-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NPdUwtIb6yMlo21HyNFL+NhtIW3ZqvMHm5mb752V/1sv6cCZ29nXkpzJ+yI5Bcpb hspWw87ssb8c3rVq/eWJVw== 0000806085-96-000097.txt : 19960716 0000806085-96-000097.hdr.sgml : 19960716 ACCESSION NUMBER: 0000806085-96-000097 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960715 FILED AS OF DATE: 19960715 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEHMAN BROTHERS HOLDINGS INC CENTRAL INDEX KEY: 0000806085 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 133216325 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09466 FILM NUMBER: 96594835 BUSINESS ADDRESS: STREET 1: AMERICAN EXPRESS TWR STREET 2: 3 WORLD FINANCIAL CNTR CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 2125267000 MAIL ADDRESS: STREET 1: AMERICAN EXPRESS TOWER 15TH FL STREET 2: 2 WORLD TRADE CENTER CITY: NEW YORK STATE: NY ZIP: 10048 FORMER COMPANY: FORMER CONFORMED NAME: SHEARSON LEHMAN HUTTON HOLDINGS INC DATE OF NAME CHANGE: 19901017 10-Q 1 LEHMAN BROTHERS HOLDINGS 10 Q - 1996 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, 1996 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 (I.R.S. Employer incorporation or organization) Identification No.) 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, 1996, 100,411,162 shares of the Registrant's Common Stock, par value $.10 per share, were outstanding. =============================================================================== LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED MAY 31, 1996 INDEX Part I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements - (unaudited) Consolidated Statement of Operations - Three and Six Months Ended May 31, 1996 and 1995 ............................................ 3 Consolidated Statement of Financial Condition - May 31, 1996 and November 30, 1995 ................... 5 Consolidated Statement of Cash Flows - Six Months Ended May 31, 1996 and 1995 ........................................... 7 Notes to Consolidated Financial Statements.............. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 14 Part II. OTHER INFORMATION Item 1. Legal Proceedings......................................... 28 Item 6. Exhibits and Reports on Form 8-K ........................ 29 Signatures................................................................. 30 EXHIBIT INDEX ..................................................... 31 Exhibits LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of OPERATIONS (Unaudited) (In millions, except per share data) Three months ended May 31, May 31, 1996 1995 ---------- --------- Revenues Principal transactions $ 398 $ 355 Investment banking 223 152 Commissions 94 121 Interest and dividends 2,749 2,655 Other 12 15 ------- ------- Total revenues 3,476 3,298 Interest expense 2,643 2,567 ----- ----- Net revenues 833 731 ------- ----- Non-interest expenses Compensation and benefits 422 371 Brokerage, commissions and clearance fees 58 60 Communications 38 47 Occupancy and equipment 37 45 Professional services 39 42 Business development 25 28 Depreciation and amortization 22 27 Other 23 21 ------ ------ Total non-interest expenses 664 641 ----- ----- Income before taxes 169 90 Provision for income taxes 61 32 ------ ------ Net income $ 108 $ 58 ======= ====== Net income applicable to common stock $ 102 $ 48 ======== ====== Average common and common equivalent shares outstanding 114.8 110.2 ===== ===== Earnings per common share $0.89 $0.43 ====== ===== See notes to consolidated financial statements. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT of OPERATIONS (Unaudited) (In millions, except per share data) Six months ended May 31, May 31, 1996 1995 --------- ------- Revenues Principal transactions $ 811 $ 714 Investment banking 433 289 Commissions 190 226 Interest and dividends 5,405 5,156 Other 23 25 ------- ------- Total revenues 6,862 6,410 Interest expense 5,208 4,972 ----- ----- Net revenues 1,654 1,438 ----- ----- Non-interest expenses Compensation and benefits 839 730 Brokerage, commissions and clearance fees 115 124 Communications 78 94 Occupancy and equipment 77 90 Professional services 73 84 Business development 52 57 Depreciation and amortization 46 54 Other 47 45 ------- ------- Total non-interest expenses 1,327 1,278 ----- ----- Income before taxes 327 160 Provision for income taxes 115 57 ------ ------- Net income $ 212 $ 103 ====== ====== Net income applicable to common stock $ 195 $ 82 ====== ======= Average common and common equivalent shares outstanding 115.9 110.2 ===== ===== Earnings per common share $1.68 $0.74 ===== ======= See notes to consolidated financial statements. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Unaudited) (In millions) ASSETS May November 31, 1996 30, 1995 -------- -------- Cash and cash equivalents ...................................$ 1,477 $ 874 Cash and securities segregated and on deposit for regulatory and other purposes ......................... 617 945 Securities and other financial instruments owned: Governments and agencies ................................. 25,791 22,849 Corporate obligations and other contractual commitments .. 10,704 11,415 Corporate stocks and options ............................. 7,916 7,143 Mortgages and mortgage-backed ............................ 7,825 6,847 Certificates of deposit and other money market instruments 3,048 3,068 -------- -------- 55,284 51,322 -------- -------- Collateralized short-term agreements: Securities purchased under agreements to resell .......... 43,861 36,234 Securities borrowed ...................................... 19,295 16,290 Receivables: Brokers, dealers and clearing organizations .............. 2,948 2,845 Customers ................................................ 7,357 3,891 Others ................................................... 1,451 1,434 Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $618 in 1996 and $585 in 1995) ......................... 473 495 Deferred expenses and other assets .......................... 786 793 Excess of cost over fair value of net assets acquired (net of accumulated amortization of $99 in 1996 and $95 in 1995) ........................... 176 180 -------- -------- Total assets .........................................$133,725 $115,303 ======== ======== 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, 1996 1995 LIABILITIES AND STOCKHOLDERS' EQUITY Commercial paper and short-term debt ......................................................... $ 8,004 $ 6,235 Securities and other financial instruments sold but not yet purchased: Governments and agencies .................................................................. 14,476 11,665 Corporate stocks and options .............................................................. 7,562 4,393 Corporate obligations and other contractual commitments ................................... 3,674 3,796 --------- --------- 25,712 19,854 --------- --------- Collateralized short-term financings: Securities sold under agreements to repurchase ............................................ 65,332 59,035 Securities loaned ......................................................................... 4,250 1,966 Payables: Brokers, dealers and clearing organizations ............................................... 2,728 2,513 Customers ................................................................................. 7,819 6,311 Accrued liabilities and other payables ....................................................... 2,745 2,926 Long-term debt: Senior notes .............................................................................. 10,574 10,505 Subordinated indebtedness ................................................................. 2,995 2,260 --------- --------- Total liabilities ................................................................. 130,159 111,605 --------- --------- Commitments and contingencies STOCKHOLDERS' EQUITY Preferred Stock, $1 par value; 38,000,000 shares authorized: 5% Cumulative Convertible Voting, Series A, 13,000,000 shares authorized, issued and outstanding; $39.10 liquidation preference per share .......................................................................... 508 508 8.44% Cumulative Voting, 8,000,000 shares issued and outstanding; $25.00 liquidation preference per share ............................................ 200 Redeemable Voting, 1,000 shares issued and outstanding; $1.00 liquidation preference per share Common Stock, $.10 par value; 300,000,000 shares authorized; shares issued: 106,197,088 in 1996 and 105,684,565 in 1995; shares outstanding: 100,398,499 in 1996 and 104,565,875 in 1995 ....................... 11 11 Common Stock issuable ..................................................................... 209 211 Additional paid-in capital ................................................................ 3,180 3,172 Foreign currency translation adjustment ................................................... 6 9 Accumulated deficit ....................................................................... (214) (397) Common Stock in treasury at cost: 5,798,589 shares in 1996 and 1,118,690 shares in 1995 .......................................................... (134) (16) --------- --------- Total stockholders' equity ....................................................... 3,566 3,698 --------- --------- Total liabilities and stockholders' equity ....................................... $ 133,725 $ 115,303 ======== ========
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, 1996 1995 ------ -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 212 $ 103 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 46 54 Provisions for losses and other reserves 22 16 Other adjustments 23 22 Net change in: Cash and securities segregated 328 519 Receivables from brokers, dealers and clearing organizations (103) 1,073 Receivables from customers (3,466) (2,204) Securities purchased under agreements to resell (7,627) (2,816) Securities borrowed (3,005) (8,614) Securities and other financial instruments owned (3,962) (1,560) Payables to brokers, dealers and clearing organizations 215 1,009 Payables to customers 1,508 3,471 Accrued liabilities and other payables (186) (65) Securities sold under agreements to repurchase 6,297 7,188 Securities loaned 2,284 3,298 Securities and other financial instruments sold but not yet purchased 5,858 (1,392) Other operating assets and liabilities, net (74) 863 ------- ------ Net cash (used in) provided by operating activities $(1,630) $ 965 ------- ------- 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, 1996 1995 ------ ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes $1,271 $3,445 Principal payments of senior notes (1,171) (2,093) Proceeds from issuance of subordinated indebtedness 975 27 Principal payments of subordinated indebtedness (246) (213) Net proceeds from (payments for) commercial paper and short-term debt 1,773 (1,514) Payment for repurchase of preferred stock (200) Payments for treasury stock purchases (118) Dividends paid (32) (32) ------ ------- Net cash provided by (used in) financing activities 2,252 (380) ----- ------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, equipment and leasehold improvements (19) (30) ------ ------ Net cash used in investing activities (19) (30) ------ ------ Net change in cash and cash equivalents 603 555 ------ ------ Cash and cash equivalents, beginning of period 874 964 ------ ------ Cash and cash equivalents, end of period $1,477 $1,519 ====== ====== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions) Interest paid totaled $5,213 and $4,955 for the six months ended May 31, 1996 and 1995, respectively. Income taxes paid totaled $50 and $21 for the six months ended May 31, 1996 and 1995, 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 and South 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. The Consolidated Statement of Financial Condition at November 30, 1995 was derived from the audited financial statements. It is recommended that these 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, 1995 (the "Form 10-K"). 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 amounts reflect reclassifications to conform to the current period's presentation. 2. Long-Term Debt: During the six months ended May 31, 1996, the Company issued $2,246 million of long-term debt (comprised of $1,271 million of senior notes and $975 million of subordinated debt). Of the total issuances for the first six months of 1996, $1,203 million were U.S. dollar fixed rate, $630 million were U.S. dollar floating rate and $413 million were foreign currency denominated. The U.S. dollar fixed rate issuances included $200 million 8.30% Quarterly Income Capital Securities ("Series A QUICS"), which were issued to fund the repurchase of the $200 million 8.44% Cumulative Preferred Stock from American Express. The remaining issuances were used to refinance current and prefund expected maturities of long-term debt in 1996. The Series A QUICS, issued on February 15, 1996, mature in 2035 and are subject to early redemption by the Company on or after March 31, 2001. The Company retains the right to defer interest payments on the Series A QUICS on one or more occasions for a period of up to twenty consecutive quarters. Interest payments may not be deferred beyond the maturity of the Series A QUICS. The Series A QUICS are subordinated to all senior and subordinated debt of the Company. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS The Company's floating rate new issuances contain contractual interest rates based primarily on the London Interbank Offered Rates ("LIBOR") and Prime. All of the Company's U.S. dollar fixed rate new issuances, including the Series A QUICS, were effectively converted to floating rate obligations through the use of interest rate swaps. In addition, all of the Company's foreign currency denominated new issuances were effectively converted to U.S. dollar obligations with floating interest rates based primarily on LIBOR through the use of currency swaps. The Company had approximately $1,417 million of long-term debt mature during the six months ended May 31, 1996. 3. Capital Requirements: As a registered broker-dealer, LBI 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, 1996, LBI's regulatory net capital, as defined, of $1,746 million exceeded the minimum requirement by $1,621 million. Lehman Brothers International (Europe) ("LBIE"), Lehman Brothers Japan Inc. ("LBJ") and other Holdings 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, 1996, LBIE's and LBJ's combined regulatory capital, as defined, exceeded the minimum requirement by approximately $250 million. At May 31, 1996, other Holdings subsidiaries were in compliance with the applicable local capital adequacy requirements. The Company's triple-A rated derivatives subsidiary, Lehman Brothers Financial Products Inc., has established certain capital and operating restrictions which are reviewed by various rating agencies. There are no restrictions on Holdings' present ability to pay dividends on its common stock, other than Holdings' obligation first to make dividend payments on its preferred stock and the governing provisions of the Delaware General Corporation Law. 4. Derivative Financial Instruments: In the normal course of business, the Company enters into derivative transactions both in a trading capacity and as an end user. Acting in a trading capacity, 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 risks resulting from its trading activities in cash instruments (collectively, "Trading Related Derivative Activities"). 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 Note 16 to the Consolidated Financial Statements, included in the Form 10-K. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES NOTES to CONSOLIDATED FINANCIAL STATEMENTS Trading-Related Derivative Activities The Company records its Trading-Related Derivative Activities on a mark-to-market basis with realized and unrealized gains (losses) recognized in principal transactions in the Consolidated Statement of Operations. The Company records unrealized gains and losses on derivative contracts on a net basis in the Consolidated Statement of Financial Condition for those transactions with counterparties executed under a legally enforceable master netting agreement. Listed in the following table is the fair value and average fair value of the Company's Trading Related Derivative Activities (in millions):
Average Fair Value* Fair Value* Six Months Ended May 31, 1996 May 31, 1996 ------------ ------------ Assets Liabilities Assets Liabilities - --------------------------------------------------------------------------------------------------------------------------- Interest rate and currency swaps and options (including caps, collars and floors) $3,415 $1,574 $3,136 $1,667 Foreign exchange forward contracts and options 956 1,252 914 1,272 Options on other fixed income securities, mortgage-backed securities forward contracts and options 249 228 254 226 Equity contracts (including equity swaps, warrants and options) 1,134 935 1,094 977 Commodity Contracts (including swaps, forwards, and options) 652 637 703 676 ------------------------------------------------------ Total $6,406 $4,626 $6,101 $4,818 -------------------------------------------------------
Average Fair Value* Fair Value* Twelve Months Ended November 30, 1995 November 30, 1995 ----------------- Assets Liabilities Assets Liabilities - --------------------------------------------------------------------------------------------------------------------------- Interest rate and currency swaps and options (including caps, collars and floors) $2,680 $2,260 $2,729 $2,102 Foreign exchange forward contracts and options 1,248 1,428 1,455 1,461 Options on other fixed income securities, mortgage-backed securities forward contracts and options 204 188 213 241 Equity contracts (including equity swaps, warrants and options) 804 953 717 747 Commodity Contracts (including swaps, forwards, and options) 339 434 405 487 -------------------------------------------------- Total $5,275 $5,263 $5,519 $5,038 -----------------------------------------------------
* 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 represent the Company's unrealized gains, net of unrealized losses for which the Company has a master netting agreement. Therefore, the fair value of assets related to derivative contracts at May 31, 1996 represents the Company's net receivable for derivative financial instruments before consideration of collateral. Included within this amount was $6,305 million and $101 million, respectively, related to OTC and exchange-traded contracts. With respect to OTC contracts, the Company views its net credit exposure to be $4,047 million at May 31, 1996, representing the fair value of the Company's OTC contracts in an unrealized gain position, after consideration of collateral of $2,258 million. Presented below is an analysis of the Company's net credit exposure for OTC contracts based upon internal designations of counterparty credit quality. May 31, 1996 Counterparty S&P/Moody's Net Credit Risk Rating Equivalent Exposure 1 AAA/Aaa 18% 2 AA-/Aa3 21% 3 A-/A3 or higher 39% 4 BBB-/Baa3 or higher 16% 5 BB-/Ba3 or higher 5% 6 B+/B1 or lower 1% - -------------------------------------------------------------------------------- These designations are based on actual ratings made by external rating agencies or by equivalent ratings established and utilized by the Company's Corporate Credit Department. The Company is also subject to credit risk related to its exchange traded derivative contracts. Exchange traded contracts are transacted directly on the exchange. To protect against the potential for a default, all exchange clearing houses impose net capital requirements for their membership. Additionally, the exchange clearing house 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 extend settlement to three days). Therefore, the potential for losses from exchange-traded products is limited. 5. Other Commitments and Contingencies: 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 to monitor and manage each type of risk on a global basis throughout the Company. For further discussion of these matters, refer to Note 18 to the Consolidated Financial Statements, in the Form 10-K. 6. Incentive Plans: In June 1996, the Compensation and Benefits Committee of the Board of Directors of Holdings (the "Compensation Committee") approved the 1996 Stock Award Program (the "1996 Program"), pursuant to the Lehman Brothers Holdings Inc. Employee Incentive Plan ("EIP"). Under the 1996 Program, eligible employees are to receive, subject to vesting provisions and transfer restrictions, approximately five million restricted stock units ("RSUs"). These RSUs will vest 80% on July 1, 1997 and 20% on July 1, 2001. Effective during the second quarter of 1996, a total of 20 million shares of common stock may be subject to awards under the EIP. Through July 15, 1996, approximately eleven million shares have been awarded, consisting of approximately seven million RSUs for both the 1996 Program and for new hires as part of the Company's recruitment efforts, 1.4 million options granted in 1995 and approximately 2.7 million options granted in 1996 to certain senior officers. It is expected that the share requirements for these awards will be met by repurchasing shares in the open market. In addition, members of the Corporate Management Committee ("CMC") and certain senior officers are eligible to receive RSUs based on the achievement of 1996 performance goals, with approximately one million RSUs expected to be awarded in total under the 1996 Management Ownership Plan (the "1996 Plan") and the EIP. The 1996 Plan was approved by shareholders on April 10, 1996. In the second quarter of 1996, the Company granted approximately 0.8 million options under the 1996 Plan to members of the CMC at an average market price on the dates of grant of $24.06 (the "1996 Options"). The 1996 Options become exercisable in four and one half years and expire five years after grant date; exercisability is accelerated ratably in one-third increments at such time as the closing price of the common stock meets, or exceeds, $28.00, $30.00 and $32.00 for 30 consecutive trading days. If a minimum target price is not reached and maintained for the specified period in the four and one half year period following issuance, the award recipients may then exercise all of their options thereafter. Also, in the second quarter, the Company granted approximately 2.7 million options under the EIP to certain senior officers (which are included in the eleven million referred to in the first paragraph of this footnote) at an average market price on the dates of grant of $24.19, with provisions similar to the 1996 Options. No compensation expense has been recognized for these stock options as all have been issued at the market price of the common stock on the date of the respective grant. Also in the second quarter of 1996, the Company awarded performance stock units ("PSUs") under the 1996 Plan to members of the CMC and under the EIP to certain senior officers as part of a four-year long-term incentive award. The number of PSUs which may be earned, if any, is dependent upon achievement of certain performance levels within a two-year period. At the end of the performance period, any PSUs earned will convert one-for-one to RSUs which then vest at the end of the fourth year. The compensation cost for the estimated number of RSUs that may eventually become payable in satisfaction of PSUs is accrued over the combined performance and vesting period and added to common stock issuable. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Business Environment The Company's principal business activities, investment banking and securities trading and sales, are by their nature subject to volatility, primarily due to changes in interest and foreign exchange rates, 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 environment experienced during the second half of 1995 continued into 1996. The U.S. bond market continued to rally as expectations for additional easing by the U.S. Federal Reserve Bank and the possibility of a deficit reduction package positively impacted the industry as a whole. Internationally, weakness in the major European economies produced a round of interest rate cuts from a number of central banks in an effort to promote stronger economic growth. These actions led to more positive market conditions in Europe. The favorable worldwide trend in interest rates also supported strong performance in global equity markets. All of these factors led to continued strength in debt and equity underwriting volumes. By mid February, 1996, investor concerns about stronger economic data, raising the possibility of no further interest rate reductions by the U.S. Federal Reserve Bank, caused a significant correction in the U.S. fixed income market and a general increase in interest rates. Despite this change in interest rates, the overall market environment in the second quarter remained reasonably favorable. Investors were active in purchasing new issue products that offered a spread to Treasuries, such as corporate, asset-backed and mortgage-backed bonds, in order to achieve their performance benchmarks. The increase in investor demand created a high level of customer volume in the U.S. debt market, while strong customer demand and favorable spreads drove more issuers into the market, resulting in an extremely high level of debt syndicate activity. Late in the second quarter of 1996, the tone in the U.S. fixed income market became decidedly more negative. Investors reflected the uncertainty of a possible Federal Reserve tightening by becoming less active in general and more defensive. Fixed income underwriting continued at a reasonable pace as issuers accelerated financing in anticipation of higher interest rates later in the year. The equity market, meanwhile, continued to exhibit strength as positive cash flows into mutual funds provided a strong underpinning for both trading and syndicate activity. Recent strength in the U.S. economy has created a more volatile market environment in terms of heightening inflationary expectations and a general increase in interest rates; these factors may impact equity market activity and valuations, going forward. The second quarter's record levels of merger and acquisition activity, reflecting strategic purchases, restructurings, spin-offs and growth in cross-border transactions continued into the third quarter. Transaction volumes are expected to remain strong for the remainder of the year. Note: Except for the historical information contained herein, the Business Environment and Specific Business Activities and Transactions sections of this Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that discuss the risks and uncertainties involved in the Company's business. 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, 1996 and May 31, 1995 The Company reported net income of $108 million for the second quarter ended May 31, 1996 representing an increase of 86% from net income of $58 million for the second quarter ended May 31, 1995. Earnings per common share increased to $0.89 for the second quarter of 1996 from $0.43 per common share for the second quarter of 1995. The improved results for 1996 reflect stronger earnings and enhanced margins which resulted from the fifth consecutive quarter of both higher revenues and reduced nonpersonnel expenses, amid a period of generally improved market conditions. Net revenues increased to $833 million for the second quarter of 1996 from $731 million for the second quarter of 1995 and $821 million for the first quarter of 1996. The increase in net revenues reflected continued strengthening in customer flow and trading activities in a number of fixed income and equity product areas and improved investment banking results. The increase in investment banking revenues over the second quarter of 1995 reflected a significant strengthening in underwriting volumes and improved corporate finance advisory revenues, partially offset by reduced merchant banking revenues. Compensation and benefits expense as a percentage of net revenues was 50.7% for both the second quarter of 1996 and 1995, reflecting the fifth successive quarter of consistent compensation levels relative to net revenues. Nonpersonnel expenses declined for the eighth consecutive quarter to $242 million for the second quarter of 1996 from $270 million for the second quarter of 1995. The increase in net revenues and the corresponding reduction in nonpersonnel expenses led to an improvement in the Company's pretax operating margin to 20.2% in the second quarter of 1996 from 12.3% for the second quarter of 1995. The Company, through its subsidiaries, is a market-maker in all major equity and fixed income products in both the domestic and international markets. As part of its market-making activities, the Company maintains inventory positions of varying amounts across a broad range of financial instruments which are marked-to-market on a daily basis and along with the Company's proprietary trading positions, give rise to principal transactions revenues. The Company utilizes various hedging strategies to minimize its exposure to significant movements in interest and foreign exchange rates and the equity markets. Net revenues from the Company's market-making and trading activities in fixed income and equity products are recognized as either principal transactions or net interest revenues depending upon the method of financing and/or hedging related to specific inventory positions. The Company evaluates its trading strategies on an overall profitability basis which includes both principal transactions revenues and net interest. Therefore, changes in net interest should not be viewed in isolation but should be viewed in conjunction with revenues from principal transactions. Net interest revenues were $106 million for the second quarter of 1996 compared to $88 million for the second quarter of 1995. This increase was due to increased dividend revenue on structured equity derivative products, a slight increase in total interest earning assets for the quarter, and higher spreads on certain U.S. government matched book financing transactions. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table of net revenues by business unit and the accompanying discussion have been prepared in order to present the Company's net revenues in a format that reflects the manner in which the Company manages its businesses. For internal management purposes, the Company has been segregated into five major business units: Fixed Income, Equity, Corporate Finance Advisory, Merchant Banking and Asset Management. Each business unit represents a grouping of financial activities and products with similar characteristics. These business activities result in revenues that are recognized in multiple revenue categories contained in the Company's Consolidated Statement of Operations. Net revenues by business unit contain certain internal allocations, including funding costs, which are centrally managed.
Three Months Ended May 31, 1996 Principal Transactions and Investment Net Interest Commissions Banking Other Total - --------------------------------------------------------------------------------------------------------------------------- Fixed Income $417 $ 15 $ 74 $ 5 $511 Equity 94 74 72 3 243 Corporate Finance Advisory 57 57 Merchant Banking (7) 20 13 Asset Management 5 4 9 - --------------------------------------------------------------------------------------------------------------------------- $504 $ 94 $223 $ 12 $833 - ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended May 31, 1995 Principal Transactions and Investment Net Interest Commissions Banking Other Total - --------------------------------------------------------------------------------------------------------------------------- Fixed Income $387 $ 26 $ 41 $ 8 $462 Equity 62 87 23 1 173 Corporate Finance Advisory 45 45 Merchant Banking (8) 43 35 Asset Management 2 8 6 16 - --------------------------------------------------------------------------------------------------------------------------- $443 $121 $152 $ 15 $731 - ---------------------------------------------------------------------------------------------------------------------------
Fixed Income. The Company's fixed income net revenues reflect customer flow activities (both institutional and high-net-worth retail), secondary trading, debt underwriting, syndicate and financing activities related to fixed income products. Fixed income products include dollar- and non-dollar government securities, mortgage- and asset-backed securities, money market products, dollar- and non-dollar corporate debt securities, emerging market securities, municipal securities, financing (global access to debt financing sources including repurchase and reverse repurchase agreements), foreign exchange, commodities and fixed income derivative products. Fixed income net revenues increased 11% to $511 million for the second quarter of 1996 from $462 million for the second quarter of 1995, and decreased 4% from the $535 million in the first quarter of 1996. Fixed income revenues improved versus the prior year quarter despite the volatility that affected the fixed income markets for much of the current quarter and the significant rise in U.S. interest rates which saw a 83 basis point rise in the two year treasury note and a 52 basis point rate increase on the 30 year treasury bond. The improvement in the second quarter results over the prior year reflected the stronger syndicate calendar in 1996 and improved customer flow and net trading results (principal transactions and net interest) from a number of fixed income products including mortgages, emerging markets, high yield, firm financing and foreign exchange. The slight decrease in fixed income net revenues over the trailing quarter reflected continued strength in underwriting volumes offset in part by a slowdown in customer trading activity in the last few weeks of the quarter as investors reflected the uncertainty of a U.S. Federal Reserve tightening. Investment banking revenues, as a component of fixed income revenues, increased to $74 million for the second quarter of 1996 from $41 million for the second quarter of 1995 due to a strengthening in origination volumes and an improved mix of underwriting revenues. Equity. Equity net revenues reflect customer flow activities (both institutional and high-net-worth retail), secondary trading, equity underwriting, equity finance, equity derivatives and arbitrage activities. The Company's equity net revenues increased 40% to $243 million for the second quarter of 1996 from $173 for the second quarter of 1995, and increased 27% from the $192 million for the first quarter of 1996 reflecting the favorable equity markets which saw record inflows of capital into mutual funds, generally improved trading volumes on exchanges and favorable valuations which continued to drive syndicate activities. Investment banking revenues, as a component of equity revenues, increased to $72 million for the second quarter of 1996 from $23 million for the second quarter of 1995 due to an increase in the number of lead and co-managed equity related underwritings. Corporate Finance Advisory. Corporate finance advisory net revenues, classified in the Consolidated Statement of Operations as a component of investment banking revenues, result primarily from fees earned by the Company in its role as strategic advisor to its clients. This role primarily consists of advising clients on mergers and acquisitions, divestitures, leveraged buyouts, financial restructurings, and a variety of cross-border transactions. Net revenues from corporate finance advisory increased to $57 million for the second quarter of 1996 reflecting a 27% increase from the $45 million recognized in the second quarter of 1995. This increase reflected continued strength in the merger and acquisition market environment. The Company ended the second quarter with a strong transaction pipeline, which stood at $50 billion in terms of total dollar value. Merchant Banking. The Company is the general partner for six merchant banking partnerships, including three institutional funds and three employee investment vehicles. In December 1995, the Company established the third of its employee investment vehicles, Capital Partners III. Current merchant banking investments held by the partnerships include both publicly traded and privately held companies diversified on a geographic and industry basis. At May 31, 1996 the Company's investment in such merchant banking partnerships, for which the Company acts as a general partner, was $307 million. At May 31, 1996 the Company had commitments to fund up to $200 million in Capital Partners III over the commitment period ending June 30, 2000. There are no remaining commitments to the remaining five partnerships. Merchant banking net revenues primarily represent the Company's proportionate share of net realized and net unrealized gains and losses from the sale and revaluation of investments held by the partnerships. Such amounts are classified in the Consolidated Statement of Operations as a component of investment banking revenues. Merchant banking net revenues also reflect the net interest expense relating to the financing of the Company's investment in the partnerships. Merchant banking net revenues of $13 million for the second quarter of 1996, decreased 63% from the $35 million recognized in the second quarter of 1995, reflecting a reduction in the net gains recognized on the publicly traded investments held by the partnerships. Asset Management. Revenues from asset management activities decreased to $9 million for the second quarter of 1996 from $16 million for the second quarter of 1995, primarily due to the sale of the Company's offshore mutual fund advisory business in February 1996 to Legg Mason. Asset Management revenues primarily consist of fees from the management of various funds, commissions from the sale of funds to customers and fees from the management of certain accounts for institutions and high-net-worth individuals. Non-Interest Expenses. Non-interest expenses were $664 million for the second quarter of 1996 and $641 million for the second quarter of 1995; however, compensation and benefits expense as a percentage of net revenues remained unchanged from the prior year quarter at 50.7%. Nonpersonnel expenses declined for the eighth consecutive quarter to $242 million for the second quarter of 1996 from $270 million for the second quarter of 1995 and $246 million for the first quarter of 1996, reflecting the Company's commitment to reducing costs. The $300 million cost reduction program originally announced at year-end 1994 was completed by year-end 1995. As a result, the Company's expense base has been permanently lowered. The Company continued its focus on reducing nonpersonnel costs during 1996, achieving additional annualized cost savings of $48 million as of the second quarter of 1996 relative to the fourth quarter 1995 run rate. The Company's goal is to achieve total annualized nonpersonnel cost savings of $50 - $100 million by the end of 1996 relative to the fourth quarter 1995 run rate. Income Taxes. The Company's income tax provision was $61 million for the second quarter of 1996 as compared to $32 million for the second quarter of 1995. The effective tax rate was 36% for the second quarter of 1996 and 1995. The 1996 effective tax rate, although the same as that of 1995, reflects continued benefits from the restructuring of certain legal entities in 1995, partially offset by an increase in state taxes and a decrease in tax benefits attributable to income subject to preferential treatment. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations For the Six Months Ended May 31, 1996 and May 31, 1995 The Company reported net income of $212 million for the six months ended May 31, 1996 representing an increase of 106% from net income of $103 million for the six months ended May 31, 1995. Earnings per common share increased to $1.68 for the six months of 1996 from $0.74 per common share for the comparable 1995 period. The improved results for 1996 reflect stronger earnings and enhanced margins, amid a period of generally improved market conditions. Net revenues increased to $1,654 million for the six months of 1996 from $1,438 million for the six months of 1995. The increase in net revenues reflected continued strengthening in customer flow and trading activities in a number of fixed income and equity product areas and improved investment banking results. The increase in revenues from investment banking in 1996 reflected a significant strengthening in underwriting volumes and improved corporate finance advisory revenues partially offset by reduced merchant banking revenues. Compensation and benefits expense as a percentage of net revenues was 50.7% and 50.8% for the six months ended May 31, 1996 and 1995, respectively. Nonpersonnel expenses declined to $488 million for the six months ended May 31, 1996 from $548 million for the comparable 1995 period. The increase in net revenues and the corresponding reduction in nonpersonnel expenses led to an improvement in the Company's pretax operating margin to 19.7% for the six months of 1996 from 11.2% for the six months of 1995. Net interest revenues were $197 million for the six months of 1996 compared to $184 million for the six months of 1995. This increase was attributable to a change in the mix of the Company's assets, a slight increase in total interest earning assets and higher spreads on certain U.S. government matched book financing transactions.
Six Months Ended May 31, 1996 Principal Transactions and Investment Net Interest Commissions Banking Other Total - --------------------------------------------------------------------------------------------------------------------------- Fixed Income $ 859 $ 33 $ 147 $ 9 $1,048 Equity 157 146 125 5 433 Corporate Finance Advisory 107 107 Merchant Banking (10) 54 44 Asset Management 2 11 9 22 - --------------------------------------------------------------------------------------------------------------------------- $1,008 $ 190 $ 433 $ 23 $1,654 - ---------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six Months Ended May 31, 1995 Principal Transactions and Investment Net Interest Commissions Banking Other Total - --------------------------------------------------------------------------------------------------------------------------- Fixed Income $ 778 $ 50 $ 69 $ 10 $ 907 Equity 138 162 45 2 347 Corporate Finance Advisory 93 93 Merchant Banking (16) 82 66 Asset Management (2) 14 13 25 - --------------------------------------------------------------------------------------------------------------------------- $ 898 $ 226 $ 289 $ 25 $1,438 - ---------------------------------------------------------------------------------------------------------------------------
Fixed Income. Fixed income net revenues increased 16% to $1,048 million for the six months ended May 31, 1996 from $907 million for the six months ended May 31, 1995. Fixed income revenues for 1996 improved versus 1995 primarily as a result of favorable market conditions which lead to improved investment banking results and greater contributions from customer flow and trading activities in a number of fixed income products including mortgages, emerging markets, and high yield corporate bonds. Investment banking revenues, as a component of fixed income revenues, increased to $147 million for the six months ended May 31, 1996 from $69 million for the six months ended May 31, 1995 due to a strengthening in origination volumes and an improved mix of underwriting revenues. Equity. The Company's equity net revenues increased 25% to $433 million for the six months ended May 31, 1996 from $347 for the six months ended May 31, 1995 primarily due to improved customer flow trading activities including the equity derivatives and NASDAQ businesses. Investment banking revenues, as a component of equity revenues, increased to $125 million for the six months ended May 31, 1996 from $45 million for the six months ended May 31, 1995 due to a stronger syndicate calendar which resulted in an increase in the number of lead and co-managed equity related underwritings. Corporate Finance Advisory. The net revenues for corporate finance advisory were $107 million for the six months ended May 31, 1996 reflecting a 15% increase from the $93 million recognized in the six months ended May 31, 1995. The environment for merger and acquisition activity during 1996 was strong as a result of heightened industry and cross-border consolidation. Merchant Banking. Merchant banking net revenues of $44 million for the six months ended May 31, 1996, decreased 33% from the $66 million recognized in the six months ended May 31, 1995, reflecting a reduction in the net gains recognized on the publicly traded investments held by the partnerships. Asset Management. Revenues from asset management activities decreased to $22 million for the six months ended May 31, 1996 from $25 million for the six months ended May 31, 1995, primarily due to the sale of the Company's offshore mutual fund advisory business in February 1996 to Legg Mason. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Non-Interest Expenses. Non-interest expenses were $1,327 million for the six months ended May 31, 1996 and $1,278 million for the six months ended May 31, 1995. Compensation and benefits expense increased to $839 million in 1996 from $730 million in 1995. Compensation and benefits expense as a percentage of net revenues was 50.7% for six months ended May 31, 1996 compared to 50.8% for the six months ended May 31, 1995. Nonpersonnel expenses declined to $488 million for the six months ended May 31, 1996 from $548 million for the six months ended May 31, 1995, reflecting the effects of the Company's cost reduction efforts. Income Taxes. The Company's income tax provision was $115 million for the six months ended May 31, 1996 as compared to $57 million for the six months ended May 31, 1995. The effective tax rate was 35% for 1996 and 36% for 1995. The 1996 effective tax rate is lower than that of 1995 due to continued benefits from the restructuring of certain legal entities in 1995, partially offset by an increase in state taxes and a decrease in tax benefits attributable to income subject to preferential treatment. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Company's total assets increased to $133.7 billion at May 31, 1996 from $115.3 billion at November 30, 1995. The increase in total assets is primarily attributable to an increase in financing activities in both fixed income and equity, as well as an increase in government and agency positions. The Company's balance sheet is highly liquid and consists primarily of cash and cash equivalents, securities and other financial instruments owned which are marked-to-market daily and collateralized short-term financing agreements. As the Company's primary activities are based on customer flow transactions, the Company experiences a rapid asset turnover rate. In addition, the highly liquid nature of these assets provides the Company with flexibility in financing and managing its business. The overall size of the Company's total assets and liabilities fluctuates from time to time, and at specific points in time (such as calendar quarter ends) may be higher than fiscal quarter ends. Balance sheet leverage ratios are one methodology to evaluate the financial risk inherent in the balance sheet. The Company evaluates this risk by monitoring its adjusted leverage, defined as total assets less the lower of securities purchased under agreements to resell or securities sold under agreements to repurchase, [which represent short-term collateralized transactions with high quality assets,] divided by stockholders' equity. At May 31, 1996, and November 30, 1995, the Company's adjusted leverage ratios were 25.2x and 21.4x, respectively, increasing due to the redemption of preferred stock owned by American Express, (see "Total Capital"); however, the ratio continues to be in line with the period end leverage ratios of the Company's peer group of competitor firms. Funding and Capital Policies The Company's Finance Committee, which includes senior officers from key areas of the Company, is responsible for establishing and managing the funding and liquidity policies of the Company. This includes recommendations for balance sheet size as well as the allocation of balance sheet to product areas as determined by internal profitability models and return on equity targets. In addition, in coordination with the Regional Asset and Liability Committees, the Finance Committee works to ensure coordination of global funding efforts. The Regional Asset and Liability Committees are aligned with the Company's geographic funding centers and are responsible for implementing funding strategies consistent with the direction set by the Finance Committee and to monitor and manage liquidity for each region. The primary goal of the Company's funding principles as set by the Finance Committee are to provide sufficient liquidity and availability of funding sources throughout all market environments. As a policy, the Company attempts to maintain sufficient capital and funding to finance itself on a fully secured basis, through its liquidity contingency plan. This liquidity contingency plan meets the Company's funding requirements through a combination of collateralized short-term financings and short-term secured debt, as well as Total Capital, defined as long-term debt, including both senior notes and subordinated indebtedness, plus stockholders' equity. To achieve this objective, the Company's liquidity policies include maintaining sufficient excess unencumbered securities to use as collateral to obtain secured financing, if necessary, to meet maturities of short-term unsecured liabilities as well as current maturities of long-term debt. Also, the Company maintains a sufficient amount of Total Capital to enable the Company to fund those assets which are less liquid. The Company's liquidity contingency plans are continually reviewed and updated as the Company's asset/liability mix and liquidity requirements change. Additionally, the Company periodically tests its secured and unsecured credit facilities to ensure availability and operational readiness. The Company's liquidity and Total Capital policies are designed to ensure that the Company can meet its funding needs over a wide range of economic, credit and market environments. The Company met all liquidity and Total Capital policy requirements at May 31, 1996. Short-Term Funding Each of the Company's businesses is required to fund its products primarily through global collateralized financings. There are two principal business areas which are responsible for these efforts, Lehman Brothers' Fixed Income Financing ("Financing") and Equity Finance. Financing works in conjunction with the institutional fixed income sales and trading professionals to provide financing to customers and the Company through the repurchase markets. Equity Finance provides a similar function in the equity markets typically through securities loaned/securities borrowed transactions. The ability of the Company to leverage its global market expertise and distribution capabilities are key to a successful financing effort. The amount of the Company's collateralized borrowing activities will vary reflecting changes in the mix and overall levels of securities and other financial instruments owned and global market conditions. However, at all times, the majority of the Company's assets are funded with collateralized borrowing sources. The Company's treasury area works closely with Financing and Equity Finance to develop funding plans to support the business areas, as well as to execute daily funding activities. On a daily basis, treasury is responsible for meeting any funding needs not met through Financing and Equity Finance. Treasury funding is managed globally through regional centers which have access to the capital markets though the issuance of commercial paper as well as bank lines of credit and other short- and long-term debt instruments. At May 31, 1996 and November 30, 1995, $95 billion and $81 billion, respectively, of the Company's total balance sheet was financed using collateralized borrowing sources. The remainder of the financing for the balance sheet was comprised of commercial paper and short-term debt, payables and Total Capital. As of May 31, 1996 and November 30, 1995, commercial paper and short-term debt were $8.0 billion and $6.2 billion, respectively. Of these amounts, commercial paper outstanding at May 31, 1996 was $2.9 billion with an average maturity of 66 days, compared to $1.4 billion with an average maturity of 78 days at November 30, 1995. At May 31, 1996, Holdings maintained a Revolving Credit Agreement with a group of banks. Under the terms of the credit agreement, the banks have committed to provide up to $2 billion. The credit agreement contains restrictive covenants which require, among other things that the Company maintain specified levels of liquidity, consolidated stockholders' equity and tangible net worth, as defined. The Company has been in compliance with these terms at all times. There were no borrowings outstanding under this agreement as of May 31, 1996. In addition, the Company maintained a $1 billion Secured Revolving Credit Facility (the "Facility") for Lehman Brothers International (Europe) ("LBIE"), the Company's major operating entity in Europe. Under the terms of this committed facility, the bank group has committed to provide up to $1 billion on a secured basis with a variety of financial instruments as collateral. The bank group has further committed to provide loans under the Facility for up to 6 months beyond the Facility maturity date. The loans provided by the bank group are available in several currencies including U.S. Dollar, British pound sterling, Deutsche mark, ECU, French franc, and Italian lira, as well as many other currencies as required. There were no borrowings outstanding under this Facility as of May 31, 1996. However, the Company anticipates utilizing this Facility for general corporate purposes from time to time. In addition, the Company maintains uncommitted lines of credit with a broad range of banks and financial institutions from which it draws funds in a variety of currencies. Uncommitted lines consist of facilities that the Company has been advised are available but for which no contractual lending obligation exists. Total Capital Long-term assets are financed with Total Capital. The Company maintains Total Capital in excess of its long-term assets to provide additional liquidity, which the Company uses to meet its short-term funding requirements and to reduce its reliance on commercial paper and short-term debt. At May 31, 1996 and November 30, 1995, Total Capital consisted of the following: May 31, November 30, Long-term debt: 1996 1995 ----------- ---------- Senior notes $10,574 $10,505 Subordinated indebtedness 2,995 2,260 ------- ------ 13,569 12,765 ------ ------ Stockholders' equity: Preferred equity 508 708 Common equity 3,058 2,990 ------- ----- 3,566 3,698 ------- ------ Total Capital $17,135 $16,463 ======= ======= During the six months ended May 31, 1996, the Company issued $2,246 million in long term-debt, which was $829 million in excess of its maturing debt. As part of these issuances, the Company issued $200 million of Quarterly Income Capital Securities ("Series A QUICS"). The Series A QUICS are subordinated to all senior and subordinated debt of the Company. The Company repurchased the $200 million 8.44% Cumulative Preferred Stock owned by American Express ("Cumulative Preferred Stock") with the proceeds from the Series A QUICS. The repurchase of the preferred stock included a premium of $2 million over the par value which is included in preferred dividends in determining net income applicable to common stock. Because of the repayment of the Cumulative Preferred Stock, total stockholders' equity decreased by $200 million; however, with the issuance of the Series A QUICS, Total Capital remained unchanged. Excluding the Series A QUICS, these issuances were used to refinance current and prefund expected maturities of long-term debt in 1996. Additionally, these issuances were consistent with the Company's intent to increase Total Capital and issue long-term debt when opportunities in the market arise. At May 31, 1996, the Company had approximately $5.6 billion available for issuance of debt securities under various shelf registrations and debt programs. Preferred stockholders' equity decreased to $508 million at May 31, 1996 from $708 million at November 30, 1995 due to the repurchase of the Cumulative Preferred Stock. Common stockholders' equity increased to $3,058 million at May 31, 1996 from $2,990 million at November 30, 1995 due to the retention of earnings partially offset by the repurchase of approximately 4.7 million shares of treasury stock and the payment of dividends. The repurchase of these shares, as well as any additional share repurchases in 1996, will be allocated to fund certain stock awards made under the Company's incentive plans. On May 29, 1996, the Company announced an odd-lot buyback program for stockholders who own less than 100 shares as of May 15, 1996. Approximately 200,000 shares were tendered by the July 9, 1996 deadline. The Company extended this buyback program to August 2, 1996. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Dependence on 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. Access to global capital markets for short-term financing, such as commercial paper and short-term debt, senior notes and subordinated indebtedness are dependent on the Company's short- and long-term debt ratings. The current short- and long-term senior debt ratings of Holdings and the current short- and long-term senior and subordinated ratings of the Company's principal subsidiary, Lehman Brothers Inc. ("LBI") are as follows: Holdings LBI -------- --- Short-term Long-term Short-term Long-term** - -------------------------------------------------------------------------------- Duff & Phelps Credit Rating Co. D-1 A D-1 A/A- Fitch Investors Service Inc. F-1 A F-1 A/A- IBCA A1 A- A1 A/A- Moody's P2 Baa1 P2 A3*/Baa1 S&P + A-1 A A-1 A+*/A Thomson BankWatch TBW-1 A- TBW-1 A/A- - -------------------------------------------------------------------------------- * Provisional ratings on shelf registration ** Senior/subordinated + Long term ratings outlook revised to negative on September 21, 1994 Specific Business Activities and Transactions The following sections include information on specific business activities of the Company which affect overall liquidity and capital resources: High Yield Securities. 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 companies. For purposes of this discussion, high yield debt securities are defined as securities or loans to companies rated as 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 securities are carried at market value and unrealized gains or losses for these securities are reflected in the Company's consolidated statement of operations. The Company's portfolio of such securities at May 31, 1996 and November 30, 1995 included long positions with an aggregate market value of approximately $1.3 billion and $1.2 billion, respectively, and short positions with an aggregate market value of approximately $236 million and $172 million, respectively. The portfolio may from time to time contain concentrated holdings of selected issues. The Company's largest high yield position was $100 million and $73 million at May 31, 1996 and November 30, 1995, respectively. Westinghouse. In May 1993, the Company and Westinghouse Electric Corporation ("Westinghouse") entered into a partnership to facilitate the disposition of Westinghouse's commercial real estate portfolio, valued at approximately $1.1 billion, to be accomplished substantially through securitizations, asset sales and mortgage remittances. In 1995, the Company purchased the partnership interest owned by Westinghouse and sold an additional interest to an affiliate of Lennar Inc., (Lennar), a third party mortgage servicer. Currently, the Company and Lennar hold 75% and 25% of the partnership, respectively. Following the increase in ownership percentage, the partnership has been consolidated in the Company's Statement of Financial Position. The Company's net investment in the partnership at May 31, 1996 is $78 million. The partnership expects to substantially liquidate the remaining real estate by the end of 1996. The Company's original investment in the partnership was approximately $136 million. The Company also advanced approximately $750 million of financing to the partnership in 1993, which has subsequently been repaid in its entirety from proceeds related to the disposition of the real estate assets. Non-core Activities and Investments. In March 1990, the Company discontinued the origination of limited partnership syndications (the assets of which are primarily real estate) and investments in real estate. Currently, the Company acts as a general partner for approximately $4 billion of partnership investment capital and manages the remaining real estate investment portfolio. At May 31, 1996, the Company had $16 million of investments in these real estate activities, as well as $101 million of commitments and contingent liabilities under guarantees and credit enhancements, both net of applicable reserves. In certain circumstances, the Company provides financial and other support and assistance to such investments to maintain investment values. There is no contractual requirement that the Company continue to provide this support. The Company also has equity, partnership and debt investments made in previous years that are unrelated to its ongoing businesses. These investments are awaiting disposition or the occurrence of certain events which will ultimately lead to their liquidation. The Company carries these equity, partnership and debt investments at their estimated net realizable value, which approximates $81 million at May 31, 1996. Non-core activities and investments have declined 16% since November 30, 1995. Management's intention with regard to noncore assets is the prudent liquidation of these investments if and when possible. LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS Lehman Brothers 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 LBI and others with respect to transactions in which LBI acted as an underwriter or financial advisor, actions arising out of LBI'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 of which LBI is one. Although there can be no assurance as to the ultimate outcome, Lehman Brothers 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. Although there can be no assurance as to the ultimate outcome, 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. Actions Relating to First Capital Holdings Inc. (Reported in Holdings' Annual Report on Form 10-K and First Quarter Report on Form 10-Q) At a hearing on June 24, 1996, the Court orally gave final approval to the settlement of the American Express Shareholder Action and the American Express Derivative Action. Easton & Co. v. Mutual Benefit Life Insurance Co., et al.; Easton & Co. v. Lehman Brothers Inc. (Reported in Holdings' Annual Report on Form 10-K and First Quarter Report on Form 10-Q) LBI, together with the other defendants in Easton I and Easton II, has agreed to settle both cases, subject to court approval. Lehman Brothers Commercial Corporation and Lehman Brothers Special Financing Inc. v. Minmetals International Non-Ferrous Metals Trading Company (Reported in Holdings' Annual Report on Form 10-K) On June 24, 1996, the court granted the motion of LBCC and LBSF to file an amended complaint naming CNM as an additional defendant. 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: 11. Computation of Per Share Earnings 12.A Computation in Support of Ratio of Earnings to Fixed Charges 12.B Computation in Support of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends 27. Financial Data Schedule (b) Reports on Form 8-K: 1. Form 8-K dated June 20, 1996, Items 5 and 7. SIGNATURES ---------- 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 15, 1996 By /s/ Richard S. Fuld Jr. -------------------------------- Richard S. Fuld, Jr. Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: July 15, 1996 By /s/ Charles B. Hintz ----------------------------- Charles B. Hintz Chief Financial Officer (Principal Financial Officer) EXHIBIT INDEX ------------- Exhibit No. Exhibit Exhibit 11 Computation of Per Share Earnings Exhibit 12A Computation in Support of Ratio of Earnings to Fixed Charges Exhibit 12B Computation in Support of Ratio of Earnings to Combined Fixed Charges and Preferred Dividends Exhibit 27 Financial Data Schedule Exhibit 11 LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES COMPUTATION of PER SHARE EARNINGS (Unaudited) (In millions, except share data)
Three months Three months Six months Six months ended ended ended ended May 31, May 31, May 31, May 31, 1996 1995 1996 1995 Primary: Weighted average shares outstanding: Common stock 101,692,508 104,510,057 102,883,293 104,514,659 Common stock issuable 11,594,020 5,466,763 11,693,861 5,510,020 Common stock equivalents 1,502,160 271,927 1,276,455 166,658 ------------- -------------- -------------- -------------- Total 114,788,688 110,248,747 115,853,609 110,191,337 =========== =========== =========== =========== Net income $108.0 $ 58.2 $212.1 $103.2 Preferred dividends (1) (6.4) (10.6) (17.6) (21.2) ------- ------- ------- ------ Net income applicable to common stock $101.6 $ 47.6 $194.5 $ 82.0 ====== ====== ====== ====== Earnings per common share $ 0.89 $ 0.43 $ 1.68 $ 0.74 ====== ====== ====== ====== Fully diluted: Weighted average shares outstanding: Common stock 101,692,508 104,510,057 102,883,293 104,514,659 Common stock issuable 11,594,020 5,466,763 11,693,861 5,510,020 Common stock equivalents 1,502,160 369,522 1,423,471 227,668 ------------- -------------- ------------- -------------- Total 114,788,688 110,346,342 116,000,625 110,252,347 =========== =========== =========== =========== Net income $108.0 $ 58.2 $212.1 $103.2 Preferred dividends (1) (6.4) (10.6) (17.6) (21.2) ------- ------- ------- ------ Net income applicable to common stock $101.6 $ 47.6 $194.5 $ 82.0 ====== ====== ====== ====== Earnings per common share $ 0.89 $ 0.43 $ 1.68 $ 0.74 ====== ====== ====== ======
(1) Amount for the six months ended May 31, 1996 includes the $2 million premium paid over par value to repurchase the $200 million 8.44% cumulative preferred stock owned by the American Express Company. Exhibit 12.A LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES COMPUTATION in SUPPORT of RATIO of EARNINGS to FIXED CHARGES (Dollars in millions) (Unaudited)
For the For the For the Eleven Months Twelve Months Six Months For the Year Ended Ended Ended Ended December 31 November 30 November 30 May 31 -------------------------------- ----------- ----------- ------ 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- Fixed Charges: Interest expense: Subordinated indebtedness $ 170 $ 150 $ 144 $ 158 $ 206 $ 104 Bank loans and other borrowings* 4,755 5,035 5,224 6,294 10,199 5,104 Interest component of rentals of office and equipment 70 74 76 42 44 18 Other adjustments** 2 2 7 4 28 10 ---------- ---------- --------- --------- --------- -------- TOTAL (A) $4,997 $5,261 $5,451 $6,498 $10,477 $5,236 ======= ======= ====== ========= ======== ====== Earnings: Pretax income (loss) from continuing operations $ 150 $ (247) $ 27 $ 193 $ 369 $ 327 Fixed charges 4,997 5,261 5,451 6,498 10,477 5,236 Other adjustments*** 7 _____ (6) (4) (28) (10) --------- -------- --------- -------- -------- TOTAL (B) $5,154 $5,014 $5,472 $6,687 $10,818 $5,553 ====== ====== ====== ====== ======= ====== (B / A) 1.03 **** 1.00 1.03 1.03 1.06
* Includes amortization of long-term debt discount. ** Other adjustments include capitalized interest and debt issuance costs and amortization of capitalized interest. *** Other adjustments include adding the net loss of affiliates accounted for at equity whose debt is not guaranteed by the Company and subtracting capitalized interest and debt issuance costs and undistributed net income of affiliates accounted for at equity. **** Earnings were inadequate to cover fixed charges and would have had to increase $247 million in 1992 in order to cover the deficiencies. Exhibit 12.B LEHMAN BROTHERS HOLDINGS INC. and SUBSIDIARIES COMPUTATION in SUPPORT of RATIO of EARNINGS to COMBINED FIXED CHARGES and PREFERRED DIVIDENDS (Dollars in millions) (Unaudited)
For the For the For the Eleven Months Twelve Months Six Months For the Year Ended Ended Ended Ended December 31 November 30 November 30 May 31 -------------------------------- ----------- ----------- ------ 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- Combined Fixed Charges and Preferred Dividends: Interest expense: Subordinated indebtedness $ 170 $ 150 $ 144 $ 158 $ 206 $ 104 Bank loans and other borrowings* 4,755 5,035 5,224 6,294 10,199 5,104 Interest component of rentals of office and equipment 70 74 76 42 44 18 Other adjustments** 2 2 7 4 28 10 ---------- ---------- --------- --------- --------- -------- Total fixed charges 4,997 5,261 5,451 6,498 10,477 5,236 Preferred dividends (tax equivalent basis) 48 48 48 58 64 28 -------- -------- -------- -------- --------- -------- TOTAL (A) $5,045 $5,309 $5,499 $6,556 $10,541 $5,264 ====== ====== ====== ====== ======= ====== Earnings: Pretax income (loss) from continuing operations $ 150 $ (247) $ 27 $ 193 $ 369 $ 327 Fixed charges 4,997 5,261 5,451 6,498 10,477 5,236 Other adjustments*** 7 _____ (6) (4) (28) (10) --------- -------- --------- -------- -------- TOTAL (B) $5,154 $5,014 $5,472 $6,687 $10,818 $5,553 ====== ====== ====== ====== ======= ====== (B / A) 1.02 **** **** 1.02 1.03 1.05
* Includes amortization of long-term debt discount. ** Other adjustments include capitalized interest and debt issuance costs and amortization of capitalized interest. *** Other adjustments include adding the net loss of affiliates accounted for at equity whose debt is not guaranteed by the Company and subtracting capitalized interest and debt issuance costs and undistributed net income of affiliates accounted for at equity. **** Earnings were inadequate to cover fixed charges and preferred dividends and would have had to increase $295 million in 1992 and $27 million in 1993 in order to cover the deficiencies. Exhibit 27 EX-27 2 LEHMAN BROTHERS HOLDINGS FDS
BD 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, 1996 (Unaudited) and the Consolidated Statement of Operations for the six months ended May 31, 1996 (Unaudited) and is qualified in its entirety by reference to such financial statements. 6-MOS NOV-30-1996 DEC-01-1995 MAY-31-1996 2,094 11,756 43,861 19,295 55,284 473 133,725 8,004 10,547 65,332 4,250 25,712 13,569 11 0 508 3,047 133,725 811 5,405 190 433 0 5,208 839 327 212 0 0 212 $1.68 $1.68
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