we expect our business in the developing economies will continue to expand. Given our globally diversified platform and our ability to provide investment

 

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  solutions for a global mix of clients, we believe we are positioned to benefit from growth that may occur in the asset management industry. We recently extended the global footprint of our Asset Management business by opening new offices in Zurich, Singapore and Dubai. We are continually developing and seeding new investment strategies that extend our existing platforms. Recent examples of growth initiatives include the following investment strategies: Emerging Markets Debt, Core Emerging Markets Equity, Emerging Markets Small Cap Equity, Real Estate, Managed Volatility Strategies, Middle East North African Equities and Asian Equities.

We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge continuously, and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all potentially applicable 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. See Item 1A, “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.

Overall, we continue to focus on the development of our business, including the generation of stable revenue and earnings growth and stockholder returns, the prudent management of our costs and expenses, the efficient use of our assets and the return of capital to our stockholders.

Certain data with respect to our Financial Advisory and Asset Management businesses is included below.

Financial Advisory

As reflected in the following table, which sets forth global M&A industry statistics, the value and number of all completed transactions decreased in the first quarter of 2014 as compared to the first quarter of 2013, however for deals with values greater than $500 million, the value and number increased in the current period as compared to the prior period. With respect to announced M&A transactions, the value of all transactions, including deals with values greater than $500 million, increased substantially in the first quarter of 2014 as compared to the first quarter of 2013.

 

      Three Months Ended
March 31,
 
      2014      2013      %
Incr /  (Decr)
 
    

($ in billions)

 

Completed M&A Transactions:

        

All deals:

        

Value

   $ 662       $ 669         (1 )% 

Number

     7,835         9,538         (18 )% 

Deals Greater than $500 million:

        

Value

   $ 512       $ 483         6

Number

     222         221        

Announced M&A Transactions:

        

All deals:

        

Value

   $ 813       $ 648         25

Number

     8,614         9,495         (9 )% 

Deals Greater than $500 million:

        

Value

   $ 636       $ 461         38

Number

     249         210         19

 

Source: Dealogic as of April 7, 2014.

 

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Global restructuring activity during the first quarter of 2014, as measured by the number of corporate defaults, decreased as compared to the first quarter of 2013, and the aggregate value of debt defaults remained low, consistent with the last several years. The number of defaulting issuers decreased to 8 in the first quarter of 2014, according to Moody’s Investors Service, Inc., as compared to 21 in the first quarter of 2013. In the U.S., the number of corporate defaults decreased 36% in the first quarter of 2014 as compared to the first quarter of 2013, while the value of such defaults decreased 67% during the same period.

Asset Management

The percentage change in major equity market indices at March 31, 2014, as compared to such indices at December 31, 2013, and at March 31, 2013, is shown in the table below.

 

      Percentage Changes
March 31, 2014 vs.
 
     December 31,
2013
    March 31,
2013
 

MSCI World Index

     1     17

Euro Stoxx

     2     21

MSCI Emerging Market

     (1 )%      (4 )% 

S&P 500

     1     19

The fees that we receive for providing investment management and advisory services are primarily driven by the level of AUM and the nature of the AUM product mix. Accordingly, market movements, foreign currency volatility and changes in our AUM product mix will impact the level of revenues we receive from our Asset Management business when comparing periodic results. A substantial portion of our AUM is invested in equities. Movements in AUM during the period generally reflect the changes in equity market indices. Our AUM at March 31, 2014 increased 1% versus AUM at December 31, 2013, due to market and foreign exchange appreciation as well as net inflows. Average AUM in the first quarter of 2014 increased 9% as compared to average AUM in the first quarter of 2013.

Cost Saving Initiatives

In October 2012, we announced cost saving initiatives which, at that time, were expected to result in approximately $125 million in annual savings from our compensation and non-compensation cost base. We currently expect total annual savings related to the cost saving initiatives to be approximately $160 million, partially offset by investment in our business.

Approximately $120 million of the expected annual savings relate to compensation expense associated with our headcount, and approximately $40 million to non-compensation expense. Through 2013, more than two-thirds of these savings were realized, with the full impact of all the savings expected to be reflected in our 2014 results.

Expenses associated with implementation of the cost saving initiatives were completed in the second quarter of 2013 and were reflected in our financial results. These implementation expenses were approximately: $38 million in the second quarter of 2013; $26 million in the first quarter of 2013; and $103 million in the fourth quarter of 2012, for a total of approximately $167 million.

The cost saving initiatives are intended to improve our profitability with minimal impact on revenue growth. The initiatives include: streamlining our corporate structure and consolidating support functions; realigning our investments into areas with potential for the greatest long-term return; the settlement of certain contractual obligations; reducing occupancy costs; and creating greater flexibility to retain and attract the best people and invest in new growth areas.

See Note 14 of Notes to Condensed Consolidated Financial Statements.

 

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Financial Statement Overview

Net Revenue

The majority of Lazard’s Financial Advisory net revenue historically has been earned from the successful completion of M&A transactions, strategic advisory matters, restructuring and capital structure advisory services, capital raising and similar transactions. The main drivers of Financial Advisory net revenue are overall M&A activity, the level of corporate debt defaults and the environment for capital raising activities, particularly in the industries and geographic markets in which Lazard focuses. In some client engagements, often those involving financially distressed companies, revenue is earned in the form of retainers and similar fees that are contractually agreed upon with each client for each assignment and are not necessarily linked to the completion of a transaction. In addition, Lazard also earns fees from providing strategic advice to clients, with such fees not being dependent on a specific transaction, and may also earn fees in connection with public and private securities offerings and for referring opportunities to LFCM Holdings for underwriting, distribution and placement of securities. The referral fees received from LFCM Holdings are generally one-half of the revenue recorded by LFCM Holdings in respect of such activities. 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.

Lazard’s Asset Management segment principally includes LAM, LFG and Edgewater. Asset Management net revenue is derived from fees for investment management and advisory services provided to clients. As noted above, the main driver of Asset Management net revenue is the level and product mix of AUM, which is generally influenced by the performance of the global equity markets and, to a lesser extent, fixed income markets as well as Lazard’s investment performance, which impacts its ability to successfully attract and retain assets. As a result, fluctuations (including timing thereof) in financial markets and client asset inflows and outflows have a direct effect on Asset Management net revenue and operating income. Asset Management fees are generally based on the level of AUM measured daily, monthly or quarterly, and an increase or reduction in AUM, due to market price fluctuations, currency fluctuations, changes in product mix, or net client asset flows 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 and alternative investment funds, such as hedge funds and private equity funds, and lower fees earned on fixed income and cash management products.

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

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

 

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on a whole-fund basis and, therefore, clawback of carried interest 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 investment gains and losses on the Company’s “seed investments” related to our Asset Management business, principal investments in private equity funds and “equity method” investments, net of hedging activities, as well as gains and losses on investments held in connection with Lazard Fund Interests and on the extinguishment of debt (to the extent applicable), interest income and interest expense. Corporate net revenue also can fluctuate due to changes in the fair value of investments classified as “trading”, as well as due to changes in interest and currency exchange rates and in the levels of cash, investments and indebtedness.

Although Corporate segment net revenue during the first quarter of 2014 represented (2)% of Lazard’s net revenue, total assets in the Corporate segment represented 57% of Lazard’s consolidated total assets as of March 31, 2014, which are attributable to investments in government bonds and money market funds, fixed income funds, alternative investment funds and other securities, private equity investments, cash and assets associated with LFB.

Operating Expenses

The majority of Lazard’s operating expenses relate to compensation and benefits for managing directors and employees. Our compensation and benefits expense includes (i) salaries and benefits, (ii) amortization of the relevant portion of previously granted deferred incentive compensation awards, including (a) share-based incentive compensation under the Lazard Ltd 2005 Equity Incentive Plan (the “2005 Plan”) and the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”) and (b) Lazard Fund Interests awards and other similar deferred compensation arrangements (see Note 12 of Notes to Condensed Consolidated Financial Statements), (iii) a provision for discretionary or guaranteed cash bonuses and profit pools and (iv) when applicable, severance payments. Compensation expense in any given period is dependent on many factors, including general economic and market conditions, our actual and forecasted operating and financial performance, staffing levels, competitive pay conditions and the nature of revenues earned, as well as the mix between current and deferred compensation.

For interim periods, we use “adjusted compensation and benefits expense” and the ratio of “adjusted compensation and benefits expense” to “operating revenue,” both non-U.S. GAAP measures, for comparison of compensation and benefits expense between periods. For the reconciliations and calculations with respect to “adjusted compensation and benefits expense” and related ratios to “operating revenue,” see the table under “Consolidated Results of Operations” below.

We believe that “awarded compensation and benefits expense” and the ratio of “awarded compensation and benefits expense” to “operating revenue,” both non-U.S. GAAP measures, are the most appropriate measures to assess the annual cost of compensation and provide the most meaningful basis for comparison of compensation and benefits expense between present, historical and future years. “Awarded compensation and benefits expense” for a given year is calculated using “adjusted compensation and benefits expense,” also a non-U.S. GAAP measure, as modified by the following items:

 

   

We deduct amortization expense recorded for U.S. GAAP purposes in each fiscal year associated with the vesting of deferred incentive compensation awards,

 

   

We add (i) the grant date fair value of the deferred incentive compensation awards granted applicable to the relevant year-end compensation process (i.e. the grant date fair value of deferred incentive awards granted in 2014, 2013 and 2012 related to the 2013, 2012 and 2011 year-end compensation processes, respectively) and (ii) investments in people (i.e. “sign-on” bonuses) and other special deferred incentive awards granted throughout the applicable year, with such amounts in (i) and (ii) reduced by an estimate of future forfeitures of such awards, and

 

   

We adjust for year-end foreign exchange fluctuations.

 

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Compensation and benefits expense is the largest component of our operating expenses. Our goal is for awarded compensation and benefits expense to rise at a slower rate than operating revenue growth, and if operating revenue declines, awarded compensation and benefits expense should also decline. In addition, we seek to maintain discipline with respect to the rate at which we award deferred compensation. Based on a similar level and mix of revenues from our business as in 2012 and a gradual improvement in the macroeconomic environment, we believe that over the cycle we can attain a ratio of awarded compensation and benefits expense to operating revenue in the mid-to-high-50s percentage range, which compares to 58.3% for the year ended December 31, 2013. While we have implemented initiatives, including the cost saving initiatives announced in October 2012 (see “Cost Saving Initiatives” above and Note 14 of Notes to Condensed Consolidated Financial Statements), that we believe will assist us in attaining a ratio within this range, there can be no guarantee that such a ratio will be attained or that our policies or initiatives will not change in the future. We may benefit from pressure on compensation costs within the financial services industry in future periods; however, increased competition for senior professionals, changes in the macroeconomic environment or the financial markets generally, lower operating revenue resulting from, for example, a decrease in M&A activity, our share of the M&A market, AUM levels and/or changes in the mix of revenues from our businesses or various other factors could prevent us from attaining this goal.

Our 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, and, in the 2013 period, the relevant portion of the expense relating to the implementation of the cost saving initiatives. For all periods, the amortization of intangible assets related to acquisitions pertains primarily to the acquisition of Edgewater.

We believe that “adjusted non-compensation expense,” a non-U.S. GAAP measure, provides a more meaningful basis for assessing our operating results. For calculations with respect to “adjusted non-compensation expense” see the table under “Consolidated Results of Operations” below.

Provision for Income Taxes

As a result of its indirect investment in Lazard Group, Lazard Ltd, through certain of its subsidiaries, 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 its partners. Outside the U.S., Lazard Group operates principally through subsidiary corporations that are subject to local income taxes. Income taxes shown on Lazard’s consolidated statements of operations are principally related to foreign taxes from non-U.S. entities and to New York City Unincorporated Business Tax (“UBT”) attributable to Lazard Group’s operations apportioned to New York City (see Note 15 of Notes to Condensed Consolidated Financial Statements for additional information).

Noncontrolling Interests

Noncontrolling interests primarily consist of amounts related to Edgewater’s management vehicles that the Company is deemed to control but not own and the amount attributable to LAZ-MD Holdings’ ownership interest in the net income of Lazard Group. See Note 11 of Notes to Condensed Consolidated Financial Statements for information regarding the Company’s noncontrolling interests. The Company expects that all remaining interests in LAZ-MD Holdings that are exchangeable for shares of the Company’s Class A common stock will be exchanged in May 2014. Following such event, Lazard Group will be a wholly-owned indirect subsidiary of Lazard Ltd, and the sole issued and outstanding share of the Company’s Class B common stock will automatically convert into one share of the Company’s Class A common stock.

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

 

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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.

The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Selected financial data from the Company’s reported condensed consolidated results of operations is set forth below, followed by a more detailed discussion of both the consolidated and business segment results.

 

 

     Three Months Ended
March  31,
 
      2014     2013  
    

($ in thousands)

 

Net Revenue

   $ 533,400      $ 401,903   
  

 

 

   

 

 

 

Operating Expenses:

    

Compensation and benefits

     321,565        277,739   

Non-compensation

     103,435        101,690   

Amortization of intangible assets related to acquisitions

     1,220        877   
  

 

 

   

 

 

 

Total operating expenses

     426,220        380,306   
  

 

 

   

 

 

 

Operating Income

     107,180        21,597   

Provision for income taxes

     21,751        3,948   
  

 

 

   

 

 

 

Net Income

     85,429        17,649   

Less – Net Income Attributable to Noncontrolling Interests

     4,587        2,289   
  

 

 

   

 

 

 

Net Income Attributable to Lazard Ltd

   $ 80,842      $ 15,360   
  

 

 

   

 

 

 

Operating Income, as a % of net revenue

     20.1     5.4
  

 

 

   

 

 

 

The tables below describe the components of operating revenue, adjusted compensation and benefits expense, adjusted non-compensation expense, earnings from operations and related key ratios, which are non-U.S. GAAP measures used by the Company to manage its business. We believe such non-U.S. GAAP measures provide the most meaningful basis for comparison between present, historical and future periods, as described above.

 

     Three Months Ended
March  31,
 
     2014     2013  
     ($ in thousands)  

Operating Revenue:

    

Net revenue

   $ 533,400      $ 401,903   

Adjustments:

    

Interest expense (a)

     15,716        19,848   

Revenue related to noncontrolling interests (b)

     (6,266     (4,322

Gains on investments pertaining to Lazard Fund Interests (c)

     (2,626     (3,725
  

 

 

   

 

 

 

Operating revenue

   $ 540,224      $ 413,704   
  

 

 

   

 

 

 

 

(a) Interest expense (excluding interest expense incurred by LFB) is added back in determining operating revenue because such expense relates to corporate financing activities and is not considered to be a cost directly related to the revenue of our 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.
(c) Represents changes in the fair value of investments held in connection with Lazard Fund Interests and other similar deferred compensation arrangements for which a corresponding equal amount is excluded from compensation and benefits expense.

 

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     Three Months Ended 
March 31,
 
         2014         2013  
     ($ in thousands)  
Adjusted Compensation and Benefits Expense:     

Total compensation and benefits expense

   $ 321,565      $ 277,739   

Adjustments:

    

Noncontrolling interests (a)

     (1,148     (1,121

Charges pertaining to Lazard Fund Interests (b)

     (2,626     (3,725

Cost saving initiatives (c)

            (24,671
  

 

 

   

 

 

 

Adjusted compensation and benefits expense

   $ 317,791      $ 248,222   
  

 

 

   

 

 

 

Adjusted compensation and benefits expense, as a % of operating revenue

     58.8     60.0
  

 

 

   

 

 

 

 

(a) Expenses related to the consolidation of noncontrolling interests are excluded because Lazard has no economic interest in such amounts.
(b) Represents changes in the fair value of the compensation liability recorded in connection with Lazard Fund Interests and other similar deferred compensation arrangements for which a corresponding equal amount is excluded from operating revenue.
(c) Represents expenses related to the cost saving initiatives for (i) severance costs and benefit payments; (ii) the acceleration of unrecognized amortization expense of deferred incentive compensation previously granted to individuals terminated and (iii) the settlement of certain contractual obligations.

 

     Three Months Ended
March 31,
 
         2014             2013      
     ($ in thousands)  
Adjusted Non-Compensation Expense:     

Total non-compensation expense

   $ 103,435      $ 101,690   

Adjustments:

    

Noncontrolling interests (a)

     (434     (458

Cost saving initiatives (b)

            (1,651
  

 

 

   

 

 

 

Adjusted non-compensation expense

   $ 103,001      $ 99,581   
  

 

 

   

 

 

 

Adjusted non-compensation expense, as a % of operating revenue

     19.1     24.1
  

 

 

   

 

 

 

 

(a) Expenses related to the consolidation of noncontrolling interests are excluded because the Company has no economic interest in such amounts.
(b) Represents expenses related to the cost saving initiatives for occupancy cost reduction and other non-compensation related costs.

 

     Three Months Ended
March 31,
 
         2014         2013  
     ($ in thousands)  

Earnings From Operations:

    

Operating revenue

   $ 540,224      $ 413,704   

Deduct:

    

Adjusted compensation and benefits expense

     (317,791     (248,222

Adjusted non-compensation expense

     (103,001     (99,581
  

 

 

   

 

 

 

Earnings from operations

   $ 119,432      $ 65,901   
  

 

 

   

 

 

 

Earnings from operations, as a % of operating revenue

     22.1     15.9
  

 

 

   

 

 

 

 

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Headcount information is set forth below:

 

     As Of
     March  31,
2014
   December 31,
2013(a)
   March  31,
2013(a)

Headcount:

              

Managing Directors:

              

Financial Advisory

       140          132          146  

Asset Management

       82          72          76  

Corporate

       17          15          15  
    

 

 

      

 

 

      

 

 

 

Total Managing Directors

       239          219          237  

Other Employees:

              

Business segment professionals

       1,082