Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

---

 

FORM 10-Q

 

---

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2010

 

OR

 

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

 

For the transition period from                          to                         

 

333-126751

(Commission File Number)

 

---

 

LAZARD GROUP LLC

(Exact name of registrant as specified in its charter)

 

Delaware		51-0278097
(State or Other Jurisdiction of Incorporation		(I.R.S. Employer Identification No.)
or Organization)

 

---

 

30 Rockefeller Plaza

New York, NY 10020

(Address of principal executive offices)

 

Registrant’s telephone number: (212) 632-6000

 

---

 

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

 

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

 

As of July 26, 2010, in addition to profit participation interests, there were 126,686,338 common membership interests and two managing member interests outstanding.

 

---

---

Table of Contents

TABLE OF CONTENTS

 

When we use the terms “Lazard Group”, “Lazard”, “we”, “us”, “our” and “the Company”, we mean Lazard Group LLC, a Delaware limited liability company, that is the current holding company for the subsidiaries that conduct our businesses. Lazard Ltd is a Bermuda exempt company whose shares of Class A common stock are publicly traded on the New York Stock Exchange under the Symbol “LAZ”. Lazard Ltd’s subsidiaries include Lazard Group and their respective subsidiaries. Lazard Ltd has no operating assets other than indirect ownership as of June 30, 2010 of approximately 89.0% of the common membership interests in Lazard Group and its controlling interest in Lazard Group. Lazard Ltd controls Lazard Group through two of its indirect wholly-owned subsidiaries who are co-managing members of Lazard Group.

 

Lazard Group has two primary holders of its common membership interests: Lazard Ltd and LAZ-MD Holdings LLC (“LAZ-MD Holdings”), a holding company that is owned by current and former managing directors of Lazard Group. The Lazard Group common membership interests held by LAZ-MD Holdings are effectively exchangeable over time on a one-for-one basis with Lazard Ltd for shares of Lazard Ltd’s Class A common stock. In addition, Lazard Group has granted profit participation interests in Lazard Group to certain of its managing directors in connection with the recapitalization of Lazard Group at the time of Lazard Ltd’s equity public offering. The profit participation interests are discretionary profits interests that are intended to enable Lazard Group to compensate its managing directors in a manner consistent with historical practices.

 

		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		38
Item 3. Quantitative and Qualitative Disclosures About Market Risk		70
Item 4. Controls and Procedures		70
Part II. Other Information
Item 1. Legal Proceedings		72
Item 1A. Risk Factors		72
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		73
Item 3. Defaults Upon Senior Securities		73
Item 4. [Removed and Reserved]		73
Item 5. Other Information		73
Item 6. Exhibits		74
Signatures		79

 

i

---

Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 

		Page
Condensed Consolidated Statements of Financial Condition as of June 30, 2010 and December 31,  2009		2
Condensed Consolidated Statements of Operations for the three month and six month periods ended  June 30, 2010 and 2009		4
Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2010 and 2009		5
Condensed Consolidated Statements of Changes in Members’ Equity for the six month periods ended June 30, 2010 and 2009		6
Notes to Condensed Consolidated Financial Statements		8

 

1

---

Table of Contents

LAZARD GROUP LLC

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

JUNE 30, 2010 AND DECEMBER 31, 2009

(UNAUDITED)

(dollars in thousands)

 

		June 30, 2010			December 31, 2009
ASSETS
Cash and cash equivalents		$	792,965		$	899,733
Cash deposited with clearing organizations and other segregated cash			20,631			20,217
Receivables-net:
Fees			394,777			437,532
Banks			163,413			143,778
Customers and other			58,940			73,750
Related parties			32,483			46,099
			649,613			701,159
Investments:
Debt:
U.S. Government and agencies (includes $126,502 and $126,413 of securities at amortized cost at June 30, 2010 and December 31, 2009, respectively)			147,881			147,507
Other (includes $9,543 and $10,217 of securities at amortized cost at June 30, 2010 and December 31, 2009, respectively)			219,939			313,342
Equities			73,978			82,442
Other			235,405			264,402
			677,203			807,693
Property (net of accumulated amortization and depreciation of $228,803 and $239,603 at June 30, 2010 and December 31, 2009, respectively)			143,616			166,913
Goodwill and other intangible assets (net of accumulated amortization of $10,679 and $7,140 at June 30, 2010 and December 31, 2009, respectively)			306,833			317,780
Other assets			192,929			201,553
Total assets		$	2,783,790		$	3,115,048

 

See notes to condensed consolidated financial statements.

 

2

---

Table of Contents

LAZARD GROUP LLC

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

JUNE 30, 2010 AND DECEMBER 31, 2009

(UNAUDITED)

(dollars in thousands)

 

		June 30, 2010				December 31, 2009
LIABILITIES AND MEMBERS’ EQUITY
Liabilities:
Deposits and other customer payables		$	289,528			$	322,101
Accrued compensation and benefits			227,630				515,033
Senior debt			1,076,850				1,086,850
Capital lease obligations			20,165				24,628
Related party payables			231,870				242,284
Other liabilities			441,416				491,221
Subordinated debt			150,000				150,000
Total liabilities			2,437,459				2,832,117
Commitments and contingencies
MEMBERS’ EQUITY
Members’ equity (net of 3,825,124 and 5,850,775 shares of Lazard Ltd Class A common stock, at cost of $132,157 and $191,140 at June 30, 2010 and December 31, 2009, respectively)			333,683				214,163
Accumulated other comprehensive income (loss), net of tax			(117,414	)			(58,792	)
Total Lazard Group members’ equity			216,269				155,371
Noncontrolling interests			130,062				127,560
Total members’ equity			346,331				282,931
Total liabilities and members’ equity		$	2,783,790			$	3,115,048

 

 

See notes to condensed consolidated financial statements.

 

3

---

Table of Contents

LAZARD GROUP LLC

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

(dollars in thousands)

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2010		2009		2010		2009
REVENUE
Investment banking and other advisory fees		$245,282		$236,387		$514,491		$397,789
Money management fees		180,899		120,301		358,002		219,244
Interest income		6,341		7,816		12,256		16,109
Other		11,484		40,198		23,873		48,232
Total revenue		444,006		404,702		908,622		681,374
Interest expense		25,198		28,667		51,867		57,472
Net revenue		418,808		376,035		856,755		623,902
OPERATING EXPENSES
Compensation and benefits		263,018		239,274		563,393		442,806
Occupancy and equipment		21,312		19,982		42,582		40,076
Marketing and business development		18,252		15,786		33,855		29,239
Technology and information services		16,996		16,156		34,648		32,078
Professional services		10,011		11,169		18,003		19,005
Fund administration and outsourced services		10,996		8,057		22,370		15,803
Amortization of intangible assets related to acquisitions		1,769		344		3,539		688
Restructuring		–		–		87,108		62,550
Other		8,764		7,152		18,115		14,450
Total operating expenses		351,118		317,920		823,613		656,695
OPERATING INCOME (LOSS)		67,690		58,115		33,142		(32,793	)
Provision for income taxes		13,040		13,219		18,580		8,665
NET INCOME (LOSS)		54,650		44,896		14,562		(41,458	)
LESS - NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTERESTS		481		259		2,839		(812	)
NET INCOME (LOSS) ATTRIBUTABLE TO LAZARD GROUP		$  54,169		$  44,637		$  11,723		$(40,646	)

 

 

See notes to condensed consolidated financial statements.

 

4

---

Table of Contents

LAZARD GROUP LLC

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2010 AND 2009

(UNAUDITED)

(dollars in thousands)

 

		Six Months Ended June 30,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	14,562			$	(41,458	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Noncash items included in net income (loss):
Depreciation and amortization of property			10,122				11,114
Amortization of deferred expenses, share-based compensation and interest rate hedge			206,671				158,094
Amortization of intangible assets related to acquisitions			3,539				688
(Gain) loss on extinguishment of debt			424				(258	)
(Increase) decrease in operating assets:
Cash deposited with clearing organizations and other segregated cash			(2,190	)			6,508
Receivables - net			7,151				161,390
Investments			(17,312	)			(6,303	)
Other assets			(3,578	)			15,879
Increase (decrease) in operating liabilities:
Deposits and other payables			3,395				(159,591	)
Accrued compensation and benefits and other liabilities			(301,812	)			(98,780	)
Net cash provided by (used in) operating activities			(79,028	)			47,283
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equity method investments			–				(1,780	)
Disposition of and distributions from equity method investments			51,437				–
Additions to property			(5,465	)			(4,131	)
Disposals of property			254				805
Purchases of available-for-sale securities			–				(3,320	)
Proceeds from sales and maturities of available-for-sale securities			52,786				33,226
Net cash provided by investing activities			99,012				24,800
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Contribution from noncontrolling interests			2,000				265
Other financing activities			5,554				14,195
Payments for:
Senior borrowings			(10,375	)			(635	)
Capital lease obligations			(1,096	)			(1,665	)
Distributions to noncontrolling interests			(2,327	)			(7,054	)
Repurchase of common membership interests from members of LAZ-MD Holdings			–				(1,810	)
Purchase of Lazard Ltd Class A common stock			(22,733	)			(49,829	)
Distribution to members			(30,125	)			(89,962	)
Settlement of vested share-based incentive compensation awards			(43,812	)			(11,322	)
Other financing activities			(72	)			(71	)
Net cash used in financing activities			(102,986	)			(147,888	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(23,766	)			14,457
NET DECREASE IN CASH AND CASH EQUIVALENTS			(106,768	)			(61,348	)
CASH AND CASH EQUIVALENTS - January 1			899,733				907,278
CASH AND CASH EQUIVALENTS - June 30		$	792,965			$	845,930

 

See notes to condensed consolidated financial statements.

 

5

---

Table of Contents

LAZARD GROUP LLC

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2010

(UNAUDITED)

(dollars in thousands)

 

		Members’ Equity			Accumulated Other Comprehensive Income (Loss), Net of Tax			Total Lazard Group Members’ Equity			Noncontrolling Interests			Total Members’ Equity
Balance–January 1, 2010 (*)		$214,163			$(58,792)			$155,371			$127,560			$282,931
Comprehensive income (loss):
Net income		11,723						11,723			2,839			14,562
Other comprehensive income (loss)-net of tax:
Currency translation adjustments					(58,320	)		(58,320	)		(10	)		(58,330	)
Amortization of interest rate hedge					539			539						539
Available-for-sale securities:
Net unrealized loss					(848	)		(848	)					(848	)
Adjustments for items reclassified to earnings					2,361			2,361						2,361
Employee benefit plans:
Net actuarial loss					(2,871	)		(2,871	)					(2,871	)
Adjustments for items reclassified to earnings					517			517						517
Comprehensive income (loss)								(46,899	)		2,829			(44,070	)
Amortization of share-based incentive compensation awards		201,383						201,383						201,383
Distributions to members and noncontrolling interests		(30,125	)					(30,125	)		(327	)		(30,452	)
Purchase of Lazard Ltd Class A common stock		(22,733	)					(22,733	)					(22,733	)
Delivery of Lazard Ltd Class A common stock in connection with share-based incentive compensation awards		(43,812	)					(43,812	)					(43,812	)
Lazard Ltd Class A common stock issued / issuable in connection with business acquisitions and LAM Merger and related amortization		3,145						3,145						3,145
Other		(61	)					(61	)					(61	)
Balance–June 30, 2010 (*)		$333,683			$(117,414	)		$216,269			$130,062			$346,331

 

(*)	Includes 123,686,338 and 126,686,338 common membership interests at January 1, 2010 and June 30, 2010, respectively. Also includes profit participation interests and two managing member interests at each such date.

 

See notes to condensed consolidated financial statements.

 

6

---

Table of Contents

LAZARD GROUP LLC

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2009

(UNAUDITED)

(dollars in thousands)

 

		Members’ Equity				Accumulated Other Comprehensive Income (Loss), Net of Tax				Total Lazard Group Members’ Equity				Noncontrolling Interests				Total Members’ Equity
Balance–January 1, 2009(*)		$	227,036			$	(121,407)			$	105,629			$	20,881			$	126,510
Comprehensive income (loss):
Net loss			(40,646	)							(40,646	)			(812	)			(41,458	)
Other comprehensive income (loss) - net of tax:
Currency translation adjustments							48,148				48,148								48,148
Amortization of interest rate hedge							538				538								538
Available-for-sale securities:
Net unrealized gain							9,639				9,639								9,639
Adjustments for items reclassified to earnings							254				254								254
Employee benefit plans:
Net actuarial gain							1,128				1,128								1,128
Adjustments for items reclassified to earnings							(256	)			(256	)							(256	)
Comprehensive income (loss)											18,805				(812	)			17,993
Amortization of share-based incentive compensation awards			152,798								152,798								152,798
Distributions to members and noncontrolling interests			(89,962	)							(89,962	)			(6,789	)			(96,751	)
Purchase of Lazard Ltd Class A common stock			(49,829	)							(49,829	)							(49,829	)
Delivery of Lazard Ltd Class A common stock in connection with share-based incentive compensation awards			(11,322	)							(11,322	)							(11,322	)
Repurchase of common membership interests from LAZ-MD Holdings			(1,810	)							(1,810	)							(1,810	)
Lazard Ltd Class A common stock issued / issuable in connection with business acquisitions and LAM Merger and related amortization			7,634								7,634								7,634
Other			(71	)							(71	)							(71	)
Balance–June 30, 2009(*)		$	193,828			$	(61,956)			$	131,872			$	13,280			$	145,152

 

(*)	Includes 122,233,664 and 122,164,041 common membership interests at January 1, 2009 and June 30, 2009, respectively. Also includes profit participation interests and two managing member interests at each such date.

 

See notes to condensed consolidated financial statements.

 

7

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

1.	ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

The accompanying condensed consolidated financial statements are those of Lazard Group LLC and its subsidiaries (collectively referred to with its subsidiaries as “Lazard Group” or the “Company”). Lazard Group is a Delaware limited liability company and is governed by an Operating Agreement dated as of May 10, 2005, as amended (the “Operating Agreement”).

 

Lazard Ltd, a Bermuda holding company, through its subsidiaries held approximately 89.0% and 74.5% of all outstanding Lazard Group common membership interests as of June 30, 2010 and December 31, 2009, respectively. Lazard Ltd, through its control of the managing members of Lazard Group, controls Lazard Group.

 

Lazard Ltd, including its indirect investment in Lazard Group, is one of the world’s preeminent financial advisory and asset management firms and has long specialized in crafting solutions to the complex financial and strategic challenges of our clients. We serve a diverse set of clients around the world, including corporations, partnerships, institutions, governments and high net worth individuals.

 

LAZ-MD Holdings LLC (“LAZ-MD Holdings”), an entity owned by Lazard Group’s current and former managing directors, held approximately 11.0% and 25.5% of all outstanding Lazard Group common membership interests as of June 30, 2010 and December 31, 2009, respectively. Additionally, LAZ-MD Holdings was the sole owner of the one issued and outstanding share of Lazard Ltd’s Class B common stock (the “Class B common stock”) which provided LAZ-MD Holdings with approximately 11.0%, and 25.5% of the voting power but no economic rights in the Company as of June 30, 2010 and December 31, 2009, respectively. Subject to certain limitations, LAZ-MD Holdings’ interests in Lazard Group are exchangeable for Lazard Ltd Class A common stock, par value $0.01 per share (“Class A common stock”).

 

Lazard Group’s principal operating activities are included in two business segments:

 

•

Financial Advisory, which includes providing advice on mergers and acquisitions (“M&A”) and strategic advisory matters, restructurings and capital structure advisory services, capital raising and other transactions, and

 

•

Asset Management, which includes the management of equity and fixed income securities, alternative investments and private equity funds.

 

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

 

LFB is a registered bank regulated by the Banque de France and its primary operations include asset and liability management for Lazard Group’s businesses in France through its money market desk and commercial banking operations, deposit taking and, to a lesser extent, financing activities and custodial oversight over assets of various clients. LFB also engages in underwritten offerings of securities in France.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements of Lazard Group have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding

 

8

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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 Group’s annual report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”). The accompanying December 31, 2009 unaudited condensed consolidated statement of financial condition data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. Although these estimates are based on management’s knowledge of current events and actions that Lazard may undertake in the future, actual results may differ materially from the estimates. The consolidated results of operations for the three month and six month periods ended June 30, 2010 are not necessarily indicative of the results to be expected for any future period or the full fiscal year. Any material events or transactions that occurred subsequent to June 30, 2010 through the date of filing of this Quarterly Report on Form 10-Q were reviewed for purposes of determining whether any adjustments or additional disclosures were required to be made to the accompanying condensed consolidated financial statements.

 

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

 

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

 

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

 

2.    RECENT ACCOUNTING DEVELOPMENTS

 

Fair Value Measurements—On April 1, 2009, the Company adopted, on a prospective basis, additional accounting guidance issued by the FASB on fair value measurements. The additional accounting guidance assists in the determination of fair value for securities or other financial assets when the volume and level of activity for such items have significantly decreased when compared with normal market activity and there is no longer sufficient frequency or volume to provide pricing information on an ongoing basis. The additional accounting guidance also assists in determining whether or not a transaction is orderly and whether or not a transaction or quoted price can be considered in the determination of fair value. Accordingly, the additional accounting guidance does not apply to quoted prices for identical assets or liabilities in active markets categorized as Level 1 in the fair value measurement hierarchy, and also requires that additional fair value disclosures be included on an

 

9

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

interim basis. See Note 5 of Notes to Condensed Consolidated Financial Statements for the additional disclosures provided pursuant to the additional accounting guidance. The adoption of additional guidance regarding fair value measurements did not materially impact the Company’s consolidated financial statements.

 

In January 2010, the FASB amended its fair value measurement disclosure guidance to require disclosure of significant transfers into and out of the Level 1 and Level 2 categories in the fair value measurement hierarchy, as well as separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. In addition, the FASB also clarified its existing fair value measurement disclosure guidance regarding the level of disaggregation required and disclosures about inputs and valuation techniques used to measure fair value. The new disclosure requirements and clarifications of existing fair value measurement disclosure guidance are effective for interim and annual reporting periods beginning after December 15, 2009, except for the requirement to provide disclosures about purchases, sales, issuances and settlements on a gross basis in the roll forward of activities in Level 3 fair value measurements, which becomes effective for interim and annual reporting periods beginning after December 15, 2010. On January 1, 2010, the Company adopted, on a prospective basis, the applicable new disclosure requirements and clarifications of existing fair value measurement disclosure guidance, which did not have a material impact on the Company’s consolidated financial statements. The Company does not anticipate that the adoption of the remaining new disclosure requirements that are effective for interim and annual reporting periods beginning after December 15, 2010 will have a material impact on its consolidated financial statements.

 

Other-Than-Temporary Impairments of Debt Securities—On April 1, 2009, the Company adopted, on a prospective basis, new accounting guidance issued by the FASB with respect to the recognition and presentation of other-than-temporary impairments pertaining to debt securities. The new accounting guidance requires greater clarity about the credit and non-credit components of debt securities that are not expected to be sold and whose fair value is below amortized cost, and also requires increased disclosures regarding expected cash flows, credit losses and an aging of securities with unrealized losses. The adoption of the new accounting guidance did not materially impact the Company’s consolidated financial statements. See Note 4 of Notes to Condensed Consolidated Financial Statements.

 

VIEs—In June 2009, the FASB amended its guidance on VIEs, which changes how a company determines whether an entity in which it is involved with is insufficiently capitalized or is not controlled through voting (or similar rights) and whether or not such entity should be consolidated. It also requires a company to provide additional disclosures about its involvement with VIEs and any significant changes in risk exposure due to that involvement. The requirements of the amended accounting guidance were to be effective for interim and annual periods beginning after November 15, 2009. On January 27, 2010, the FASB voted to defer the application of its guidance on consolidation of a reporting enterprise’s interest in an entity when certain conditions are met. This deferral, which affects interests in mutual funds, hedge funds, private equity funds and other types of funds, is effective for interim and annual periods beginning after November 15, 2009. The adoption of the amended guidance for which the deferral provisions do not apply and related disclosures did not have a material impact on the Company’s consolidated financial statements.

 

3.	RECEIVABLES—NET

 

Receivables—net is comprised of receivables from fees, banks, customers and other and related parties.

 

Receivables from banks represent those related to LFB’s short-term deposits in the inter-bank market and with the Banque de France. The level of these deposits may be driven by the level of LFB customer and bank-related interest-bearing time and demand deposits (which can fluctuate significantly on a daily basis) and by changes in asset allocation.

 

10

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Customers and other receivables at June 30, 2010 and December 31, 2009 include $2,016 and $4,466, respectively, of loans by LFB to managing directors and employees in France that are made in the ordinary course of business at market terms.

 

Receivables are stated net of an estimated allowance for doubtful accounts of $18,871 and $11,575 at June 30, 2010 and December 31, 2009, respectively, for past due amounts and for specific accounts deemed uncollectible, which may include situations where a fee is in dispute. The Company recorded bad debt expense (recoveries) of $2,322 and $9,190 for the three month and six month periods ended June 30, 2010, respectively, and $4,170 and $3,622 for the three month and six month periods ended June 30, 2009, respectively. In addition, the Company recorded charge-offs, foreign currency translation and other adjustments, which resulted in a net decrease (increase) to the allowance for doubtful accounts of $937 and $1,894 for the three month and six month periods ended June 30, 2010 and $(150) and $4,495 for the three month and six month periods ended June 30, 2009, respectively. At June 30, 2010 and December 31, 2009, the Company had $26,090 and $14,150, respectively, of receivables deemed past due or uncollectible.

 

4.	INVESTMENTS

 

The Company’s investments and securities sold, not yet purchased, consist of the following at June 30, 2010 and December 31, 2009:

 

		June 30, 2010			December  31, 2009
Debt:
U.S. Government and agencies		$	147,881		$	147,507
Other:
Non-U.S. Governments and agencies			38,119			43,501
U.S. states and municipals			12,797			15,728
Corporates			169,023			254,113
			219,939			313,342
Total debt securities			367,820			460,849
Equities			73,978			82,442
Other:
Interest in LAM alternative asset management funds:
General Partner (“GP”) interests owned			71,604			50,080
GP interests consolidated but not owned			14,126			13,038
Private equity:
Investments owned			94,303			102,983
Investments consolidated but not owned			44,106			35,743
Equity method			11,266			62,558
			235,405			264,402
Total investments			677,203			807,693
Less:
Debt at amortized cost			136,045			136,630
Equity method investments			11,266			62,558
Investments, at fair value		$	529,892		$	608,505
Securities sold, not yet purchased, at fair value (included in “other liabilities”)		$	2,640		$	5,179

 

11

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Debt investments at June 30, 2010 and December 31, 2009 were categorized as follows:

 

		June 30, 2010			December 31, 2009
Trading securities:
U.S. Government and agencies		$	21,379		$	21,094
Non-U.S. Government and agencies			28,576			33,284
U.S. states and municipals			12,797			15,728
Corporates			480			450
			63,232			70,556
Available-for-sale securities:
Corporates			168,543			253,663
Held-to-maturity securities:
U.S. Government and agencies			126,502			126,413
Non-U.S. Government and agencies			9,543			10,217
			136,045			136,630
Total debt securities		$	367,820		$	460,849

 

Substantially all of the corporate and non-U.S. Government and agency debt securities are held by LFB and primarily consist of fixed and floating rate European corporate and French government debt securities.

 

The fair value and amortized cost basis pertaining to debt securities classified as “available-for-sale” at June 30, 2010, by maturity date/first call date, are as follows:

 

Maturity Date/First Call Date		Fair Value			Amortized Cost Basis
Within one year		$	19,789		$	19,613
After 1 year through 5 years			84,042			87,575
After 5 years through 10 years			51,656			65,003
After 10 years			13,056			13,390
			$168,543		$	185,581

 

Debt investments include corporate perpetual securities that are callable. Such securities are listed in the table above based on their respective first call dates. All other “available-for-sale” securities are listed in the table based on their contractual maturities.

 

Debt securities classified as “available-for-sale” at June 30, 2010 and December 31, 2009 that are in an unrealized loss position are as follows:

 

June 30, 2010

December 31, 2009

Securities in a Continuous Loss Position for Less than 12 Months

Securities in a Continuous Loss Position for 12 Months or Longer

Securities in a Continuous Loss Position for Less than 12 Months

Securities in a Continuous Loss Position for 12 Months or Longer

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

Fair Value

Unrealized Loss

$44,639

$811

$69,548

$17,080

$ -

$ -

$166,094

$21,381

 

12

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

LFB does not intend to sell its debt securities classified as “available-for-sale” that are in an unrealized loss position, nor is it more likely than not that LFB will be required to sell such debt securities before their anticipated recovery. In addition, no credit loss was required to be recognized during the three month and six month periods ended June 30, 2010 based on the qualitative and quantitative analysis performed by the Company. During the three month and six month periods ended June 30, 2009, an other-than-temporary impairment charge of $916 was recognized in “other-revenue” on the condensed consolidated statements of operations representing the credit loss component of debt securities whose fair value was below amortized cost during the second quarter of 2009.

 

The fair value and amortized cost basis pertaining to debt securities classified as “held-to-maturity” at June 30, 2010, by maturity date, are as follows:

 

Maturity Date		Fair Value			Amortized Cost Basis
After 1 year through 5 years		$	140,991		$	136,045

 

There were no debt securities classified as “held-to-maturity” at June 30, 2010 and December 31, 2009 that were in an unrecognized loss position.

 

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

 

In 2008, LFNY was a party to a Prime Brokerage Agreement with Lehman Brothers Inc. (“LBI”) for certain accounts involving investment strategies managed by LAM. On September 9, 2008, LAM requested a transfer of such accounts, of which $11,368 was not received. On September 15, 2008, Lehman Brothers Holdings, Inc., the ultimate parent company in the Lehman Group, filed for protection under Chapter 11 of the United States Bankruptcy Code and a number of Lehman Group entities in the UK entered into administration proceedings under the Insolvency Act 1986. In addition, the Securities Investor Protection Corporation (“SIPC”) commenced liquidation proceedings on September 19, 2008 pursuant to the Securities Investor Protection Act of 1970, as amended, with respect to LBI. The Chapter 11 filing, Insolvency Act Administration and SIPC proceedings exposed Lazard to possible loss due to counterparty credit and other risk. During 2008, the Company provided for the entire amount of such possible loss, and, through June 30, 2010, no amounts have been recovered by the Company. We continue to actively seek recovery of all amounts.

 

Interests in LAM alternative asset management funds represent (i) GP interests owned by Lazard in LAM-managed alternative asset management funds and (ii) GP interests consolidated by the Company pertaining to noncontrolling interests in LAM alternative asset management funds. Such noncontrolling interests in LAM alternative asset management funds, which represent GP interests held directly by certain of our LAM managing directors or employees of the Company, are deemed to be controlled by, and therefore consolidated by, the Company in accordance with U.S. GAAP. Noncontrolling interests are presented within “members’ equity” on the condensed consolidated statements of financial condition (see Note 12 of Notes to Condensed Consolidated Financial Statements).

 

Private equity investments owned by Lazard are primarily comprised of investments in private equity funds and direct private equity interests. Such investments primarily include (i) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small- to mid-cap European companies; (ii) Corporate Partners II

 

13

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Limited (“CP II”), a private equity fund targeting significant noncontrolling-stake investments in established public and private companies and (iii) Lazard Senior Housing Partners LP (“Senior Housing”), which acquires companies and assets in the senior housing, extended-stay hotel and shopping center sectors. Senior Housing is managed by Lazard Alternative Investments Holdings LLC (“LAI”), a subsidiary of LFCM Holdings LLC (“LFCM Holdings”). LAI owns and operates the alternative investments of LFCM Holdings. CP II was managed by a subsidiary of LAI until February 16, 2009. Effective February 17, 2009, ownership and control of CP II was transferred to the investment professionals who manage CP II.

 

Private equity investments consolidated but not owned by Lazard are related solely to Lazard’s establishment of a private equity business with the Edgewater Funds (“Edgewater”), a Chicago-based private equity firm, through the acquisition of Edgewater’s management vehicles on July 15, 2009. The acquisition was structured as a purchase by Lazard of interests in a holding company that owns interests in the general partner and management company entities of the current Edgewater private equity funds (the “Edgewater Acquisition”). Edgewater is focused on buyout and growth equity investments in middle market companies. The economic interests that the Company does not own are owned by the current leadership team and other investors in the Edgewater management vehicles. See Note 8 of Notes to Condensed Consolidated Financial Statements.

 

Equity method investments at December 31, 2009 primarily consisted of our investment in Sapphire Industrials Corp. (“Sapphire”). On January 24, 2008, Sapphire, a then newly-organized special purpose acquisition company formed by the Company, completed an initial public offering (the “Sapphire IPO”). Sapphire was formed for the purpose of effecting a business combination within a 24-month period (the “Business Combination”) and net proceeds from the Sapphire IPO were placed in a trust account by Sapphire (the “Trust Account”) pending consummation of the Business Combination. In connection with the Sapphire IPO, the Company purchased warrants from Sapphire for a total purchase price of $12,500 and Sapphire common stock for an aggregate purchase price of $50,000.

 

On January 6, 2010, Sapphire announced that it had not completed the Business Combination and it would dissolve and distribute the funds in the Trust Account to all its public shareholders, to the extent they were holders of shares issued in the Sapphire IPO. Pursuant to such dissolution, on January 26, 2010, Sapphire distributed an initial distribution to the Company aggregating $50,319. All Sapphire warrants expired without value. During the fourth quarter of 2009, the Company recognized a loss of approximately $13,000 principally related to its investment in warrants of Sapphire.

 

The Company recognized gross investment gains and losses on investments measured at fair value for the three month and six month periods ended June 30, 2010 and 2009, in “revenue-other” on its condensed consolidated statement of operations as follows:

 

		Three Month Period Ended June 30,						Six Month Period Ended June 30,
		2010			2009			2010			2009
Gross investment gains		$	3,724		$	18,648		$	13,482		$	21,871
Gross investment losses		$	6,368		$	–		$	11,129		$	6,312

 

14

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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

 

		Three Month Period Ended June 30,						Six Month Period Ended June 30,
		2010			2009			2010			2009
Gross unrealized investment gains		$	–		$	1,549		$	101		$	719
Gross unrealized investment losses		$	1,497		$	–		$	1,325		$	12

 

In addition, within “accumulated other comprehensive income (loss), net of tax” (“AOCI”), the Company recorded gross pre-tax unrealized investment gains of $5,456 and $18,969 during the six month periods ended June 30, 2010 and 2009, respectively, and gross pre-tax unrealized investment losses of $6,013 and $2,893 during the six month periods ended June 30, 2010 and 2009, respectively pertaining to debt securities held at LFB that are designated as “available-for-sale.” The average cost basis is utilized for purposes of calculating realized investment gains and losses.

 

5.	FAIR VALUE MEASUREMENTS

 

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

 

Level 1.

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

 

Level 2.

Assets and liabilities whose values are based on quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in non-active markets or inputs other than quoted prices that are directly observable or derived principally from or corroborated by market data.

 

Level 3.

Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. Items included in Level 3 include securities or other financial assets whose volume and level of activity have significantly decreased when compared with normal market activity and there is no longer sufficient frequency or volume to provide pricing information on an ongoing basis.

 

Most of the Company’s investments in corporate debt securities are considered Level 2 investments with such fair value based on observable data, principally broker quotes as provided by external pricing services. The Company’s other debt securities at fair value are considered Level 1 investments with such fair value based on unadjusted quoted prices in active markets.

 

The fair value of equities is principally classified as Level 1 or Level 2 as follows: marketable equity securities are classified as Level 1 and are valued based on the last trade price on the primary exchange for that security; public asset management funds are classified as Level 1 and are valued based on the reported closing price for the fund; and investments in private asset management funds are classified as Level 2 and are primarily valued based on information provided by fund managers and, secondarily, from external pricing services to the extent managed by LAM.

 

The fair value of interests in LAM alternative asset management funds is classified as Level 2 and is based on information provided by external pricing services.

 

15

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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

 

Where information reported is based on broker quotes, the Company generally obtains one quote/price per instrument. In some cases, quotes related to corporate bonds obtained through external pricing services represent the average of several broker quotes.

 

Where information reported is based on data received from fund managers or from external pricing services, the Company reviews such information to ascertain at which level within the fair value hierarchy to classify the investment.

 

The following tables present the categorization of investments and certain other assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009 into a three-level fair value hierarchy in accordance with fair value measurement disclosure requirements:

 

		As of June 30, 2010
		Level 1			Level 2			Level 3			Total
Assets:
Investments:
Debt (excluding securities at amortized cost)		$	63,232		$	168,543		$	-		$	231,775
Equities			56,407			17,272			299			73,978
Other (excluding equity method investments):
Interest in LAM alternative asset management funds:
GP interests owned			-			71,604			-			71,604
GP interests consolidated but not owned			-			14,126			-			14,126
Private equity:
Investments owned			-			-			94,303			94,303
Investments consolidated but not owned			-			-			44,106			44,106
Derivatives			-			6,186			-			6,186
Total Assets		$	119,639		$	277,731		$	138,708		$	536,078
Liabilities:
Securities sold, not yet purchased		$	2,640		$	-		$	-		$	2,640
Derivatives			-			16,709			-			16,709
Total Liabilities		$	2,640		$	16,709		$	-		$	19,349

 

16

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

		As of December 31, 2009
		Level 1			Level 2			Level 3			Total
Assets:
Investments:
Debt (excluding securities at amortized cost)		$	70,556		$	253,663		$	-		$	324,219
Equities			65,932			16,205			305			82,442
Other (excluding equity method investments):
Interest in LAM alternative asset management funds:
GP interests owned			-			50,080			-			50,080
GP interests consolidated but not owned			-			13,038			-			13,038
Private equity:
Investments owned			-			2,812			100,171			102,983
Investments consolidated but not owned			-			-			35,743			35,743
Derivatives			5			916			-			921
Total Assets		$	136,493		$	336,714		$	136,219		$	609,426
Liabilities:
Securities sold, not yet purchased		$	5,179		$	-		$	-		$	5,179
Derivatives			-			17,383			-			17,383
Total Liabilities		$	5,179		$	17,383		$	-		$	22,562

 

There were no transfers into and out of the Level 1, 2 and 3 categories in the fair value measurement hierarchy for the three month and six month periods ended June 30, 2010.

 

The following tables provide a summary of changes in fair value of the Company’s Level 3 assets for the three month and six month periods ended June 30, 2010 and 2009:

 

		Three Months Ended June 30, 2010
		Beginning Balance			Net  Unrealized/ Realized Gains (Losses) Included In Revenue-Other				Net Purchases, Issuances and Settlements/ Acquisitions			Foreign Currency Translation Adjustments				Ending Balance
Investments:
Equities		$	298		$	(4	)		$	5		$	-			$	299
Private equity:
Investments owned			98,037			20				-			(3,754	)			94,303
Investments consolidated but not owned			38,227			1,515				4,364			-				44,106
Total Level 3 Assets		$	136,562		$	1,531			$	4,369		$	(3,754	)		$	138,708

 

17

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

		Three Months Ended June 30, 2009
		Beginning Balance			Net Unrealized/ Realized Gains (Losses) Included In Revenue-Other				Net Purchases, Issuances and Settlements/ Acquisitions				Foreign Currency Translation Adjustments				Ending Balance
Investments:
Equities		$	261		$	(5	)		$	36			$	5			$	297
Private equity investments owned			86,324			(127	)			4,201				3,132				93,530
Total Level 3 Assets		$	86,585		$	(132	)		$	4,237			$	3,137			$	93,827
		Six Months Ended June 30, 2010
		Beginning Balance			Net  Unrealized/ Realized Gains (Losses) Included In Revenue-Other				Net Purchases, Issuances and Settlements/ Acquisitions				Foreign Currency Translation Adjustments				Ending Balance
Investments:
Equities		$	305		$	(12	)		$	6			$	-			$	299
Private equity:
Investments owned			100,171			754				(3	)			(6,619	)			94,303
Investments consolidated but not owned			35,743			3,999				4,364				-				44,106
Total Level 3 Assets		$	136,219		$	4,741			$	4,367			$	(6,619	)		$	138,708
		Six Months Ended June 30, 2009
		Beginning Balance			Net  Unrealized/ Realized Gains (Losses) Included In Revenue-Other				Net Purchases, Issuances and Settlements/ Acquisitions				Foreign Currency Translation Adjustments				Ending Balance
Investments:
Equities		$	2,453		$	(5	)		$	(2,056	)		$	(95	)		$	297
Private equity investments owned			83,931			(108	)			8,613				1,094				93,530
Total Level 3 Assets		$	86,384		$	(113	)		$	6,557			$	999			$	93,827

 

There were no realized gains or losses included in income for the three month and six month periods ended June 30, 2010 with respect to Level 3 assets. There were net realized gains of $21 included in income for the three month and six month periods ended June 30, 2009 with respect to such assets.

 

6.	DERIVATIVES

 

The Company enters into forward foreign currency exchange rate contracts, interest rate swaps, interest rate futures, equity swaps and other derivative contracts to hedge exposures to fluctuations in interest rates, currency exchange rates and equity markets. The Company reports its derivative instruments separately as assets and liabilities unless a legal right of set-off exists under a master netting agreement enforceable by law. The Company’s derivative instruments are recorded at their fair value, and are included in “other assets” and “other liabilities” on the consolidated statements of financial condition. Except for derivatives hedging

 

18

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

“available-for-sale” securities, the Company elected to not apply hedge accounting to its other derivative instruments held. Gains and losses on the Company’s derivatives not designated as hedging instruments, as well as gains and losses on derivatives accounted for as fair value hedges, are included in “interest income” and “interest expense”, respectively, or “revenue-other”, depending on the nature of the underlying item, on the consolidated statements of operations. Furthermore, with respect to derivatives designated as fair value hedges, the hedged item is required to be adjusted for changes in fair value of the risk being hedged, with such adjustment accounted for in the consolidated statements of operations.

 

The table below presents the fair values of the Company’s derivative assets and liabilities reported within “other assets” and “other liabilities” on the accompanying condensed consolidated statements of financial condition as of June 30, 2010 and December 31, 2009:

 

		Designated as Hedging Instruments						Not Designated as Hedging Instruments						Total
		June 30, 2010			December 31, 2009			June 30, 2010			December 31, 2009			June 30, 2010			December 31, 2009
Derivative Assets:
Forward foreign currency exchange rate contracts		$	-		$	-		$	5,357			$836		$	5,357			$836
Interest rate swaps			-			-			61			80			61			80
Equity swaps and other			-			-			768			5			768			5
		$	-		$	-		$	6,186			$921		$	6,186			$921
Derivative Liabilities:
Forward foreign currency exchange rate contracts		$	-		$	-		$	2,314		$	2,213		$	2,314		$	2,213
Interest rate swaps			13,821			14,147			3			56			13,824			14,203
Equity swaps			-			-			571			967			571			967
		$	13,821		$	14,147		$	2,888		$	3,236		$	16,709		$	17,383

 

Gains (losses) with respect to derivatives not designated as hedging instruments on the accompanying condensed consolidated statements of operations for the three month and six month periods ended June 30, 2010 and 2009 (predominantly reflected in “revenue-other”), by type of derivative, were as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010			2009
Forward foreign currency exchange rate contracts		$	7,133			$	3,482			$	12,351		$	3,650
Interest rate swaps			(10	)			344				34			482
Equity swaps and other			5,382				(7,145	)			4,050			(3,263	)
		$	12,505			$	(3,319	)		$	16,435		$	869

 

Derivatives designated as hedging instruments relate to interest rate swaps that hedge “available-for-sale” securities and are being accounted for as fair value hedges. For the three month and six month periods ended June 30, 2010, the Company recognized net losses pertaining to interest rate swaps of $1,765 and $3,756, respectively, and for the three month and six month periods ended June 30, 2009, recognized net gains (losses) of $3,143 and $(190), respectively, with respect to such interest rate swaps. These gains (losses) were substantially offset by amounts recognized on the hedged risk portion of such “available-for-sale” securities.

 

19

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

7.	LAM MERGER TRANSACTION

 

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

 

The aggregate non-contingent consideration relating to the equity interests of LAM held by present and former employees of LAM and its subsidiaries (the “Transaction Consideration”) consists of (i) cash payments made from the closing of the LAM Merger through January 2, 2009 of approximately $60,100, (ii) a cash payment on October 31, 2011 of approximately $90,300 and (iii) an issuance on October 31, 2011 of 2,201,457 shares of Lazard Ltd’s Class A common stock (plus additional shares of Class A common stock in an amount determined by reference to the cash dividends paid on Class A common stock since the closing of the LAM Merger), subject, in the case of clauses (ii) and (iii) and with respect to certain present employees of LAM and its subsidiaries, to delayed payment/issuance until the eighth anniversary of the closing of the LAM Merger if the applicable employee is no longer employed by Lazard or its affiliates on October 31, 2011, subject to certain exceptions. The merger agreement also generally provides that if there is a change in control of Lazard Ltd or a sale of LAM, any and all of the Transaction Consideration will be payable as of the date of such change in control. The related liabilities for the present value of the unpaid cash consideration have been recorded in the accompanying condensed consolidated statements of financial condition in “accrued compensation and benefits” and “other liabilities”, and amounted to $14,754 and $68,145, respectively, as of June 30, 2010 and $14,252 and $65,308, respectively, as of December 31, 2009.

 

In connection with the LAM Merger, Lazard Group recorded a related party payable to subsidiaries of Lazard Ltd of $64,305 at both June 30, 2010 and December 31, 2009, which corresponds to the increase in stockholders’ equity recorded by Lazard Ltd for such merger (see Note 17 of Notes to Condensed Consolidated Financial Statements).

 

8.	BUSINESS ACQUISITIONS

 

On July 15, 2009, the Company established a private equity business with Edgewater, a private equity firm based in Chicago, Illinois, through the Edgewater Acquisition. Following such acquisition, Edgewater’s current leadership team retained a substantial economic interest in such entities. Edgewater primarily manages two middle market funds, Edgewater Growth Capital Partners, L.P. and Edgewater Growth Capital Partners II, L.P. (the “underlying funds”), with an aggregate of approximately $700,000 of capital raised. The acquisition was structured as a purchase by Lazard Group of interests in a holding company that in turn owns interests in the general partner and management company entities of the current Edgewater private equity funds.

 

The aggregate fair value of the consideration recognized by the Company at the acquisition date was $61,624. Such consideration consisted of (i) a one-time cash payment, (ii) 1,142,857 shares of Class A common stock (the “Initial Shares”) and (iii) up to 1,142,857 additional shares of Class A common stock subject to earnout criteria and payable over time (the “Earnout Shares”). The Initial Shares are subject to transfer restrictions and forfeiture provisions that lapse only upon the achievement of certain performance thresholds for the next Edgewater fund that must be met by July 15, 2011. The Earnout Shares will be issued only if certain performance thresholds for the next two Edgewater funds are met.

 

20

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The Edgewater Acquisition was accounted for under the acquisition method of accounting, whereby the results of the acquired business are included in our consolidated financial results from July 15, 2009, the effective date of the acquisition. As a result of the acquisition, we recorded net tangible assets, identifiable intangible assets and goodwill of $53,635 (consisting primarily of Edgewater’s investments in their underlying funds and cash), $56,200 and $61,630, respectively, which include amounts for Edgewater’s noncontrolling interests held (whose economic interests approximate 50%) aggregating $109,841. Goodwill pertaining to this acquisition is deductible for income tax purposes. See Note 9 of Notes to Condensed Consolidated Financial Statements for additional information relating to goodwill and other intangible assets. The operating results relating to Edgewater, which have not been material, are included in the Company’s Asset Management segment.

 

In 2007, the Company acquired Goldsmith, Agio, Helms & Lynner, LLC (“GAHL”), a Minneapolis-based investment bank specializing in financial advisory services to mid-sized private companies, and Carnegie, Wylie & Company (Holdings) PTY LTD (“CWC”), an Australia-based financial advisory firm. These purchases were affected through an exchange of a combination of cash, Class A common stock, and by Lazard Ltd issuing shares of non-participating convertible Series A and Series B preferred stock, which are or were each convertible into Class A common stock. In connection with such acquisitions, as of both June 30, 2010 and December 31, 2009, 662,015 shares of Class A common stock were issuable on a non-contingent basis. Additionally, at both June 30, 2010 and December 31, 2009, 7,293 shares of Series A preferred stock were convertible into Class A common shares on a non-contingent basis, with the number of Class A common shares dependent, in part, upon future prices of the Class A common stock. At both June 30, 2010 and December 31, 2009, 948,631 shares of Class A common stock were contingently issuable and, at both such dates, 19,590 shares of Series A preferred stock were contingently convertible into shares of Class A common stock, dependent upon the future performance of GAHL and CWC. The Class A common stock described above related to the GAHL and CWC acquisitions is issuable over multi-year periods.

 

In connection with Lazard Group’s acquisitions of GAHL and Edgewater’s management vehicles, as well as Lazard Ltd’s acquisition of CWC and subsequent contribution of CWC to Lazard Group, Lazard Group recorded related party payables of $39,820 at both June 30, 2010 and December 31, 2009 to subsidiaries of Lazard Ltd (see Note 17 of Notes to the Condensed Consolidated Financial Statements).

 

9.    GOODWILL AND OTHER INTANGIBLE ASSETS

 

The components of goodwill and other intangible assets at June 30, 2010 and December 31, 2009 are presented below:

 

		June 30, 2010			December 31, 2009
Goodwill		$	254,295		$	261,703
Other intangible assets (net of accumulated amortization)			52,538			56,077
		$	306,833		$	317,780

 

At June 30, 2010 and December 31, 2009, goodwill of $192,665 and $200,073, respectively, was attributable to the Company’s Financial Advisory segment and, at each such date, $61,630 of goodwill was attributable to the Company’s Asset Management segment.

 

21

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Changes in the carrying amount of goodwill for the six month periods ended June 30, 2010 and 2009 are as follows:

 

		Six Months Ended June 30,
		2010				2009
Balance, January 1		$	261,703			$	170,277
Business acquisitions, including additional contingent consideration earned			-				2,779
Foreign currency translation adjustments			(7,408	)			12,378
Balance, June 30		$	254,295			$	185,434

 

The gross cost and accumulated amortization of other intangible assets as of June 30, 2010 and December 31, 2009, by major intangible asset category, are as follows:

 

		June 30, 2010									December 31, 2009
		Gross Cost			Accumulated Amortization			Net Carrying Amount			Gross Cost			Accumulated Amortization			Net Carrying Amount
Success/performance fees		$	30,740		$	-		$	30,740		$	30,740		$	-		$	30,740
Management fees, customer relationships and non-compete agreements			32,477			10,679			21,798			32,477			7,140			25,337
		$	63,217		$	10,679		$	52,538		$	63,217		$	7,140		$	56,077

 

Amortization expense of intangible assets for the three month and six month periods ended June 30, 2010 was $1,769 and $3,539, respectively, and for the three month and six month periods ended June 30, 2009 was $344 and $688, respectively. Estimated future amortization expense is as follows:

 

Year Ending December 31,		Amortization Expense (a)
2010 (July 1 through December 31)		$	3,449
2011			5,718
2012			6,302
2013			13,022
2014			10,083
Thereafter			13,964
Total amortization expense		$	52,538

 

(a)

Approximately 47% of intangible asset amortization is attributable to a noncontrolling interest.

 

22

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

10.	SENIOR AND SUBORDINATED DEBT

 

Senior Debt—Senior debt is comprised of the following as of June 30, 2010 and December 31, 2009:

 

		Initial Principal Amount			Maturity Date		Annual Interest Rate			Outstanding As Of
										June 30, 2010			December  31, 2009
Lazard Group 7.125% Senior Notes (a)		$	550,000		5/15/15		7.125	%		$	528,500		$	538,500
Lazard Group 6.85% Senior Notes (b)			600,000		6/15/17		6.85	%			548,350			548,350
Lazard Group Credit Facility			150,000		4/29/13		2.15	%			-			-
Total										$	1,076,850		$	1,086,850

 

(a)

During the six month period ended June 30, 2010, the Company repurchased $10,000 principal amount of the 7.125% Senior Notes at a cost, excluding accrued interest, of $10,375 and, after the write-off of applicable unamortized debt issuance costs of $49, the Company recognized a pre-tax loss of $424.

(b)	During the six month period ended June 30, 2009, the Company repurchased $900 principal amount of the 6.85% Senior Notes at a cost, excluding accrued interest, of $635 and, after the write-off of unamortized debt issuance costs of $7, recognized a pre-tax gain of $258.

 

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

 

On April 29, 2010, Lazard Group entered into a $150,000, three-year senior revolving credit facility with a group of lenders (the “Credit Facility”). The Credit Facility replaced the prior revolving credit facility, which was terminated as a condition to effectiveness of the Credit Facility. The Credit Facility contains customary terms and conditions substantially similar to the prior revolving credit facility, including certain financial covenants. In addition, the Credit Facility, the indenture and supplemental indentures relating to Lazard Group’s senior notes as well as its subordinated convertible note contain certain covenants (none of which relate to financial condition), events of default and other customary provisions, including a customary make-whole provision in the event of early redemption where applicable. As of June 30, 2010, the Company was in compliance with all of these provisions. All of the Company’s senior and subordinated debt obligations are unsecured.

 

As of June 30, 2010, the Company had approximately $259,000 in unused lines of credit available to it, including the Credit Facility, and approximately $50,000 and $39,000 of unused lines of credit available to LFB and Edgewater, respectively. In addition, LFB has access to the Eurosystem Covered Bond Purchase Program of the Banque de France.

 

The Company’s senior and subordinated debt are recorded at historical amounts. At June 30, 2010 and December 31, 2009, the fair value of the Company’s senior and subordinated debt was $1,231,581 and $1,255,254, respectively, and exceeded the aggregate carrying value by $4,731 and $18,404, respectively. The fair value of the Company’s senior and subordinated debt was estimated using a discounted cash flow analysis based on the Company’s current borrowing rates for similar types of borrowing arrangements or based on market quotations where available.

 

23

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

11.    COMMITMENTS AND CONTINGENCIES

 

Leases—Lazard 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 Lazard’s consolidated financial position, results of operations or cash flows.

 

Guarantees—On March 12, 2007, Lazard entered into an agreement to guarantee to a foreign tax jurisdiction the deferred payment of certain income tax obligations and potential tax penalties of certain managing directors of Lazard Group, which, as of June 30, 2010, aggregate to $4,454. These managing directors have pledged their interests in LAZ-MD Holdings LLC (which are exchangeable into shares of Class A common stock) and unsold shares of Class A common stock received in exchange for such interests, with the value of such collateral in each case exceeding the guarantee provided by Lazard.

 

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 June 30, 2010, LFB had $5,171 of such indemnifications and held $3,577 of collateral/counter-guarantees to secure these commitments. The Company believes the likelihood of loss with respect to these indemnities is remote. Accordingly, no liability is recorded in the consolidated statement of financial condition.

 

Private Equity Funding Commitments—At June 30, 2010, the principal unfunded commitments by the Company for capital contributions to private equity investment funds related to CP II, in an amount not to exceed $7,442 for potential “follow-on investments” and/or for CP II expenses through the earlier of (i) February 25, 2017 or (ii) the liquidation of the fund.

 

Other Commitments—In the normal course of business, LFB enters into commitments to extend credit, predominantly at variable interest rates. Outstanding commitments at June 30, 2010 were $29,390. Such commitments have varying expiration dates and are fully collateralized and generally contain requirements for the counterparty to maintain a minimum collateral level. These commitments may not represent future cash requirements as they may expire without being drawn upon.

 

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

 

The Company has various other contractual commitments arising in the ordinary course of business. In the opinion of management, the consummation of such commitments will not have a material adverse effect on the Company’s consolidated financial position or results of operations. 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.

 

Legal—The Company’s businesses, as well as the financial services industry generally, are subject to extensive regulation throughout the world. The Company is involved from time to time in a number of judicial, regulatory and arbitration proceedings and inquiries concerning matters arising in connection with the conduct of our businesses, including proceedings initiated by former employees alleging wrongful termination. The Company reviews such matters on a case-by-case basis and establishes any required reserves if a loss is probable and the amount of such loss can be reasonably estimated. Management believes, based on currently available

 

24

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

information, that the results of such matters, in the aggregate, will not have a material adverse effect on its financial condition but might be material to its operating results or cash flows for any particular period, depending upon the operating results for such period.

 

12.	MEMBERS’ EQUITY

 

At June 30, 2010 and 2009, Lazard Group common membership interests held by subsidiaries of Lazard Ltd amounted to 89.0% and 71.2%, respectively, and by LAZ-MD Holdings amounted to 11.0% and 28.8%, respectively. Pursuant to provisions of its Operating Agreement, Lazard Group distributions in respect of its common membership interests are allocated to the holders of such interests on a pro rata basis. Such distributions represent amounts necessary to fund (i) any dividends Lazard Ltd may declare on its Class A common stock and (ii) tax distributions in respect of income taxes that Lazard Ltd’s subsidiaries and the members of LAZ-MD Holdings incur as a result of holding Lazard Group common membership interests. During the six month periods ended June 30, 2010 and 2009, Lazard Group distributed $7,103 and $9,163, respectively, to LAZ-MD Holdings and $23,022 and $13,439, respectively, to the subsidiaries of Lazard Ltd, which latter amounts were used by Lazard Ltd to pay dividends to third-party stockholders of its Class A common stock. In addition, during the six month period ended June 30, 2009, Lazard Group made tax distributions of $67,360, including $25,316 paid to LAZ-MD Holdings and $42,044 paid to subsidiaries of Lazard Ltd. During the six month period ended June 30, 2010, Lazard Group made no such tax distributions.

 

Issuance of Class A Common Shares—During the first quarter of 2010, 3,000,000 shares of Class A common stock were newly issued by Lazard Ltd to Lazard Group in connection with the settlement of vested restricted stock unit grants (“RSUs”). Such shares were authorized as part of the 25,000,000 shares of Class A common stock that may be issued under the Lazard Ltd 2005 Equity Incentive Plan (the “2005 Plan”).

 

Secondary Offerings—In March 2010, pursuant to a Prospectus Supplement dated March 16, 2010, certain selling shareholders of Lazard Ltd (which include current and former managing directors of Lazard and a former executive officer) and their permitted transferees, sold 7,869,311 shares of Class A common stock (including (i) 7,262 shares of Class A common stock previously received upon the exchange of a like number of LAZ-MD Holdings exchangeable interests, (ii) 6,180,639 shares of Class A common stock received upon a simultaneous exchange of a like number of LAZ-MD Holdings exchangeable interests (including 5,958,000 shares held by the Estate of Lazard’s former Chairman and Chief Executive Officer and related trusts (collectively, the “Estate”) and (iii) 1,681,410 shares held by the Estate) at a price of $35.90 per share (collectively, the “2010 Secondary Offering”)).

 

In June 2009, pursuant to a Prospectus Supplement dated June 2, 2009, certain current and former managing directors of Lazard (including certain of our executive officers) and their permitted transferees (the “2009 Selling Shareholders”) sold 4,000,000 shares of Class A common stock at a price of $26.00 per share (the “2009 Secondary Offering”). Separately, in connection with the 2009 Secondary Offering, Lazard Group agreed to purchase from the 2009 Selling Shareholders 1,700,000 shares of Class A common stock for an aggregate cost of $44,200 ($26.00 per share), with such purchase being part of the share repurchase program in effect during 2009. In the aggregate, the 2009 Selling Shareholders sold a total of 5,700,000 shares of Class A common stock (including 2,110,754 shares of Class A common stock previously received upon the exchange of a like number of LAZ-MD Holdings exchangeable interests and 3,589,246 shares of Class A common stock received upon a simultaneous exchange of a like number of LAZ-MD Holdings exchangeable interests).

 

Lazard Ltd did not receive any net proceeds from the sales of Class A common stock from the 2010 Secondary Offering or the 2009 Secondary Offering.

 

25

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Exchange of Lazard Group Common Membership Interests—In addition to the simultaneous exchanges that occurred in connection with the secondary offerings discussed above, during the six month periods ended June 30, 2010 and 2009, Lazard Ltd issued 11,465,108 and 7,077,741 shares of Class A common stock, respectively, in connection with the exchange of a like number of common membership interests of Lazard Group (received from members of LAZ-MD Holdings in exchange for a like number of LAZ-MD Holdings exchangeable interests).

 

Share Repurchase Program

 

On January 27, 2010, the Board of Directors of Lazard Ltd authorized, on a cumulative basis, the repurchase of up to $200,000 in aggregate cost of its Class A common stock and Lazard Group common membership interests through December 31, 2011. The Company expects that the share repurchase program, with respect to the Class A common stock, will continue to be used primarily to offset a portion of the shares that have been or will be issued under the 2005 Plan and the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”). The Company’s prior share repurchase program expired on December 31, 2009, with $62,542 of the initial $500,000 repurchase authorization unused. Pursuant to such authorizations, purchases have been made in the open market or through privately negotiated transactions, and since inception of the program in February 2006 through June 30, 2010, Lazard Group purchased an aggregate of 12,799,717 shares of Class A common stock at an average price of $33.01 per share, and an aggregate of 1,156,675 Lazard Group common membership interests at an average price of $32.58 per common membership interest. As a result of Lazard Group’s delivery of shares of Class A common stock for the settlement of vested RSUs and deferred stock unit grants (“DSUs”) during the three year period ended December 31, 2009 and the six month period ended June 30, 2010 and the incentive plan share award of restricted Class A common stock granted during the second quarter of 2010, there were 3,825,124 and 5,850,775 shares of Class A common stock held by Lazard Group at June 30, 2010 and December 31, 2009, respectively. Such Class A common shares are reported, at cost, as a reduction of members’ equity within the condensed consolidated statements of financial condition.

 

As of June 30, 2010, $177,267 of the $200,000 share repurchase authorization remained available under the share repurchase program. In addition, under the terms of the 2005 Plan and the 2008 Plan, upon the vesting of RSUs, shares of Class A common stock may be withheld by the Company to cover estimated income taxes. During the six month period ended June 30, 2010, the Company withheld 1,288,331 shares to cover estimated taxes upon the vesting of 6,952,061 RSUs (see Note 13 of Notes to Condensed Consolidated Financial Statements).

 

Accumulated Other Comprehensive Income (Loss), Net of Tax

 

The components of AOCI at June 30, 2010 and December 31, 2009 are as follows:

 

		June 30, 2010				December 31, 2009
Currency translation adjustments		$	(22,440	)		$	35,890
Interest rate hedge			(5,235	)			(5,774	)
Available-for-sale securities			(11,117	)			(12,630	)
Employee benefit plans			(78,433	)			(76,079	)
Total AOCI			(117,225	)			(58,593	)
Less amount attributable to noncontrolling interests			189				199
Total Lazard Group AOCI		$	(117,414	)		$	(58,792	)

 

26

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Noncontrolling Interests

 

Noncontrolling interests represent interests in various LAM-related GP interests and Edgewater’s management vehicles that the Company is deemed to control but does not own.

 

The tables below summarize net income (loss) attributable to noncontrolling interests for the three month and six month periods ended June 30, 2010 and 2009 and noncontrolling interests as of June 30, 2010 and December 31, 2009 in the Company’s condensed consolidated financial statements:

 

		Net Income (Loss) Attributable To Noncontrolling Interests
		Three Months Ended June 30,							Six Months Ended June  30,
		2010				2009			2010				2009
LAM GPs		$	(598	)		$	259		$	(728	)		$(812	)
Edgewater			1,270				-			3,877			-
Other			(191	)			-			(310	)		-
Total		$	481			$	259		$	2,839			$(812	)

 

		Noncontrolling Interests As Of
		June  30, 2010			December  31, 2009
LAM GPs		$	14,126		$	13,409
Edgewater			114,267			112,158
Other			1,669			1,993
Total		$	130,062		$	127,560

 

13.	INCENTIVE PLANS

 

Share-Based Incentive Plan Awards

 

A description of Lazard Ltd’s 2005 Plan and 2008 Plan, and activity with respect thereto during the six month periods ended June 30, 2010 and 2009, is presented below.

 

Shares Available Under the 2005 Plan and 2008 Plan

 

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

 

In addition to the shares available under the 2005 Plan, additional shares of Class A common stock are available under the 2008 Plan, which was approved by the stockholders of Lazard Ltd on May 6, 2008. 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).

 

27

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Restricted and Deferred Stock Units

 

RSUs require future service as a condition for the delivery of the underlying shares of Class A common stock (unless the recipient is then eligible for retirement under the Company’s retirement policy) and convert into Class A common stock on a one-for-one basis after the stipulated vesting periods. The grant date fair value of the RSUs, net of an estimated forfeiture rate, is amortized over the vesting periods or requisite service periods. Expense relating to RSUs is charged to “compensation and benefits” expense (and, as applicable, in “restructuring” expense, with respect to the expense associated with the acceleration of unrecognized expense pertaining to RSUs granted previously to individuals who were terminated in the restructuring programs during 2009 and 2010) as follows within the Company’s condensed consolidated statements of operations:

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2010		2009		2010		2009
Compensation and benefits (including $24,860 in the six month period ended June 30, 2010 relating to the amendment of the Company’s retirement policy(a))		$50,530		$64,111		$154,343		$128,559
Restructuring		-		-		46,880		24,239
Total		$50,530		$64,111		$201,223		$152,798

 

(a)	As described below, the Company amended its retirement policy during the first quarter of 2010 to modify the retirement eligibility vesting requirement with respect to RSU awards.

 

RSUs issued subsequent to December 31, 2005 generally include a dividend participation right that provides that during vesting periods each RSU is attributed additional RSUs (or fractions thereof) equivalent to any ordinary quarterly dividends paid on Class A common stock during such period. During the six month periods ended June 30, 2010 and 2009, dividend participation rights required the issuance of 163,146 and 169,582 RSUs, respectively.

 

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

 

Non-executive members of the Board of Directors of Lazard Group (who are also the same Non-Executive Directors of Lazard Ltd) receive approximately 55% of their annual compensation for service on the Board of Directors and its committees in the form of DSUs which resulted in 31,588 and 33,359 DSUs granted during the six month periods ended June 30, 2010 and 2009, respectively. Their remaining compensation is payable in cash, which they may elect to receive in the form of additional DSUs under the Directors’ Fee Deferral Unit Plan described below. DSUs are convertible into Class A common stock at the time of cessation of service to the Board. The DSUs include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock, and resulted in nominal cash payments for the six month periods ended June 30, 2010 and 2009. DSU awards are expensed at their fair value on their date of grant, which, inclusive of amounts related to the Directors’ Fee Deferral Unit Plan, totaled $520 and $558 during the three month and six month periods ended June 30, 2010, respectively, and $502 and $541 during the three month and six month periods ended June 30, 2009, respectively.

 

28

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

On May 9, 2006, the Board of Directors adopted the Directors’ Fee Deferral Unit Plan, which allows the Company’s Non-Executive Directors to elect to receive additional DSUs pursuant to the 2005 Plan in lieu of some or all of their cash fees. The number of DSUs that shall be granted to a Non-Executive Director pursuant to this election will equal the value of cash fees that the applicable Non-Executive Director has elected to forego pursuant to such election, divided by the market value of a share of Class A common stock on the date on which the foregone cash fees would otherwise have been paid. During the six month periods ended June 30, 2010 and 2009, 4,120 and 5,446 DSUs, respectively, had been granted pursuant such Plan.

 

The following is a summary of activity relating to RSUs and DSUs during the six month periods ended June 30, 2010 and 2009:

 

		RSUs						DSUs
		Units			Weighted Average Grant Date Fair Value			Units			Weighted Average Grant Date Fair Value
Balance, January 1, 2010		23,367,813			$	37.01		103,146			$	35.75
Granted (including 163,146 RSUs relating to dividend participation)		6,853,747			$	35.98		35,708			$	31.25
Forfeited		(315,002	)		$	34.57		–				–
Vested/Converted		(6,952,061	)		$	39.88		(20,435	)		$	35.38
Balance, June 30, 2010		22,954,497			$	35.88		118,419			$	34.46

 

		RSUs						DSUs
		Units			Weighted Average Grant Date Fair Value			Units		Weighted Average Grant Date Fair Value
Balance, January 1, 2009		22,141,468			$	39.17		65,256		$	40.32
Granted (including 169,582 RSUs relating to dividend participation)		7,161,473			$	30.84		38,805		$	27.90
Forfeited		(657,866	)		$	37.01		–			–
Vested		(1,128,585	)		$	39.39		–			–
Balance, June 30, 2009		27,516,490			$	37.05		104,061		$	35.69

 

In connection with the vested RSUs above, and after considering the withholding tax obligations pertaining thereto, 5,663,730 and 745,890 shares of Class A common stock held by Lazard Group were delivered during the six month periods ended June 30, 2010 and 2009, respectively.

 

As of June 30, 2010, unrecognized RSU compensation expense, adjusted for estimated forfeitures, was approximately $324,000, with such unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.8 years subsequent to June 30, 2010. The ultimate amount of such expense is dependent upon the actual number of RSUs that vest. The Company periodically assesses the forfeiture rates used for such estimates. A change in estimated forfeiture rates would cause the aggregate amount of compensation expense recognized in future periods to differ from the estimated unrecognized compensation expense described herein.

 

29

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Restricted Stock

 

During the second quarter of 2010, 54,437 shares of restricted Class A common stock were awarded under the 2008 Plan at a grant date fair value of $38.78 per share. Such award will vest and will no longer be subject to any restrictions on August 31, 2012. The aggregate grant date fair value of the award is being amortized over the vesting period. Expense relating to such restricted stock award is charged to “compensation and benefits” expense within the consolidated statements of operations, and amounted to $160 for the three month and six month periods ended June 30, 2010. The award includes 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.

 

14.	EMPLOYEE BENEFIT PLANS

 

The Company provides retirement and other post-retirement benefits to certain of its employees through defined contribution and defined benefit pension plans and other post-retirement plans. These plans generally provide benefits to participants based on average levels of compensation. Expenses (benefits) related to the Company’s employee benefit plans are included in “compensation and benefits” expense on the consolidated statements of operations. The Company uses December 31 as the measurement date for its employee benefit plans.

 

Employer Contributions to Pension Plans—In accordance with agreements reached with the Trustees of certain non-U.S. pension plans in 2005, the Company is obligated to make further contributions to such pension plans based upon the cumulative performance of the plans’ assets against specific benchmarks as measured on June 1, 2009 (the “measurement date”) and subsequently remeasured on June 1, 2010 (the “remeasurement date”). As of June 30, 2010, the remaining obligation related to the cumulative underperformance of the plans’ assets (the “underperformance obligation”) was approximately 4.0 million British pounds ($6,070 at June 30, 2010 exchange rates) which is payable in equal monthly installments through May 2013. During the six month period ended June 30, 2010, the Company contributed approximately $2,006 with respect to the underperformance obligation.

 

In addition, on June 30, 2009 the Company and Trustees concluded the December 31, 2007 triennial valuation of the non-U.S. pension plans discussed above, pursuant to which: (i) the Company agreed to contribute, in addition to amounts to cover administrative expenses under the plans, 2.3 million British pounds ($3,453 at June 30, 2010 exchange rates), during each year from 2011 to 2018 inclusive, subject to adjustment resulting from the December 31, 2010 triennial valuation, which the Company expects to have concluded prior to the contribution payment scheduled for 2011, and (ii) to secure the Company’s obligations thereunder, on July 15, 2009 the Company placed in escrow 12.5 million British pounds, with a final redemption date of December 31, 2018. This amount is subject to adjustment based on the results of the December 31, 2010 triennial valuation and subsequent triennial valuations. The escrow balance has been recorded in “cash deposited with clearing organizations and other segregated cash” and “investments: debt-other” in the amounts of 6.25 million British pounds and 6.25 million British pounds, respectively, at each of June 30, 2010 and December 31, 2009 ($9,382 and $9,382 at June 30, 2010 exchange rates and $10,138 and $10,138 at December 31, 2009 exchange rates), respectively, on the accompanying condensed consolidated statements of financial condition. Income on the escrow balance accretes to the Company and is recorded in interest income.

 

During the six month period ended June 30, 2010, there were no other contributions made to other pension plans.

 

30

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The following table summarizes the components of total benefit cost (credit) for the three month and six month periods ended June 30, 2010 and 2009:

 

		Pension Plans								Post-Retirement Medical Plans
		Three Months Ended June 30,
		2010				2009				2010				2009
Components of Net Periodic Benefit Cost (Credit):
Service cost		$	(88	)		$	-			$	22			$	21
Interest cost			6,702				5,901				73				60
Expected return on plan assets			(7,056	)			(6,570	)			-				-
Amortization of:
Prior service cost (credit)			725				-				(435	)			(345	)
Net actuarial (gain) loss			198				227				-				(27	)
Net periodic benefit cost (credit)		$	481			$	(442	)		$	(340	)		$	(291	)

 

		Pension Plans								Post-Retirement Medical Plans
		Six Months Ended June 30,
		2010				2009				2010				2009
Components of Net Periodic Benefit Cost (Credit):
Service cost		$	260			$	-			$	40			$	49
Interest cost			13,787				11,420				146				155
Expected return on plan assets			(14,429	)			(12,700	)			-				-
Amortization of:
Prior service cost (credit)			1,476				-				(691	)			(691	)
Net actuarial loss			399				435				-				-
Net periodic benefit cost (credit)		$	1,493			$	(845	)		$	(505	)		$	(487	)

 

15.	RESTRUCTURING PLANS

 

In each of the first quarters of 2010 and 2009, the Company announced a restructuring plan which included certain staff reductions and realignments of personnel (the “2010 Restructuring Plan” and the “2009 Restructuring Plan”, respectively, and collectively the “2010 and 2009 Restructuring Plans”). In connection with the 2010 Restructuring Plan, the Company recorded a pre-tax charge in the first quarter of 2010 of $87,108, inclusive of $46,880 relating to the acceleration of RSUs (in aggregate, the “2010 Restructuring Charge”), with this charge partially offset by an associated income tax benefit of $5,680, and, in connection with the 2009 Restructuring Plan, the Company recorded a charge in the first quarter of 2009 of $62,550, inclusive of $24,239 relating to the acceleration of RSUs (in aggregate, the “2009 Restructuring Charge”), with this charge partially offset by an associated income tax benefit of $6,401 (collectively, the “2010 and 2009 Restructuring Charges”).

 

The 2010 and 2009 Restructuring Charges primarily consisted of compensation-related expenses, including the acceleration of unrecognized expenses pertaining to RSUs previously granted to individuals who were terminated pursuant to the restructuring, severance and benefit payments and other costs. As of June 30, 2010, the remaining liability associated with the 2010 Restructuring Plan was $23,417 and, as of June 30, 2010 and December 31, 2009, the remaining liability associated with the 2009 Restructuring Plan was $6,769 and $11,500,

 

31

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

respectively. During the six month period ended June 30, 2010, other than cash payments of $16,811 and $4,731 for the 2010 Restructuring Plan and the 2009 Restructuring Plan, respectively, there were no adjustments to the liabilities with respect to the 2010 and 2009 Restructuring Plans. Such liabilities are reported within “accrued compensation and benefits” and “other liabilities” on the accompanying condensed consolidated statements of financial condition.

 

16.	INCOME TAXES

 

The Company recorded an income tax provision of $13,040 and $18,580 for the three month and six month periods ended June 30, 2010, respectively, and $13,219 and $8,665 for the three month and six month periods ended June 30, 2009, respectively, representing effective tax rates of 19.3%, 56.1%, 22.7% and (26.4)%, respectively. Excluding (i) the income tax benefits of $5,680 related to the 2010 Restructuring Charge and $1,363 related to the charge incurred in connection with the amendment of Lazard’s retirement policy with respect to RSU awards, and (ii) the income tax benefit of $6,401 related to the 2009 Restructuring Charge, the Company had an income tax provision of $13,040, and $25,623 for the three month and six month periods ended June 30, 2010, respectively, and $13,219 and $15,066 for the three month and six month periods ended June 30, 2009, respectively, representing effective tax rates of 19.3%, 17.7%, 22.7% and 50.6%, respectively. The effective tax rates herein for the six month period ended June 30, 2010 reflect a benefit from the reductions in unrecognized tax benefits of (i) $4,480 during the first quarter of 2010 relating to settlements with taxing authorities pertaining to certain prior years and (ii) $2,149 during the second quarter of 2010 relating to other adjustments to certain prior years.

 

Although a portion of Lazard Group’s income is subject to U.S. federal income taxes, the principal difference between the U.S. federal statutory tax rate of 35.0% and Lazard Group’s effective tax rates described above is due to Lazard Group primarily operating 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 taxes associated with such income represent obligations of the individual partners. Lazard Group, however, 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.

 

17.	RELATED PARTIES

 

Amounts receivable from, and payable to, related parties as of June 30, 2010 and December 31, 2009 are set forth below:

 

		June  30, 2010			December 31, 2009
Receivables
LFCM Holdings		$	5,285		$	14,212
Lazard Ltd Subsidiaries			26,186			31,684
Other			1,012			203
Total		$	32,483		$	46,099
Payables
LFCM Holdings		$	118		$	1,747
Lazard Ltd Subsidiaries			231,650			240,518
Other			102			19
Total		$	231,870		$	242,284

 

32

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

LFCM Holdings

 

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

 

For the three month and six month periods ended June 30, 2010, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $513 and $1,059, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $3,384 and $6,729, respectively. For the three month and six month periods ended June 30, 2009, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $1,035 and $2,492, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $6,431 and $6,588, respectively. Amounts relating to the administrative services agreement are reported as reductions to operating expenses. Net referral fees for underwriting transactions under the business alliance agreement are reported in “revenue-other”. Net referral fees for private placement, M&A and restructuring transactions under the business alliance agreement are reported in advisory fee revenue.

 

Receivables from LFCM Holdings and its subsidiaries as of June 30, 2010 and December 31, 2009 primarily include $808 and $5,891, respectively, related to administrative and support services and reimbursement of expenses incurred on behalf of LFCM Holdings and $3,978 and $6,202, respectively, related to referral fees for underwriting and private placement transactions. Payables to LFCM Holdings and its subsidiaries at June 30, 2010 and December 31, 2009 relate primarily to referral fees for Financial Advisory transactions of $118 and $1,747, respectively.

 

Lazard Ltd Subsidiaries

 

Lazard Group’s receivables from subsidiaries of Lazard Ltd at June 30, 2010 and December 31, 2009 include interest-bearing loans of $26,025 and $29,732, respectively, including accrued interest thereon. Interest income relating to interest-bearing loans with subsidiaries of Lazard Ltd amounted to $843 and $1,652 for the three month and six month periods ended June 30, 2010, respectively, and $2,014 and $2,857 for the three month and six month periods ended June 30, 2009, respectively.

 

As of both June 30, 2010 and December 31, 2009, Lazard Group’s payables to subsidiaries of Lazard Ltd included $64,305 related to the LAM Merger (see Note 7 of Notes to Condensed Consolidated Financial Statements), as well as payables at both June 30, 2010 and December 31, 2009 aggregating $39,820, in connection with Lazard Group’s acquisition of GAHL and Edgewater’s management vehicles, and with respect to Lazard Ltd’s acquisition of CWC and subsequent contribution of CWC to Lazard Group (see Note 8 of Notes to Condensed Consolidated Financial Statements). In addition, as of both June 30, 2010 and December 31, 2009, Lazard Group’s payables to subsidiaries of Lazard Ltd include interest-bearing loans, plus accrued interest

 

33

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

thereon, of $126,679 and $136,329, respectively. Interest expense relating to interest-bearing loans with subsidiaries of Lazard Ltd amounted to $1,080 and $2,205 for the three month and six month periods ended June 30, 2010, respectively, and $1,659 and $3,487 for the three month and six month periods ended June 30, 2009, respectively.

 

LAZ-MD Holdings

 

Lazard Group provides selected administrative and support services to LAZ-MD Holdings through the administrative services agreement as discussed above, with such services generally to be provided until December 31, 2014 unless terminated earlier because of a change in control of either party. Lazard Group charges LAZ-MD Holdings for these services based on Lazard Group’s cost allocation methodology and, for the three month and six month periods ended June 30, 2010, such charges amounted to $187 and $375, respectively. For the three month and six month periods ended June 30, 2009, such charges amounted to $187 and $375, respectively.

 

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 Securities Exchange Act of 1934 (the “Exchange Act”). Under the basic method permitted by this rule, the minimum required net capital, as defined, is a specified fixed percentage of total aggregate indebtedness recorded in LFNY’s Financial and Operational Combined Uniform Single (“FOCUS”) report filed with the Financial Industry Regulatory Authority (“FINRA”), or $100, whichever is greater. At June 30, 2010, LFNY’s regulatory net capital was $126,471, which exceeded the minimum requirement by $118,605.

 

Certain U.K. subsidiaries of the Company, including LCL, Lazard Fund Managers Limited and Lazard Asset Management Limited (the “U.K. Subsidiaries”) are regulated by the Financial Services Authority. At June 30, 2010, the aggregate regulatory net capital of the U.K. Subsidiaries was $139,448, which exceeded the minimum requirement by $98,414.

 

CFLF, through which non-corporate finance advisory activities are carried out in France, is subject to regulation by the Autorité de Contrôle Prudentiel for its banking activities conducted through its subsidiary, LFB. In addition, the investment services activities of the Paris group, exercised through LFB and other subsidiaries of CFLF, primarily LFG (asset management), are subject to regulation and supervision by the Autorité des Marchés Financiers. At June 30, 2010, the consolidated regulatory net capital of CFLF was $179,267, which exceeded the minimum requirement set for regulatory capital levels by $89,473.

 

Certain other U.S. and non-U.S. subsidiaries are subject to various capital adequacy requirements promulgated by various regulatory and exchange authorities in the countries in which they operate. At June 30, 2010, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $80,087, which exceeded the minimum required capital by $59,364.

 

At June 30, 2010, each of these subsidiaries individually was in compliance with its regulatory capital requirements.

 

Lazard Ltd is currently subject to supervision by the SEC as a Supervised Investment Bank Holding Company (“SIBHC”). As a SIBHC, Lazard Ltd is subject to group-wide supervision, which requires it to

 

34

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

compute allowable capital and risk allowances on a consolidated basis. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) discussed below will have an impact on the SEC’s SIBHC program.

 

On December 11, 2009, the U.S. House of Representatives passed The Wall Street Reform and Consumer Protection Act of 2009 (“H.R. 4173”). On May 20, 2010, the U.S. Senate passed the Restoring American Financial Stability Act of 2010 (“S. 3217”). A House-Senate conference committee was established to reconcile the differences between H.R. 4173 and S. 3217. On June 25, 2010, the House-Senate conference committee agreed on a reconciled bill, the Dodd-Frank Act. Congress has enacted the Dodd-Frank Act, and on July 21, 2010, the President signed the Dodd-Frank Act.

 

The Dodd-Frank Act provides for the eventual elimination of the SEC’s SIBHC program. In addition, the Dodd-Frank Act allows entities seeking consolidated supervision to elect to be regulated by the Federal Reserve. We are currently in the process of examining the potential impact of the elimination of the SIBHC program and the Dodd-Frank Act on us.

 

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: Financial Advisory (which includes providing general strategic and transaction-specific advice on M&A and other strategic matters, restructurings, capital structure, capital raising and various other corporate finance matters), and Asset Management (which includes the management of equity and fixed income securities and alternative investment and private equity funds). In addition, the Company records selected other activities in its Corporate segment, including management of cash, certain investments and the commercial banking activities of LFB. The Company also allocates outstanding indebtedness to its Corporate segment.

 

The Company’s segment information for the three month and six month periods ended June 30, 2010 and 2009 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

 

35

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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.

 

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

 

				Three Months Ended June 30,								Six Months Ended June 30,
				2010				2009				2010				2009
Financial Advisory		Net Revenue		$	245,973			$	252,024			$	514,469			$	415,001
		Operating Expenses			213,900				205,485				451,700				383,106
		Operating Income (a)		$	32,073			$	46,539			$	62,769			$	31,895
Asset Management		Net Revenue		$	189,414			$	131,543			$	377,167			$	233,066
		Operating Expenses			136,886				103,973				266,326				194,413
		Operating Income (a)		$	52,528			$	27,570			$	110,841			$	38,653
Corporate		Net Revenue		$	(16,579	)		$	(7,532	)		$	(34,881	)		$	(24,165	)
		Operating Expenses			332				8,462				105,587				79,176
		Operating Income (Loss) (a)		$	(16,911	)		$	(15,994	)		$	(140,468	)		$	(103,341	)
Total		Net Revenue		$	418,808			$	376,035			$	856,755			$	623,902
		Operating Expenses			351,118				317,920				823,613				656,695
		Operating Income (Loss) (a)		$	67,690			$	58,115			$	33,142			$	(32,793	)

 

		As of
		June 30, 2010			December 31, 2009
Total Assets:
Financial Advisory		$	627,986		$	706,785
Asset Management			679,500			702,775
Corporate			1,476,304			1,705,488
Total		$	2,783,790		$	3,115,048

 

36

---

Table of Contents

LAZARD GROUP LLC

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

 

(a)

Operating income (loss) for the six month periods ended June 30, 2010 and 2009 was significantly impacted by certain special items related to the three month periods ended March 31, 2010 and 2009, respectively. Such impact, including the amounts attributable to each of the Company’s business segments, is described in the table below:

 

		Six Months Ended June 30,
		2010				2009
Financial Advisory
Operating income, as reported above		$	62,769			$	31,895
Special item:
Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards			19,571				-
Operating income, excluding impact of special item		$	82,340			$	31,895
Asset Management
Operating income, as reported above		$	110,841			$	38,653
Special item:
Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards			2,902				-
Operating income, excluding impact of special item		$	113,743			$	38,653
Corporate
Operating loss, as reported above		$	(140,468	)		$	(103,341	)
Special items:
Restructuring expense			87,108				62,550
Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards			2,387				-
Operating loss, excluding impact of special items		$	(50,973	)		$	(40,791	)
Consolidated
Operating income (loss), as reported above		$	33,142			$	(32,793	)
Special items:
Restructuring expense			87,108			$	62,550
Acceleration of amortization expense pertaining to the amendment of Lazard’s retirement policy with respect to RSU awards			24,860				-
Operating income, excluding impact of special items		$	145,110			$	29,757

 

37

---

Table of Contents

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with Lazard Group’s condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”), as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”). All references to “2010”, “2009”, “second quarter”, “first half”, or “the period” refer to, as the context requires, the three month and six month periods ended June 30, 2010 and June 30, 2009.

 

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

 

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

 

•

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

 

•

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

 

•

losses due to unidentified or unanticipated risks,

 

•

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

 

•

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

 

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

 

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

 

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

 

•

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

 

•

business’ strategies and investment policies,

 

•

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

 

•

business’ competitive position,

 

•

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

 

38

---

Table of Contents

•

potential growth opportunities available to our businesses,

 

•

recruitment and retention of our managing directors and employees,

 

•

target levels of compensation expense,

 

•

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

 

•

likelihood of success and impact of litigation,

 

•

expected tax rates,

 

•

changes in interest and tax rates,

 

•

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

 

•

effects of competition on our business, and

 

•

impact of future legislation and regulation on our business.

 

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

 

Business Summary

 

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

 

•

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

 

•

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

 

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

 

LFB is a registered bank regulated by the Banque de France and its primary operations include asset and liability management for Lazard Group’s businesses in France through its money market desk and commercial banking operations, deposit taking and, to a lesser extent, financing activities and custodial oversight over assets of various clients. LFB engages in underwritten offerings of securities in France and we expect that it may expand its scope to include placements elsewhere in Europe.

 

Lazard also has a long history of making alternative investments with its own capital, usually alongside capital of qualified institutional and individual investors. At the time of Lazard Ltd’s equity public offering and as a part of the separation, we transferred to LFCM Holdings LLC (“LFCM Holdings”) all of our alternative investment activities, except for Fonds Partenaires Gestion SA (“FPG”), our private equity business in France. Such activities

 

39

---

Table of Contents

transferred to LFCM Holdings represented the alternative investment activities of Lazard Alternative Investments Holdings LLC (“LAI”) and included private equity investments of Corporate Partners II Limited (“CP II”) and Lazard Senior Housing Partners LP. CP II was managed by a subsidiary of LAI until February 16, 2009. Effective February 17, 2009, ownership and control of CP II was transferred to the investment professionals who manage CP II. We also transferred to LFCM Holdings certain principal investments by Lazard Group in the funds managed by the separated businesses, subject to certain options by us to reacquire such investments, while we retained our investment in our French private equity funds. Since 2005, consistent with our obligations to LFCM Holdings, we have engaged in a number of alternative investments and private equity activities. Effective September 30, 2009, the Company sold FPG to a fund management company forming part of a group that manages investment companies and funds, in some of which Lazard could earn carried interests. The managing directors and staff conducting this activity were accordingly transferred to the buyer. The sale of FPG did not have a material impact on our financial condition or results of operations. Operating results of FPG have been included in our consolidated financial statements through the effective date of sale.

 

We continue to explore and discuss opportunities to expand the scope of our alternative investment and private equity activities in Europe, the U.S. and elsewhere. These opportunities could include internal growth of new funds and direct investments by us, partnerships or strategic relationships, investments with third parties or acquisitions of existing funds or management companies. In that regard, on July 15, 2009, the Company established a private equity business with The Edgewater Funds (“Edgewater”), a Chicago-based private equity firm, through the acquisition of Edgewater’s management vehicles. The acquisition was structured as a purchase by Lazard of interests in a holding company that owns interests in the general partner and management company entities of the current Edgewater private equity funds (the “Edgewater Acquisition”) (see Note 8 of Notes to Condensed Consolidated Financial Statements). Also, consistent with our obligations to LFCM Holdings, we may explore discrete capital markets opportunities.

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2010			2009			2010			2009
Financial Advisory		59	%		67	%		60	%		67	%
Asset Management		45			35			44			37
Corporate		(4	)		(2	)		(4	)		(4	)
Total		100	%		100	%		100	%		100	%

 

Business Environment

 

While economic and market conditions in general in the U.S. and globally showed signs of recovery in the first quarter of 2010, global equity markets and foreign currencies experienced significant volatility in the second quarter primarily due to concerns about the state of public finances of certain Euro economies and its impact on the speed of a global economic recovery. As a result, U.S. and global equity market indices declined from both year-end 2009 as well as March 31, 2010 levels. Partially offsetting this volatility were healthier domestic credit markets, improved corporate earnings and continued low interest rates. However, when compared to the first half of 2009, economic and market conditions have improved substantially, which contributed to the improvement in our operating performance in both Financial Advisory and Asset Management during the 2010 first half. However, we believe that going forward certain vulnerabilities to the global economy and, in turn, to the overall business environment, remain.

 

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

 

40

---

Table of Contents

Financial Advisory

 

Global and trans-atlantic completed and announced M&A transactions for the first half of 2010 increased versus the corresponding prior year periods, but continue to be at relatively low levels. The following table sets forth industry statistics regarding the value of M&A transactions in the periods:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2010			2009			%     Incr /(Decr)		2010			2009			%     Incr /(Decr)
		($ in billions)
Completed M&A Transactions:
Global		$	440		$	303		45%		$	822		$	797		3	%
Trans-Atlantic			42			6		nm			72			62		16	%
Announced M&A Transactions:
Global			523			488		7%			1,019			1,002		2	%
Trans-Atlantic			37			30		23%			75			38		97	%

 

Source:

Thomson Financial as of July 9, 2010.

 

We believe that in the current environment we are relatively well positioned as our clients refinance, restructure and position their asset portfolios for growth. While overall M&A industry statistics regarding the number and size of announced transactions increased modestly in the first half of 2010 as compared to the 2009 period, we continue to remain cautious with respect to the overall economic environment and its impact on the M&A business. Generally, during periods of unfavorable market or economic conditions, the volume and value of M&A transactions may decrease, thereby reducing the demand for our advisory services and increasing competition among financial services companies seeking such engagements.

 

Global restructuring activity during the first half of 2010 decreased from record levels in 2009, due to a lower level of corporate debt defaults. According to Moody’s Investors Service, Inc., in the first half of 2010, a total of 26 issuers defaulted as compared to 175 in the corresponding 2009 period. While we believe that the number and value of corporate defaults may continue to decline throughout the year, we expect that our Restructuring business should remain active from the significant level of corporate defaults in 2009, as well as from advising companies during this period of volatility on matters relating to debt and financing restructuring and other on- and off-balance sheet assignments. Our Restructuring assignments normally are executed over a six- to eighteen-month period.

 

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

 

41

---

Table of Contents

Asset Management

 

As shown in the table below, major global market indices at June 30, 2010 decreased as compared to such indices at March 31 and December 31, 2009, but increased in most markets as compared to June 30, 2009.

 

		Percentage Change June 30, 2010 vs.
		March 31, 2010			December 31, 2009			June 30, 2009
MSCI World Index		(13	)%		(11	)%		8	%
CAC 40		(13	)%		(13	)%		10	%
DAX		(3	)%		0	%		24	%
FTSE 100		(13	)%		(9	)%		16	%
TOPIX 100		(16	)%		(9	)%		(10	)%
MSCI Emerging Market		(9	)%		(7	)%		21	%
Dow Jones Industrial Average		(10	)%		(6	)%		16	%
NASDAQ		(12	)%		(7	)%		15	%
S&P 500		(12	)%		(8	)%		12	%

 

The fees that we receive for providing investment management and advisory services are primarily driven by the level of AUM. Accordingly, since market movements and foreign currency volatility impact the level of our AUM, such items will impact the level of revenues we receive from our Asset Management business. A substantial portion of our AUM is invested in equities, and market movements reflected in the changes in Lazard’s AUM during the period generally corresponded to the changes in global market indices. While our AUM at June 30, 2010 decreased versus AUM at December 31, 2009, our average AUM during the second quarter and first half of 2010 increased significantly as compared to our average AUM for the corresponding periods of 2009, reflecting significant market appreciation for the last nine months of 2009, and, to a lesser extent, the first three months of 2010, as well as net inflows over the twelve month period ended June 30, 2010. Such increased AUM resulted in higher management fee revenues in the 2010 periods.

 

Financial Statement Overview

 

Net Revenue

 

The majority of Lazard’s Financial Advisory net revenue is earned from the successful completion of M&A transactions, strategic advisory matters, restructuring and capital structure advisory services, capital raising and similar transactions. The main drivers of Financial Advisory net revenue are overall M&A activity, the level of corporate debt defaults and the environment for capital raising activities, particularly in the industries and geographic markets in which Lazard focuses. In some client engagements, often those involving financially distressed companies, revenue is earned in the form of retainers and similar fees that are contractually agreed upon with each client for each assignment and are not necessarily linked to the completion of a transaction. In addition, Lazard also earns fees from providing strategic advice to clients, with such fees not being dependent on a specific transaction, and from public and private securities offerings for referring opportunities to LFCM Holdings for underwriting and distribution 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, Lazard Frères Gestion SAS, FPG (through its disposition on September 30, 2009) and, effective July 15, 2009, Edgewater. Asset Management net revenue is derived from fees for investment management and advisory services provided to institutional and private clients. The main driver of Asset Management net revenue is the level of AUM, which is influenced by Lazard’s investment performance, its ability to successfully attract and retain assets, the broader performance of the global equity markets and, to a lesser extent, fixed income markets. As a result, fluctuations in financial markets and

 

42

---

Table of Contents

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 as of the end of a quarter or month, and an increase or reduction in AUM at such dates, due to market price fluctuations, currency fluctuations, net client asset flows or otherwise, will result in a corresponding increase or decrease in management fees. The majority of our investment advisory contracts are generally terminable at any time or on notice of 30 days or less. Institutional and individual clients, and firms with which we have strategic alliances, can terminate their relationship with us, reduce the aggregate amount of AUM or shift their funds to other types of accounts with different rate structures for a number of reasons, including investment performance, changes in prevailing interest rates and financial market performance. In addition, as Lazard’s AUM includes significant 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, with higher fees earned on equity assets, alternative investments (such as hedge funds) and private equity investments, and lower fees earned on fixed income and cash management products.

 

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

 

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

 

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

 

Corporate segment net revenue consists primarily of net interest income, including amounts earned at LFB, and investment gains and losses on the Company’s investment portfolio of LAM-managed equity funds and principal investments in equities, debt securities at LFB and alternative investment funds. Interest expense is also included in Corporate net revenue. Corporate net revenue can fluctuate due to changes in the fair value of investments classified as “trading”, and with respect to “available-for-sale”, when realized, or when a decline is determined to be other than temporary, with respect to “available-for-sale” and “held-to-maturity” investments, 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 half of 2010 represented (4)% of Lazard’s net revenue, total assets in Corporate represented 53% of Lazard’s consolidated total assets as of June 30, 2010, which is attributable to assets associated with LFB, investments in government bonds, LAM-managed funds, other securities and cash.

 

Operating Expenses

 

The majority of Lazard’s operating expenses relate to compensation and benefits for employees and managing directors. Our compensation and benefits expense includes amortization of the relevant portion of the restricted stock unit awards (“RSUs”) under the Lazard Ltd 2005 Equity Incentive Plan (“2005 Plan”) and the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”), with such amortization generally determined on

 

43

---

Table of Contents

a straight-line basis over the vesting periods and not on the basis of revenue recognition. Compensation expense in any given period is dependent on many factors, including general economic and market conditions, our operating and financial performance, staffing levels and competitive pay conditions, as well as the mix between current and deferred compensation. Our compensation expense-to-operating revenue ratio was 59.9% and 59.7%, respectively for the second quarters of 2010 and 2009, and for the six month periods of 2010 and 2009 was 60.0% and 65.6%, respectively (with such ratio in the six month period of 2010 excluding the compensation charge of approximately $25 million in connection with the accelerated vesting of RSUs related to the Company’s change in retirement policy). See Note 13 of Notes to Condensed Consolidated Financial Statements for additional information regarding the Company’s incentive plans.

 

Lazard’s operating expenses also include “non-compensation expense”, amortization of intangible assets related to acquisitions and, in the six month periods of 2010 and 2009, restructuring expense. Non-compensation expense includes costs for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourced services, and other expenses. Amortization of intangibles related to acquisitions relates primarily to the July 2009 acquisition of Edgewater. Restructuring expense relates to the certain staff reductions and realignment of personnel in the first quarters of 2010 and 2009, and includes severance and related benefits expense, the acceleration of unrecognized expense pertaining to RSUs previously granted to individuals who were terminated and certain other costs related to these initiatives.

 

Provision for Income Taxes

 

Lazard Group primarily operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal income tax purposes. As a result, Lazard Group’s income pertaining to the limited liability company is not subject to U.S. federal income taxes because taxes associated with such income represent obligations of the individual partners. Outside the U.S., Lazard Group operates principally through corporations and is subject to local income taxes. Income taxes shown on Lazard’s consolidated statements of operations are related to non-U.S. entities and to New York City Unincorporated Business Tax (“UBT”) attributable to Lazard’s operations apportioned to New York City.

 

Noncontrolling Interests

 

The Company records a charge (credit) to noncontrolling interests relating to Edgewater and various LAM-related general partnership interests (“GPs”) held directly by certain of our LAM managing directors.

 

See Note 12 of Notes to Condensed Consolidated Financial Statements for information regarding Company’s noncontrolling interests.

 

Consolidated Results of Operations

 

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

 

During the first quarters of 2010 and 2009 the Company reported certain charges (the “2010 special items” and the “2009 special item,” respectively, and collectively, the “2010 and 2009 special items”) that resulted in a significant adverse impact on its operating results. The impact of such special items on the Company’s

 

44

---

Table of Contents

condensed consolidated statements of operations for the 2010 and 2009 six month periods is described in more detail in the table below.

 

		Six Months Ended June 30,
		2010									2009
		Restructuring (a)			RSU Amortization Amendment (b)			Total			Restructuring (a)
		($ in thousands)
Compensation					$ 24,860			$   24,860
Restructuring		$ 87,108						87,108			$ 62,550
Operating Income (Loss)		(87,108	)		(24,860	)		(111,968	)		(62,550	)
Income Tax (Benefit)		(5,680	)		(1,363	)		(7,043	)		(6,401	)
Net Income (Loss) Attributable to Lazard Group		$(81,428	)		$(23,497	)		$(104,925	)		$(56,149	)

 

(a)	Restructuring plans announced in the first quarters of 2010 and 2009, respectively.

(b)	Additional amortization expense in connection with the accelerated vesting of RSUs related to the amendment of the Company’s retirement policy.

 

A discussion of the Company’s consolidated results of operations for the 2010 and 2009 periods is set forth below, followed by a more detailed discussion of business segment results. For comparability purposes in the discussion that follows, the results for the six month periods in 2010 and 2009 are shown in tables below, as applicable, on both an “as reported” U.S. GAAP and “excluding special items” non-U.S. GAAP basis.

 

		Three Months Ended June 30,
		2010				2009
		($ in thousands)
Net Revenue		$	418,808			$	376,035
Operating Expenses:
Compensation and benefits			263,018				239,274
Non-compensation expense			86,331				78,302
Amortization of intangible assets related to acquisitions			1,769				344
Total operating expenses			351,118				317,920
Operating Income			67,690				58,115
Provision for income taxes			13,040				13,219
Net Income			54,650				44,896
Less – Net Income Attributable to Noncontrolling Interests			481				259
Net Income Attributable to Lazard Group		$	54,169			$	44,637
Operating Income, As A % Of Net Revenue			16	%			15	%

 

45

---

Table of Contents

		Six Months Ended June 30,
		2010												2009
		U.S. GAAP As  Reported				Impact  of Special Items (a)				Non-U.S.  GAAP Excluding Special Item (b)				U.S. GAAP As  Reported				Impact of Special Item (a)				Non-U.S.  GAAP Excluding Special Item (b)
		($ in thousands)
Net Revenue		$	856,755							$	856,755			$	623,902							$	623,902
Operating Expenses:
Compensation and benefits			563,393			$	24,860				538,533				442,806								442,806
Non-compensation expense			169,573								169,573				150,651								150,651
Amortization of intangible assets related to acquisitions			3,539								3,539				688								688
Restructuring			87,108				87,108				-				62,550			$	62,550				-
Total operating expenses			823,613				111,968				711,645				656,695				62,550				594,145
Operating Income (Loss)			33,142				(111,968	)			145,110				(32,793	)			(62,550	)			29,757
Provision (benefit) for income taxes			18,580				(7,043	)			25,623				8,665				(6,401	)			15,066
Net Income (Loss)			14,562				(104,925	)			119,487				(41,458	)			(56,149	)			14,691
Less – Net Income (Loss) Attributable to Noncontrolling Interests			2,839								2,839				(812	)							(812	)
Net Income (Loss) Attributable to Lazard Group		$	11,723			$	(104,925	)		$	116,648			$	(40,646	)		$	(56,149	)		$	15,503
Operating Income (Loss), As A % Of Net Revenue			4	%							17	%			(5	)%							5	%

 

(a)	Represents charges related to the previously described special items. See Notes 13, 15 and 19 of Notes to Condensed Consolidated Financial Statements.

(b)	A non-U.S. GAAP measure that management believes provides the most meaningful comparison between historical, present and future periods.

 

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		($ in thousands)
Operating revenue
Total revenue		$	444,006			$	404,702			$	908,622			$	681,374
Add (deduct):
LFB interest expense (a)			(1,987	)			(3,629	)			(4,546	)			(7,646	)
Revenue related to noncontrolling interests (b)			(2,798	)			(257	)			(7,137	)			813
Operating revenue		$	439,221			$	400,816			$	896,939			$	674,541

 

(a)	The interest expense incurred by LFB is excluded from total revenue because LFB is a commercial bank and we consider its interest expense to be a cost directly related to the conduct of its business.

(b)	Revenue related to the consolidation of noncontrolling interests is excluded from operating revenue because the Company has no economic interest in such amount. Further, such revenue is offset by a charge or credit to noncontrolling interests.

 

46

---

Table of Contents

Certain key ratios, statistics and headcount information for the 2010 and 2009 periods are set forth below:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2010			2009			2010			2009
As a % of Net Revenue, By Revenue Category:
Investment banking and other advisory fees		59	%		63	%		60	%		64	%
Money management fees		43			32			42			35
Interest income		1			2			1			2
Other		3			11			3			8
Interest expense		(6	)		(8	)		(6	)		(9	)
Net Revenue		100	%		100	%		100	%		100	%

 

		As of June 30,
		2010		2009
Headcount:
Managing Directors:
Financial Advisory		131		147
Asset Management		63		56
Corporate		8		7
Other Employees:
Business segment professionals		984		975
All other professionals and support staff		1,106		1,091
Total		2,292		2,276

 

Operating Results

 

The Company’s quarterly revenue and profits can fluctuate materially depending on the number, size and timing of completed transactions on which it advised, as well as seasonality and other factors. Accordingly, the revenue and profits in any particular quarter may not be indicative of future results. Lazard management believes that annual results are the most meaningful basis for comparison among present, historical and future periods. As reflected in the table of consolidated results of operations above, charges related to the 2010 and 2009 special items had a significant impact on the Company’s reported operating results for the six month periods in the respective years. Lazard management believes that comparisons between periods are most meaningful after excluding the impact of such items.

 

Three Months Ended June 30, 2010 versus June 30, 2009

 

The Company reported net income attributable to Lazard Group of $54 million, as compared to net income of $45 million in the 2009 period. The changes in the Company’s operating results during the periods are described below.

 

Net revenue increased $43 million, or 11%, as compared to the 2009 period, with operating revenue increasing $38 million, or 10%. Fees from investment banking and other advisory activities increased $9 million, or 4%, principally due to an increase in M&A and Strategic Advisory fees and from our Private Fund Advisory Group businesses, with the latter due to an increase in the value and number of fund closings, partially offset by a decrease in Restructuring fees. Money management fees, including incentive fees, increased $61 million, or 50%, due to a $40 billion, or 44%, increase in average AUM for the 2010 period, primarily as the result of market appreciation experienced most significantly in the last nine months of 2009, and, to a lesser extent, the first three

 

47

---

Table of Contents

months of 2010, and net inflows during such periods. Other revenue decreased $29 million, or 71%, principally due to a decrease in underwriting fees as a result of a decline in equity capital markets transactions, a $10 million decrease principally resulting from foreign exchange losses as compared to gains in the 2009 period and an $8 million net reduction in investment income. Interest expense decreased $3 million, or 12%, principally due to a lower interest rate environment.

 

Compensation and benefits expense for the 2010 period increased $24 million, or 10%, principally reflecting an increase in the provision for discretionary compensation and profit pools relating to the increase in operating revenue and a decline in the amortization of share-based and deferred cash incentive awards. Compensation and benefits expense was 59.9% and 59.7% of operating revenue for the 2010 and 2009 periods, respectively.

 

Non-compensation expense increased $8 million, or 10%. Factors contributing to the increase were increased spending on travel and other business development activities, and increased fund administration expenses related to the increased level of business activity and AUM. The ratio of non-compensation expense to operating revenue was 19.7% as compared to 19.5% in the 2009 period.

 

Amortization of intangible assets increased $1 million principally due to the Edgewater acquisition in July 2009.

 

Operating income for the 2010 period was $68 million, as compared to operating income of $58 million in the prior year period and, as a percentage of net revenue, was 16% as compared to 15% in the 2009 period.

 

The provision for income taxes was $13 million in both the 2010 and the 2009 periods.

 

Net income attributable to noncontrolling interests was unchanged as compared to the 2009 period.

 

Six Months Ended June 30, 2010 versus June 30, 2009

 

The Company reported net income attributable to Lazard Group of $12 million, as compared to a net loss of $41 million in the 2009 period. The Company’s results in both periods were adversely affected by the 2010 and the 2009 special items, which served to increase the net loss attributable to Lazard Group in the 2010 and 2009 periods by $105 million and $56 million, respectively. Excluding the after-tax impact of the 2010 and 2009 special items in each year, net income attributable to Lazard Group in the 2010 period was $117 million, an increase of $101 million as compared to the 2009 period. The changes in the Company’s operating results during the period are described below.

 

Net revenue increased $233 million, or 37%, as compared to the 2009 period, with operating revenue increasing $222 million, or 33%. Fees from investment banking and other advisory activities increased $117 million, or 29%, including increases of $62 million in M&A and Strategic Advisory fees, a $26 million increase in Restructuring fees, and an increase in fees principally from our Private Fund Advisory Group business due to an increase in the value and number of fund closings. Money management fees, including incentive fees, increased $139 million, or 63%, due to a $39 billion, or 44%, increase in average AUM for the 2010 period, primarily as the result of market appreciation experienced most significantly in the last nine months of 2009, and, to a lesser extent, the first three months of 2010, and net inflows during such periods, as well as higher incentive fees earned in the 2010 period. Interest income decreased $4 million, or 24%, due primarily to the lower interest rate environment and lower receivables from banks. Other revenue decreased $24 million, or 51%, principally due to a decrease in underwriting fees as a result of a decline in equity capital markets transactions, a $9 million decrease, principally resulting from foreign exchange losses as compared to gains in the 2009 period, and a $6 million net reduction in investment income, partially offset by increased commission revenue. Interest expense decreased $6 million, or 10%, due to the lower interest rate environment and reduced levels of LFB’s customer deposits.

 

48

---

Table of Contents

Compensation and benefits expense for the 2010 period, including the 2010 special item of $25 million, increased $121 million, or 27%. When excluding the 2010 special item, compensation and benefits expense increased $96 million, or 22%, which includes an increase in the provision for discretionary compensation and profit pools relating to the increase in operating revenue and a reduction in the amortization of share-based and deferred cash incentive awards. Compensation and benefits expense, excluding the 2010 special item, was 60.0% and 65.6% of operating revenue for the 2010 and 2009 periods, respectively. The reduction in the compensation ratio for the first half of 2010 is due primarily to execution of our previously announced goal to grow annual compensation expense at a slower rate than operating revenue.

 

Non-compensation expense increased $19 million, or 13%. Factors contributing to the increase were increased spending on travel and other business development activities, including technology and increased fund administration expenses related to the increased level of business activity and AUM. The ratio of non-compensation expense to operating revenue was 18.9% as compared to 22.3% of operating revenue for the 2009 period.

 

Amortization of intangible assets increased $3 million principally due to the Edgewater acquisition in July 2009.

 

In the first quarters of 2010 and 2009, the Company announced plans to reduce certain staff and realign personnel. As a result, the 2010 and 2009 special items include restructuring charges of $87 million and $63 million, respectively, in connection with severance and benefit payments, the acceleration of unrecognized expense pertaining to RSUs previously granted to individuals who were terminated and certain other costs related to the restructuring initiatives.

 

Operating income for the 2010 period was $33 million, as compared to an operating loss of $33 million in the prior year period (with such amounts including the impact of the 2010 and 2009 special items) and, as a percentage of net revenue, was 4% as compared to (5)% in the 2009 period. Excluding the impact of the 2010 and 2009 special items in each period, operating income was $145 million, an increase of $115 million, as compared to operating income of $30 million in 2009, and, as a percentage of net revenue, was 17%, as compared to 5%, respectively.

 

The provision for income taxes was $19 million, an increase of $10 million, as compared to $9 million in the 2009 period. When excluding the tax benefits of $7 million and $6 million relating to the 2010 and 2009 special items, respectively, the income tax provision was $26 million in the 2010 period compared to approximately $15 million in the 2009 period, with the increase principally due to increases in operating income in 2010.

 

Net income attributable to noncontrolling interests increased $4 million, as compared to the 2009 period.

 

Business Segments

 

The following is a discussion of net revenue and operating income for the Company’s business segments - Financial Advisory, Asset Management and Corporate. Each segment’s operating expenses include (i) compensation and benefits expenses that are incurred directly in support of the segment and (ii) other operating expenses, which include directly incurred expenses for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourcing, and indirect support costs (including compensation and benefits expense and other operating expenses related thereto) for administrative services. Such administrative services include, but are not limited to, accounting, tax, legal, facilities management and senior management activities. Such support costs are allocated to the relevant segments based on various statistical drivers such as, among other items, headcount, square footage and transactional volume. As reflected in the tables below, each segment’s operating results are presented, as applicable, on an “as reported” and “excluding special items” basis (see Note 19 of Notes to Condensed Consolidated Financial Statements).

 

49

---

Table of Contents

Financial Advisory

 

The following table summarizes the operating results of the Financial Advisory segment:

 

		Three Months Ended June 30,
		2010				2009
		($ in thousands)
M&A and Strategic Advisory		$	145,855			$	134,854
Restructuring			79,879				93,231
Capital Markets and Other Advisory			20,239				23,939
Net Revenue			245,973				252,024
Operating Expenses			213,900				205,485
Operating Income		$	32,073			$	46,539
Operating Income, As A Percentage Of Net Revenue			13	%			18	%

 

		Six Months Ended June 30,
		2010												2009
		U.S. GAAP As  Reported				Impact of Special Item (a)				Non-U.S. GAAP Excluding Special Item (b)				U.S. GAAP As  Reported
		($ in thousands)
M&A and Strategic Advisory		$	293,411							$	293,411			$	231,329
Restructuring			180,067								180,067				154,160
Capital Markets and Other Advisory			40,991								40,991				29,512
Net Revenue			514,469								514,469				415,001
Operating Expenses (c)			451,700			$	19,571				432,129				383,106
Operating Income (Loss)		$	62,769			$	(19,571	)		$	82,340			$	31,895
Operating Income, As A Percentage Of Net Revenue			12	%							16	%			8	%

 

		As of June 30,
		2010		2009
Headcount (d):
Managing Directors		131		147
Other Employees:
Business segment professionals		673		671
All other professionals and support staff		215		217
Total		1,019		1,035

 

(a)	Represents the portion of the 2010 special item attributable to the Financial Advisory segment (see Note 19 of Notes to Condensed Consolidated Financial Statements).

(b)	A non-U.S. GAAP measure that management believes provides the most meaningful comparison between historical, present and future periods.

(c)	Includes indirect support costs (including compensation and benefits expense and other operating expenses related thereto).

(d)	Excludes headcount related to indirect support functions, with such headcount being included in the Corporate segment.

 

50

---

Table of Contents

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

 

		Six Months Ended June 30,
		2010			2009
Lazard Statistics:
Number of Clients:
Total		383			370
With Fees Greater than $1 million		125			119
Percentage of Total Financial Advisory Revenue from Top 10 Clients		25	%		24	%
Number of M&A Transactions Completed Greater than $1 billion (a)		9			20

 

(a)	Source: Thomson Financial as of July 9, 2010.

 

The geographical distribution of Financial Advisory net revenue is set forth below in percentage terms. The offices that generate Financial Advisory net revenue are located in the U.S., Europe (principally in the U.K., France, Italy, Spain and Germany) and the rest of the world (principally in Australia).

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2010			2009			2010			2009
United States		54	%		53	%		54	%		53	%
Europe		43			41			43			42
Rest of World		3			6			3			5
Total		100	%		100	%		100	%		100	%

 

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

 

Financial Advisory Results of Operations

 

Financial Advisory’s quarterly revenue and profits can fluctuate materially depending on the number, size and timing of completed transactions on which it advised, as well as seasonality and other factors. Accordingly, the revenue and profits in any particular quarter or period may not be indicative of future results. Lazard management believes that annual results are the most meaningful basis for comparison among present, historical and further periods. As reflected in the table of operating results of the Financial Advisory segment above, the portion of the 2010 special item attributable to the Financial Advisory segment had a significant impact on the segment’s reported operating results for the six month period ended June 30, 2010. Lazard management believes that comparisons between periods are most meaningful after excluding the impact of such item.

 

51

---

Table of Contents

Three Months Ended June 30, 2010 versus June 30, 2009

 

Financial Advisory net revenue decreased $6 million, or 2%, as compared to the 2009 period, with increases in M&A and Strategic Advisory revenue of $11 million, or 8%, being offset by decreases in Restructuring revenue of $13 million, or 14%, and Capital Markets and Other Advisory net revenue of $4 million, or 15%.

 

The increase in M&A and Strategic Advisory revenue was principally due to higher average fees per M&A and Strategic Advisory assignment. Our major clients, which in the aggregate represented a significant portion of our M&A and Strategic Advisory revenue for the second quarter of 2010, included the Al Fayed Family Trust, Areva, AXA Private Equity, Cisco Systems, Continental Airlines, Cote d’Ivoire, Newcrest Mining, OSI Pharmaceuticals, Qwest Communications International and Royal Bank of Scotland Group.

 

Restructuring revenue is derived from various activities, including bankruptcy assignments, global debt and financing restructurings, distressed asset sales and advice on complex on- and off-balance sheet assignments, such as retiree health care obligations. The decrease in Restructuring revenue was principally driven by a decrease in retainer fees, partially offset by an increase in success fees. The decline in retainer fees is related to a lower number of active deals versus that in the 2009 period, consistent with the industry trend previously described. Notable assignments completed in the second quarter of 2010 included Citadel Broadcasting Group, Cooper Standard Automotive, Gala Coral Group, Grupo Reyal Urbis and Smurfit Stone Container. Several of these assignments that were completed in the second quarter of 2010 began in the first half of 2009.

 

The decrease in Capital Markets and Other Advisory net revenue principally reflected a decrease in underwriting fees from public offerings. Such decrease was partially offset by increased revenue in our Private Fund Advisory Group resulting from an increase in the number and value of fund closings.

 

Operating expenses increased $8 million, or 4%, as compared to the 2009 period. Contributing to the increase were higher costs related to travel and other business development expenses, and technology expenses.

 

Financial Advisory operating income was $32 million, a decrease of $14 million, as compared to the 2009 period, and represented 13% of segment net revenues in the 2010 period as compared to 18% in the 2009 period.

 

Six Months Ended June 30, 2010 versus June 30, 2009

 

Financial Advisory net revenue increased approximately $99 million, or 24%, as compared to the 2009 period, reflecting increases in M&A and Strategic Advisory revenue of $62 million, or 27%, Restructuring revenue of $26 million, or 17%, and Capital Markets and Other Advisory net revenue of $11 million, or 39%.

 

The increase in M&A and Strategic Advisory revenue was principally due to an increase in completed transactions in which we were engaged and higher average fees per M&A and Strategic Advisory assignment.

 

The increase in Restructuring revenue was principally driven by an increase in success fees, with such increase more than offsetting a decline in retainer fees earned. The decline in retainer fees is related to a lower number of active assignments in the six months of 2010 versus that in the 2009 period, consistent with the industry trend previously described.

 

The increase in Capital Markets and Other Advisory net revenue principally reflected increased revenue in our Private Fund Advisory Group, resulting from an increase in the number and value of fund closings, and was partially offset by decreases in underwriting fees from public offerings.

 

Operating expenses increased $69 million, or 18%, as compared to the 2009 period. Excluding the impact of the portion of the 2010 special item attributable to the Financial Advisory segment, operating expenses increased $49 million, or 13%. Contributing to the increase was a higher provision for discretionary compensation related to

 

52

---

Table of Contents

the increase in operating revenue, and higher costs related to travel and other business development expenses and technology expenses. During the 2010 period, the Company has grown its Financial Advisory compensation expense at a slower rate than our corresponding segment revenue, which is consistent with our previously announced goal as described above.

 

Financial Advisory operating income was $63 million, an increase of $31 million, as compared to the 2009 period, and represented 12% of segment net revenues in the 2010 period. Excluding the impact of the portion of the 2010 special item attributable to the Financial Advisory segment, operating income in the 2010 period increased $50 million, and represented 16% of segment net revenues, as compared to 8% in the 2009 period.

 

Asset Management

 

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

 

		As of
		June 30, 2010			December  31, 2009
		($ in millions)
AUM:
International Equities		$	26,562		$	32,268
Global Equities			59,862			58,332
U.S. Equities			16,242			16,003
Total Equities			102,666			106,603
European and International Fixed Income			10,720			13,763
Global Fixed Income			1,614			1,794
U.S. Fixed Income			3,135			2,499
Total Fixed Income			15,469			18,056
Alternative Investments			4,336			3,936
Private Equity			950			839
Cash Management			62			109
Total AUM		$	123,483		$	129,543

 

Average AUM for the 2010 and 2009 periods is set forth below. Average AUM is based on an average of quarterly ending balances for the respective periods.

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2010			2009			2010			2009
		($ in millions)
Average AUM		$	129,227		$	89,551		$	129,333		$	90,071

 

Total AUM at June 30, 2010 decreased $6 billion, or 5%, as compared to that at December 31, 2009. Average AUM for both the three month and six month periods in 2010 was 44% higher than the average AUM for the corresponding 2009 periods, principally the result of market appreciation (which was generally consistent with the industry as a whole) for the last nine months of 2009 and, to a lesser extent, the first three months of 2010, and net inflows occurring over the last twelve month period. International, Global and U.S. equities represented 22%, 48% and 13% of total AUM at June 30, 2010, respectively, versus 25%, 45% and 12% of total AUM at December 31, 2009, respectively.

 

As of June 30, 2010 and December 31, 2009, approximately 89% of our AUM was managed on behalf of institutional clients, including corporations, labor unions, public pension funds, insurance companies and banks, and through sub-advisory relationships, mutual fund sponsors, broker-dealers and registered advisors and, as of both such dates, 11% of our AUM was managed on behalf of individual client relationships, which are principally with family offices and high-net worth individuals.

 

53

---

Table of Contents

As of June 30, 2010, AUM denominated in foreign currencies represented approximately 42% of our total AUM, as compared to 45% at December 31, 2009. Foreign denominated AUM declines in value with the strengthening of the U.S. dollar and increases in value as the U.S. dollar weakens.

 

The following is a summary of changes in AUM for the 2010 and 2009 periods.

 

		Three Months Ended June 30,							Six Months Ended June 30,
		2010				2009			2010				2009
		($ in millions)
AUM - Beginning of Period		$	134,972			$	81,084		$	129,543			$	91,109
Net Flows(a)			2,064				353			5,031				(2,093	)
Market and Foreign Exchange Appreciation (Depreciation)			(13,553	)			16,583			(11,091	)			9,004
AUM - End of Period		$	123,483			$	98,020		$	123,483			$	98,020

 

(a)	Includes inflows of $9,275 and $5,748 and outflows of $7,211 and $5,395 for the three month periods in 2010 and 2009, respectively, and inflows of $18,281 and $9,289 and outflows of $13,250 and $11,382 for the six month periods in 2010 and 2009, respectively.

 

Inflows in the first half of 2010 were principally Global Equity and, to a lesser extent, U.S. Equity products, due to increased investments in existing accounts as well as new accounts gained. Outflows in the period occurred most significantly in Global and International Equity and Fixed Income products.

 

As of July 26, 2010, AUM was $132.8 billion, a $9.3 billion increase since June 30, 2010. The change in AUM was due to market appreciation of $8.8 billion and net inflows of $0.5 billion. Market appreciation was approximately 7% of AUM since June 30, 2010, which was generally consistent with the increase in global market indices during that period.

 

The following table summarizes the operating results of the Asset Management segment.

 

		Three Months Ended June 30,
		2010				2009
		($ in thousands)
Revenue:
Management Fees		$	169,389			$	107,123
Incentive Fees			12,635				13,170
Other Income			4,928				10,993
Sub-total			186,952				131,286
Noncontrolling Interest Revenue