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, 1995
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 1-6817
Lehman Brothers Inc.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 13-2518466
(State or other jurisdiction
of incorporation) (I.R.S. Employer 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 ______
The Registrant meets the conditions set forth in General Instructions H
1 (a) and (b) of Form 10-Q and therefore is filing this form with the
reduced disclosure format contemplated thereby.
As of July 14, 1995, 1,006 shares of the Registrant's Common Stock, par
value $.10 per share, were issued and outstanding.
LEHMAN BROTHERS INC. and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MAY 31, 1995
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Operations -
Three and Six Months Ended May 31, 1995
and June 30, 1994 3
Consolidated Statement of Financial Condition -
May 31, 1995 and November 30, 1994 5
Consolidated Statement of Cash Flows -
Six Months Ended May 31, 1995
and June 30, 1994 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
EXHIBIT INDEX 24
Exhibits
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions)
<CAPTION>
Three months ended
May 31, June 30,
1995 1994
<S> <C> <C>
Revenues
Principal transactions $ 182 $ 203
Investment banking 112 94
Commissions 107 103
Interest and dividends 2,576 1,544
Other 14 14
Total revenues 2,991 1,958
Interest expense 2,504 1,475
Net revenues 487 483
Non-interest expenses
Compensation and benefits 267 256
Brokerage, commissions and
clearance fees 48 52
Communications 31 38
Occupancy and equipment 21 25
Professional services 19 33
Business development 21 25
Depreciation and amortization 16 28
Management fees 48
Other 28 55
Total non-interest expenses 499 512
Income (loss) before taxes and
preferred dividend of subsidiary (12) (29)
Provision for (benefit from)
income taxes (12) (22)
Income (loss) before preferred
dividend of subsidiary (7)
Preferred dividend of subsidiary (17)
Net income (loss) $ 0 $ (24)
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions)
<CAPTION>
Six months ended
May 31, June 30,
1995 1994
<S> <C> <C>
Revenues
Principal transactions $ 339 $ 505
Investment banking 221 231
Commissions 200 224
Interest and dividends 4,989 2,897
Other 22 28
Total revenues 5,771 3,885
Interest expense 4,833 2,729
Net revenues 938 1,156
Non-interest expenses
Compensation and benefits 447 592
Brokerage, commissions and
clearance fees 99 114
Communications 64 75
Occupancy and equipment 44 50
Professional services 44 61
Business development 43 48
Depreciation and amortization 33 54
Management fees 100
Other 74 99
Severance charge 27
Total non-interest expenses 948 1,120
Income (loss) before taxes,
cumulative effect of
change in accounting principle and
preferred dividend of subsidiary (10) 36
Provision for (benefit from)
income taxes (15) 2
Income before cumulative effect of
change in accounting principle
and preferred dividend of subsidiary 5 34
Cumulative effect of change in
accounting principle,
net of taxes (13)
Preferred dividend of subsidiary (34)
Net income (loss) $ 5 $ (13)
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
(In millions)
ASSETS
<CAPTION>
May 31, November 30,
1995 1994
<S> <C> <C>
Cash and cash equivalents $ 444 $ 361
Cash and securities segregated and on deposit
for regulatory and other purposes 754 1,263
Securities and other financial instruments owned:
Governments and agencies 15,367 16,941
Corporate obligations and other contractual
commitments 5,649 7,094
Certificates of deposit and other money market
instruments 2,691 1,239
Mortgages and mortgage-backed 1,774 2,444
Corporate stocks and options 1,452 1,411
26,933 29,129
Collateralized short-term agreements:
Securities purchased under agreements to resell 29,123 29,392
Securities borrowed 19,854 9,210
Receivables:
Brokers, dealers and clearing organizations 3,413 3,868
Customers 2,960 1,406
Others 2,896 3,694
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $439 in 1995 and $424 in 1994) 370 409
Deferred expenses and other assets 241 221
Excess of cost over fair value of net assets
acquired
(net of accumulated amortization of $82 in 1995
and $79 in 1994) 178 181
$87,166 $79,134
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)
(Unaudited)
(In millions, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
<CAPTION>
May 31, November 30,
1995 1994
<S> <C> <C>
Short-term financings:
Securities sold under agreements to repurchase $43,533 $44,174
Securities loaned 6,255 315
Commercial paper and short-term debt 1,507 2,272
Securities and other financial instruments sold but not
yet purchased:
Governments and agencies 5,255 5,184
Corporate obligations and other contractual
commitments 3,573 2,842
Corporate stocks and options 705 1,352
9,533 9,378
Advances from Holdings and other affiliates 8,098 8,807
Payables:
Brokers, dealers and clearing organizations 4,567 2,730
Customers 4,852 2,059
Accrued liabilities and other payables 3,206 3,416
Senior notes 411 511
Subordinated indebtedness 2,824 2,885
Total liabilities 84,786 76,547
Commitments and contingencies (Note 4)
Stockholder's equity:
Preferred stock, $.10 par value; 10,000 shares
authorized;
none outstanding
Common stock, $.10 par value; 10,000 shares
authorized;
1,006 shares issued and outstanding in 1995
and 1994
Additional paid-in capital 2,730 2,905
Foreign currency translation adjustment 3 3
Accumulated deficit (353) (321)
Total stockholder's equity 2,380 2,587
Total liabilities and stockholder's equity $87,166 $79,134
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions)
<CAPTION>
Six months ended
May 31, June 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before cumulative effect of change
in accounting
principle and preferred dividend of $ 5 $ 34
subsidiary
Adjustments to reconcile income to net
cash provided
by (used in) operating activities:
Depreciation and amortization 33 54
Provisions for losses and other reserves 15 43
Other adjustments 8 10
Net change in:
Cash and securities segregated 509 (528)
Receivables from brokers, dealers
and clearing organizations 455 (1,941)
Receivables from customers (1,554) (39)
Securities purchased under agreements to resell 269 (7,903)
Securities borrowed (10,644) (4,440)
Securities and other financial instruments owned 2,196 (10,355)
Payables to brokers, dealers and
clearing organizations 1,837 1,706
Payables to customers 2,683 (40)
Accrued liabilities and other payables (223) (487)
Securities sold under agreements to
repurchase (641) 13,421
Securities loaned 5,940 2,515
Securities and other financial instruments
sold but not yet purchased 155 5,062
Other operating assets and liabilities, net 796 487
Net cash provided by (used in) operating
activities $1,839 $(2,401)
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS -- (Continued)
(Unaudited)
(In millions)
<CAPTION>
Six months ended
May 31, June 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of senior notes $ (90) $ (7)
Proceeds from issuance of subordinated
indebtedness 760
Principal payments of subordinated
indebtedness (63) (512)
Proceeds from issuance of other
indebtedness 173 827
Principal payments of other
indebtedness (749) (26)
Increase (decrease) in commercial paper
and short-term debt, net (804) 1,815
Dividends and capital distributions paid (212) (358)
Net cash (used in) provided by
financing activities (1,745) 2,499
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and
leasehold improvements (11) (24)
Other (7)
Net cash used in by investing activities (11) (31)
Net change in cash and cash equivalents 83 67
Cash and cash equivalents, beginning of period 361 316
Cash and cash equivalents, end of period $ 444 $ 383
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $4,863 and $2,813 for the six months ended
May 31, 1995 and June 30, 1994, respectively. Income taxes paid
totaled $4 and $12 for the six months ended May 31, 1995 and June 30,
1994, respectively.
See notes to consolidated financial statements.
1. Basis of Presentation:
The consolidated financial statements include the accounts of
Lehman Brothers Inc., a registered broker-dealer ("LBI") and
subsidiaries (LBI together with its subsidiaries, the "Company"). LBI
is a wholly owned subsidiary of Lehman Brothers Holdings Inc.
("Holdings"). 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, 1994 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 Transition Report on Form 10-K for the
eleven months ended November 30, 1994.
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. Borrowings:
For the six months ended May 31, 1995, the Company had no new
issuances of senior notes or subordinated indebtedness.
The Company had approximately $153 million of long-term debt
mature during the six months ended May 31, 1995.
3. Capital Requirements:
As registered broker-dealers, LBI and Lehman Government
Securities Inc. ("LGSI"), a wholly owned subsidiary of LBI, are
subject to SEC Rule 15c3-1, the Net Capital Rule, which requires LBI
and LGSI 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, 1995, LBI's regulatory net
capital, as defined, of $1,180 million exceeded the minimum
requirement by $1,099 million. LGSI's regulatory net capital, as
defined, of $385 million exceeded the minimum requirement by $338
million at May 31, 1995.
4. 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 its success and profitability. 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 14 of the Consolidated Financial Statements
included in the Company's Transition Report on Form 10-K for the
eleven months ended November 30, 1994.
5. Changes in Accounting Principles:
Postemployment Benefits. Effective January 1, 1994, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits". SFAS No. 112
requires the accrual of obligations associated with services rendered
to date for employee benefits accumulated or vested for which payment
is probable and can be reasonably estimated. These benefits
principally include the continuation of salary, health care and life
insurance costs for employees on service disability leaves. The
Company previously expensed the cost of these benefits as they were
incurred.
The cumulative effect of adopting SFAS No. 112 reduced net income
for the first quarter of 1994 by $13 million aftertax ($23 million
pretax). The effect of this change on the 1994 results of operations
was not material, excluding the cumulative effect.
Offsetting of Certain Receivables and Payables. In January 1995,
the Financial Accounting Standards Board issued Interpretation No. 41,
"Offsetting of Amounts Related to Certain Repurchase and Reverse
Repurchase Agreements" ("FIN No. 41"). FIN No. 41 is a modification
to Financial Accounting Standards Board No. 39 "Offsetting of Amounts
Related to Certain Contracts" ("FIN No. 39"), which permits certain
limited exceptions to the criteria established under FIN No. 39 for
offsetting certain repurchase and reverse repurchase agreements with
the same counterparty. The Company adopted this modification in
January 1995.
6. Severance Charge:
During the first quarter of 1994, the Company conducted a review
of personnel needs, which resulted in the termination of certain
personnel. The Company recorded a severance charge of $27 million
pretax ($15 million aftertax) in the first quarter of 1994.
7. Related Party Transactions:
In the normal course of business, the Company engages in various
securities trading, investment banking and financing activities with
Holdings and many of its affiliates (the "Related Parties"). In
addition, various charges, such as compensation, occupancy,
administration and computer processing are allocated among the Related
Parties, based upon specific identification and allocation methods.
During the third quarter of 1994, Holdings acquired additional
space in the World Financial Center and also began occupying its
leased facility at 101 Hudson Street in Jersey City, New Jersey. In
addition, certain employees of the Company who perform administrative
and corporate functions were transferred to Holdings. Accordingly,
Holdings has allocated the cost of these new facilities and services
provided by employees transferred to its appropriate subsidiaries.
These charges, which are classified in the consolidated statement of
operations as management fees, are primarily comprised of
compensation, occupancy and computer processing. The result of these
allocations was to reduce expenses incurred directly by the Company in
previous periods with an offsetting increase in management fees.
LB I Group, a wholly owned subsidiary of the Company had
outstanding 1,000 shares of its 9% Cumulative Preferred Stock, Series
A (the "Preferred Stock"), which it issued for an aggregate purchase
price of $750,000,000 to LB Funding Corp., a wholly owned subsidiary
of Holdings for $1,000 in cash and a promissory note of $749,999,000
bearing interest at a rate equal to the holder's cost of funds (the
"Note"). In the fourth quarter of 1994, the Preferred Stock and Note
were canceled. Interest income from the Note was $8 million for the
three months ended June 30, 1994 and $15 million for the six months
ended June 30, 1994. The dividend requirement on the Preferred Stock,
as reflected on the Company's consolidated statement of operations was
$17 million for the three months ended June 30, 1994 and $34 million
for the six months ended June 30, 1994.
During the six months ended May 31, 1995, the Company paid $212
million to Holdings, $175 million as a return of capital and $37
million as dividends.
8. Change in Year-End:
During 1994, the Company changed its year-end from December 31 to
November 30. Such a change to a non-calendar cycle shifts certain
year-end administrative activities to a time period that conflicts
less with the business needs of the Company's institutional customers.
As such, the second quarter ended May 31, 1995 has been reported on
the basis of the new fiscal year. The prior year's quarter ended June
30, 1994 was reported on the basis of the old calendar year cycle.
9. Subsequent Event:
Incentive Plans
In June 1995, the Compensation and Benefits Committee of the
Board of Directors of Holdings (the "Compensation Committee") approved
the 1995 Stock Award Program, pursuant to the Lehman Brothers
Holdings Inc. 1994 Management Ownership Plan. Under the 1995 Stock
Award Program, eligible employees of Holdings and the Company are to
receive, subject to vesting provisions and transfer restrictions,
approximately 6 million restricted stock units ("RSUs"). These RSUs
will vest 80% on July 1, 1996 and 20% on July 1, 2000. In addition,
certain senior officers of Holdings and the Company are eligible to
receive RSUs based on the achievement of 1995 performance goals, with
1 million RSUs expected to be awarded. The Compensation Committee
also determined to award RSUs (or Restricted Stock) to certain senior
officers of Holdings and the Company as part of a three-year long term
incentive plan. The number of RSUs (or Restricted Stock) which may be
awarded, if any, will be determined upon the completion of a two year
period; vesting would not occur until the end of the third year.
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 adverse market conditions that prevailed during the last
three quarters of 1994, which were characterized by rising interest
rates and depressed underwriting volumes, continued throughout most of
the first quarter of 1995. The financial crisis in Mexico and the
collapse of Barings Brothers PLC also had a negative impact on both
emerging markets and derivative transaction volumes in the first
quarter of 1995.
In the second quarter of 1995, market conditions showed signs of
improvement as expectations for lower U.S. interest rates prompted
strong rallies in the stock and bond markets. Although customer
volumes increased in both the debt and equity markets, activity
continued to be inconsistent during this period. In general,
investors remained conservative and defensive due to uncertainties
surrounding further declines in U.S. interest rates and the value of
the dollar. Over the same period, derivative transaction volumes
showed improvement as customers and clients were looking for
protection in a declining interest rate and volatile currency
environment.
The market rallies experienced during the second quarter of 1995
resulted in increased syndicate activities from the first quarter 1995
levels, with the majority of this increase in debt issuances. Such
syndicate volumes, however, remained below those experienced during
the comparable 1994 period. The environment for merger and
acquisition activity remained strong throughout the first half of
fiscal 1995.
Results of Operations
For the Three Months Ended May 31, 1995 and June 30, 1994
Summary. The Company reported net income of less than $1 million
for the second quarter ended May 31, 1995 as compared to a net loss of
$24 million for the second quarter ended June 30, 1994. Net revenues
increased to $487 million in the second quarter of 1995 from $451
million in the first quarter of 1995 and $483 million for the second
quarter of 1994. The increase in net revenues reflected an improving
market environment in the second quarter of 1995, as changing interest
rate expectations caused rallies in the U.S. stock and bond markets
and generally higher levels of customer activity.
Principal Transactions. Principal transactions revenues include
the results of the Company's market making and trading activity
related to its customer business, as well as proprietary trading for
the Company's own account. 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, along with the Company's proprietary trading positions.
The Company utilizes various hedging strategies to minimize its
exposure to significant movements in interest and foreign exchange
rates and the equity and commodity markets. Principal transactions
revenues decreased 10% to $182 million for the second quarter of 1995
from $203 million for the second quarter of 1994. This decline in
principal transactions revenues was primarily due to reduced net
revenues in certain equity products partially offset by increased net
revenues from foreign exchange products.
Investment Banking. Investment banking revenues increased 19% to
$112 million for the second quarter of 1995 from $94 million in the
prior year period. The increase in investment banking revenues during
the second quarter of 1995 was primarily attributable to improved net
results from underwriting activities. Revenues from strategic
advisory activities remained strong with revenues consistent in the
second quarter of 1995 when compared to the second quarter of 1994 and
the first quarter of 1995.
Commissions. Commission revenues increased 4% to $107 million
for the second quarter of 1995 from $103 million for the second
quarter of 1994, reflecting an improvement in the Company's
institutional trading volumes of listed securities partially offset by
the effects of restructuring the Company's high-net-worth brokerage
unit. Commission revenues are generated from the Company's agency
activities on behalf of corporations, institutions and high-net-worth
individuals.
Interest and Dividends. Interest and dividend revenues increased
to $2,576 million for the second quarter of 1995 from $1,544 million
for the second quarter of 1994. This increase is the result of higher
levels of interest rates in the second quarter of 1995 versus the
second quarter of 1994 and an increase in the Company's volume of
matched book transactions.
Net interest and dividend income increased 4% to $72 million in
the second quarter of 1995 from $69 million in the second quarter of
1994. Net interest and dividend revenue amounts are closely related
to the Company's trading activities. 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 and dividend revenue from period to period
should not be viewed in isolation but should be viewed in conjunction
with revenues from principal transactions. Net interest and dividend
revenue is impacted by the balance sheet size and mix of assets, the
amount and mix of short- and long-term funding sources, as well as the
prevailing level, term structure and volatility of interest rates. In
the second quarter of 1995, the increase in net interest and dividend
revenue was due to a higher level of interest earning assets.
Non-Interest Expenses. Non-interest expenses decreased 3% to
$499 million for the second quarter of 1995 from $512 million for the
second quarter of 1994. Compensation and benefits expense was $267
million for the second quarter of 1995 and $256 million for the second
quarter of 1994. Compensation and benefits expense in 1995 does not
include any portion of management fees, which are separately
categorized on the Company's consolidated statement of operations,
related to employee services provided by Holdings.
Non-compensation and benefits expenses were $232 million for the
second quarter of 1995 and $256 million for the second quarter of
1994. Non-compensation and benefits expense in 1995 includes a $48
million management fee, a portion of which relates to employee
services provided by Holdings.
Cost Reduction Effort. At year end 1994, Holdings announced a
cost reduction target of $300 million on an annualized basis (pre-tax)
compared to the third quarter 1994 annualized expenses. The Company
expects that its overall cost structure will be reduced significantly
as a result of Holdings' cost reduction efforts. However, the
Company's cost structure differs from Holdings in that nonpersonnel
related expenses are not readily determinable from the Company's
statement of operations, since a portion of the Company's management
fee expense is comprised of charges related to employee services
provided by Holdings and its subsidiaries. In addition, the Company's
management fees are subject to fluctuation due to changes in the
nature and levels of intercompany services provided.
Holdings has continued its progress in reducing costs
concentrating on both personnel and non-personnel expenses. During
the second quarter of 1995, Holdings' headcount was further reduced to
8,195 employees at May 31, 1995 from 8,428 at February 28, 1995. Such
reductions were achieved despite certain strategic hires by Holdings
in a number of business units. Holdings also continued to reduce
nonpersonnel expenses with annualized savings of approximately $28
million being achieved in the second quarter when compared to
Holdings' first quarter 1995 expense level. Holdings expects to
achieve its remaining cost reduction objectives by year end 1995.
In addition to Holdings' cost reduction efforts described above,
Holdings continues to review its activities, realigning and
consolidating operations and facilities where possible.
Income Taxes. For the second quarter of 1995, the Company reported a
$12 million tax benefit on a pretax loss of $12 million. For the
second quarter of 1994, the Company reported a $22 million tax benefit
on a pretax loss of $29 million. The effective tax rate for these
periods differ from the statutory U.S. federal income tax rate
primarily as a result of tax benefits related to income subject to
preferential tax treatment.
Results of Operations
For the Six Months Ended May 31, 1995 and June 30, 1994
Summary. The Company reported net income of $5 million for the
six months ended May 31, 1995 as compared to a net loss of $13 million
for the six months ended June 30, 1994. The 1994 results include a
$15 million aftertax severance charge related to the Company's review
of its personnel needs, and a $13 million aftertax charge for the
cumulative effect of a change in accounting for postemployment
benefits as a result of the adoption of Statement of Financial
Accounting Standards No. 112.
Net revenues decreased 19% to $938 million for the six months
ended May 31, 1995 from $1,156 million for the six months ended June
30, 1994. The decline in net revenues was primarily due to decreased
revenues in the first quarter of 1995 from the first quarter of 1994
as a result of a significant weakening in the global business
environment. The first quarter of 1994 reflected the carryover of the
1993 robust operating environment. This cycle was characterized by
historically low interest rates, strong syndicate activity and heavy
customer volumes. The first quarter of 1995 reflected a more
difficult business environment, due to significantly increased
interest rates, reduced levels of debt and equity underwritings and
increased volatility in the secondary markets. Partially offsetting
this decrease was a somewhat improved operating environment in the
second quarter of 1995 as compared to the prior year, due to a change
in the expectations for interest rates and rallies in the stock and
bond markets.
Principal Transactions. Principal transactions revenues decreased
33% to $339 million for the six months ended May 31, 1995 from $505
million for the six months ended June 30, 1994. The decline in
principal transactions revenues was principally due to reduced
derivatives activity and a decrease in the Company's customer flow
activity in certain equity products, in the first quarter of fiscal
1995 from that experienced during the first quarter of 1994. Customer
flow volumes increased in the second quarter of 1995 from the first
quarter 1995 levels due to changes in the expectations regarding
interest rates and rallies in both the stock and bond markets.
Investment Banking. Investment banking revenues decreased 4% to
$221 million for the six months ended May 31, 1995 from $231 million
for the six months ended June 30, 1994. Underwriting activity
continued at low levels industrywide as demand for debt and equity
issuance remained below the comparable levels present during 1994.
Accordingly, the Company's origination volumes overall were below
those achieved during 1994. Partially offsetting these decreases were
improved results from merchant banking activities.
Commissions. Commission revenues decreased 11% to $200 million
for the six months ended May 31, 1995 from $224 million for the six
months ended June 30, 1994. The decline in commission revenues
reflects lower volumes of customer trading in listed securities
primarily due to the effects of restructuring the Company's high net
worth brokerage unit. Commission revenues are generated from the
Company's agency activities on behalf of corporations, institutions
and high-net-worth individuals.
Interest and Dividends. Interest and dividend revenues increased
to $4,989 million for the six months ended May 31, 1995 from $2,897
million for the six months ended June 30, 1994. This increase is the
result of higher levels of interest rates in the six months ended May
31, 1995 versus the six months ended June 30, 1994 and an increase in
the Company's volume of matched book transactions.
Net interest and dividend income decreased 7% to $156 million for
the six months ended May 31, 1995 from $168 million for the six months
ended June 30, 1994. The 1995 decrease in net interest revenue was
due primarily to reduced spreads on fixed income products as a result
of the higher interest rate environment in 1995.
Non-Interest Expenses. Non-interest expenses were $948 million
for the six months ended May 31, 1995 and $1,120 million for the six
months ended June 30, 1994. Compensation and benefits expense was
$447 million for the six months ended May 31, 1995 and $592 million
for the six months ended June 30, 1994. Compensation and benefits
expense in 1995 does not include any portion of management fees, which
are separately categorized on the Company's consolidated statement of
operations, related to employee services provided by Holdings.
Non-compensation and benefits expenses were $501 million for the
six months ended May 31, 1995 and $528 million for the six months
ended June 30, 1994. Non-compensation and benefits expense in 1995
includes a $100 million management fee, a portion of which relates to
employee services provided by Holdings and in 1994 includes a $27
million severance charge.
Income Taxes. For the six months ended May 31, 1995, the Company
reported a tax benefit of $15 million on a pretax loss of $10 million.
For the six months ended June 30, 1994, the Company reported a tax
provision of $2 million on pretax income of $36 million. The
effective tax rate for these periods differ from the statutory U.S.
federal income tax rate primarily as a result of tax benefits related
to income subject to preferential tax treatment.
Liquidity and Capital Resources
Total assets increased to $87.2 billion at May 31, 1995 from $79.1
billion at November 30, 1994. The increase in total assets is
primarily the result of the change in the Company's clearing
arrangements. After the close of business on February 17, 1995, the
Company became self-clearing for equities, municipal securities and
corporate debt securities. Previously all clearing and settlement for
these products was performed by Smith Barney Inc. The Company has
entered into an agreement, for a term of five years, with the Bear
Stearns Securities Corp. ("BSSC") pursuant to which BSSC has agreed
to process the transactions previously cleared by Smith Barney Inc.
As a result of this arrangement, assets increased by approximately $11
billion which were predominantly funded with offsetting liabilities.
The Company's asset base consists primarily of cash and cash
equivalents and assets which can be converted to cash within one year,
including securities and other financial instruments owned,
collateralized short-term agreements and receivables. Long-term
assets consist primarily of other receivables, property, equipment and
leasehold improvements, deferred expenses and other assets, and excess
of cost over fair value of net assets acquired.
On a daily basis the Company reviews its mix of long- and short-
term borrowings as it relates to maturity matching and the
availability of secured and unsecured financing. In addition, the
Company periodically tests its secured and unsecured credit facilities
to ensure availability and monitors its unencumbered collateral
positions to ensure maximum availability of secured borrowing
facilities.
Short-Term Secured Funding. The Company finances its short-term
assets primarily on a secured basis. At May 31, 1995, 78% of the
Company's securities and other financial instruments owned, securities
purchased under agreements to resell and securities borrowed are
financed by securities and other financial instruments sold but not
yet purchased, securities sold under agreements to repurchase and
securities loaned.
Short-Term Unsecured Funding. The Company uses short-term
unsecured borrowing sources to fund short-term assets not financed on
a secured basis. The Company's primary sources of short-term,
unsecured general purpose funding include commercial paper and short-
term debt, including master notes and bank borrowings under
uncommitted lines of credit. Commercial paper and short-term debt
outstanding totaled $1.5 billion at May 31, 1995, compared to $2.3
billion at November 30, 1994. Of these amounts, commercial paper
outstanding totaled $1.9 million at May 31, 1995. The Company had no
commercial paper outstanding at November 30, 1994.
The Company's uncommitted lines of credit provide an additional
source of secured and unsecured short-term financing. The Company had
$5.3 billion in uncommitted lines of credit at May 31, 1995 and at
November 30, 1994. 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 a combination
of long-term debt and stockholder's equity (collectively, "Total
Capital"). The Company's long-term unsecured funding sources are
senior notes and subordinated indebtedness. The Company maintains
long-term debt 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. During the six months ended May 31, 1995, the Company paid
$212 million to Holdings, $175 million as a return of capital and $37
million as dividends.
For the six months ended May 31, 1995, the Company had no new
issuances of long-term debt compared to $760 million for the six
months ended June 30, 1994. The Company staggers the maturities of
its long-term debt to minimize refunding risk. At May 31, 1995, the
Company had long-term debt outstanding of $3.2 billion compared to
$3.4 billion at November 30, 1994.
At May 31, 1995, the Company had approximately $525 million
available for issuance of indebtedness under its shelf registrations.
Credit Ratings. The current short-term and subordinated debt
ratings of the Company are as follows:
LBI
Short- subordinated
term debt
Duff & Phelps Credit Rating Co D-1 A-
Fitch Investors Service Inc. F-1 A-
IBCA A1 -
Moody's P2 Baa1
S&P A-1 A
Thomson BankWatch TBW-1 A-
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,
1995 and November 30, 1994 included long positions with an aggregate
market value of approximately $617 million and $624 million,
respectively, and short positions with an aggregate market value of
approximately $75 million and $71 million, respectively. The
portfolio may from time to time contain concentrated holdings of
selected issues. The Company's two largest high yield positions were
$57 million and $56 million at May 31, 1995 and $89 million and $70
million at November 30, 1994.
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 and asset sales. The Company's original
investment in the partnership was approximately $136 million, after
consideration of a 10% limited partnership interest purchased by
Lennar Inc. In addition, the Company made collateralized loans to the
partnership of $752 million.
At May 31, 1995, the carrying value of the Company's investment in
the partnership was $114 million. The outstanding balance of the loan
to the partnership was fully paid in the first quarter of 1995. The
remaining investment should be principally recovered by the end of
1995 through a combination of securitizations, asset sales, mortgage
remittances and refinancings by third parties.
Merchant Banking Partnerships. At May 31, 1995, the Company's
investment in merchant banking partnerships was $101 million. At May
31, 1995, the Company had no remaining commitments to make investments
through these partnerships. The Company's policy is to carry its
interests in merchant banking partnerships at fair value based upon
the Company's assessment of the underlying investments. The Company's
merchant banking investments, made primarily through a series of
partnerships are consistent with the terms of those partnerships, and
are expected to be sold or otherwise monetized during the remaining
term of the partnerships.
Noncore Activities and Investments. In March 1990, the Company
discontinued the origination of partnerships (the assets of which are
primarily real estate) and investments in real estate. Currently,
Holdings and the Company act as a general partner for approximately
$4.1 billion of partnership investment capital and manage the
remaining real estate investment portfolio. At May 31, 1995, the
Company had net exposure to these investments of $78 million. This
amount includes $32 million of investments in these real estate
activities, as well as $46 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. Although a decline in
the real estate market or the economy in general or a change in the
Company's disposition strategy could result in additional reserves,
the Company believes that it is adequately reserved for its
investments in real estate and commitments and contingent liabilities.
Management's intention with regard to noncore assets is the
prudent liquidation of these investments as and when possible.
LEHMAN BROTHERS INC. and SUBSIDIARIES
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 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,
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. 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.
Glynwil Investment, Ltd. v. Shearson Lehman Brothers Inc. (Reported in
Holdings' Annual Report on Form 10-K and First Quarter Report on Form
10-Q)
On June 13, 1995, the Appellate Division, First Department,
reversed the summary judgment in favor of the Company and remanded the
case back to the trial court for further proceedings. The case is
scheduled to go to trial on October 16, 1995.
First Capital Holdings Inc. - Bankruptcy Court Action. (Reported in
Holdings' Annual Report on Form 10-K)
The parties have agreed to a settlement of all claims, with all
defendants agreeing to pay a total of $80 million. On June 30, 1995,
the Bankruptcy Court entered an order in the case which, inter alia,
establishes notice procedures for serving shareholders and bondholders
with the settlement motion and setting August 9, 1995 as the hearing
date for the motion.
Lehman Brothers Commercial Corporation and Lehman Brothers Special
Financing Inc. v. China International United Petroleum and Chemical
Co., Ltd. (Reported in Holdings' Annual Report on Form 10-K and First
Quarter Report on Form 10-Q)
Unipec has asserted fifteen counterclaims against Lehman entities
based on violations of federal securities and commodities laws and
rules, and theories of fraud, breach of fiduciary duty, conversion and
business torts. Unipec seeks $8 million in compensatory damages, as
well as punitive damages. The Lehman counterclaim defendants have
moved to dismiss the six counterclaims based on fraud and the two
based on business tort theories. Discovery is commencing.
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 and First
Quarter Report on Form 10-Q)
CNM filed a motion to dismiss the claims against it. The court
granted the motion, but also granted LBCC and LBSF leave to replead.
Minmetals filed fourteen counterclaims against Lehman entities based
on violations of federal securities and commodities laws and rules,
and theories of fraud, breach of fiduciary duty and conversion. The
Lehman counterclaim defendants have moved to dismiss the six fraud
based counterclaims. Discovery is commencing.
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.
27. Financial Data Schedule
(b) Reports on Form 8-K:
None
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 INC.
(Registrant)
Date: July 14, 1995 By /s/ Richard S. Fuld, Jr.
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: July 14, 1995 By /s/ Robert Matza
Robert Matza
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit No. Exhibit
Exhibit 12. Computation in Support of Ratio of Earnings to Fixed
Charges.
Exhibit 27. Financial Data Schedule
Exhibit 12
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
COMPUTATION in SUPPORT of RATIO of EARNINGS to FIXED CHARGES
(Dollars in millions)
(Unaudited)
<CAPTION>
For the For the
Eleven Six
Months Months
Ended Ended
For the Year Ended December 31, November 30, May 31,
1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense:
Subordinated indebtedness 277 231 210 192 184 99
Bank loans and other
borrowings* 3,753 4,068 4,363 4,393 5,661 4,734
Interest component of
rentals of office and
equipment 57 64 64 62 27 14
Other adjustments** 73 88 127 101 53
TOTAL (A) $4,160 $4,451 $4,764 $4,748 $5,925 $4,847
Earnings:
Pre-tax income (loss)
from continuing operations (501) 283 319 (146) 1 (10)
Fixed charges 4,160 4,451 4,764 4,748 5,925 4,847
Other adjustments*** (68) (69) (68) (68) (52)
TOTAL (B) $3,591 $4,665 $5,015 $4,534 $5,874 $4,837
(B / A) 1.05 1.05
</TABLE>
* Includes amortization of long-term debt discount.
** Other adjustments include capitalized interest and debt
issuance costs, amortization of capitalized interest and
preferred stock dividends of a wholly owned subsidiary.
*** 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 costs and
undistributed net income of affiliates accounted for at equity
and preferred stock dividends of a wholly owned subsidiary.
**** Earnings were inadequate to cover fixed charges and would have
had to increase approximately $569 million in 1990, $214
million in 1993, $51 million in 1994 and $10 million in 1995 in
order to cover the deficiency.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at May 31, 1995 (Unaudited) and
the Consolidated Statement of Operations for the six months ended May 31, 1995
(Unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000728586
<NAME> LEHMAN BROTHERS INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> MAY-31-1995
<CASH> 1,198
<RECEIVABLES> 9,269
<SECURITIES-RESALE> 29,123
<SECURITIES-BORROWED> 19,854
<INSTRUMENTS-OWNED> 26,933
<PP&E> 370
<TOTAL-ASSETS> 87,166
<SHORT-TERM> 1,507
<PAYABLES> 9,419
<REPOS-SOLD> 43,533
<SECURITIES-LOANED> 6,255
<INSTRUMENTS-SOLD> 9,533
<LONG-TERM> 3,235
<COMMON> 0
0
0
<OTHER-SE> 2,380
<TOTAL-LIABILITY-AND-EQUITY> 87,166
<TRADING-REVENUE> 339
<INTEREST-DIVIDENDS> 4,989
<COMMISSIONS> 200
<INVESTMENT-BANKING-REVENUES> 221
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 4,833
<COMPENSATION> 447
<INCOME-PRETAX> (10)
<INCOME-PRE-EXTRAORDINARY> 5
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
