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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 30, 2014

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 10112

(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  x    No  ¨

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

 

Large accelerated filer  ¨		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 October 20, 2014, in addition to profit participation interests, there were 129,766,090 common membership interests and two managing member interests outstanding.

 

 

 

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TABLE OF CONTENTS

When we use the terms “Lazard Group”, “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 (the “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 material operating assets other than indirect ownership as of September 30, 2014 of all of the common membership interests in Lazard Group. Lazard Ltd controls Lazard Group through two of its indirect wholly-owned subsidiaries that are co-managing members of Lazard Group.

Lazard Group has granted profit participation interests in Lazard Group to certain of its managing directors. 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 practice.

 

		Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			42
Item 3. Quantitative and Qualitative Disclosures About Market Risk			76
Item 4. Controls and Procedures			76
Part II. Other Information
Item 1. Legal Proceedings			77
Item 1A. Risk Factors			77
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			77
Item 3. Defaults Upon Senior Securities			77
Item 4. Mine Safety Disclosures			77
Item 5. Other Information			77
Item 6. Exhibits			78
Signatures			84

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 

		Page
Condensed Consolidated Statements of Financial Condition as of September 30, 2014 and December  31, 2013			2
Condensed Consolidated Statements of Operations for the three month and nine month periods ended September 30, 2014 and 2013			4
Condensed Consolidated Statements of Comprehensive Income for the three month and nine month periods ended September 30, 2014 and 2013			5
Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2014 and 2013			6
Condensed Consolidated Statements of Changes in Members’ Equity for the nine month periods ended September 30, 2014 and 2013			7
Notes to Condensed Consolidated Financial Statements			9

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

(UNAUDITED)

(dollars in thousands)

 

		September 30, 2014				December 31, 2013
ASSETS
Cash and cash equivalents		$	789,874			$	832,277
Deposits with banks and short-term investments			240,728				244,879
Cash deposited with clearing organizations and other segregated cash			44,710				62,046
Receivables (net of allowance for doubtful accounts of $29,859 and $28,777 at September 30, 2014 and December 31, 2013, respectively):
Fees			429,477				452,535
Customers and other			77,908				52,220
Related parties			98,708				117,862
			606,093				622,617
Investments			537,562				466,542
Property (net of accumulated amortization and depreciation of $257,512 and $253,930 at September 30, 2014 and December 31, 2013, respectively)			227,358				248,795
Goodwill and other intangible assets (net of accumulated amortization of $51,325 and $45,379 at September 30, 2014 and December 31, 2013, respectively)			356,254				363,877
Other assets			290,359				252,955
Total Assets		$	3,092,938			$	3,093,988

 

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

(UNAUDITED)

(dollars in thousands)

 

		September 30, 2014				December 31, 2013
LIABILITIES AND MEMBERS’ EQUITY
Liabilities:
Deposits and other customer payables		$	278,334			$	275,434
Accrued compensation and benefits			517,640				523,063
Senior debt			1,048,350				1,048,350
Capital lease obligations			12,889				15,834
Related party payables			112,620				202,919
Other liabilities			514,669				492,262
Total Liabilities			2,484,502				2,557,862
Commitments and contingencies
MEMBERS’ EQUITY
Members’ equity (net of 4,005,583 and 5,744,856 shares of Lazard Ltd Class A common stock, at a cost of $161,311 and $194,873 at September 30, 2014 and December 31, 2013, respectively)			663,030				571,668
Accumulated other comprehensive loss, net of tax			(118,963	)			(102,196	)
Total Lazard Group LLC Members’ Equity			544,067				469,472
Noncontrolling interests			64,369				66,654
Total Members’ Equity			608,436				536,126
Total Liabilities and Members’ Equity		$	3,092,938			$	3,093,988

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2014 AND 2013

(UNAUDITED)

(dollars in thousands)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
REVENUE
Investment banking and other advisory fees			$290,604				$232,006				$843,186				$660,351
Asset management fees			276,940				241,478				805,848				707,536
Interest income			2,609				2,964				8,201				8,560
Other			12,924				25,554				60,815				61,518
Total revenue			583,077				502,002				1,718,050				1,437,965
Interest expense			16,781				22,033				51,654				66,485
Net revenue			566,296				479,969				1,666,396				1,371,480
OPERATING EXPENSES
Compensation and benefits			338,598				301,795				1,006,059				910,638
Occupancy and equipment			29,394				27,388				86,055				96,412
Marketing and business development			19,127				17,076				59,254				60,645
Technology and information services			23,025				22,216				68,465				65,330
Professional services			10,820				12,629				31,180				30,646
Fund administration and outsourced services			17,034				14,475				48,490				43,328
Amortization of intangible assets related to acquisitions			4,020				877				5,946				2,758
Other			10,233				2,443				29,626				17,493
Total operating expenses			452,251				398,899				1,335,075				1,227,250
OPERATING INCOME			114,045				81,070				331,321				144,230
Provision for income taxes			22,370				12,252				56,105				22,053
NET INCOME			91,675				68,818				275,216				122,177
LESS - NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS			1,060				2,100				5,733				4,461
NET INCOME ATTRIBUTABLE TO LAZARD GROUP LLC			$90,615				$66,718				$269,483				$117,716

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2014 AND 2013

(UNAUDITED)

(dollars in thousands)

 

		Three Months  Ended September 30,								Nine Months  Ended September 30,
		2014				2013				2014				2013
NET INCOME		$	91,675			$	68,818			$	275,216			$	122,177
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Currency translation adjustments			(23,572	)			11,407				(16,787	)			(9,557	)
Amortization of interest rate hedge			–				264				–				791
Employee benefit plans:
Actuarial gain (loss) (net of tax (expense) benefit of $(1,731) and $(25) for the three months ended September 30, 2014 and 2013, respectively, and $1,919 and $1,686 for the nine months ended September 30, 2014 and 2013, respectively)			3,251				50				(3,695	)			(2,669	)
Adjustment for items reclassified to earnings (net of tax expense of $528 and $404 for the three months ended September 30, 2014 and 2013, respectively, and $1,391 and $1,206 for the nine months ended September 30, 2014 and 2013, respectively)			1,145				1,223				3,714				3,653
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX			(19,176	)			12,944				(16,768	)			(7,782	)
COMPREHENSIVE INCOME			72,499				81,762				258,448				114,395
LESS - COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS			1,059				2,086				5,732				4,381
COMPREHENSIVE INCOME ATTRIBUTABLE TO LAZARD GROUP LLC		$	71,440			$	79,676			$	252,716			$	110,014

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2014 AND 2013

(UNAUDITED)

(dollars in thousands)

 

		Nine Months Ended September 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	275,216			$	122,177
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of property			26,332				25,465
Amortization of deferred expenses, share-based incentive compensation and interest rate hedge			227,077				238,584
Amortization of intangible assets related to acquisitions			5,946				2,758
(Increase) decrease in operating assets:
Deposits with banks and short-term investments			(18,626	)			25,558
Cash deposited with clearing organizations and other segregated cash			15,630				6,291
Receivables-net			(1,218	)			(61,543	)
Investments			(78,023	)			(55,300	)
Other assets			(105,041	)			(80,162	)
Increase (decrease) in operating liabilities:
Deposits and other payables			(61,671	)			11,123
Accrued compensation and benefits and other liabilities			59,458				(67,327	)
Net cash provided by operating activities			345,080				167,624
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property			(14,161	)			(54,344	)
Disposals of property			1,023				5,843
Net cash used in investing activities			(13,138	)			(48,501	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Contributions from noncontrolling interests			902				805
Excess tax benefits from share-based incentive compensation			1,508				2,211
Other financing activities			200				–
Payments for:
Capital lease obligations			(1,738	)			(2,092	)
Distributions to noncontrolling interests			(8,919	)			(9,663	)
Purchase of Lazard Ltd Class A common stock			(141,192	)			(77,934	)
Distribution to members			(109,805	)			(61,496	)
Settlement of vested share-based incentive compensation			(83,783	)			(125,546	)
Other financing activities			(4,432	)			(1,455	)
Net cash used in financing activities			(347,259	)			(275,170	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(27,086	)			(7,309	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(42,403	)			(163,356	)
CASH AND CASH EQUIVALENTS—January 1			832,277				845,503
CASH AND CASH EQUIVALENTS—September 30		$	789,874			$	682,147

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2013

(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, 2013 (*)		$	545,572			$	(92,393	)		$	453,179			$	75,908			$	529,087
Comprehensive income (loss):
Net income			117,716								117,716				4,461				122,177
Other comprehensive loss - net of tax							(7,702	)			(7,702	)			(80	)			(7,782	)
Amortization of share-based incentive compensation			183,341								183,341								183,341
Distributions to members and noncontrolling interests, net			(61,496	)							(61,496	)			(8,858	)			(70,354	)
Purchase of Lazard Ltd Class A common stock			(77,934	)							(77,934	)							(77,934	)
Delivery of Lazard Ltd Class A common stock in connection with shared-based incentive compensation awards and related tax benefit of $862			(124,684	)							(124,684	)							(124,684	)
Business acquisitions and related equity transactions:
Lazard Ltd Class A common stock issuable (including related amortization)			834								834								834
Adjustment related to noncontrolling interests			(656	)							(656	)			(344	)			(1,000	)
Other			(1,455	)							(1,455	)							(1,455	)
Balance – September 30, 2013 (*)		$	581,238			$	(100,095)			$	481,143			$	71,087			$	552,230

  

 

(*)	Includes 129,766,090 common membership interests issued at both January 1, 2013 and September 30, 2013. Also includes profit participation interests and two managing member interests issued at each such date.

 

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2014

(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, 2014 (*)		$	571,668			$	(102,196	)		$	469,472			$	66,654			$	536,126
Comprehensive income (loss):
Net income			269,483								269,483				5,733				275,216
Other comprehensive loss – net of tax							(16,767	)			(16,767	)			(1	)			(16,768	)
Amortization of share-based incentive compensation			159,095								159,095								159,095
Distributions to members and noncontrolling interests, net			(109,805	)							(109,805	)			(8,017	)			(117,822	)
Purchase of Lazard Ltd Class A common stock			(141,192	)							(141,192	)							(141,192	)
Delivery of Lazard Ltd Class A common stock in connection with shared-based incentive compensation awards and related tax benefit of $1,409			(82,374	)							(82,374	)							(82,374	)
Business acquisitions and related equity transactions:
Lazard Ltd Class A common stock issuable (including related amortization)			387								387								387
Other			(4,232	)							(4,232	)							(4,232	)
Balance – September 30, 2014 (*)		$	663,030			$	(118,963	)		$	544,067			$	64,369			$	608,436

 

(*)	Includes 129,766,090 common membership interests issued at both January 1, 2014 and September 30, 2014. Also includes profit participation interests and two managing member interests issued at each such date.

 

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

1.	ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

Lazard Ltd indirectly held 100% and approximately 99.5% of all outstanding Lazard Group common membership interests as of September 30, 2014 and December 31, 2013, respectively. Lazard Ltd, through its control of the managing members of Lazard Group, controls Lazard Group. LAZ-MD Holdings LLC (“LAZ-MD Holdings”), an entity formerly owned by Lazard Group’s current and former managing directors, held approximately 0.5% of the outstanding Lazard Group common membership interests as of December 31, 2013. Additionally, LAZ-MD Holdings was the sole owner of the one issued and outstanding share of Lazard Ltd’s Class B common stock (the “Class B common stock”), which provided LAZ-MD Holdings with approximately 0.6% of the voting power, but no economic rights, in Lazard Ltd as of December 31, 2013. In May 2014, the remaining outstanding Lazard Group common membership interests held by LAZ-MD Holdings were exchanged for shares of Lazard Ltd’s Class A common stock, par value $0.01 per share (“Class A common stock”), and the sole issued and outstanding share of Lazard Ltd’s Class B common stock was automatically converted into one share of Lazard Ltd’s Class A common stock pursuant to the provisions of Lazard Ltd’s bye-laws, resulting in only one outstanding class of common stock (the “Final Exchange of LAZ-MD Interests”). Following the Final Exchange of LAZ-MD Interests, Lazard Group became a wholly-owned indirect subsidiary of Lazard Ltd.

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

 

•

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

 

•

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

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

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Significant Accounting Policies

Basis of Presentation—The accompanying condensed consolidated financial statements of Lazard Group have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in Lazard Group’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “Form 10-K”). The accompanying December 31, 2013 unaudited condensed consolidated statement of financial condition data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.

Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. For example, discretionary compensation and benefits expense for interim periods is accrued based on the year-to-date amount of revenue earned, and an assumed annual ratio of compensation and benefits expense to revenue, with the applicable amounts adjusted for certain items. Although these estimates are based on management’s knowledge of current events and actions that Lazard may undertake in the future, actual results may differ materially from the estimates.

The consolidated results of operations for the three month and nine month periods ended September 30, 2014 are not necessarily indicative of the results to be expected for any future interim or annual period.

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

The Company’s policy is to consolidate entities in which it has a controlling financial interest. The Company consolidates (i) a voting interest entity (“VOE”) where the Company either holds a majority of the voting interest in such entity or is the general partner in such entity and the third-party investors do not have the right to replace the general partner and (ii) a variable interest entity (“VIE”) where the Company absorbs a majority of the expected losses, expected residual returns, or both, of such entity. When the Company does not have a controlling interest in an entity, but exerts significant influence over such entity’s operating and financial decisions, the Company applies the equity method of accounting in which it records in earnings its share of earnings or losses of the entity. Intercompany transactions and balances have been eliminated.

Deposits with Banks and Short-Term Investments—Represents LFB’s short-term deposits, including with the Banque de France and amounts placed by LFB in short-term, highly liquid securities, such as French government securities, with original maturities of 90 days or less when purchased. The level of these deposits and investments 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. The carrying value of deposits with banks and short-term investments approximates fair value due to their short-term maturities. Under the fair value hierarchy, such amounts would be categorized within Level 1 if carried at fair value.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

For a detailed discussion about the Company’s significant accounting policies, see Note 2 of Notes to Consolidated Financial Statements in our Form 10-K.

 

2.	RECENT ACCOUNTING DEVELOPMENTS

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

Revenue from Contracts with Customers—In May 2014, the FASB issued comprehensive new revenue recognition guidance. The guidance requires a company to recognize revenue when it transfers promised services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those services and requires enhanced disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is not permitted. The new guidance can be applied either retrospectively to each prior reporting period presented, or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the new guidance.

 

3.	RECEIVABLES

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

Receivables are stated net of an estimated allowance for doubtful accounts, for past due amounts and for specific accounts deemed uncollectible, which may include situations where a fee is in dispute. Activity in the allowance for doubtful accounts for the three month and nine month periods ended September 30, 2014 and 2013 was as follows:

 

		Three Month Period Ended September 30,								Nine Month Period Ended September 30,
		2014				2013				2014				2013
Beginning Balance		$	29,943			$	24,593			$	28,777			$	23,017
Bad debt expense, net of recoveries			2,064				(198	)			9,567				1,644
Charge-offs, foreign currency translation and other adjustments			(2,148	)			1,765				(8,485	)			1,499
Ending Balance		$	29,859			$	26,160			$	29,859			$	26,160

At September 30, 2014 and December 31, 2013, the Company had receivables past due or deemed uncollectible of $35,086 and $39,341, respectively.

Of the Company’s fee receivables at September 30, 2014 and December 31, 2013, $81,531 and $69,464, respectively, represented interest-bearing financing receivables. In addition, at September 30, 2014 and December 31, 2013, the Company had interest-bearing related party receivables of $92,706 and $108,204,

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

respectively. Based upon our historical loss experience, the credit quality of the counterparties, and the lack of past due or uncollectible amounts, there was no allowance for doubtful accounts required at those dates related to such receivables.

The aggregate carrying amount of our non-interest bearing receivables of $431,856 and $444,949 at September 30, 2014 and December 31, 2013, respectively, approximates fair value.

 

4.	INVESTMENTS

The Company’s investments and securities sold, not yet purchased, consist of the following at September 30, 2014 and December 31, 2013:

 

		September 30,				December 31,
		2014				2013
Interest-bearing deposits		$	24,785			$	516
Debt			7,185				8,013
Equities			63,275				59,394
Funds:
Alternative investments (a)			36,184				37,030
Debt (a)			68,739				47,206
Equity (a)			211,772				190,702
Private equity			117,104				114,193
			433,799				389,131
Equity method			8,518				9,488
Total investments			537,562				466,542
Less:
Interest-bearing deposits			24,785				516
Equity method			8,518				9,488
Investments, at fair value		$	504,259			$	456,538
Securities sold, not yet purchased, at fair value (included in “other liabilities”)		$	8,630			$	4,045

 

(a)

Interests in alternative investment funds, debt funds and equity funds include investments with fair values of $8,566, $43,779 and $166,541, respectively, at September 30, 2014 and $7,099, $31,515 and $130,481, respectively, at December 31, 2013, held in order to satisfy the Company’s liability upon vesting of previously granted Lazard Fund Interests (“LFI”) and other similar deferred compensation arrangements. LFI represent grants by the Company to eligible employees of actual or notional interests in a number of Lazard-managed funds (see Notes 6 and 12 of Notes to Condensed Consolidated Financial Statements).

Interest-bearing deposits mature within one year and are carried at cost that approximates fair value due to their short-term maturities.

Debt securities primarily consist of seed investments invested in debt securities held within separately managed accounts related to our Asset Management business.

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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

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

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

Private equity investments include those owned by Lazard and those consolidated but not owned by Lazard. Private equity investments owned by Lazard are primarily comprised of investments in private equity funds. Such investments primarily include (i) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small- to mid-cap European companies, (ii) Corporate Partners II Limited (“CP II”), a fund targeting significant noncontrolling-stake investments in established private companies, (iii) Edgewater Growth Capital Partners III, L.P. (“EGCP III”), a fund primarily making equity and buyout investments in middle market companies and (iv) Lazard Australia Corporate Opportunities Fund (“COF2”), a Lazard-managed Australian fund targeting Australian mid-market investments.

Private equity investments consolidated but not owned by Lazard relate to the economic interests that are owned by the management team and other investors in the Edgewater Funds (“Edgewater”) which totaled $6,732 and $9,787 at September 30, 2014 and December 31, 2013, respectively (see Note 10 of Notes to Condensed Consolidated Financial Statements).

During the three month and nine month periods ended September 30, 2014 and 2013, the Company reported in “revenue-other” on its condensed consolidated statements of operations gross unrealized investment gains and losses pertaining to “trading” securities as follows:

 

		Three Month Period Ended September 30,								Nine Month Period Ended September 30,
		2014				2013				2014				2013
Gross unrealized investment gains		$	–			$	10,800			$	4,700			$	12,044
Gross unrealized investment losses		$	13,759			$	–			$	5,601			$	3,120

 

5.	FAIR VALUE MEASUREMENTS

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

 

Level 1.

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

 

Level 2.

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Level 3.

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

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

The fair value of equities is classified as Level 1 or Level 3 as follows: marketable equity securities are classified as Level 1 and are valued based on the last trade price on the primary exchange for that security as provided by external pricing services; equity securities in private companies are generally classified as Level 3.

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

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

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

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

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

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The following tables present the classification of investments and certain other assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 within the fair value hierarchy:

 

		September 30, 2014
		Level 1				Level 2				Level 3				Total
Assets:
Investments:
Debt		$	1,141			$	6,044			$	–			$	7,185
Equities			61,941				–				1,334				63,275
Funds:
Alternative investments			–				36,184				–				36,184
Debt			68,735				4				–				68,739
Equity			211,729				43				–				211,772
Private equity			–				–				117,104				117,104
Derivatives			–				8,625				–				8,625
Total		$	343,546			$	50,900			$	118,438			$	512,884
Liabilities:
Securities sold, not yet purchased		$	8,630			$	–			$	–			$	8,630
Derivatives			–				209,941				–				209,941
Total		$	8,630			$	209,941			$	–			$	218,571

 

		December 31, 2013
		Level 1				Level 2				Level 3				Total
Assets:
Investments:
Debt		$	1,681			$	6,332			$	–			$	8,013
Equities			58,054				–				1,340				59,394
Funds:
Alternative investments			–				37,030				–				37,030
Debt			47,202				4				–				47,206
Equity			190,660				42				–				190,702
Private equity			–				–				114,193				114,193
Derivatives			–				682				–				682
Total		$	297,597			$	44,090			$	115,533			$	457,220
Liabilities:
Securities sold, not yet purchased		$	4,045			$	–			$	–			$	4,045
Derivatives			–				164,001				–				164,001
Total		$	4,045			$	164,001			$	–			$	168,046

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The following tables provide a summary of changes in fair value of the Company’s Level 3 assets for the three month and nine month periods ended September 30, 2014 and 2013:

 

		Three Months Ended September 30, 2014
		Beginning Balance				Net  Unrealized/ Realized Gains (Losses) Included In Revenue- Other (a)				Purchases/ Acquisitions				Sales/ Dispositions				Foreign Currency Translation Adjustments				Ending Balance
Investments:
Equities		$	1,370			$	–			$	–			$	–			$	(36	)		$	1,334
Private equity funds			116,895				2,500				7,498				(5,769	)			(4,020	)			117,104
Total Level 3 Assets		$	118,265			$	2,500			$	7,498			$	(5,769	)		$	(4,056	)		$	118,438

 

		Nine Months Ended September 30, 2014
		Beginning Balance				Net  Unrealized/ Realized Gains (Losses) Included In Revenue- Other (a)				Purchases/ Acquisitions				Sales/ Dispositions				Foreign Currency Translation Adjustments				Ending Balance
Investments:
Equities		$	1,340			$	14			$	–			$	–			$	(20	)		$	1,334
Private equity funds			114,193				9,336				8,709				(10,854	)			(4,280	)			117,104
Total Level 3 Assets		$	115,533			$	9,350			$	8,709			$	(10,854	)		$	(4,300	)		$	118,438

 

		Three Months Ended September 30, 2013
		Beginning Balance				Net  Unrealized/ Realized Gains (Losses) Included In Revenue- Other (a)				Purchases/ Acquisitions				Sales/ Dispositions				Foreign Currency Translation Adjustments				Ending Balance
Investments:
Equities		$	637			$	2			$	650			$	–			$	34			$	1,323
Alternative investment funds			11				(11	)			–				–				–				–
Private equity funds			112,833				5,174				2,907				(6,848	)			1,502				115,568
Total Level 3 Assets		$	113,481			$	5,165			$	3,557			$	(6,848	)		$	1,536			$	116,891

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

		Nine Months Ended September 30, 2013
		Beginning Balance				Net  Unrealized/ Realized Gains (Losses) Included In Revenue- Other (a)				Purchases/ Acquisitions				Sales/ Dispositions				Foreign Currency Translation Adjustments				Ending Balance
Investments:
Equities		$	190			$	8			$	1,095			$	–			$	30			$	1,323
Alternative investment funds			3,457				117				–				(3,574	)			–				–
Equity funds			10				–				–				(10	)			–				–
Private equity funds			112,444				8,912				6,166				(12,716	)			762				115,568
Total Level 3 Assets		$	116,101			$	9,037			$	7,261			$	(16,300	)		$	792			$	116,891

 

(a)	Earnings for the three month and nine month periods ended September 30, 2014 and the three month and nine month periods ended September 30, 2013 include net unrealized gains of $810, $6,346, $2,680 and $6,007, respectively.

There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy during the three month and nine month periods ended September 30, 2014 and 2013.

Fair Value of Certain Investments Based on NAV—The Company’s Level 2 and Level 3 investments at September 30, 2014 and December 31, 2013 include certain investments that are valued using NAV or its equivalent as a practical expedient in determining fair value. Information with respect thereto was as follows:

 

September 30, 2014

% of Fair Value Not Redeemable

Estimated Liquidation Period of Investments Not Redeemable

Investments Redeemable

Fair value

Unfunded Commitments

% Next 5 Years

% 5-10 Years

% Thereafter

Redemption Frequency

Redemption Notice Period

Alternative investment funds:

Hedge funds

$

32,344

$

–

NA

NA

NA

NA

(a)

<30-60 days

Funds of funds

480

–

NA

NA

NA

NA

(b)

<30-90 days

Other

3,360

–

NA

NA

NA

NA

(c)

<30-60 days

Debt funds

4

–

NA

NA

NA

NA

(d)

30 days

Equity funds

43

–

NA

NA

NA

NA

(e)

30-90 days

Private equity funds:

Equity growth

76,164

19,137

(f)

100%

11%

61%

28%

NA

NA

Mezzanine debt

40,940

–

100%

–%

–%

100%

NA

NA

Total

$

153,335

$

19,137

 

(a)	weekly (17%), monthly (64%) and quarterly (19%)

(b)	monthly (98%) and quarterly (2%)

(c)	daily (11%), weekly (5%) and monthly (84%)

(d)	daily (100%)

(e)	daily (14%), monthly (58%) and quarterly (28%)

(f)	Unfunded commitments to private equity investments consolidated but not owned by Lazard of $7,518 are excluded. Such commitments are required to be funded by capital contributions from noncontrolling interest holders.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

December 31, 2013

% of Fair Value Not Redeemable

Estimated Liquidation Period of Investments Not Redeemable

Investments Redeemable

Fair value

Unfunded Commitments

% Next 5 Years

% 5-10 Years

% Thereafter

Redemption Frequency

Redemption Notice Period

Alternative investment funds:

Hedge funds

$

31,837

$

–

NA

NA

NA

NA

(a)

<30-90 days

Funds of funds

475

–

NA

NA

NA

NA

(b)

<30-90 days

Other

4,718

–

NA

NA

NA

NA

(c)

<30-60 days

Debt funds

4

–

NA

NA

NA

NA

(d)

30 days

Equity funds

42

–

NA

NA

NA

NA

(e)

30-90 days

Private equity funds:

Equity growth

70,054

27,135

(f)

100%

17%

60%

23%

NA

NA

Mezzanine debt

44,139

–

100%

–%

–%

100%

NA

NA

Total

$

151,269

$

27,135

 

(a)	weekly (17%), monthly (65%) and quarterly (18%)

(b)	monthly (95%) and quarterly (5%)

(c)	daily (7%), weekly (1%) and monthly (92%)

(d)	daily (100%)

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

(f)	Unfunded commitments to private equity investments consolidated but not owned by Lazard of $10,613 are excluded. Such commitments are required to be funded by capital contributions from noncontrolling interest holders.

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

Investment Capital Funding Commitments—At September 30, 2014, the Company’s maximum unfunded commitments for capital contributions to investment funds arose from (i) commitments to CP II, which amounted to $1,644 for potential “follow-on investments” and/or for fund expenses through the earlier of February 25, 2017 or the liquidation of the fund, (ii) commitments to EGCP III, which amounted to $12,688, through the earlier of October 12, 2016 (i.e., the end of the investment period) for investments and/or expenses (with a portion of the undrawn amount of such commitments as of that date remaining committed until October 12, 2023 in respect of “follow-on investments” and/or fund expenses) or the liquidation of the fund and (iii) commitments to COF2, which amounted to $4,805, through the earlier of November 11, 2016 (i.e., the end of the investment period) for investments and/or fund expenses (with a portion of the undrawn amount of such commitments as of that date remaining committed until November 11, 2019 in respect of “follow-on investments” and/or fund expenses) or the liquidation of the fund.

 

6.	DERIVATIVES

The Company enters into forward foreign currency exchange rate contracts, interest rate swaps, interest rate futures, total return swap contracts on various equity and debt indices and other derivative contracts to economically hedge exposures to fluctuations in currency exchange rates, interest rates and equity and debt prices. The Company reports its derivative instruments separately as assets and liabilities unless a legal right of

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

set-off exists under a master netting agreement enforceable by law. The Company’s derivative instruments are recorded at their fair value, and are included in “other assets” and “other liabilities” on the consolidated statements of financial condition. Gains and losses on the Company’s derivative instruments not designated as hedging instruments are included in “interest income” and “interest expense”, respectively, or “revenue-other”, depending on the nature of the underlying item, on the consolidated statements of operations.

In addition to the derivative instruments described above, the Company records derivative liabilities relating to its obligations pertaining to LFI and other similar deferred compensation arrangements, the fair value of which is based on the value of the underlying investments, adjusted for estimated forfeitures, and is included in “accrued compensation and benefits” in the consolidated statements of financial condition. Changes in the fair value of the derivative liabilities are included in “compensation and benefits” in the consolidated statements of operations, the impact of which equally offsets the changes in the fair value of investments which are currently expected to be delivered upon settlement of LFI and other similar deferred compensation arrangements, which are reported in “revenue-other” in the consolidated statements of operations.

The tables below present the fair values of the Company’s derivative instruments reported within “other assets” and “other liabilities” and the fair values of the Company’s derivative liabilities relating to its obligations pertaining to LFI and other similar deferred compensation arrangements (see Note 12 of Notes to Condensed Consolidated Financial Statements) on the accompanying condensed consolidated statements of financial condition as of September 30, 2014 and December 31, 2013:

 

		September 30, 2014				December 31, 2013
Derivative Assets:
Forward foreign currency exchange rate contracts		$	4,464			$	250
Total return swaps and other (a)			4,161				432
		$	8,625			$	682
Derivative Liabilities:
Forward foreign currency exchange rate contracts		$	20			$	1,579
LFI and other similar deferred compensation arrangements			209,921				162,422
		$	209,941			$	164,001

 

(a)

For total return swaps, amounts represent the netting of gross derivative assets and liabilities of $4,220 and $59 as of September 30, 2014, respectively, and $2,019 and $1,587 as of December 31, 2013, respectively, for contracts with the same counterparty under legally enforceable master netting agreements. Such amounts are recorded “net” in “other assets”, with receivables for net cash collateral under such contracts of $10,434 and $11,384 as of September 30, 2014 and December 31, 2013, respectively.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Net gains (losses) with respect to derivative instruments (predominantly reflected in “revenue-other”) and the Company’s derivative liabilities relating to its obligations pertaining to LFI and other similar deferred compensation arrangements (included in “compensation and benefits” expense) as reflected on the accompanying condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2014 and 2013, were as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Forward foreign currency exchange rate contracts		$	15,355			$	(5,310	)		$	14,380			$	(1,705	)
LFI and other similar deferred compensation arrangements			5,528				(7,519	)			(6,004	)			(7,767	)
Total return swaps and other			2,563				(6,469	)			(4,709	)			(7,857	)
Total		$	23,446			$	(19,298	)		$	3,667			$	(17,329	)

 

7.

PROPERTY

At September 30, 2014 and December 31, 2013, property consists of the following:

 

		Estimated Depreciable Life in Years				September 30, 2014				December 31, 2013
Buildings			33			$	158,551			$	173,772
Leasehold improvements			3-20				169,814				175,600
Furniture and equipment			3-10				151,269				149,597
Construction in progress							5,236				3,756
Total							484,870				502,725
Less - Accumulated depreciation and amortization							257,512				253,930
Property						$	227,358			$	248,795

 

8.	GOODWILL AND OTHER INTANGIBLE ASSETS

The components of goodwill and other intangible assets at September 30, 2014 and December 31, 2013 are presented below:

 

		September 30,				December 31,
		2014				2013
Goodwill		$	343,776			$	345,453
Other intangible assets (net of accumulated amortization)			12,478				18,424
		$	356,254			$	363,877

At September 30, 2014 and December 31, 2013, goodwill of $279,235 and $280,912, respectively, was attributable to the Company’s Financial Advisory segment and, at each such respective date, $64,541 of goodwill was attributable to the Company’s Asset Management segment.

 

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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 nine month periods ended September 30, 2014 and 2013 are as follows:

 

		Nine Months  Ended September 30,
		2014				2013
Balance, January 1		$	345,453			$	364,328
Business acquisitions			3,232				1,601
Foreign currency translation adjustments			(4,909	)			(15,310	)
Balance, September 30		$	343,776			$	350,619

The gross cost and accumulated amortization of other intangible assets as of September 30, 2014 and December 31, 2013, by major intangible asset category, are as follows:

 

		September 30, 2014												December 31, 2013
		Gross Cost				Accumulated Amortization				Net Carrying Amount				Gross Cost				Accumulated Amortization				Net Carrying Amount
Performance fees		$	30,740			$	21,116			$	9,624			$	30,740			$	17,173			$	13,567
Management fees, customer relationships and non-compete agreements			33,063				30,209				2,854				33,063				28,206				4,857
		$	63,803			$	51,325			$	12,478			$	63,803			$	45,379			$	18,424

Amortization expense of intangible assets for the three month and nine month periods ended September 30, 2014 was $4,020 and $5,946, respectively, and for the three month and nine month periods ended September 30, 2013 was $877 and $2,758, respectively. Estimated future amortization expense is as follows:

 

Year Ending December 31,		Amortization Expense (a)
2014 (October 1 through December 31)		$	864
2015			6,433
2016			5,181
Total amortization expense		$	12,478

 

(a)

Approximately 46% of intangible asset amortization is attributable to a noncontrolling interest.

 

9.	SENIOR DEBT

Senior debt is comprised of the following as of September 30, 2014 and December 31, 2013:

 

		Initial Principal Amount				Maturity Date				Annual Interest Rate				Outstanding As of
														September  30, 2014				December  31, 2013
Lazard Group 6.85% Senior Notes			600,000				6/15/17				6.85	%		$	548,350			$	548,350
Lazard Group 4.25% Senior Notes			500,000				11/14/20				4.25	%			500,000				500,000
Lazard Group Credit Facility			150,000				9/25/15				0.78	%			–				–
Total														$	1,048,350			$	1,048,350

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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

On September 25, 2012, Lazard Group entered into a $150,000, three-year senior revolving credit facility with a group of lenders (the “Credit Facility”), which expires in September 2015. The Credit Facility replaced a similar revolving credit facility which was terminated as a condition to effectiveness of the Credit Facility. Interest rates under the Credit Facility vary and are based on either a Federal Funds rate or a Eurodollar rate, in each case plus an

applicable margin. As of September 30, 2014, the annual interest rate for a loan accruing interest (based on the Federal Funds overnight rate), including the applicable margin, was 0.78%. At September 30, 2014 and December 31, 2013, no amounts were outstanding under the Credit Facility.

The Credit Facility contains customary terms and conditions, including certain financial covenants. In addition, the Credit Facility, the indenture and the supplemental indentures relating to Lazard Group’s senior notes contain certain covenants, events of default and other customary provisions, including a customary make-whole provision in the event of early redemption, where applicable. As of September 30, 2014, the Company was in compliance with such provisions. All of the Company’s senior debt obligations are unsecured.

As of September 30, 2014, the Company had approximately $262,000 in unused lines of credit available to it, including the Credit Facility, and unused lines of credit available to LFB of approximately $44,000 (at September 30, 2014 exchange rates) and Edgewater of $64,000. In the second quarter of 2014, $20,000 of Edgewater’s available lines of credit was drawn down by the general partner of EGCP III to provide a loan to EGCP III to finance a certain fund investment. The loan to EGCP III was repaid in the third quarter of 2014 from a capital call made by EGCP III to its investors. In addition, LFB has access to the Eurosystem Covered Bond Purchase Program of the Banque de France.

The Company’s senior debt at September 30, 2014 and December 31, 2013 is carried at historical amounts. At those dates, the fair value of such senior debt was approximately $1,141,000 and $1,117,000, respectively, and exceeded the aggregate carrying value by approximately $93,000 and $69,000, respectively. The fair value of the Company’s senior debt is based on market quotations. The Company’s senior debt would be categorized within Level 2 of the hierarchy of fair value measurements if carried at fair value.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

10.	COMMITMENTS AND CONTINGENCIES

Leases—The Company has various leases and other contractual commitments arising in the ordinary course of business. At September 30, 2014, minimum rental commitments under non-cancelable operating leases, net of sublease income, are approximately as follows:

 

Year Ending December 31,
2014 (October 1 through December 31)		$	21,159
2015			77,287
2016			75,672
2017			70,321
2018			64,894
Thereafter			646,775
Total minimum lease payments			956,108
Sublease proceeds (a)			82,162
Net lease payments		$	873,946

 

(a)

Committed sublease income was reduced by approximately $79,600 in the third quarter of 2014 pursuant to arrangements we entered into with LFCM Holdings LLC (“LFCM Holdings”). See Note 16 of Notes to Condensed Consolidated Financial Statements.

Guarantees—In the normal course of business, LFB provides indemnifications to third parties to protect them in the event of non-performance by its clients. At September 30, 2014, LFB had $4,851 of such indemnifications and held $4,357 of collateral/counter-guarantees to secure these commitments. The Company believes the likelihood of loss with respect to these indemnities is remote. Accordingly, no liability is recorded in the condensed consolidated statement of financial condition.

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

The aggregate fair value of the consideration recognized by the Company at the acquisition date was $61,624. Such consideration consisted of (i) a one-time cash payment, (ii) 1,142,857 shares of Class A common stock (the “Initial Shares”) and (iii) up to 1,142,857 additional shares of Class A common stock (the “Earnout Shares”) that are subject to earnout criteria and payable over time. The Initial Shares are subject to forfeiture provisions that lapse only upon the achievement of certain performance thresholds and transfer restrictions during the four year period ending December 2014. The Earnout Shares will be issued only if certain performance thresholds are met. As of September 30, 2014 and December 31, 2013, 913,722 shares are issuable on a contingent basis, and 1,371,992 shares have been earned because applicable performance thresholds have been satisfied. As of September 30, 2014 and December 31, 2013, 1,041,436 and 1,029,006, respectively, of the earned shares have been settled.

Contingent Consideration Relating To Other Business Acquisitions—For a business acquired in 2012, at December 31, 2012, 170,988 shares of Class A common stock (including dividend equivalent shares) were issuable on a

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

non-contingent basis. Such shares were delivered in the first quarter of 2013. The Company is obligated to issue a maximum of 202,650 additional shares of Class A common stock if certain performance thresholds are achieved by December 31, 2014.

Other Commitments—In the normal course of business, LFB enters into commitments to extend credit, predominately at variable interest rates. These commitments have varying expiration dates, are fully collateralized and generally contain requirements for the counterparty to maintain a minimum collateral level. These commitments may not represent future cash requirements as they may expire without being drawn upon. At September 30, 2014, these commitments were not material.

See Notes 5 and 13 of Notes to Condensed Consolidated Financial Statements for information regarding commitments relating to investment capital funding commitments and obligations to fund our pension plans, respectively.

The Company has various other contractual commitments arising in the ordinary course of business. In addition, from time to time, each of LFB and LFNY (See Note 16 of Notes to Condensed Consolidated Financial Statements) may enter into underwriting commitments in which it will participate as an underwriter. At September 30, 2014, LFB and LFNY had no such underwriting commitments.

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

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

 

11.	MEMBERS’ EQUITY

Lazard Group Distributions—As previously described, Lazard Group’s common membership interests are held by subsidiaries of Lazard Ltd and, until May 2014, also were held by LAZ-MD Holdings. Pursuant to provisions of the Operating Agreement, Lazard Group distributions in respect of its common membership interests are allocated to the holders of such interests on a pro rata basis. Such distributions represent amounts necessary to fund (i) any dividends Lazard Ltd may declare on its Class A common stock and (ii) tax distributions in respect of income taxes that Lazard Ltd’s subsidiaries incur and, until May 2014, that the members of LAZ-MD Holdings incurred, as a result of holding Lazard Group common membership interests.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

During the nine month periods ended September 30, 2014 and 2013, Lazard Group distributed the following amounts to LAZ-MD Holdings and the subsidiaries of Lazard Ltd (none of which related to tax distributions):

 

		Nine Months Ended September 30,
		2014				2013
LAZ-MD Holdings		$	213			$	565
Subsidiaries of Lazard Ltd			109,592				60,931
		$	109,805			$	61,496

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

Exchanges of Lazard Group Common Membership Interests—During the nine month periods ended September 30, 2014 and 2013, Lazard Ltd issued 710,009 and 839,658 shares of Class A common stock, respectively, in connection with the exchanges of a like number of Lazard Group common membership interests (received from members of LAZ-MD Holdings in exchange for a like number of LAZ-MD Holdings exchangeable interests) (see Note 1 of Notes to Condensed Consolidated Financial Statements for a discussion of the Final Exchange of LAZ-MD Interests).

Share Repurchase Program—During the nine month period ended September 30, 2014 and for the years ended December 31, 2013, 2012 and 2011, the Board of Directors of Lazard Ltd authorized the repurchase of Class A common stock and Lazard Group common membership interests as set forth in the table below.

 

Date		Share Repurchase Authorization				Expiration
February, 2011		$	250,000				December 31, 2012
October, 2011		$	125,000				December 31, 2013
April, 2012		$	125,000				December 31, 2013
October, 2012		$	200,000				December 31, 2014
October, 2013		$	100,000				December 31, 2015
April, 2014		$	200,000				December 31, 2015

The Company expects that the share repurchase program will primarily be used to offset a portion of the shares that have been or will be issued under the Lazard Ltd 2005 Equity Incentive Plan (the “2005 Plan”) and the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”). Pursuant to the share repurchase program, purchases have been made in the open market or through privately negotiated transactions. The rate at which the Company purchases shares in connection with the share repurchase program may vary from quarter to quarter due to a variety of factors. Purchases with respect to such program are set forth in the table below:

 

		Number  of Shares/Common Membership Interests Purchased				Average Price  Per Share/Common Membership Interest
Nine Months Ended September 30:
2013			2,201,657			$	35.40
2014			4,114,206			$	46.83

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The shares purchased in the nine months ended September 30, 2014 included 1,000,000 shares purchased from Natixis S.A. on June 26, 2014 for $50,340 in connection with the sale by Natixis S.A. of its entire investment in Lazard Ltd’s Class A common stock. The purchase transaction closed on July 1, 2014. As of September 30, 2014, a total of $128,932 of share repurchase authorization remained available under the Company’s share repurchase program, which will expire on December 31, 2015.

During the nine month period ended September 30, 2014, the Company had in place trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, pursuant to which it effected stock repurchases in the open market.

Accumulated Other Comprehensive Income (Loss), Net of Tax (“AOCI”)—The tables below reflect changes in the balances of each component of AOCI during the nine month periods ended September 30, 2014 and 2013:

 

		Currency Translation Adjustments				Employee Benefit Plans				Total AOCI				Amount Attributable to Noncontrolling Interests				Total Lazard Group AOCI
Balance, January 1, 2014		$	35,236			$	(137,431	)		$	(102,195	)		$	1			$	(102,196	)
Activity January 1 to September 30, 2014:
Other comprehensive loss before reclassifications			(16,787	)			(3,695	)			(20,482	)			(1	)			(20,481	)
Adjustments for items reclassified to earnings, net of tax			–				3,714				3,714				–				3,714
Net other comprehensive income (loss)			(16,787	)			19				(16,768	)			(1	)			(16,767	)
Balance, September 30, 2014		$	18,449			$	(137,412	)		$	(118,963	)		$	–			$	(118,963	)

 

		Currency Translation Adjustments				Interest Rate Hedge				Employee Benefit Plans				Total AOCI				Amount Attributable to Noncontrolling Interests				Total Lazard Group AOCI
Balance, January 1, 2013		$	38,657			$	(2,502	)		$	(128,536	)		$	(92,381	)		$	12			$	(92,393	)
Activity January 1 to September 30, 2013:
Other comprehensive loss before reclassifications			(9,557	)			–				(2,669	)			(12,226	)			(80	)			(12,146	)
Adjustments for items reclassified to earnings, net of tax			–				791				3,653				4,444				–				4,444
Net other comprehensive income (loss)			(9,557	)			791				984				(7,782	)			(80	)			(7,702	)
Balance, September 30, 2013		$	29,100			$	(1,711	)		$	(127,552	)		$	(100,163	)		$	(68	)		$	(100,095	)

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The table below reflects adjustments for items reclassified out of AOCI, by component, for the three month and nine month periods ended September 30, 2014 and 2013:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Amortization of interest rate hedge (a)		$	–			$	264			$	–			$	791
Amortization relating to employee benefit plans (b)			1,673				1,627				5,105				4,859
Less – related income taxes			528				404				1,391				1,206
Net of tax			1,145				1,223				3,714				3,653
Total reclassifications, net of tax		$	1,145			$	1,487			$	3,714			$	4,444

 

(a)	Included in “interest expense” on the condensed consolidated statements of operations.

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

Noncontrolling Interests—Noncontrolling interests principally represent interests held in Edgewater’s management vehicles that the Company is deemed to control, but does not own.

The tables below summarize net income attributable to noncontrolling interests for the three month and nine month periods ended September 30, 2014 and 2013 and noncontrolling interests as of September 30, 2014 and December 31, 2013 in the Company’s condensed consolidated financial statements:

 

		Net Income (Loss) Attributable To Noncontrolling Interests
		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Edgewater		$	1,060			$	2,018			$	5,732			$	4,671
Other			–				82				1				(210	)
Total		$	1,060			$	2,100			$	5,733			$	4,461

 

		Noncontrolling Interests As Of
		September 30,      2014				December 31,   2013
Edgewater		$	64,360			$	66,641
Other			9				13
Total		$	64,369			$	66,654

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

12.	INCENTIVE PLANS

Share-Based Incentive Plan Awards

A description of Lazard Ltd’s 2005 Plan and 2008 Plan and activity with respect thereto during the three month and nine month periods ended September 30, 2014 and 2013, is presented below.

Shares Available Under the 2005 Plan and 2008 Plan

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

In addition to the shares available under the 2005 Plan, additional shares of Class A common stock are available under the 2008 Plan. The maximum number of shares available under the 2008 Plan is based on a formula that limits the aggregate number of shares that may, at any time, be subject to awards that are considered “outstanding” under the 2008 Plan to 30% of the then-outstanding shares of Class A common stock (treating, for this purpose, the then-outstanding exchangeable interests of LAZ-MD Holdings on a “fully-exchanged” basis as described in the 2008 Plan).

The following reflects the amortization expense recorded with respect to share-based incentive plans within “compensation and benefits” expense (with respect to RSUs, performance-based restricted stock units (“PRSUs”) and restricted stock awards) and “professional services” expense (with respect to deferred stock units (“DSUs”)) within the Company’s accompanying condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2014 and 2013:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Share-based incentive awards:
RSUs (a)		$	39,091			$	46,095			$	132,307			$	163,184
PRSUs			4,957				6,467				11,657				8,900
Restricted Stock (b)			2,637				2,627				13,493				9,712
DSUs			51				35				819				772
Total		$	46,736			$	55,224			$	158,276			$	182,568

 

(a)	Includes charges relating to the cost saving initiatives of $9,099 for the nine month period ended September 30, 2013 (see Note 14 of Notes to Condensed Consolidated Financial Statements).

(b)	Includes charges relating to the cost saving initiatives of $247 for the nine month period ended September 30, 2013.

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The Company’s incentive plans are described below.

RSUs and DSUs

RSUs generally require future service as a condition for the delivery of the underlying shares of Class A common stock (unless the recipient is then eligible for retirement under the Company’s retirement policy) and convert into shares of Class A common stock on a one-for-one basis after the stipulated vesting periods. PRSUs, which are RSUs that are also subject to service-based vesting conditions, have additional performance conditions, and are described below. The grant date fair value of the RSUs, net of an estimated forfeiture rate, is amortized over the vesting periods or requisite service periods (generally one-third after two years, and the remaining two-thirds after the third year), and is adjusted for actual forfeitures over such period.

RSUs generally include a dividend participation right that provides that during vesting periods each RSU is attributed additional RSUs (or fractions thereof) equivalent to any dividends paid on Class A common stock during such period. During the nine month periods ended September 30, 2014 and 2013, dividend participation rights required the issuance of 288,272 and 257,418 RSUs, respectively.

Non-executive members of the Board of Directors of Lazard Group, who are the same Non-Executive Directors of Lazard Ltd (“Non-Executive Directors”), receive approximately 55% of their annual compensation for service on the Board of Directors and its committees in the form of DSUs, which resulted in 26,360 and 39,315 DSUs granted during the nine month periods ended September 30, 2014 and 2013, 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 shares of Class A common stock at the time of cessation of service to the Board of Directors. DSUs include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock, and resulted in nominal cash payments for the nine month periods ended September 30, 2014 and 2013.

The Company’s Directors’ Fee Deferral Unit Plan permits the Non-Executive Directors to elect to receive additional DSUs pursuant to the 2005 Plan in lieu of some or all of their cash fees. The number of DSUs that shall be granted to a Non-Executive Director pursuant to this election will equal the value of cash fees that the applicable Non-Executive Director has elected to forego pursuant to such election, divided by the market value of a share of Class A common stock on the date immediately preceding the date of the grant. During the nine month periods ended September 30, 2014 and 2013, 6,381 and 5,880 DSUs, respectively, had been granted pursuant to such Plan.

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The following is a summary of activity relating to RSUs and DSUs during the nine month periods ended September 30, 2014 and 2013:

 

		RSUs								DSUs
		Units				Weighted Average Grant Date Fair Value				Units				Weighted Average Grant Date Fair Value
Balance, January 1, 2014			16,630,009			$	34.51				251,434			$	32.02
Granted (including 288,272 RSUs relating to dividend participation)			3,733,113			$	42.75				32,741			$	50.04
Forfeited			(210,458	)		$	33.45				–				–
Vested			(6,529,801	)		$	37.86				–				–
Balance, September 30, 2014			13,622,863			$	35.18				284,175			$	34.10
Balance, January 1, 2013			21,481,131			$	33.92				204,496			$	31.47
Granted (including 257,418 RSUs relating to dividend participation)			4,868,963			$	36.92				45,195			$	34.18
Forfeited			(239,117	)		$	34.63				–				–
Vested			(9,363,792	)		$	34.78				–				–
Balance, September 30, 2013			16,747,185			$	34.30				249,691			$	31.96

In connection with RSUs that vested during the nine month periods ended September 30, 2014 and 2013, the Company satisfied its minimum statutory tax withholding requirements in lieu of issuing 1,876,398 and 3,471,813 shares of Class A common stock in the respective nine month periods. Accordingly, 4,653,403 and 5,891,979 shares of Class A common stock held by the Company were delivered during the nine month periods ended September 30, 2014 and 2013, respectively.

During the fourth quarter of 2012, 958,213 RSUs were modified through forward purchase agreements into liability awards. Such liability awards were settled on March 1, 2013 for $28,612. During the nine month period ended September 30, 2013, compensation expense of $1,690 was recorded for such liability awards.

As of September 30, 2014, estimated unrecognized RSU compensation expense was approximately $168,382, with such expense expected to be recognized over a weighted average period of approximately 1.1 years subsequent to September 30, 2014.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Restricted Stock

The following is a summary of activity related to shares of restricted Class A common stock associated with compensation arrangements during the nine month periods ended September 30, 2014 and 2013:

 

		Restricted Shares				Weighted Average Grant Date Fair Value
Balance, January 1, 2014			575,054			$	32.72
Granted			449,911			$	45.52
Forfeited			(12,097	)		$	41.19
Vested			(205,075	)		$	35.23
Balance, September 30, 2014			807,793			$	39.08
Balance, January 1, 2013			1,972,609			$	34.85
Granted			368,736			$	36.74
Forfeited			(35,794	)		$	33.35
Vested			(1,728,509	)		$	36.00
Balance, September 30, 2013			577,042			$	32.72

In connection with shares of restricted Class A common stock that vested during the nine month periods ended September 30, 2014 and 2013, the Company satisfied its minimum statutory tax withholding requirements in lieu of delivering 29,999 and 18,631 shares of Class A common stock during the respective nine month periods. Accordingly, 175,076 and 1,709,878 shares of Class A common stock held by the Company were delivered during the nine month periods ended September 30, 2014 and 2013, respectively.

The restricted stock awards include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock during the period, which will vest concurrently with the underlying restricted stock award. At September 30, 2014, estimated unrecognized restricted stock expense was approximately $13,460, with such expense to be recognized over a weighted average period of approximately 1.4 years subsequent to September 30, 2014.

PRSUs

PRSUs are subject to both performance-based and service-based vesting conditions. The number of shares of Class A common stock that a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics that relate to the Company’s performance over a three-year period. The target number of shares of Class A common stock subject to each PRSU is one; however, based on the achievement of the performance criteria, the number of shares of Class A common stock that may be received in connection with each PRSU can range from zero to two times the target number (or, for PRSUs granted in 2013, three times the target number in the event of a substantial increase in fiscal year 2014 revenue (adjusted for certain items)). The PRSUs granted in 2014 will vest on a single date three years following the date of the grant and the PRSUs granted in 2013 will vest 33% in March 2015 and 67% in March 2016, in each case provided the applicable service and performance conditions are satisfied. In addition, the performance metrics applicable to each PRSU will be evaluated on an annual basis at the end of each fiscal year during the performance period and, if the Company has achieved a threshold level of performance with respect to the fiscal year, 25% of the target number

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

of shares of Class A common stock subject to each PRSU will no longer be at risk of forfeiture based on the achievement of performance criteria. PRSUs include dividend participation rights that provide that during vesting periods the target number of PRSUs receive dividend equivalents at the same rate that dividends are paid on Class A common stock during such period. These dividend equivalents are credited as RSUs that are not subject to the performance-based vesting criteria but are otherwise subject to the same restrictions as the underlying PRSUs to which they relate.

The following is a summary of activity relating to PRSUs during the nine month periods ended September 30, 2014 and 2013 at the target level:

 

		PRSUs				Weighted Average Grant Date Fair Value
Balance, January 1, 2014			448,128			$	36.11
Granted			360,783			$	44.46
Balance, September 30, 2014			808,911			$	39.83
Balance, January 1, 2013			–				–
Granted			448,128			$	36.11
Balance, September 30, 2013			448,128			$	36.11

Compensation expense recognized for PRSU awards is determined by multiplying the number of shares of Class A common stock underlying such awards that, based on the Company’s estimate, are considered probable of vesting, by the grant date fair value. As of September 30, 2014, the total estimated unrecognized compensation expense was approximately $23,850, and the Company expects to amortize such expense over a weighted-average period of approximately 1.6 years subsequent to September 30, 2014.

LFI and Other Similar Deferred Compensation Arrangements

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The following is a summary of activity relating to LFI and other similar deferred compensation arrangements during the nine month periods ended September 30, 2014 and 2013:

 

		Prepaid Compensation Asset				Compensation   Liability
Balance, January 1, 2014		$	60,433			$	162,422
Granted			92,728				92,728
Settled			–				(54,293	)
Forfeited			(1,320	)			(1,908	)
Amortization			(57,287	)			–
Change in fair value related to:
Increase in fair value of underlying investments			–				6,004
Adjustment for estimated forfeitures			–				6,527
Other			(551)				(1,559	)
Balance, September 30, 2014		$	94,003			$	209,921

 

		Prepaid Compensation Asset				Compensation   Liability
Balance, January 1, 2013		$	47,445			$	97,593
Granted			72,217				72,217
Settled			–				(22,903	)
Forfeited			(765	)			(985	)
Amortization			(44,195	)			–
Change in fair value related to:
Increase in fair value of underlying investments			–				7,767
Adjustment for estimated forfeitures			–				3,175
Other			(217	)			(558	)
Balance, September 30, 2013		$	74,485			$	156,306

The amortization of the prepaid compensation asset will generally be recognized over a weighted average period of approximately 1.7 years subsequent to September 30, 2014.

The following is a summary of the impact of LFI and other similar deferred compensation arrangements on “compensation and benefits” expense within the accompanying condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2014 and 2013:

 

		Three Months Ended  September 30,								Nine Months  Ended September 30,
		2014				2013				2014				2013
Amortization, net of forfeitures (a)		$	21,310			$	15,049			$	63,226			$	47,150
Change in the fair value of underlying investments			(5,528	)			7,519				6,004				7,767
Total		$	15,782			$	22,568			$	69,230			$	54,917

 

(a)	Includes charges relating to the cost saving initiatives of $2,665 for the nine month period ended September 30, 2013 (see Note 14 of Notes to Condensed Consolidated Financial Statements).

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

13.	EMPLOYEE BENEFIT PLANS

The Company provides retirement and other post-retirement benefits to certain of its employees through defined benefit pension plans (the “pension plans”) and, in the U.S., a partially funded contributory post-retirement plan covering qualifying U.S. employees (the “medical plan” and together with the pension plans, the “post-retirement plans”). The Company also offers defined contribution plans to its employees. The post-retirement plans generally provide benefits to participants based on average levels of compensation. Expenses related to the Company’s employee benefit plans are included in “compensation and benefits” expense on the condensed consolidated statements of operations.

Employer Contributions to Pension Plans—The Company’s funding policy for its U.S. and non-U.S. pension plans is to fund when required or when applicable upon an agreement with the plans’ trustees (the “Trustees”). Management also evaluates from time to time whether to make voluntary contributions to the plans.

On April 30, 2012, the Company and the Trustees of the U.K. pension plans concluded the December 31, 2010 triennial valuations of the plans. In connection with such valuations and a previously negotiated agreement with the Trustees, the Company and the Trustees agreed upon pension funding terms (the “agreement”) pursuant to which the Company agreed to make plan contributions of 1 million British pounds during each year from 2012 through 2020 inclusive and to make annual contributions of 1 million British pounds into an account security arrangement during each year from 2014 through 2020 inclusive. It was further agreed that, to the extent that the value of the plans’ assets falls short of the funding target for June 1, 2020 that has been agreed upon with the Trustees, the assets from the account security arrangement would be released into the plans at that date. Additionally, the Company agreed to fund the expenses of administering the plans, including certain regulator levies and the cost of other professional advisors to the plans. The terms of the agreement are subject to adjustment based on the results of subsequent triennial valuations, the first of which is currently underway. The aggregate amount in the account security arrangement was approximately $18,200 and $16,900 at September 30, 2014 and December 31, 2013, respectively, and has been recorded in “cash deposited with clearing organizations and other segregated cash” on the accompanying condensed consolidated statements of financial condition. Income on the account security arrangement accretes to the Company and is recorded in interest income.

The following table summarizes the components of net periodic benefit cost (credit) related to the Company’s post-retirement plans for the three month and nine month periods ended September 30, 2014 and 2013:

 

		Pension Plans								Medical Plan
		Three Months Ended September 30,
		2014				2013				2014				2013
Components of Net Benefit Cost (Credit):
Service cost		$	267			$	315			$	7			$	12
Interest cost			7,636				6,744				49				46
Expected return on plan assets			(8,253	)			(6,701	)			–				–
Amortization of:
Prior service cost			708				708				–				–
Net actuarial loss (gain)			1,096				919				(131	)			–
Net benefit cost (credit)		$	1,454			$	1,985			$	(75	)		$	58

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

		Pension Plans								Medical Plan
		Nine Months Ended September 30,
		2014				2013				2014				2013
Components of Net Benefit Cost (Credit):
Service cost		$	718			$	938			$	24			$	39
Interest cost			22,807				20,193				146				137
Expected return on plan assets			(24,560	)			(20,090	)			–				–
Amortization of:
Prior service cost			2,176				2,114				–				–
Net actuarial loss (gain)			3,325				2,745				(396	)			–
Net benefit cost (credit)		$	4,466			$	5,900			$	(226	)		$	176

 

14.	COST SAVING INITIATIVES

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

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

 

		Financial Advisory				Asset Management				Corporate				Total
Nine Month Period Ended September 30, 2013:
Compensation and benefits		$	45,746			$	236			$	5,417			$	51,399
Other			2,033				(1	)			11,272				13,304
Total		$	47,779			$	235			$	16,689			$	64,703
		Financial Advisory				Asset Management				Corporate				Total
Cumulative October 2012 Through September 30, 2013:
Compensation and benefits		$	121,879			$	12,292			$	17,215			$	151,386
Other			3,432				732				11,729				15,893
Total		$	125,311			$	13,024			$	28,944			$	167,279

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Activity related to the obligations pursuant to the Cost Saving Initiatives during the nine month period ended September 30, 2014 was as follows:

 

		Accrued Compensation and Benefits				Other Liabilities				Total
Balance, January 1, 2014		$	11,860			$	5,356			$	17,216
Less:
Settlements			(9,815	)			(150	)			(9,965	)
Balance, September 30, 2014		$	2,045			$	5,206			$	7,251

 

15.	INCOME TAXES

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

The Company recorded income tax provisions of $22,370 and $56,105 for the three month and nine month periods ended September 30, 2014, respectively, and $12,252 and $22,053 for the three month and nine month periods ended September 30, 2013, respectively, representing effective tax rates of 19.6%, 16.9%, 15.1% and 15.3%, respectively. The difference between the U.S. federal statutory rate of 35.0% and the effective tax rates reflected above principally relates to (i) Lazard Group primarily operating as a limited liability company in the U.S., (ii) taxes payable to foreign jurisdictions and (iii) U.S. state and local taxes (primarily UBT), which are incremental to the U.S. federal statutory tax rate.

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

16.	RELATED PARTIES

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

 

		September 30, 2014				December 31, 2013
Receivables
LFCM Holdings		$	139			$	7,794
Lazard Ltd Subsidiaries			98,178				109,942
Other			391				126
Total		$	98,708			$	117,862
Payables
LFCM Holdings		$	1,427			$	3,051
Lazard Ltd Subsidiaries			110,995				199,137
Other			198				731
Total		$	112,620			$	202,919

LFCM Holdings

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

In the third quarter of 2014, the Company entered into arrangements with LFCM Holdings and certain of its subsidiaries (“LFCM”) pursuant to which, among other things, the Company has acquired certain assets from LFCM relating to its convertible securities business, the business alliance provided for in the business alliance agreement has been terminated, and LFCM has relinquished certain license rights previously granted under the license agreement. In addition, LFCM surrendered certain leasehold interests, including leasehold improvements, to the Company, and was relieved of obligations to pay related sublease rent. See Note 10 of Notes to Condensed Consolidated Financial Statements. The Company does not believe that any of these arrangements will have a material effect on its consolidated financial position or results of operations.

The acquired assets will facilitate the execution of exchange offers and other transactions related to financial advice provided by the Company’s convertible securities practice group. In addition, the Company may act as an underwriter in public offerings and other distributions of securities from time to time, primarily relating to its Financial Advisory business.

For the three month and nine month periods ended September 30, 2014, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $220 and $812, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $54 and $795, respectively. For the three month and nine month periods ended September 30, 2013,

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

amounts recorded by Lazard Group relating to the administrative services agreement amounted to $534 and $1,466, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $1,633 and $1,163, respectively. Amounts relating to the administrative services agreement are reported as reductions to operating expenses. Net referral fees for underwriting transactions under the business alliance agreement are reported in “revenue-other.” Net referral fees for private placement, M&A and restructuring transactions under the business alliance agreement are reported in advisory fee revenue.

Receivables from LFCM Holdings and its subsidiaries as of September 30, 2014 and December 31, 2013 include $139 and $3,112, respectively, related to administrative and support services and other receivables which include sublease income and reimbursement of expenses incurred on behalf of LFCM Holdings, and, at December 31, 2013, $4,682 related to referral fees for underwriting and private placement transactions. Payables to LFCM Holdings and its subsidiaries at September 30, 2014 and December 31, 2013 include $1,427 and $3,051, respectively, relating to referral fees for Financial Advisory and other transactions.

Lazard Ltd Subsidiaries

Lazard Group’s receivables from subsidiaries of Lazard Ltd at September 30, 2014 and December 31, 2013 included interest-bearing loans of $92,706 and $108,204, respectively, including accrued interest thereon. Interest income relating to interest-bearing loans with subsidiaries of Lazard Ltd amounted to $1,434 and $4,454 for the three month and nine month periods ended September 30, 2014, respectively, and $1,616 and $4,737 for the three month and nine month periods ended September 30, 2013, respectively.

As of both September 30, 2014 and December 31, 2013, Lazard Group’s payables to subsidiaries of Lazard Ltd included $3,125 in connection with Lazard Group’s prior year business acquisitions. In addition, as of September 30, 2014 and December 31, 2013, Lazard Group’s payables to subsidiaries of Lazard Ltd included interest-bearing loans, plus accrued interest thereon, of approximately $107,000 and $194,000, respectively. Interest expense relating to interest-bearing loans with subsidiaries of Lazard Ltd amounted to $1,280 and $4,496 for the three month and nine month periods ended September 30, 2014, respectively, and $1,862 and $5,849 for the three month and nine month periods ended September 30, 2013, respectively.

Other

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

LAZ-MD Holdings

Lazard Group provides certain administrative and support services to LAZ-MD Holdings through the administrative services agreement. Lazard Group charges LAZ-MD Holdings for these services based on Lazard Group’s cost allocation methodology and, for the three month and nine month periods ended September 30, 2014, such charges amounted to $250 and $750, respectively. For the three month and nine month periods ending September 30, 2013, such charges amounted to $250 and $750, respectively.

 

17.	REGULATORY AUTHORITIES

LFNY is a U.S. registered broker-dealer and is subject to the net capital requirements of Rule 15c3-1 under the Exchange Act. Under the basic method permitted by this rule, the minimum required net capital, as defined,

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

is a specified fixed percentage (6  ²/₃%) of total aggregate indebtedness recorded in LFNY’s Financial and Operational Combined Uniform Single (“FOCUS”) report filed with the Financial Industry Regulatory Authority (“FINRA”), or $100, whichever is greater. At September 30, 2014, LFNY’s regulatory net capital was $180,909, which exceeded the minimum requirement by $178,043.

Certain U.K. subsidiaries of the Company, including LCL, Lazard Fund Managers Limited and Lazard Asset Management Limited (the “U.K. Subsidiaries”) are regulated by the Financial Conduct Authority. At September 30, 2014, the aggregate regulatory net capital of the U.K. Subsidiaries was $91,003, which exceeded the minimum requirement by $72,842.

CFLF, under which asset management and commercial banking activities are carried out in France, is subject to regulation by the ACPR for its banking activities conducted through its subsidiary, LFB. The investment services activities of the Paris group, exercised through LFB and other subsidiaries of CFLF, primarily LFG (asset management), also are subject to regulation and supervision by the Autorité des Marchés Financiers. At September 30, 2014, the consolidated regulatory net capital of CFLF was $139,613, which exceeded the minimum requirement set for regulatory capital levels by $102,948. In addition, pursuant to the consolidated supervision rules in the European Union, LFB, in particular, as a French credit institution, is required to be supervised by a regulatory body, either in the U.S. or in the European Union. During the third quarter of 2013, the Company and the ACPR agreed on terms for the consolidated supervision of LFB and certain other non-financial advisory European subsidiaries of the Company (referred to herein, on a combined basis, as the “combined European regulated group”) under such rules. Under this new supervision, the combined European regulated group is required to comply with periodic financial, regulatory net capital and other reporting obligations. Additionally, the combined European regulated group, together with our European financial advisory entities, is required to perform an annual risk assessment and provide certain other information on a periodic basis, including financial reports and information relating to financial performance, balance sheet data and capital structure (which is similar to the information that the Company had already been providing informally). This new supervision under, and provision of information to, the ACPR became effective December 31, 2013.

Certain other U.S. and non-U.S. subsidiaries are subject to various capital adequacy requirements promulgated by various regulatory and exchange authorities in the countries in which they operate. At September 30, 2014, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $100,054, which exceeded the minimum required capital by $72,757.

At September 30, 2014, each of these subsidiaries individually was in compliance with its regulatory capital requirements.

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

 

18.	SEGMENT INFORMATION

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The Company’s segment information for the three month and nine month periods ended September 30, 2014 and 2013 is prepared using the following methodology:

 

•

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

 

•

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

 

•

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

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

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

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

 

				Three Months  Ended September 30,								Nine Months Ended September 30,
				2014				2013(a)				2014				2013(a)
Financial Advisory		Net Revenue		$	291,089			$	233,842			$	847,354			$	665,611
		Operating Expenses			255,230				218,015				754,449				674,689
		Operating Income (Loss)		$	35,859			$	15,827			$	92,905			$	(9,078	)
Asset Management		Net Revenue		$	291,967			$	252,094			$	848,695			$	741,618
		Operating Expenses			191,501				168,895				552,499				511,526
		Operating Income		$	100,466			$	83,199			$	296,196			$	230,092
Corporate		Net Revenue (Expense)		$	(16,760	)		$	(5,967	)		$	(29,653	)		$	(35,749	)
		Operating Expenses			5,520				11,989				28,127				41,035
		Operating Loss		$	(22,280	)		$	(17,956	)		$	(57,780	)		$	(76,784	)
Total		Net Revenue		$	566,296			$	479,969			$	1,666,396			$	1,371,480
		Operating Expenses			452,251				398,899				1,335,075				1,227,250
		Operating Income		$	114,045			$	81,070			$	331,321			$	144,230

 

(a)	See Note 14 of Notes to Condensed Consolidated Financial Statements for information regarding the Cost Saving Initiatives, and the impact on each of the Company’s business segments during the nine month period ended September 30, 2013.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

		As Of
		September  30, 2014				December 31, 2013
Total Assets
Financial Advisory		$	706,251			$	714,708
Asset Management			585,693				612,018
Corporate			1,800,994				1,767,262
Total		$	3,092,938			$	3,093,988

 

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Item 2.

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

The following discussion should be read in conjunction with Lazard 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 (“MD&A”) included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “Form 10-K”). All references to “2014”, “2013”, “third quarter”, “first nine months” or “the period” refer to, as the context requires, the three month and nine month periods ended September 30, 2014 and September 30, 2013.

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

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

 

•

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

 

•

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

 

•

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

 

•

losses due to unidentified or unanticipated risks,

 

•

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

 

•

competitive pressure on our businesses and on our ability to retain and attract employees at current compensation levels.

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

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

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

 

•

business’ financial goals, including the ratio of awarded compensation and benefits expense to operating revenue,

 

•

business’ ability to deploy surplus cash through distributions to members, purchases of Lazard Ltd Class A common stock and debt repurchases,

 

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•

business’ ability to offset stockholder dilution through share repurchases,

 

•

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

 

•

business’ strategies and investment policies,

 

•

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

 

•

business’ competitive position,

 

•

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

 

•

potential growth opportunities available to our businesses,

 

•

recruitment and retention of our managing directors and employees,

 

•

potential levels of compensation expense and non-compensation expense,

 

•

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

 

•

likelihood of success and impact of litigation,

 

•

expected tax rates, including effective tax rates,

 

•

changes in interest and tax rates,

 

•

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

 

•

effects of competition on our business, and

 

•

impact of future legislation and regulation on our business.

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

Business Summary

Lazard is one of the world’s preeminent financial advisory and asset management firms. We have long specialized in crafting solutions to the complex financial and strategic challenges of a diverse set of clients around the world, including corporations, governments, institutions, partnerships and individuals. Founded in 1848 in New Orleans, we currently operate from 43 cities in key business and financial centers across 27 countries throughout North America, Europe, Asia, Australia, the Middle East and Central and South America.

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

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

 

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

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

 

•

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

 

•

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

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

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

Our consolidated net revenue was derived from the following segments:

 

		Three Months  Ended September 30,								Nine Months  Ended September 30,
		2014				2013				2014				2013
Financial Advisory			51	%			49	%			51	%			49	%
Asset Management			52				52				51				54
Corporate			(3	)			(1	)			(2	)			(3	)
Total			100	%			100	%			100	%			100	%

We also invest our own capital from time to time, generally alongside capital of qualified institutional and individual investors in alternative investments or private equity investments, and, since 2005, we have engaged in a number of alternative investments and private equity activities, including investments through (i) the Edgewater Funds (“Edgewater”), our Chicago-based private equity firm (see Note 10 of Notes to Condensed Consolidated Financial Statements), (ii) Lazard Australia Corporate Opportunities Fund 2 (“COF2”), a Lazard-managed Australian fund targeting Australasian mid-market investments, (iii) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small-to mid-cap European companies and (iv) a fund targeting significant noncontrolling-stake investments in established private companies. We also make investments to seed our Asset Management strategies. We may explore and discuss opportunities to expand the scope of our alternative investment and private equity activities in Europe, the U.S. and elsewhere. These opportunities could include internal growth of new funds and direct investments by us, partnerships or strategic relationships, investments with third parties or acquisitions of existing funds or management companies.

In July 2014, the Company and Natixis S.A. entered an arrangement that would allow them, on a non-exclusive and optional basis, to place and underwrite securities on the French equity capital markets under the common brand “Lazard-Natixis.” The arrangement may be terminated by either party at any time.

 

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In the third quarter of 2014, we entered into arrangements with LFCM Holdings LLC and certain of its subsidiaries (“LFCM Holdings”) pursuant to which, among other things, (i) we have acquired certain assets from LFCM Holdings relating to its convertible securities business, (ii) the business alliance provided for in the Business Alliance Agreement, dated as of May 10, 2005, between the Company and LFCM Holdings, has been terminated, and (iii) LFCM Holdings has relinquished certain license rights previously granted under the License Agreement, dated as of May 10, 2005, between the Company and LFCM Holdings. In addition, LFCM Holdings surrendered certain leasehold interests, including leasehold improvements, to the Company, and was relieved of obligations to pay related sublease rent. See Note 10 of Notes to Condensed Consolidated Financial Statements. We do not believe that any of these arrangements will have a material effect on our consolidated financial position or results of operations.

The acquired assets will facilitate the execution of exchange offers and other transactions related to financial advice provided by our convertible securities practice group. In addition, we may act as an underwriter in public offerings and other distributions of securities from time to time, primarily relating to our Financial Advisory business.

Business Environment and Outlook

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

Overall, equity market indices for developed and emerging markets at September 30, 2014 increased as compared to such indices at September 30, 2013, despite some market volatility in the third quarter ended September 30, 2014. In the global M&A markets during the first nine months of 2014, the number and value of all completed M&A transactions decreased as compared to the same period in the prior year. However, with respect to the subset of such transactions involving values greater than $500 million, both the number and value increased as compared to the prior period. During the same time, the number and value of all announced M&A transactions, including the subset of such transactions involving values greater than $500 million, increased, reflecting an active global M&A environment. During the first nine months of 2014, global restructuring activity remained low, consistent with the last several years.

Entering the fourth quarter of 2014, interest rates remain low and corporate cash balances remain high. The U.S. economy continues to be resilient. Europe’s recovery continues to be uneven. Some volatility has returned to the capital markets but the underpinnings of a gradual U.S. led global economic recovery appear to remain in place. Although market volatility may continue, we are cautiously optimistic about the environment for both of our businesses.

We intend to leverage our existing infrastructure to capitalize on global macroeconomic recovery, positive momentum in the M&A cycle, and strength in the global equity markets. We expect to generate revenue growth by remaining adequately staffed to capitalize on macroeconomic recovery and deploying our intellectual capital to generate new revenue streams.

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

 

•

Financial Advisory – In the short to intermediate term, we expect that the U.S. macroeconomic environment will likely be the strongest of the developed economies. Certain legal decisions in the U.S. reinforce the importance of independent advice, and the global scale and breadth of our Financial

 

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Advisory business allows us to advise on large, complex cross-border transactions across a variety of industries. Conditions for our Financial Advisory business in Europe also appear to be improving. We continue to develop our range of advisory capabilities, in particular in Europe, with our Sovereign Advisory, Restructuring and Capital Advisory businesses. In addition, we believe our businesses throughout the emerging markets, Japan and Australia position us for growth in these markets, while enhancing our relationships with, and the services that we can provide to, clients in developed economies.

 

•

Asset Management – Generally, we have seen increased investor demand across regions and investment platforms. In the short to intermediate term, we expect most of our growth will come from defined benefit and defined contribution plans in the developed economies because of their sheer scope and size. Over the longer term, we expect an increasing share of our AUM to come from the developing economies in Asia, Latin America and the Middle East, as their retirement systems evolve and individual wealth is increasingly deployed in the financial markets. Our global footprint is already well established in the developed economies and we expect our business in the developing economies will continue to expand. Given our globally diversified platform and our ability to provide investment solutions for a global mix of clients, we believe we are positioned to benefit from growth that may occur in the asset management industry. We recently extended the global footprint of our Asset Management business by opening new offices in Zurich, Singapore, Dubai and Dublin. We are continually developing and seeding new investment strategies that extend our existing platforms. Recent examples of growth initiatives include the following investment strategies: Emerging Markets Debt, Core Emerging Markets Equity, Emerging Markets Small Cap Equity, Real Estate, Managed Volatility Strategies, Middle East North African Equities and Asian Equities.

We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge continuously, and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all potentially applicable factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. See Item 1A, “Risk Factors” in our Form 10-K. Furthermore, net income and revenue in any period may not be indicative of full-year results or the results of any other period and may vary significantly from year to year and quarter to quarter.

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

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

 

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Financial Advisory

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

 

		Three Months Ended September 30,												Nine Months Ended September 30,
		2014				2013				% Incr /  (Decr)				2014				2013				% Incr /  (Decr)
		($ in billions)
Completed M&A Transactions:
All deals:
Value		$	635			$	609				4	%		$	1,943			$	1,954				(1	)%
Number			9,060				9,483				(4	)%			27,738				28,454				(3	)%
Deals Greater than $500 million:
Value		$	454			$	407				12	%		$	1,390			$	1,371				1	%
Number			249				236				6	%			719				689				4	%
Announced M&A Transactions:
All deals:
Value		$	960			$	803				20	%		$	2,807			$	2,092				34	%
Number			10,002				9,666				3	%			29,874				28,509				5	%
Deals Greater than $500 million:
Value		$	737			$	588				25	%		$	2,160			$	1,492				45	%
Number			313				288				9	%			863				745				16	%

 

Source:

Dealogic as of October 6, 2014.

Global restructuring activity during the first nine months of 2014, as measured by the number of corporate defaults, decreased as compared to the 2013 period, and the aggregate value of debt defaults remained low, consistent with the last several years. The number of defaulting issuers decreased to 43 in the first nine months of 2014, according to Moody’s Investors Service, Inc., as compared to 51 in the 2013 period. In the U.S., the number of corporate defaults decreased 11% in the first nine months of 2014 as compared to the 2013 period, while the value of such defaults increased 157% due to one large default during the 2014 period.

Asset Management

The percentage change in major equity market indices at September 30, 2014, as compared to such indices at June 30, 2014, December 31, 2013, and at September 30, 2013, is shown in the table below.

 

		Percentage Changes September 30, 2014 vs.
		June 30, 2014				December 31, 2013				September 30, 2013
MSCI World Index			(3	)%			2	%			10	%
Euro Stoxx			–	%			4	%			12	%
MSCI Emerging Market			(4	)%			–	%			2	%
S&P 500			1	%			7	%			17	%

The fees that we receive for providing investment management and advisory services are primarily driven by the level of AUM and the nature of the AUM product mix. Accordingly, market movements, foreign currency volatility and changes in our AUM product mix will impact the level of revenues we receive from our Asset

 

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Management business when comparing periodic results. A substantial portion of our AUM is invested in equities. Movements in AUM during the period generally reflect the changes in equity market indices. Our AUM at September 30, 2014 increased 6% versus AUM at December 31, 2013, due to market appreciation and net inflows, partially offset by adverse foreign exchange movements. Average AUM in the first nine months of 2014 increased 15% as compared to average AUM in the first nine months of 2013.

Cost Saving Initiatives

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

Approximately $120 million of the expected annual savings relate to compensation expense associated with our headcount, and approximately $40 million to non-compensation expense. We expect the full impact of all the savings to be reflected in our 2014 results.

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

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

See Note 14 of Notes to Condensed Consolidated Financial Statements.

Financial Statement Overview

Net Revenue

The majority of Lazard’s Financial Advisory net revenue historically has been earned from the successful completion of M&A transactions, strategic advisory matters, restructuring and capital structure advisory services, capital raising and similar transactions. The main drivers of Financial Advisory net revenue are overall M&A activity, the level of corporate debt defaults and the environment for capital raising activities, particularly in the industries and geographic markets in which Lazard focuses. In some client engagements, often those involving financially distressed companies, revenue is earned in the form of retainers and similar fees that are contractually agreed upon with each client for each assignment and are not necessarily linked to the completion of a transaction. In addition, Lazard also earns fees from providing strategic advice to clients, wit