10-Q 1 0001.txt FORM 10 Q LEHMAN BROTHERS HOLDINGS INC SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 1-9466 Lehman Brothers Holdings Inc. (Exact Name of Registrant As Specified In Its Charter) Delaware 13-3216325 State or other jurisdiction of incorporation (I.R.S.Employer Identification No. or organization) 3 World Financial Center New York, New York 10285 (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (212) 526-7000 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 ______ As of June 30, 2000, 121,397,765 shares of the Registrant's Common Stock, par value $0.10 per share, were outstanding. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2000 INDEX Part I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements - (unaudited) Consolidated Statement of Income - Three and Six Months Ended May 31, 2000 and May 31, 1999....................... 3 Consolidated Statement of Financial Condition - May 31, 2000 and November 30, 1999.................. 5 Consolidated Statement of Cash Flows - Six Months Ended May 31, 2000 and May 31, 1999....................... 7 Notes to Consolidated Financial Statements.......... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 18 Part II. OTHER INFORMATION Item 1. Legal Proceedings................................... 39 Item 6. Exhibits and Reports on Form 8-K.................... 41 Signature .............................................................. 42 EXHIBIT INDEX 43 Exhibits LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of INCOME (Unaudited) (In millions, except per share data)
Three months ended ------------------------------------- May 31 May 31 2000 1999 ---------------- ---------------- Revenues Principal transactions $ 870 $ 685 Investment banking 480 445 Commissions 226 168 Interest and dividends 4,738 3,627 Other 20 7 ---------------- ---------------- Total revenues 6,334 4,932 Interest expense 4,579 3,477 ---------------- ---------------- Net revenues 1,755 1,455 ---------------- ---------------- Non-interest expenses Compensation and benefits 912 738 Technology and communications 85 81 Brokerage and clearance 62 61 Business development 42 30 Professional fees 43 28 Occupancy 32 28 Other 21 23 ---------------- ---------------- Total non-interest expenses 1,197 989 ---------------- ---------------- Income before taxes and dividends on trust preferred securities 558 466 Provision for income taxes 166 126 Dividends on trust preferred securities 14 10 ---------------- ---------------- Net income $ 378 $ 330 ================ ================ Net income applicable to common stock $ 366 $ 268 ================ ================ Earnings per common share Basic $ 2.97 $ 2.19 ================ ================ Diluted $ 2.78 $ 2.09
See notes to consolidated financial statements. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of INCOME (Unaudited) (In millions, except per share data)
Six months ended ------------------------------------- May 31 May 31 2000 1999 ---------------- ---------------- Revenues Principal transactions $ 1,984 $ 1,219 Investment banking 1,082 758 Commissions 455 314 Interest and dividends 9,051 7,208 Other 102 24 ---------------- ---------------- Total revenues 12,674 9,523 Interest expense 8,717 6,950 ---------------- ---------------- Net revenues 3,957 2,573 ---------------- ---------------- Non-interest expenses Compensation and benefits 2,057 1,305 Technology and communications 169 163 Brokerage and clearance 120 119 Business development 77 58 Professional fees 75 50 Occupancy 62 56 Other 45 47 ---------------- ---------------- Total non-interest expenses 2,605 1,798 ---------------- ---------------- Income before taxes and dividends on trust preferred securities 1,352 775 Provision for income taxes 405 222 Dividends on trust preferred securities 28 13 ---------------- ---------------- Net income $ 919 $ 540 ================ ================ Net income applicable to common stock $ 848 $ 466 ================ ================ Earnings per common share Basic $ 6.88 $ 3.82 ================ ================ Diluted $ 6.46 $ 3.66 ================ ================
See notes to consolidated financial statements. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of FINANCIAL CONDITION (Unaudited) (In millions)
May 31 November 30 2000 1999 ------------------ ------------------ ASSETS Cash and cash equivalents $ 3,968 $ 5,186 Cash and securities segregated and on deposit for regulatory and other purposes 2,763 1,989 Securities and other financial instruments owned: Governments and agencies 27,370 29,959 Mortgages and mortgage-backed 25,511 22,643 Corporate equities 18,061 12,790 Corporate debt and other 12,569 11,096 Derivatives and other contractual agreements 11,946 10,306 Certificates of deposit and other money market instruments 1,983 2,265 ------------------ ------------------ 97,440 89,059 ------------------ ------------------ Collateralized short-term agreements: Securities purchased under agreements to resell 83,742 62,222 Securities borrowed 29,373 19,397 Receivables: Brokers, dealers and clearing organizations 2,023 1,674 Customers 10,808 9,332 Others 1,326 1,354 Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $916 in 2000 and $889 in 1999) 491 485 Other assets 1,365 1,408 Excess of cost over fair value of net assets acquired (net of accumulated amortization of $133 in 2000 and $129 in 1999) 134 138 ------------------ ------------------ Total Assets $ 233,433 $ 192,244 ================== ==================
See notes to consolidated financial statements. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of FINANCIAL CONDITION - (Continued) (Unaudited) (In millions, except share data)
May 31 November 30 2000 1999 -------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper and short-term debt $ 5,912 $ 5,476 Securities and other financial instruments sold but not yet purchased: Governments and agencies 25,424 22,396 Corporate equities 13,876 12,344 Derivatives and other contractual agreements 9,737 9,582 Corporate debt and other 3,637 2,288 -------------- ---------------- 52,674 46,610 -------------- ---------------- Collateralized short-term financing: Securities sold under agreements to repurchase 103,017 81,083 Securities loaned 7,458 4,568 Payables: Brokers, dealers and clearing organizations 3,361 1,184 Customers 13,695 10,971 Accrued liabilities and other payables 5,977 4,668 Long-term debt: Senior notes 30,214 27,375 Subordinated indebtedness 3,319 3,316 -------------- ---------------- Total liabilities 225,627 185,251 -------------- ---------------- Commitments and contingencies Trust preferred securities subject to mandatory redemption 710 710 STOCKHOLDERS' EQUITY Preferred stock 850 688 Common stock, $0.10 par value; 300,000,000 shares authorized; Shares issued: 124,383,837 in 2000 and 122,619,460 in 1999; Shares outstanding: 121,708,431 in 2000 and 119,912,810 in 1999 12 12 Additional paid-in capital 3,377 3,387 Accumulated other comprehensive income (net of tax) (10) (2) Retained earnings 2,916 2,094 Other stockholders' equity, net 167 254 Common stock in treasury, at cost: 2,675,406 shares in 2000 and 2,706,650 in 1999 (216) (150) ---------------- -------------- Total stockholders' equity 7,096 6,283 -------------- ---------------- Total liabilities and stockholders' equity $ 233,433 $ 192,244 ============== ================
See notes to consolidated financial statements. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of CASH FLOWS (Unaudited) (In millions)
Six months ended -------------------------------------- May 31 May 31 2000 1999 ----------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITES Net income $ 919 $ 540 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 48 48 Provisions for losses and other reserves 13 18 Compensation payable in common stock 151 98 Other adjustments 22 4 Net change in: Cash and securities segregated (774) 268 Securities and other financial instruments owned (8,381) (9,874) Securities borrowed (9,976) (5,974) Receivables from brokers, dealers and clearing organizations (349) (683) Receivables from customers (1,476) (705) Securities and other financial instruments sold but not yet purchased 6,064 12,391 Securities loaned 2,890 2,219 Payables to brokers, dealers and clearing organizations 2,177 192 Payables to customers 2,724 (2,524) Accrued liabilities and other payables 1,296 (282) Other operating assets and liabilities, net (414) 325 ----------------- ---------------- Net cash used in operating activities $ (5,066) $ (3,939) ----------------- ----------------
See notes to consolidated financial statements. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of CASH FLOWS (Continued) (Unaudited) (In millions)
Six months ended ------------------------------------- May 31 May 31 2000 1999 ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITES Proceeds from issuances of senior notes $ 7,990 $ 5,295 Principal payments of senior notes (4,623) (3,686) Principal payments for subordinated indebtness (179) Net proceeds from commercial paper and short-term debt 436 509 Resale agreements net of repurchase agreements 414 2,629 Payments for treasury stock purchases (435) (146) Dividends paid (97) (96) Issuances of common stock 55 9 Issuance (redemption) of preferred stock 162 (100) Issuances of trust preferred securities, net of issuance costs 690 ---------------- ---------------- Net cash provided by (used in) financing activities 3,902 4,925 ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements (54) (36) ---------------- ---------------- Net cash used in investing activities (54) (36) ---------------- ---------------- Net change in cash and cash equivalents 1,218 950 ---------------- ---------------- Cash and cash equivalents, beginning of period 5,186 3,055 ---------------- ---------------- Cash and cash equivalents, end of period $ 3,968 $ 4,005 ================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions) Interest paid totaled $8,734 and $6,984 for the six months ended May 31, 2000 and May 31, 1999, respectively. Income taxes paid/(received) totaled $184 and $(132) for the six months ended May 31,2000 and May 31, 1999, respectively. See notes to consolidated financial statements. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation: The consolidated financial statements include the accounts of Lehman Brothers Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company" or "Lehman Brothers"). Lehman Brothers is one of the leading global investment banks serving institutional, corporate, government and high-net-worth individual clients and customers. The Company's worldwide headquarters in New York and regional headquarters in London and Tokyo are complemented by offices in additional locations in North America, Europe, the Middle East, Latin America and the Asia Pacific Region. The Company is engaged primarily in providing financial services. The principal U.S. subsidiary of Holdings is Lehman Brothers Inc. ("LBI"), a registered broker-dealer. All material intercompany accounts and transactions have been eliminated in consolidation. The Company's financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC") with respect to the Form 10-Q and reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Pursuant to such rules and regulations, certain footnote disclosures which are normally required under generally accepted accounting principles have been omitted. It is recommended that these consolidated financial statements be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the twelve months ended November 30, 1999 (the "Form 10-K"). The Consolidated Statement of Financial Condition at November 30, 1999 was derived from the audited financial statements. The nature of the Company's business is such that the results of any interim period may vary significantly from quarter to quarter and may not be indicative of the results to be expected for the fiscal year. Certain prior period amounts reflect reclassifications to conform to the current period's presentation. 2. Long-Term Debt: During the six months ended May 31, 2000, the Company issued $7,990 million of long-term debt (all of which were senior notes). Of the total issuances during the period, $2,330 million were U.S. dollar fixed rate, $3,330 million were U.S. dollar floating rate, $1,638 million were foreign currency denominated fixed rate, and $692 million were foreign currency denominated floating rate. These issuances were primarily utilized to refinance current maturities of long-term debt in 2000 and to increase total capital (stockholders' equity, long-term debt and trust preferred securities). The Company's floating rate new issuances contain contractual interest rates based primarily on London Interbank Offered Rates ("LIBOR"). All of the Company's fixed rate new issuances were effectively converted to floating rate obligations through the use of interest rate swaps. Of the foreign denominated new issuances totaling $2,330 million, $705 million were effectively swapped to U.S. Dollars, with the remainder match funding foreign currency denominated capital needs. The Company had $4,623 million of long-term debt mature during the six months ended May 31, 2000. 3. Capital Requirements: The Company operates globally through a network of subsidiaries, with several being subject to regulatory requirements. In the United States, LBI, as a registered broker-dealer, is subject to SEC Rule 15c3-1, the Net Capital Rule, which requires LBI to maintain net capital of not less than the greater of 2% of aggregate debit items arising from customer transactions, as defined, or 4% of funds required to be segregated for customers' regulated commodity accounts, as defined. At May 31, 2000, LBI's regulatory net capital, as defined, of $1,281 million exceeded the minimum requirement by $1,152 million. Lehman Brothers International (Europe) ("LBIE"), a United Kingdom registered broker-dealer and subsidiary of Holdings, is subject to the capital requirements of the Securities and Futures Authority ("SFA") of the United Kingdom. Financial resources, as defined, must exceed the total financial resources requirement of the SFA. At May 31, 2000, LBIE's financial resources of approximately $2,036 million exceeded the minimum requirement by approximately $475 million. Lehman Brothers Japan Inc.'s Tokyo branch, a regulated broker-dealer, is subject to the capital requirements of the Financial Supervisory Agency and, at May 31, 2000, had net capital of approximately $385 million which was approximately $275 million in excess of the specified levels required. Lehman Brothers Bank, FSB (the "Bank"), the Company's thrift subsidiary, is regulated by the Office of Thrift Supervision ("OTS"). The Bank exceeds all regulatory capital requirements and is considered well capitalized by the OTS. Certain other non-U.S. subsidiaries are subject to various securities, commodities and banking regulations and capital adequacy requirements promulgated by the regulatory and exchange authorities of the countries in which they operate. At May 31, 2000, these other subsidiaries were in compliance with their applicable local capital adequacy requirements. In addition, the Company's "AAA" rated derivatives subsidiaries, Lehman Brothers Financial Products Inc. ("LBFP") and Lehman Brothers Derivative Products Inc. ("LBDP"), have established certain capital and operating restrictions which are reviewed by various rating agencies. At May 31, 2000, LBFP and LBDP each had capital which exceeded the requirement of the most stringent rating agency by approximately $61 million and $25 million, respectively. The regulatory rules referred to above, and certain covenants contained in various debt agreements may restrict Holdings' ability to withdraw capital from its regulated subsidiaries, which in turn could limit its ability to pay dividends to shareholders. 4. Derivative Financial Instruments: In the normal course of business, the Company enters into derivative transactions to satisfy the needs of its clients and to manage the Company's own exposure to market and credit risk resulting from its trading activities (collectively, "Trading-Related Derivative Activities"). Derivative transactions entered into for Trading-Related Derivative Activities are recorded at market or fair value with realized and unrealized gains and losses recognized currently in Principal transactions in the Consolidated Statement of Income. Market or fair value for trading-related instruments is generally determined by either quoted market prices (for exchange-traded futures and options) or pricing models (for over-the-counter swaps, forwards and options). Pricing models utilize a series of market inputs to determine the present value of future cash flows, with adjustments, as required for credit risk and liquidity risk. Further valuation adjustments may be recorded, as deemed appropriate for new or complex products or for positions with significant concentrations. These adjustments are integral components of the mark-to-market process. Credit-related valuation adjustments incorporate business and economic conditions, historical experience, concentrations, estimates of expected losses and the character, quality and performance of credit sensitive financial instruments. Unrealized gains and losses on derivative contracts are recorded on a net basis in the Consolidated Statement of Financial Condition for those transactions with counterparties executed under a legally enforceable master netting agreement and are netted across products when such provisions are stated in the master netting agreement. Listed in the following table is the fair value and average fair value of the Company's Trading-Related Derivative Activities. Average fair values of these instruments were calculated based upon month-end statement of financial condition values, which the Company believes do not vary significantly from the average fair value calculated on a more frequent basis. Variances between average fair values and period-end values are due to changes in the volume of activities in these instruments and changes in the valuation of these instruments due to variations in market and credit conditions.
Average Fair Value* Fair Value* Six Months Ended May 31, 2000 May 31, 2000 --------------------------------- ---------------------------------- (in millions) Assets Liabilities Assets Liabilities -------------------------------------------------------- -------------- -- --------------- -------------- --- --------------- Interest rate and currency swaps and options (including caps, collars and floors) $ 4,993 $ 3,138 $ 4,943 $ 4,010 Foreign exchange forward contracts and options 858 1,164 801 1,150 Other fixed income securities contracts (including options and TBAs) 318 358 624 505 Equity contracts (including equity swaps, warrants and options) 5,777 5,077 5,521 5,896 -------------- -- --------------- -------------- --- --------------- Total $ 11,946 $ 9,737 $ 11,889 $ 11,561 -------------- -- --------------- -------------- --- ---------------
* Amounts represent carrying value (exclusive of collateral) and do not include receivables or payables related to exchange-traded futures contracts.
Average Fair Value* Fair Value* Twelve Months Ended November 30, 1999 November 30, 1999 ---------------------------------- --------------------------------- (in millions) Assets Liabilities Assets Liabilities -------------------------------------------------------- -------------- -- ---------------- --------------- - --------------- Interest rate and currency swaps and options (including caps, collars and floors) $ 4,807 $ 3,633 $ 4,406 $ 3,030 Foreign exchange forward contracts and options 878 1,310 1,226 1,287 Other fixed income securities contracts (including options and TBAs) 254 195 257 240 Equity contracts (including equity swaps, warrants and options) 4,367 4,444 2,478 3,291 Commodity contracts (including swaps, forwards and options) 15 5 -------------- -- ---------------- --------------- - --------------- Total $ 10,306 $ 9,582 $ 8,382 $ 7,853 -------------- -- ---------------- --------------- - ---------------
* Amounts represent carrying value (exclusive of collateral) and do not include receivables or payables related to exchange-traded futures contracts. Assets included in the table above and on the previous page represent the Company's unrealized gains, net of unrealized losses for situations in which the Company has a master netting agreement. Similarly, liabilities represent net amounts owed to counterparties. Therefore, the fair value of assets/liabilities related to derivative contracts at May 31, 2000 represents the Company's net receivable/payable for derivative financial instruments before consideration of collateral. Included within the $11,946 million fair value of assets at May 31, 2000 was $10,503 million related to swaps and other OTC contracts and $1,443 million related to exchange-traded option and warrant contracts. Included within the $10,306 million fair value of assets at November 30, 1999 was $9,002 million related to swaps and other OTC contracts and $1,304 million related to exchange-traded option and warrant contracts. With respect to OTC contracts, including swaps, the Company views its net credit exposure to be $6,314 million at May 31, 2000, representing the fair value of the Company's OTC contracts in an unrealized gain position, after consideration of collateral. Presented below is an analysis of the Company's net credit exposure at May 31, 2000 for OTC contracts based upon actual ratings made by external rating agencies or by equivalent ratings established and utilized by the Company's Credit Risk Management Department. Counterparty S&P/Moody's Net Credit Risk Rating Equivalent Exposure ----------- ---------- -------- 1 AAA/Aaa 10% 2 AA-/Aa3 or higher 43% 3 A-/A3 or higher 27% 4 BBB-/Baa3 or higher 14% 5 BB-/Ba3 or higher 4% 6 B+/B1 or lower 2% The Company is also subject to credit risk related to its exchange-traded derivative contracts. Exchange-traded contracts, including futures and certain options, are transacted directly on the exchange. To protect against the potential for a default, all exchange clearinghouses impose net capital requirements for their membership. Additionally, the exchange clearinghouse requires counterparties to futures contracts to post margin upon the origination of the contract and for any changes in the market value of the contract on a daily basis (certain foreign exchanges provide for settlement within three days). Therefore, the potential for losses from exchange-traded products is limited. For a further discussion of the Company's derivative related activities, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Financial Instruments and Derivatives" and Notes 1 and 12 to the Consolidated Financial Statements, included in the Form 10-K. 5. Other Commitments and Contingencies: In connection with its financing activities, the Company had outstanding commitments under certain lending arrangements of approximately $2.5 billion at May 31, 2000 and $4.2 billion at November 30, 1999. These commitments require borrowers to provide acceptable collateral, as defined in the agreements, when amounts are drawn under the lending facilities. Advances made under the above lending arrangements are typically at variable interest rates and generally provide for over-collateralization based upon the borrowers' creditworthiness. The Company, through its high grade and high yield sales, trading and underwriting activities, makes commitments to extend credit in loan syndication transactions and then participates out a significant portion of these commitments. The Company had lending commitments to high grade borrowers of $3.3 billion and $2.9 billion at May 31, 2000 and November 30, 1999, respectively. The Company has since arranged for third parties to purchase a majority of these commitments in the event they are funded. In addition, lending commitments to high yield borrowers totaled $1.1 billion and $1.4 billion at May 31, 2000 and November 30, 1999, respectively. All of these commitments and any related draw-downs of these facilities are typically secured against the borrowers' assets, have fixed maturity dates and are generally contingent upon certain representations, warranties and contractual conditions applicable to the borrower. Total commitments are not indicative of actual risk or funding requirements as the commitments may not be drawn or fully utilized, and the Company will continue to syndicate and/or sell these commitments. At May 31, 2000 and November 30, 1999, the Company had commitments to invest up to $484 million and $411 million, respectively, directly and through partnerships, in private equity-related investments. These commitments will be funded as required through the end of the respective investment periods, principally expiring in 2004. In addition to these specific commitments, the Company had various other commitments of approximately $300 million at both May 31, 2000 and November 30, 1999, respectively. In the normal course of its business, the Company has been named a defendant in a number of lawsuits and other legal proceedings. After considering all relevant facts, available insurance coverage and the advice of outside counsel, in the opinion of the Company such litigation will not, in the aggregate, have a material adverse effect on the Company's consolidated financial position or results of operations. As a leading global investment bank, risk is an inherent part of all of the Company's businesses and activities. The extent to which the Company properly and effectively identifies, assesses, monitors and manages each of the various types of risks involved in its trading (including derivatives), brokerage, and investment banking activities is critical to the success and profitability of the Company. The principal types of risks involved in the Company's activities are market risk, credit or counterparty risk and transaction risk. Management has developed a control infrastructure throughout the Company to monitor and manage these risks on a global basis. For further discussion of these matters, refer to Note 14 to the Consolidated Financial Statements, in the Form 10-K. 6. Segments: Lehman Brothers operates in three business segments: Investment Banking, Capital Markets, and Client Services. The Investment Banking Division provides advice to corporate, institutional and government clients throughout the world on mergers, acquisitions, and other financial matters. The Division also raises capital for clients by underwriting public and private offerings of debt and equity securities. The Capital Markets Division includes the Company's institutional sales, trading, research and financing activities in equity and fixed income cash and derivatives products. Through the Division, the Company is a global market-maker in numerous equity and fixed income products, including U.S., European and Asian equities, government and agency securities, money market products, corporate high grade, high yield and emerging market securities, mortgage- and asset-backed securities, municipal securities, bank loans, foreign exchange and derivatives products. The Division also includes the Company's risk arbitrage and secured financing businesses. The financing business manages the Company's equity and fixed income matched book activities, supplies secured financing to institutional clients and customers, and provides secured funding for the Company's inventory of equity and fixed income products. Client Services revenues reflect earnings from the Company's private client and private equity businesses. Private client revenues reflect the Company's high-net-worth retail customer flow activities as well as asset management fees earned from these clients. Private equity net revenues include the management and incentive fees earned in the Company's role as General Partner for sixteen merchant banking and venture capital partnerships. In addition, these revenues also include the appreciation of its general partnership interests. The Company's segment information for the three months and six months ended May 31, 2000 and May 31, 1999 is presented below.
Three Months Ended Six Months Ended ----------------------------------- ------------------------------------ May 31 May 31 May 31 May 31 2000 1999 2000 1999 ---------------- ---------------- ---------------- ---------------- Investment Banking: Net Revenue $ 471 $ 435 $ 1,064 $ 744 ================ ================ ================ ================ Earnings before taxes(1) $ 80 $ 152 $ 238 $ 236 ================ ================ ================ ================ Segment assets (billions) $ .2 $ .2 $ .2 $ .2 ================ ================ ================ ================ Capital Markets: Net Revenue $ 1,082 $ 878 $ 2,421 $ 1,565 ================ ================ ================ ================ Earnings before taxes(1) $ 422 $ 275 $ 942 $ 478 ================ ================ ================ ================ Segment assets (billions) $ 221.3 $ 183.0 $ 221.3 $ 183.0 ================ ================ ================ ================ Client Services: Net Revenue $ 202 $ 142 $ 472 $ 264 ================ ================ ================ ================ Earnings before taxes(1) $ 56 $ 39 $ 172 $ 61 ================ ================ ================ ================ Segment assets (billions) $ 11.9 $ 8.3 $ 11.9 $ 8.3 ================ ================ ================ ================ Total: Net Revenue $ 1,755 $ 1,455 $ 3,957 $ 2,573 ================ ================ ================ ================ Earnings before taxes(1) $ 558 $ 466 $ 1,352 $ 775 ================ ================ ================ ================ Segment assets (billions) $ 233.4 $ 191.5 $ 233.4 $ 191.5 ================ ================ ================ ================
(1) And before dividends on trust preferred securities. The following are net revenues by geographic region:
Three Months Ended Six Months Ended ------------------------------------------ ------------------------------------------ May 31 May 31 May 31 May 31 2000 1999 2000 1999 ------------------- ------------------- ------------------- ------------------- Americas* $ 916 $ 930 $ 2,181 $ 1,570 Europe 566 379 1,270 752 Asia Pacific 273 146 506 251 ------------------- ------------------- ------------------- ------------------- Total $ 1,755 $ 1,455 $ 3,957 $ 2,573 =================== =================== =================== ===================
* Includes non-U.S. revenues of $19 million and $11 million for the three months ended May 31, 2000 and May 31, 1999 respectively, and includes non-U.S. revenues of $39 million and $20 million for the six months ended May 31, 2000 and May 31, 1999, respectively. 7. Preferred Stock: On March 28, 2000, the Company issued 5,000,000 Depository Shares (each representing 1/100th of a share) of Fixed/Adjustable Rate Cumulative Preferred Stock, Series E ("Series E Preferred Stock"), $1.00 par value. The initial cumulative dividend rate on the Series E Preferred Stock is 7.115% per annum through May 31, 2005; thereafter the rate will be the highest of either the three-month U.S. Treasury Bill rate, the 10-year U.S. Treasury constant maturity rate or the 30-year U.S. Treasury constant maturity rate, in each case plus 1.15%, but in any event not less than 7.615% nor greater than 13.615%. The Series E Preferred Stock has a redemption price of $5,000 per share, together with accrued and unpaid dividends. The Company may redeem any or all of the Series E Preferred Stock at its option after May 31, 2005. The $250 million aggregate redemption value at May 31, 2000 is classified on the Company's Consolidated Statement of Financial Condition as part of Preferred Stock. 8. Incentive Plans: In the second quarter of 2000, the Company transferred 3.9 million shares of its common stock held in treasury into the RSU Trust. The RSU Trust is included in the Consolidated Statement of Financial Condition as a component of Other stockholders' equity. The transfer had no impact on the total stockholders' equity of the Company, as the decrease in treasury stock was offset by a corresponding decrease in Additional paid-in capital and Other stockholders' equity. At May 31, 2000 and November 30, 1999, 27.5 million and 24.8 million outstanding shares, respectively, were held in the RSU Trust. 9. Earnings Per Common Share: Earnings per share was calculated as follows (in millions, except for per share data):
Three Months Ended Six Months Ended May 31 May 31 ------------------------------------- --------------------------------- 2000 1999 2000 1999 ----------------- ---------------- --------------- -------------- Numerator: Net income $ 378 $ 330 $ 919 $ 540 Preferred stock dividends (12) (62) (71) (74) ----------------- ----------------- --------------- -------------- Numerator for basic earnings per share-income available to common stockholders 366 268 848 466 Convertible preferred stock dividends 2 4 4 10 ----------------- ----------------- ----------------- ----------------- Numerator for diluted earnings per share-income available to common stock-holders (adjusted for assumed conversion of preferred stock) $ 368 $ 272 $ 852 $ 476 ================= ================= =============== ============== Denominator: Denominator for basic earnings per share - weighted-average shares 123.2 122.2 123.2 122.1 Effect of dilutive securities: Employee stock options 5.9 3.1 5.4 2.7 Employee restricted stock units 2.3 2.2 2.2 1.9 Preferred shares assumed converted into common 1.2 2.9 1.2 3.3 ----------------- ----------------- ----------------- -------------- Dilutive potential common shares 9.4 8.2 8.8 7.9 ----------------- ----------------- --------------- -------------- Denominator for diluted earnings per share - adjusted weighted-average shares 132.6 130.4 132.0 130.0 ================= ================= =============== ============== Basic earnings per share $ 2.97 $ 2.19 $ 6.88 $ 3.82 ================= ================= =============== ============== Diluted earnings per share $ 2.78 $ 2.09 $ 6.46 $ 3.66 ================= ================= =============== ==============
Preferred Shares are convertible into common shares at a conversion price of approximately $123.00 per share. However, for purposes of calculating diluted earnings per share, preferred shares are assumed to be converted into common shares when basic earnings per share exceeds preferred dividends per share obtainable upon conversion (approximately $1.54 on a quarterly basis). LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS Business Environment The principal business activities of Lehman Brothers Holdings Inc. ("Holdings") and subsidiaries (collectively, the "Company" or "Lehman Brothers") are investment banking and securities trading and sales, which by their nature are subject to volatility, primarily due to changes in interest and foreign exchange rates and security valuations, global economic and political trends and industry competition. As a result, revenues and earnings may vary significantly from quarter to quarter and from year to year. The favorable market and economic conditions in the United States during 1999 continued through April 2000, but then turned choppy throughout the remaining half of the second fiscal quarter. Boosted by a wealth effect stemming from previous gains in the stock market, consumer spending soared. In response to strong growth and rising inflation fears, the Federal Reserve raised the federal funds rate by a total of 100 basis points to 6.50%, with the last increase occurring on May 16, 2000 when the federal funds rate was raised by an aggressive 50 basis points. Despite rapid growth, there were relatively few signs of a significant increase in underlying inflation, primarily because of impressive labor productivity gains, which offset an increase in wages. Unit labor costs did not accelerate. However, as the first half closed, investors became increasingly worried about inflationary pressures. These worries proved short-lived: during the course of June, evidence of moderating growth mounted and in late June the Federal Reserve supported this view when it left rates unchanged. As a result of mixed economic signals, the United States equity markets were very volatile during the first-half of the year. By the middle of January 2000, in anticipation of further rate hikes, the price of old-economy stocks, as measured by the Dow Jones Industrial Average, started to decline, falling briefly through the 10,000 barrier before recovering to end the half year at 10,522, down just under 500 points or 4.5% from the start of the year. In contrast, new-economy stocks, as measured by the NASDAQ Composite, experienced significant volatility: rising 40% to new highs in early March, but later falling back to end the half year where it started at 3,400. Broader indices, such as the S&P 500 Index, moved sideways over the half-year. The bear market in NASDAQ stocks and the correction in the broader markets led to a slowdown in the number and amount of equity offerings in the latter half of the second quarter, as well as a decrease in overall trading volumes. The uncertainty of United States monetary policy as well as inverted yield curves in the U.S. and Europe fixed income markets resulted in corporate debt spreads widening over 50 basis points and high yield spreads widening 120 basis points since the beginning of the year. These conditions, together with net redemptions in bond funds and uncertainty about interest rates forced investors to the sidelines. The combination of wider spreads and weaker investor demand also affected debt issuances, leading to a 27% reduction in global debt offerings. Long-term treasuries moved in tandem with NASDAQ, rising at first but falling into early April. However, a rise in core inflation data caused the 10-year yield to rise again, despite stock market weakness. Over the complete half-year, 10-year yields rose just 7bp to end the period at 6.27%. Financial advisory activities on a global basis continued at record levels. Industrywide, the volume of announced merger and acquisition transactions in the first-half of the fiscal year soared to $1.8 trillion, albeit influenced by the announcement of a few large transactions. The first half of the year also reflected continued activity involving European companies and cross-border mergers and acquisitions. The forces of consolidation, deregulation and globalization across industry sectors continued to drive strategic combinations. Equity new issuance during the first half of the year was at record levels worldwide, with volumes more than doubling over the same period last year. However, the second quarter did begin to reflect some slowing of activity in those industry sectors impacted by the downturn in the stock market, particularly technology, media and telecommunications. In the U.S., new equity issuance more than tripled year-over-year. Fueling the domestic market was increased IPO activity and continued equity raising in the technology, telecommunications and new media sectors. Debt issuance was initially dampened by the outward shift in the yield curve in January and later by the inversion of the yield curve and the anticipation of future interest rate hikes by the Federal Reserve. With European business and consumer confidence rising to all-time highs, the unemployment rate fell sharply, and inflationary pressures started to increase. Responding to rising inflationary pressures and a weaker euro, the European Central Bank raised its key two-week repo rate by 25 basis points each on each of three occasions, February 3rd, March 16th and April 27th, to end the period with a repo rate of 3.75%. In May, as expectations of another and more aggressive rate hike by the European Central Bank grew, the euro staged a small rally, rising to $0.94/euro. However, since the beginning of the year, the euro has fallen approximately 6.5% against the U.S. dollar. In local currency terms the European markets outperformed the S&P 500 Index with a return of 10.6% (FTSE World Europe). In Japan, the economy and financial markets were very unstable. Recovery generally remained hesitant and uneven. Even though concerns continued to mount about the sustainability of public financing, the continued weakness of real economic activity and residual evidence of deflation allowed long-term bond yields to remain below 2.0%. In the equity markets, the Nikkei 225 index ended the half-year at 16,332, down approximately 12% from the beginning of the year. Other Asian equity markets fell 6%, hurt by the effect of higher U.S. interest rates and increasing risk aversion among international investors. Note: Except for the historical information contained herein, this Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based on current expectations, estimates and projections about the industries in which the Company operates. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS Results of Operations For the Three Months Ended May 31, 2000 and May 31, 1999 The Company reported net income of $378 million for the second quarter ended May 31, 2000, representing an increase of 15% from the second quarter ended May 31, 1999. Earnings per common share (diluted) rose to $2.78 for the second quarter of 2000 from $2.09 for the second quarter of 1999, an increase of 33%. Excluding the impact of the special preferred dividend of $50 million in the second quarter of 1999, earnings per share in the second quarter of 2000 rose 12%. The quarter represented the second highest quarterly earnings ever posted by the Company. These results reflected the Company's continued ability to execute its strategy of growing its high margin investment banking and equities businesses; increasing its presence in certain strategic businesses in Europe; and, at the same time, maintaining a discipline with regard to its expenses. The Company's strategy is based on the belief that: (1) these businesses generate higher returns on equity because they are less capital intensive; (2) their rapid growth accelerates the Company's overall rate of growth; and (3) they help reduce earnings volatility by diversifying the Company's revenue base. The Company's emphasis on these high margin businesses generated operating margins of approximately 32% in the second quarters of both 2000 and 1999. Net revenues increased 21% in the second quarter of 2000 to $1,755 million from $1,455 million in the second quarter of 1999. The increase in net revenues was achieved despite challenging market conditions in the second quarter of 2000 compared to the prior period. Non-personnel expenses as a percentage of net revenues decreased to 16.2% compared to 17.3% in the second quarter of 1999, but rose 13.5% reflecting the Company's growth plan. The Company's compensation and benefits ratio increased to 52% of net revenues from 50.7%, although unchanged from the first quarter of 2000, reflecting the Company's continued expansion of its investment banking, equities, and European franchises as well as its investments in technology and e-commerce capabilities. In the following tables, the Company's results have been segregated into three business segments: Investment Banking, Capital Markets and Client Services. Each segment represents a group of activities and products with similar characteristics. These business activities result in revenues from both institutional clients as well as high-net-worth retail clients and are recognized within the different revenue categories in the Company's Consolidated Statement of Income. Net revenues by segment contain certain internal allocations, including funding costs, which are centrally managed. Three Months Ended May 31, 2000 and May 31, 1999 (in millions) Three Months Ended ---------------------------------- May 31 May 31 2000 1999 --------------- --------------- Investment Banking $ 471 $ 435 Capital Markets 1,082 878 Client Services 202 142 --------------- --------------- Total $ 1,755 $ 1,455 =============== =============== The following discussion provides an analysis of the Company's net revenues for the periods above. Investment Banking This segment's net revenues result from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, raising capital and advising clients on merger and acquisition activities and other services. Investment Banking's net revenues increased 8% in the second quarter of 2000 to $471 million from $435 million in the second quarter of 1999, principally as a result of an increase in equity underwriting activities partially offset by a decrease in debt underwriting revenues. Equity underwriting revenues increased 80% to $227 million in the second quarter of 2000 from $126 million in the second quarter of 1999, despite a slowdown in the latter half of the quarter resulting from the market corrections in mid-April. The Firm's global equity market share and league table rankings improved to 4.2% and #8 on a year-to-date basis from 3.8% and #9 for calendar year 1999. The increase was attributed to significant issuances in the communications/media and technology sectors. Debt underwriting revenues decreased 33% from the second quarter of 1999. Wider credit spreads, higher interest rates and an uneasiness over the future direction of interest rates forced investors and issuers to the sidelines and led to lower new issue volume. Global debt underwriting volume was down 27% versus the second quarter of 1999 and high yield issuance was down 70% on the same basis. Investment Banking Net Revenues ---------------------- ------------------------------ (in millions) Three Months Ended May 31 May 31 2000 1999 -------------------- --------------- Equity Underwriting $ 227 $ 126 Debt Underwriting 116 174 Financial Advisory 128 135 ---------------------- --------------- -------------- $ 471 $ 435 --------------------- --------------- -------------- Financial advisory revenues were essentially flat compared to last year; however, the Company's pipeline of announced deals remained strong at $270 billion at May 31, 2000, compared to $118 billion at May 31, 1999. Capital Markets This segment's net revenues reflect institutional flow activities and secondary trading and financing activities related to a broad spectrum of fixed income and equity products. These products include dollar and non-dollar government securities, mortgages, mortgage- and asset-backed securities, money market products, dollar and non-dollar corporate debt securities, emerging market securities, municipal securities, foreign exchange, fixed income and equity related derivatives, convertible securities and common and preferred equity securities. Capital Markets' net revenues were $1,082 million for the second quarter of 2000 compared to $878 million for the second quarter of 1999, an increase of 23%. Net revenues from the equity component of Capital Markets increased 63% to $707 million in the second quarter of 2000 from $433 million in the second quarter of 1999. Revenues benefited in the second quarter of 2000 from significantly increased institutional customer flow and trading volumes primarily in U.S. and European cash products and global derivatives. Capital Markets Net Revenues ------------------ --------------------------------- (in millions) Three Months Ended May 31 May 31 2000 1999 ------------------ --------------- ----------------- Equities $ 707 $ 433 Fixed Income 375 445 ------------------ --------------- ----------------- $ 1,082 $ 878 ------------------ --------------- ----------------- Net revenues from the fixed income component of Capital Markets decreased to $375 million in the second quarter of 2000 from $445 million in the first quarter of 1999. This decrease is primarily attributable to the difficult market conditions during the second quarter of 2000, as rising interest rates and spread widening led to decreased customer trading volumes in the quarter. Client Services Client Services net revenues reflect earnings from the Company's private client and private equity businesses. Private client net revenues reflect the Company's high-net-worth retail customer flow activities as well as asset management fees. Private equity net revenues include the management and incentive fees earned in the Company's role as General Partner for sixteen merchant banking and venture capital partnerships. Client Services Net Revenues --------------------- --------------------------------- (in millions) Three Months Ended May 31 May 31 2000 1999 --------------------- -------------- ------------------ Private Client $ 192 $ 136 Private Equity 10 6 --------------------- -------------- ------------------ $ 202 $ 142 --------------------- -------------- ------------------ Client Services' net revenues were $202 million in the second quarter of 2000 and $142 million in the second quarter of 1999. The 42% increase reflected continued strength in retail trading volume, particularly in equities, which was in part driven by the heavy syndicate calendar in the first half of the quarter. Non-Interest Expenses Non-interest expenses were $1,197 million for the second quarter of 2000 and $989 million for the second quarter of 1999. Compensation and benefits expense as a percentage of net revenues increased to 52% for the quarter compared to the prior year's ratio of 50.7%. This increase reflects the Company's continued expansion of its investment banking, equities and European franchises as well as investment spending in technology and e-commerce capabilities. Nonpersonnel expenses were $285 million for the second quarter of 2000 and $251 million for the second quarter of 1999, an increase of 13.5% that reflected the impact of the Company's growth plan. Nonpersonnel expenses as a percentage of net revenues declined to 16.2% for the second quarter of 2000 from 17.3% for the second quarter of 1999 as the Company's net revenues increased at a faster rate than spending. Increases in recruiting (professional fees), business development and technology spending were consistent with the Company's planned growth and also supported the continued build-out of the Company's technology and e-commerce platforms. Income Taxes The Company's income tax provision was $166 million for the second quarter of 2000 compared to $126 million for the second quarter of 1999. The effective tax rate was 29.7% for the second quarter of 2000 and 27.0% for the second quarter of 1999. This higher tax rate reflected the overall increase in the level of pre-tax income, which lessened the relative impact of certain tax preference revenues, partially offset by a more favorable geographic mix of earnings. Results of Operations For the Six Months Ended May 31, 2000 and May 31, 1999 The Company reported record net income of $919 million for the six months ended May 31, 2000, representing an increase of 70% from net income of $540 million for the six months ended May 31, 1999. Earnings per common share (diluted) rose to $6.46 for the six months of 2000 from $3.66 for the comparable period in 1999, an increase of 77%. Earnings per share computations for both periods include the recognition of $50 million in dividends on the Company's Redeemable Voting Preferred Stock. These results reflected the Company's continued ability to execute its strategy of growing its high margin investment banking and equities businesses; increasing its presence in certain strategic businesses in Europe; and, at the same time, maintaining a strict discipline with regard to its expenses. Net revenues increased to a record $3,957 million for the six months of 2000 from $2,573 million for the six months of 1999. The Company's emphasis on these high margin businesses supported an increase in the Company's operating margin to 34.2% in the first half of 2000 from 30.1% in the first half of 1999. Return on equity (excluding the impact of the $50 million in dividends on the Company's Redeemable Voting Preferred Stock) increased to 30.2% from 21.8% for the comparable period. Revenues in each of the Company's three segments grew by over 40% compared to the first six months of the prior year. Non-personnel expenses increased only 11% in the first half of 2000, despite an overall 54% increase in net revenues from the first half of 1999. The Company's compensation and benefits ratio increased to 52% of net revenues from 50.7% as the Company continued to increase headcount, making significant additions in areas where the Company is focusing its growth. In the following tables, the Company's results have been segregated into three business segments: Investment Banking, Capital Markets and Client Services. Each segment represents a group of activities and products with similar characteristics. These business activities result in revenues from both institutional clients as well as high-net-worth retail clients and are recognized within the different revenue categories in the Company's Consolidated Statement of Income. (Net revenues by segment contain certain internal allocations, including funding costs, which are centrally managed.) Six Months Ended May 31, 2000 and May 31, 1999 ------------------------------------------------------------------------------- (in millions) Six Months Ended --------------------------------- May 31 May 31 2000 1999 --------------- --------------- Investment Banking $ 1,064 $ 744 Capital Markets 2,421 1,565 Client Services 472 264 --------------- --------------- Total $ 3,957 $ 2,573 =============== =============== ------------------------------------------------------------------------------- The following discussion provides an analysis of the Company's net revenues for the periods above. Investment Banking This segment's net revenues result from fees earned by the Company for underwriting public and private offerings of fixed income and equity securities, raising capital and advising clients on merger and acquisition activities and other services. Investment Banking's net revenues increased 43% in the six months of 2000 to $1,064 million from $744 million in the prior year, principally as a result of a significant increase in equity underwriting partially offset by difficult conditions in the debt underwriting market. The increased net revenues reflect the Company's ongoing efforts to grow its Investment Banking franchise. Equity underwriting revenues increased 164% to $488 million in the first half of 2000 from $185 million for the prior year's period. The Company's equity underwriting revenues for the first six months of 2000 already exceed full year 1999 amounts. The results in equity underwriting were driven by issuances in the communications/media and technology sector, a significant increase in convertible offerings and strong growth in the European banking franchise. Debt underwriting revenues decreased 17% to $269 million in the six months of 2000 from $324 million in the six months of 1999. The decrease resulted from challenging market conditions as rising interest rates led to decreased underwriting volume most prominently in the high yield market. Global debt underwriting volume was down 25% versus the first half of 1999 and high yield issuance was down 53% on the same basis. Financial advisory revenues increased 31% to $307 million in the six months of 2000 from $235 million in the prior year's period. This increase was primarily attributable to a robust merger and acquisition environment in the early part of the year. At May 31, 2000, the Company's pipeline of announced deals remained strong at $270 billion, more than double the level of last year at this time. Investment Banking Net Revenues ---------------------- ------------------------------- (in millions) Six Months Ended May 31 May 31 2000 1999 ---------------------- --------------- --------------- Equity Underwriting $ 488 $ 185 Debt Underwriting 269 324 Financial Advisory 307 235 ---------------------- --------------- --------------- $ 1,064 $ 744 ---------------------- --------------- --------------- Capital Markets This segment's net revenues reflect institutional flow activities and secondary trading and financing activities related to a broad spectrum of fixed income and equity products. These products include dollar and non-dollar government securities, mortgages, mortgage- and asset-backed securities, money market products, dollar and non-dollar corporate debt securities, emerging market securities, municipal securities, foreign exchange, fixed income and equity related derivatives, convertible securities and common and preferred equity securities. Capital Markets' net revenues were $2,421 million for the six months of 2000 and $1,565 million for the six months of 1999. Customer flow sales and trading volumes continued to increase at healthy rates, significantly contributing to this increase. Net revenues from the equity component of Capital Markets increased 146% to $1,575 million in the first half of 2000 from $639 million in the comparable 1999 period. Revenues benefited from significantly increased institutional customer flow activity in cash and derivative products. In addition, commission levels grew 45% from the same period last year. Net revenues from the fixed income component of Capital Markets decreased to $846 million in the six months of 2000 from $926 million in the comparable period last year. This was a result of difficult market conditions that persisted throughout the second quarter of 2000 due to rising interest rates and spread widening as well as the Y2K slowdown early in the first quarter of 2000. Capital Markets Net Revenues ----------------- --------------------------------- (in millions) Six Months Ended May 31 May 31 2000 1999 ----------------- --------------- ----------------- Equities $ 1,575 $ 639 Fixed Income 846 926 ----------------- --------------- ----------------- $ 2,421 $ 1,565 ----------------- --------------- ----------------- Client Services Client Services net revenues reflect earnings from the Company's private client and private equity businesses. Private client net revenues reflect the Company's high-net-worth retail customer flow activities as well as asset management fees. Private equity net revenues include the management and incentive fees earned in the Company's role as General Partner for sixteen merchant banking and venture capital partnerships. Client Services Net Revenues ---------------------- ------------------------------- (in millions) Six Months Ended May 31 May 31 2000 1999 ---------------------- -------------- ---------------- Private Client $ 452 $ 255 Private Equity 20 9 ---------------------- -------------- ---------------- $ 472 $ 264 ---------------------- -------------- ---------------- Client Services' net revenues were $472 million in the six months of 2000 and $264 million in the six months of 1999. The 79% increase was driven by record customer activity due in part to the Company's active equity syndicate calendar in the early part of the year, as well as performance fees resulting from higher portfolio returns in the Company's London-based managed assets in the first quarter of 2000. Non-Interest Expenses Non-interest expenses were $2,605 million for the six months of 2000 and $1,798 million for the comparable period in 1999. Compensation and benefits expense as a percentage of net revenues increased to 52.0% compared to 50.7% in 1999. This increase reflects the Company's continued expansion of its investment banking, equities and European franchises as well as its investments in technology and e-commerce capabilities. Nonpersonnel expenses were $548 million for the six months of 2000 and $493 million for the six months of 1999, an increase of 11.2% that reflected the impact of the Company's strategic growth plan. However, nonpersonnel expenses declined as a percentage of net revenues to 13.8% for the six months of 2000 from 19.2% in the prior year's period, as the Company's net revenues increased at a significantly faster rate than expenses. Income Taxes The Company's income tax provision was $405 million for the six months of 2000 compared to $222 million for the six months of 1999. The effective tax rate was 30.0% for the first half of 2000 and 28.6% for prior year's period. The higher rate reflected an overall increase in the level of pre-tax income, which lessened the relative impact of certain tax preference revenues, partially offset by a more favorable geographic mix of earnings. Funding, Capital Resources and Liquidity Funding and Capital Policies The Company's Finance Committee is responsible for establishing and managing the funding and liquidity policies of the Company. These policies include recommendations for capital and balance sheet size as well as the allocation of capital and balance sheet to the Company's product areas. Members of the Company's treasury department and business unit financing groups work with the Finance Committee to ensure coordination of global funding efforts and implementation of the funding and liquidity policies. Regional asset and liability committees in the Company's principal funding centers are responsible for implementing funding strategies for their respective regions. The primary goal of the Company's funding policies is to provide sufficient liquidity and availability of funding sources to meet the needs of the Company's businesses. The key elements of these policies are to: (1) Maintain a total capital structure that supports the business activities in which the Company is engaged. (2) Finance the Company's assets, primarily on a secured basis. Together with Total Capital, secured funding provides a stable funding base and enables the Company to minimize its reliance on short-term unsecured debt. (3) Maintain funding availability in excess of actual utilization and obtain diversified funding through a global investor base which increases liquidity and reduces concentration risk. (4) Maintain sufficient financial resources to enable the Company to meet its obligations in periods of financial stress, defined as any event that severely constrains the Company's access to unsecured funding sources. Total Capital Total Capital (defined as long-term debt, trust preferred securities and stockholders' equity) was $41.3 billion at May 31, 2000 compared to $37.7 billion at November 30, 1999. The increase in Total Capital resulted from a net increase in long-term debt of $2.8 billion, the retention of earnings, amortization associated with RSU awards, the exercise of stock options granted to employees, tax credits arising from stock-based employee awards, and the issuance of $250 million of Series E Preferred Stock. These were offset by repurchases of common stock (to fund RSUs and option awards) and of $88 million (2.3 million shares) in convertible Series B Preferred Stock. May 31 November 30 (in millions) 2000 1999 ---------------------------------------------------------------------------- Long-term Debt Senior Notes $ 30,214 $ 27,375 Subordinated Indebtedness 3,319 3,316 -------- --------- 33,533 30,691 Trust Preferred Securities 710 710 Stockholders' Equity Preferred Equity 850 688 Common Equity 6,246 5,595 -------- --------- 7,096 6,283 ---------------------------------------------------------------------------- Total Capital $ 41,339 $ 37,684 ---------------------------------------------------------------------------- During the first six months of 2000, the Company issued $8.0 billion in long-term debt, which was $3.4 billion in excess of its maturing debt. Long-term debt increased to $33.5 billion at May 31, 2000 from $30.7 billion at November 30, 1999 with a weighted-average maturity of 3.8 years at May 31, 2000 and 3.7 years at November 30, 1999. Secured Funding The Company strives to maximize the portion of the Company's balance sheet that is funded on a secured basis. Secured funding includes securities and other financial instruments sold but not yet purchased, as well as collateralized short-term financings, defined as securities sold under agreements to repurchase ("repos") and securities loaned. Because of their secured nature, repos have historically been a stable financing source irrespective of market conditions. At May 31, 2000 and November 30, 1999, $153 billion and $123 billion, respectively, of the Company's total balance sheet of $233 billion and $192 billion at May 31, 2000 and November 30, 1999, respectively, was financed on a secured basis. By maximizing its use of secured funding, the Company minimizes its reliance on unsecured financing. As of May 31, 2000 and November 30, 1999, commercial paper and short-term debt outstanding totaled $5.9 billion and $5.5 billion, respectively. Of these amounts, commercial paper outstanding was $3.6 billion at both May 31, 2000 and November 30, 1999. Back-Up Credit Facilities Holdings maintains a Revolving Credit Agreement (the "Credit Agreement") with a syndicate of banks. Under the terms of the Credit Agreement, the banks have committed to provide up to $2 billion for up to 364 days. Any loans outstanding on the commitment termination date may be extended for up to an additional year at the option of Holdings. The Credit Agreement contains covenants which require, among other things, that the Company maintain a specified level of tangible net worth. The Company also maintains a $1 billion Committed Securities Repurchase Facility (the "Facility") for LBIE, the Company's major operating entity in Europe, which matures on July 27, 2000. Management expects that the Facility will be renewed. The Facility provides secured multi-currency financing for a broad range of collateral types. Under the terms of the Facility, the bank group will agree to provide funding for up to one year on a secured basis. Any loans outstanding on the commitment termination date may be extended for up to an additional year at the option of LBIE. The Facility contains covenants which require, among other things, that LBIE maintain specified levels of tangible net worth. There are no borrowings outstanding under either the Credit Agreement or the Facility. The Company may use the Credit Agreement and the Facility for general corporate purposes from time to time. The Company has maintained compliance with the applicable covenants for both the Credit Agreement and the Facility at all times. Balance Sheet The Company's total assets increased to $233.4 billion at May 31, 2000 from $192.2 billion at November 30, 1999. The Company's adjusted total assets, defined as total assets less the lower of securities purchased under agreements to resell or securities sold under agreements to repurchase were $149.7 billion at May 31, 2000 compared to $130.0 billion at November 30, 1999. The Company believes adjusted total assets is a more effective measure of evaluating balance sheet usage when comparing companies in the securities industry. The increase in adjusted total assets primarily reflects higher levels of equities securities owned as well as securities borrowed, both associated with increased customer flow activities related to the growth of the Company's equity franchise. The Company's balance sheet consists primarily of cash and cash equivalents, securities and other financial instruments owned, and collateralized short-term financing agreements. The liquid nature of these assets provides the Company with flexibility in financing and managing its business. The majority of these assets are funded on a secured basis through collateralized short-term financing agreements with the remaining assets being funded through short-term unsecured financing and Total Capital. Financial Leverage Balance sheet leverage ratios are one measure used to evaluate the capital adequacy of a company. Leverage ratios are commonly calculated using either total assets or adjusted total assets divided by total stockholders' equity and trust preferred securities. The Company believes that the adjusted leverage ratio is a more effective measure of financial risk when comparing companies in the securities industry. The Company's adjusted leverage ratio based on adjusted total assets at May 31, 2000 was 19.2x compared to 18.6x at November 30, 1999. Due to the nature of the Company's sales and trading activities, the overall size of the Company's assets and liabilities fluctuates from time to time and at specific points in time may be higher than the fiscal quarter ends or the quarterly average. (GRAPH OMITTED) Credit Ratings The Company, like other companies in the securities industry, relies on external sources to finance a significant portion of its day-to-day operations. The Company's access to and cost of funding is generally dependent upon its short- and long- term debt ratings. As of May 31, 2000 the short- and long-term debt ratings of Holdings and LBI were as follows:
Holdings LBI ----------------------------------- ----------------------------------- Short-term Long-term Short-term Long-term** ------------------------------------------- ---------------- ------------------ --- --------------- ------------------- Fitch F-1 A F-1 A/A- Moody's P-2 A3 P-1 A2*/A3 Standard & Poor's Corp. P-ZBaa1P-Z AA-1Baa1 A A-1 A+*/A Thomson BankWatch TBW-1 A TBW-1 A+/A
* Provisional ratings on shelf registration ** Senior/subordinated Other The Company underwrites, trades, invests and makes markets in high yield corporate debt securities. The Company also syndicates, trades and invests in loans to below investment grade-rated companies. For purposes of this discussion, high yield debt instruments are defined as securities or loans to companies rated BB+ or lower, or equivalent ratings by recognized credit rating agencies, as well as non-rated securities or loans which, in the opinion of management, are non-investment grade. Non-investment grade securities generally involve greater risks than investment grade securities due to the issuer's creditworthiness and the liquidity of the market for such securities. In addition, these issuers have higher levels of indebtedness, resulting in an increased sensitivity to adverse economic conditions. The Company recognizes these risks and aims to reduce market and credit risk through the diversification of its products and counterparties. High yield debt instruments are carried at fair value, and unrealized gains or losses from these instruments are recognized in the Company's Consolidated Statement of Income. The Company's portfolio of such instruments at May 31, 2000 and November 30, 1999 included long positions with an aggregate market value of approximately $3.1 billion and $3.0 billion, respectively, and short positions with an aggregate market value of approximately $321 million and $290 million, respectively. The Company may, from time to time, mitigate its net exposure to any single issuer through the use of derivatives and other financial instruments. Additional information about the Company's high yield securities and lending activities, including related commitments, can be found in Note 5 to the Consolidated Financial Statements (Other Commitments and Contingencies). The Company has investments in sixteen merchant banking and venture capital-related partnerships, for which the Company acts as general partner, as well as related direct investments. At May 31, 2000, the Company's investment in these partnerships totaled $137 million and related direct investments totaled $479 million. The Company's policy is to carry its investments, including its partnership interests, at fair value based upon the Company's assessment of the underlying investments. Additional information about the Company's private equity activities, including related commitments, can be found in Note 5 to the Consolidated Financial Statements (Other Commitments and Contingencies). Risk Management As a leading global investment banking company, risk is an inherent part of the Company's businesses. Global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. The Company has developed policies and procedures to identify, measure and monitor each of the risks involved in its trading, brokerage and investment banking activities on a global basis. The principal risks of Lehman Brothers are market, credit, liquidity, legal and operational risks. Risk Management is considered to be of paramount importance. Consequently, the Company devotes significant resources across all of its worldwide trading operations to the measurement, management and analysis of risk, including investments in personnel and technology. The Company seeks to reduce risk through the diversification of its businesses, counterparties and activities in geographic regions. The Company accomplishes this objective by allocating the usage of capital to each of its businesses, establishing trading limits for individual products and traders and setting credit limits for individual counterparties, including regional concentrations. The Company seeks to achieve adequate returns from each of its businesses commensurate with the risks that they assume. Overall risk management policy is established by a Risk Management Committee (the "Committee") comprised of the Chief Executive Officer, the Global Risk Manager, the Chief Financial Officer, the Chief Administrative Officer, the Co-Heads of Capital Markets, the Head of Investment Banking and the Head of Private Equity. The Committee brings together senior management with the sole intent of discussing risk-related issues and provides an effective forum for managing risk at the highest levels within the Company. The Committee meets on a monthly basis, or more frequently if required, to discuss, among other matters, significant market exposures, concentrations of positions (e.g., counterparty, market risk), potential new transactions or positions and risk limit exceptions. The Global Risk Management Group (the "Group") supports the Committee, is independent of the trading areas and reports directly to the Chief Executive Officer. The Group combines two departments, credit risk management and market risk management, into one unit. This facilitates the analysis of counterparty credit and market risk exposures and leverages personnel and information technology resources in a cost-efficient manner. The Group maintains staff in each of the Company's regional trading centers and has daily contact with trading staff at all levels within the Company. These discussions include a review of trading positions and risk exposures. Credit Risk Credit risk represents the possibility that a counterparty will be unable to honor its contractual obligations to the Company. Credit risk management is therefore an integral component of the Company's overall risk management framework. The Credit Risk Management Department ("CRM Department") has global responsibility for implementing the Company's overall credit risk management framework. The CRM Department manages the credit exposure related to trading activities by giving initial credit approval for counterparties, establishing credit limits by counterparty, country and industry group and by requiring collateral in appropriate circumstances. In addition, the CRM Department strives to ensure that master netting agreements are obtained whenever possible. The CRM Department also considers the duration of transactions in making its credit decisions, along with the potential credit exposure for complex derivative transactions. The CRM Department is responsible for the continuous monitoring and review of counterparty credit exposure and creditworthiness and recommending valuation adjustments where appropriate. Credit limits are reviewed periodically to ensure that they remain appropriate in light of market events or the counterparty's financial condition. Market Risk Market risk represents the potential change in value of a portfolio of financial instruments due to changes in market rates, prices and volatilities. Market risk management also is an essential component of the Company's overall risk management framework. The Market Risk Management Department ("MRM Department") has global responsibility for implementing the Company's overall market risk management framework. It is responsible for the preparation and dissemination of risk reports, developing and implementing the firmwide Risk Management Guidelines and evaluating adherence to these guidelines. These guidelines provide a clear framework for risk management decision-making. To that end the MRM Department identifies and quantifies risk exposures, develops limits, and reports and monitors these risks with respect to the approved limits. The identification of material market risks inherent in positions includes, but is not limited to, interest rate, equity, and foreign exchange risk exposures. In addition to these risks, the MRM Department also evaluates liquidity risks, and credit and sovereign concentrations. The MRM Department utilizes qualitative as well as quantitative information in managing trading risk, believing that a combination of the two approaches results in a more robust and complete approach to the management of trading risk. Quantitative information is developed from a variety of risk methodologies based upon established statistical principles. To ensure high standards of qualitative analysis, the MRM Department has retained seasoned risk managers with the requisite experience and academic and professional credentials. Market risk is present in cash products, derivatives, and contingent claim structures that exhibit linear as well as non-linear profit and loss sensitivity. The Company's exposure to market risk varies in accordance with the volume of client-driven market-making transactions, the size of the Company's proprietary and arbitrage positions, and the volatility of financial instruments traded. The Company seeks to mitigate, whenever possible, excess market risk exposures through the use of futures and option contracts and offsetting cash market instruments. The Company participates globally in interest rate, equity, and foreign exchange markets. The Company's Fixed Income division has a broadly diversified market presence in U.S. and foreign government bond trading, emerging market securities, corporate debt (investment and non-investment grade), money market instruments, mortgages and mortgage-backed securities, asset- backed securities, municipal bonds, and interest rate derivatives. The Company's Equities division facilitates domestic and foreign trading in equity instruments, indices, and related derivatives. The Company's foreign exchange businesses are involved in trading currencies on a spot and forward basis as well as through derivative products and contracts. The Company incurs short-term interest rate risk when facilitating the orderly flow of customer transactions through the maintenance of government and high grade corporate bond inventories. Market-making in high yield instruments exposes the Company to additional risk due to potential variations in credit spreads. Trading in international markets exposes the Company to spread risk between the term structure of interest rates in differing countries. Mortgages and mortgage-related securities are subject to prepayment risk and changes in the level of interest rates. Trading in derivatives and structured products exposes the Company to changes in the level and volatility of interest rates. The Company actively manages interest rate risk through the use of interest rate futures, options, swaps, forwards, and offsetting cash market instruments. Inventory holdings, concentrations and agings are monitored closely and used by management to selectively hedge or liquidate undesirable exposures. The Company is a significant intermediary in the global equity markets through its market-making in U.S. and non-U.S. equity securities, including common stock, convertible debt, exchange-traded and OTC equity options, equity swaps and warrants. These activities expose the Company to market risk as a result of price and volatility changes in its equity inventory. Inventory holdings are also subject to market risk resulting from concentrations, aging and liquidity that may adversely impact market valuation. Equity market risk is actively managed through the use of index futures, exchange-traded and OTC options, swaps and cash instruments. The Company enters into foreign exchange transactions in order to facilitate the purchase and sale of non-dollar instruments, including equity and interest rate securities. The Company is exposed to foreign exchange risk on its holdings of non-dollar assets and liabilities. The Company is active in many foreign exchange markets and has exposure to the euro, Japanese yen, British pound, Swiss franc, and Canadian dollar as well as a variety of developed and emerging market currencies. The Company hedges its risk exposures primarily through the use of currency forwards, swaps, futures, and options. Value at Risk For purposes of Securities and Exchange Commission ("SEC") risk disclosure requirements, the Company discloses an entity-wide value at risk analysis of virtually all of the Company's trading activities. The value at risk calculation measures the potential loss in expected revenues with a 95% confidence level. The methodology incorporates actual trading revenues over a standardized 250-day historical period. A confidence level of 95% implies, on average, that daily trading revenues or losses will exceed daily expected trading revenues by an amount greater than value at risk one out of every 20 trading days. Average value at risk computed in this manner was $23.8 million and $30.9 million for the periods ended May 31, 2000 and November 30, 1999, respectively. Value at risk at May 31, 2000 and November 30, 1999 was $21.3 million and $19.2 million, respectively. Value at risk is one measurement of potential losses in revenues that may result from adverse market movements over a specified period of time with a selected likelihood of occurrence. Value at risk has substantial limitations, including its reliance on historical performance and data as valid predictors of the future. Consequently, value at risk is only one of a number of tools the Company utilizes in its daily risk management activities. As discussed throughout Management's Discussion and Analysis, the Company seeks to reduce risk through the diversification of its businesses and a focus on customer flow activities. This diversification and focus, combined with the Company's risk management controls and processes, helps mitigate the net revenue volatility inherent in the Company's trading activities. Although historical performance is not necessarily indicative of future performance, the Company believes its focus on business diversification and customer flow activities should continue to help mitigate the volatility of future net trading revenues. New Accounting Developments In September 1999, the FASB issued an Exposure Draft, "Business Combinations and Intangible Assets." The proposal would eliminate the use of the pooling-of-interests method and require that all business combinations be accounted for using the purchase method. The Exposure Draft would also require goodwill arising from the application of the purchase method to be written off over a maximum 20-year amortization period, which is shorter than the current 40-year period. The provisions of the Exposure Draft related to business combinations are expected to be applied only for those business combinations initiated after the issuance of a final statement, projected to be late in 2000. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires all derivatives to be recorded on the balance sheet at fair value. In June 1999, the FASB extended the implementation date of SFAS No. 133 by one year. As a result, SFAS No. 133 will now be effective for the Company on December 1, 2000 (Fiscal Year 2001). The expected impact of adoption on the Company's result of operations has not yet been determined; however, it is not likely to be material since most of the Company's derivatives are carried at fair value. LEHMAN BROTHERS HOLDINGS INC. and SUSBSIDIARIES PART II - OTHER INFORMATION ITEM 1 Legal Proceedings The Company is involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its business. Such proceedings include actions brought against the Company and others with respect to transactions in which the Company acted as an underwriter or financial advisor, actions arising out of the Company's activities as a broker or dealer in securities and commodities and actions brought on behalf of various classes of claimants against many securities and commodities firms, including the Company. Although there can be no assurance as to the ultimate outcome, the Company has denied, or believes it has meritorious defenses and will deny, liability in all significant cases pending against it, including the matters described below, and intends to defend vigorously each such case, and based on information currently available and established reserves, the Company believes that the eventual outcome of the actions against it, including the matters described below, will not, in the aggregate, have a material adverse effect on its business or consolidated financial condition. Bamaodah v. E.F. Hutton & Company Inc. (Reported in Holdings' 1999 Annual Report on Form 10-K) On April 23, 2000, the Court of Cassation issued its final judgment awarding the Bamaodahs $2,923,000 plus interest. Actions Relating to First Capital Holdings Inc. The Virginia Commissioner of Insurance Action. (Reported in Holdings' 1999 Annual Report on Form 10-K) On June 30, 2000, the United States Court of Appeals for the Fourth Circuit affirmed the Judgment Order entered by the Virginia Court dismissing the complaint. Actions Relating to Bre-X Minerals Ltd. McNamara et al. v. Bre-X Minerals Ltd et al. (Reported in Holdings' 1999 Annual Report on Form 10-K) While defendants' motion to dismiss was pending, the plaintiffs obtained leave from the Court to file a Fourth Amended Complaint, which was filed on June 14, 2000. LEHMAN BROTHERS HOLDINGS INC. and SUSBSIDIARIES PART II - OTHER INFORMATION ITEM 1 Legal Proceedings - continued Klassen v. Lehman Brothers Inc. (Reported in Holdings' 1999 Annual Report on Form 10-K) The action was dismissed without prejudice to plaintiffs' right to refile it nunc pro tunc to the date of its dismissal on January 12, 1999. Bowser v. First Alliance Mortgage Company, et al. On May 1, 2000, a purported class action complaint was filed in the United States Bankruptcy Court in the Central District of California in the bankruptcy of First Alliance Mortgage Company and its parent and affiliate companies (the "Debtors"). The complaint names the Debtors and Holdings as defendants. As to Holdings, the complaint alleges common law fraud. This claim against Holdings and the other defendants is based on alleged misrepresentations or omissions of material facts in connection with consumer loan transactions entered into by all persons, during the four years prior to the filing of the complaint, who entered into mortgage loans with Debtors. The complaint's stated basis for naming Holdings is that its affiliates are alleged to have provided financing to Debtors, to have underwritten the securitization of their mortgage loans, to hold a warrant for one percent of First Alliance shares and to have approved of or acquiesced in First Alliance's purported fraudulent lending practices. The plaintiffs seek class certification and unspecified compensatory and punitive damages as to the claims against Holdings. LEHMAN BROTHERS HOLDINGS INC. and SUSBSIDIARIES PART II - OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K The following exhibits and reports on Form 8-K are filed as part of this Quarterly Report, or where indicated, were heretofore filed and are hereby incorporated by reference: (a) Exhibits: 12 Computation in Support of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Dividends 27 Financial Data Schedule (b) Reports on Form 8-K: 1. Form 8-K dated March 20, 2000, Items 5 and 7. Financial Statements: Exhibit 99.2 Consolidated Statement of Income (Three Months Ended February 29, 2000) (Preliminary and Unaudited) 2. Form 8-K dated March 28, 2000, Item 7. 3. Form 8-K dated April 17, 2000, Items 5 and 7. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEHMAN BROTHERS HOLDINGS INC. ----------------------------- (Registrant) Date: July 17, 2000 By: /s/ David Goldfarb -------------------------------------- Chief Financial Officer EXHIBIT INDEX Exhibit No. Exhibit Exhibit 12 Computation in Support of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Dividends Exhibit 27 Financial Data Schedule Exhibit 12 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES COMPUTATION of RATIOS of EARNINGS to FIXED CHARGES and COMBINED FIXED CHARGES and PREFERRED STOCK DIVIDENDS (Dollars in millions) (Unaudited)
For the For the For the For the For the For the Twelve Twelve Twelve Twelve Twelve Six Months Months Months Months Months Months Ended Ended Ended Ended Ended Ended November 30 November 30 November 30 November 30 November 30 May 31 1995 1996 1997 1998 1999 2000 ------------- ------------- ------------- -------------- ------------- --------------- Pre-tax earnings from continuing operations $ 369 $ 637 $ 937 $ 1,052 $ 1,631 $ 1,352 Add: Fixed charges (excluding capitalized interest) 10,449 10,852 13,043 15,813 13,681 8,734 ------------- ------------- ------------- -------------- ------------- --------------- Pre-tax earnings before fixed charges 10,818 11,489 13,980 16,865 15,312 10,086 ============= ============= ============= ============== ============= =============== Fixed charges: Interest 10,405 10,816 13,010 15,781 13,649 8,717 Other(a) 72 50 41 47 71 26 ------------- ------------- ------------- -------------- ------------- --------------- Total fixed charges 10,477 10,866 13,051 15,828 13,720 8,743 ------------- ------------- ------------- -------------- ------------- --------------- Preferred stock dividend requirements 64 58 109 124 174 131 ------------- ------------- ------------- -------------- ------------- --------------- Total combined fixed charges and preferred stock dividends $ 10,541 $ 10,924 $ 13,160 $ 15,952 $ 13,894 $ 8,874 ============= ============= ============= ============== ============= =============== RATIO OF EARNINGS TO FIXED CHARGES 1.03 1.06 1.07 1.07 1.12 1.15 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS 1.03 1.05 1.06 1.06 1.10 1.14
(a) Other fixed charges consist of the interest factor in rentals and capitalized interest. Exhibit 27 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES This schedule contains summary financial information extracted from the Company's Consolidated Statement of Financial Condition at May 31, 2000 (Unaudited) and the Consolidated Statement of Income for the six months ended May 31, 2000 (Unaudited) and is qualified in its entirety by reference to such financial statements. 1,000,000