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 February 28, 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 (I.R.S. Employer Identification No.)
of incorporation)
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 April 13, 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 FEBRUARY 28, 1995
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Operations -
Three Months Ended February 28, 1995
and March 31, 1994 3
Consolidated Statement of Financial Condition -
February 28, 1995 and November 30, 1994 4
Consolidated Statement of Cash Flows -
Three Months Ended February 28, 1995
and March 31, 1994 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
EXHIBIT INDEX 21
Exhibits
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions)
<CAPTION>
Three months ended
February 28, March 31,
1995 1994
<S> <C> <C>
Revenues
Principal transactions $ 157 $ 302
Investment banking 109 137
Commissions 93 121
Interest and dividends 2,413 1,353
Other 8 14
Total revenues 2,780 1,927
Interest expense 2,329 1,254
Net revenues 451 673
Non-interest expenses
Compensation and benefits 180 336
Brokerage, commissions and
clearance fees 51 62
Communications 33 37
Professional services 25 28
Occupancy and equipment 23 25
Business development 22 23
Depreciation and amortization 17 26
Management fees 52
Other 46 44
Severance charge 27
Total non-interest expenses 449 608
Income before taxes and cumulative
effect of change in accounting principle
and preferred dividend of subsidiary 2 65
Provision for (benefit from) income taxes (3) 24
Income before cumulative effect of
change in accounting principal and
preferred dividend of subsidiary 5 41
Cumulative effect of change in
accounting principle, net of taxes (13)
Preferred dividend of subsidiary (17)
Net income $ 5 $ 11
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(In millions)
ASSETS
<CAPTION>
February 28, November 30,
1995 1994
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 248 $ 361
Cash and securities segregated and on deposit
for regulatory and other purposes 1,138 1,263
Securities and other financial instruments owned:
Governments and agencies 17,062 16,941
Corporate obligations and other contractual
commitments 6,848 7,094
Certificates of deposit and other money market
instruments 2,837 1,239
Mortgages and mortgage-backed 1,851 2,444
Corporate stocks and options 1,357 1,411
29,955 29,129
Collateralized short-term agreements:
Securities purchased under agreements to resell 28,362 29,392
Securities borrowed 19,788 9,210
Receivables:
Brokers, dealers and clearing organizations 3,926 3,868
Customers 2,659 1,406
Others 4,769 3,694
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $430 in 1995 and $424 in 1994) 389 409
Deferred expenses and other assets 225 221
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $81 in 1995 and $79 in 1994) 179 181
$91,638 $79,134
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)
(In millions, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
<CAPTION>
1995 1994
(unaudited)
<S> <C> <C>
Short-term financings:
Securities sold under agreements to repurchase $46,043 $44,174
Short-term debt 2,294 2,272
Securities loaned 5,455 315
Securities and other financial instruments sold but not
yet purchased:
Governments and agencies 5,943 5,184
Corporate obligations and other contractual
commitments 2,747 2,842
Corporate stocks and options 918 1,352
9,608 9,378
Advances from Holdings and other affiliates 9,089 8,807
Payables:
Brokers, dealers and clearing organizations 3,942 2,730
Customers 5,034 2,059
Accrued liabilities and other payables 4,366 3,416
Senior notes 408 511
Subordinated indebtedness 2,823 2,885
Total liabilities 89,062 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 2,905 2,905
Foreign currency translation adjustment 2 3
Accumulated deficit (331) (321)
Total stockholder's equity 2,576 2,587
Total liabilities and stockholder's equity $91,638 $79,134
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions)
<CAPTION>
Three months ended
February 28, March 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income before cumulative effect of change
in accounting principle and preferred
dividend of subsidiary $ 5 $ 41
Adjustments to reconcile income to net
cash used in operating activities:
Depreciation and amortization 17 26
Provisions for losses and other reserves 5 35
Other adjustments 4 4
Net change in:
Cash and securities segregated 125 (290)
Receivables from brokers, dealers and clearing
organizations (58) (786)
Receivables from customers (1,253) 367
Securities purchased under agreements to resell 1,030 (5,960)
Securities borrowed (10,578) (5,226)
Securities and othe financialinstruments owned (826) (5,262)
Payables to brokers, dealers and
clearing organizations 1,212 1,573
Payables to customers 2,865 142
Accrued liabilities and other payables 946 (343)
Securities sold under agreements to repurchase 1,869 5,782
Securities loaned 5,140 1,685
Securities and other financial
instruments sold but not yet purchased 230 5,808
Other operating assets and liabilities, net (1,070) 198
Net cash used in operating activities $ (337) $(2,206)
</TABLE>
See notes to consolidated financial statements.
<TABLE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS -- (Continued)
(Unaudited)
(In millions)
<CAPTION>
Three months ended
February 28, March 31,
1995 1994
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of senior notes $ (90)
Proceeds from issuance of subordinated
indebtedness $ 240
Principal payments of subordinated indebtedness (63) (99)
Proceeds from issuance of other indebtedness 282 375
Principal payments of other indebtedness (25)
Increase in commercial paper
and short-term debt, net 116 2,133
Dividends and capital distributions paid (15) (8)
Net cash provided by financing activities 230 2,616
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and
leasehold improvements (6) (14)
Proceeds from sale of other assets 106
Net cash (used in) provided by
investing activities 92 (6)
Net change in cash and cash equivalents (113) 502
Cash and cash equivalents, beginning of period 361 316
Cash and cash equivalents, end of period $ 248 $ 818
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $2,340 and $1,338 in the first quarter of
1995 and 1994, respectively. Income taxes paid totaled $2 in the
first quarter of 1995 and the first quarter of 1994.
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. It is recommended that these
consolidated financial statements be read in conjunction with the
Company's most recent Transition Report on Form 10-K (filed for the
eleven months ended November 30, 1994).
Certain amounts reflect reclassifications to conform to the
current period's presentation.
2. Borrowings:
For the three months ended February 28, 1995, the Company had no
new issuances of senior notes or subordinated indebtedness.
For the three months ended February 28, 1995, the Company had
approximately $90 million of senior notes and approximately $63
million of subordinated indebtedness mature.
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 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 February 28, 1995, LBI's regulatory net
capital, as defined, of $1,077 million exceeded the minimum
requirement by $1,002 million. LGSI's regulatory net capital, as
defined, of $480 million exceeded the minimum requirement by $451
million at February 28, 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 for the three months ended March 31,
1994 included $7 million from the Note. 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
March 31, 1994.
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 first quarter ended February 28, 1995 has been reported
on the basis of the new fiscal year. The prior year quarter ended
March 31, 1994 was reported on the basis of the old calendar year
cycle.
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 experienced during 1994, that were
prompted by rising interest rates, continued through most of the first
quarter of 1995. Additionally, in the first quarter of 1995 the
financial crisis in Mexico and the collapse of Barings Brothers PLC
had a negative impact on both emerging markets and derivative
transaction volumes. In general, these events caused investors to
shift capital from emerging market products and derivatives into U.S.
bond and equity investments. This change in investor sentiment drove
U.S. interest rates downward and the U.S. equity markets higher.
Equity and fixed income investors worldwide remain cautious with
regard to interest rates.
Underwriting levels remained weak during the first quarter of
1995 and appear unlikely to revive during the second quarter as a
major source of industry revenues. However, customer volumes began to
increase during the end of the first quarter as investors began
redirecting assets to longer-term investments. In addition, the
environment for merger and acquisition activity remained strong with
record levels of strategic acquisitions and cross-border transactions
and a substantial backlog of transactions in process.
Results of Operations
For the Three Months Ended February 28, 1995 and March 31, 1994
Summary. The Company reported net income of $5 million for the
first quarter ended February 28, 1995 as compared to net income of $11
million for the first quarter ended March 31, 1994. The 1994 results
include a $15 million aftertax severance charge related to the
Company's review of its personnel needs ("Severance Charge") 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 were $451 million for the first quarter of 1995
compared to $504 million for the fourth quarter of 1994 and $673
million for the first quarter of 1994. The first quarter of 1994
reflected the carryover of the robust 1993 environment. This cycle
was characterized by lower interest rates, strong syndicate activity
and heavy customer volumes.
In February 1994, the Federal Reserve, in response to
inflationary concerns, increased interest rates in the first of seven
such actions. The Company's revenues, in the second, third and fourth
quarters of 1994 and the first quarter of 1995, reflect this more
difficult business environment. This new environment has adversely
impacted the entire industry and resulted in lower levels of debt and
equity underwritings and increased volatility in the secondary
markets.
Principal Transactions. Principal transactions include the
results of the Company's market making and trading related to customer
activities, 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 48% to $157 million for the first quarter of 1995 from $302
million for the first quarter of 1994. The decline in principal
transactions revenues was principally caused by reduced derivatives
activity and a decrease in the Company's customer flow activity in
certain equity products.
Investment Banking. Investment banking revenues decreased 20% to
$109 million for the first quarter of 1995 from $137 million for the
prior year period due to lower origination volumes, partially offset
by improved results from merchant banking activities.
Commissions. Commission revenues decreased 23% to $93 million
for the first quarter of 1995 from $121 million for the first quarter
of 1994, reflecting lower volumes of customer trading in listed
securities primarily due to the Company's restructuring of the 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 $2,413 million for the first quarter of 1995 from $1,353 million
for the first quarter of 1994. This increase is the result of higher
levels of interest rates in the first quarter of 1995 versus the first
quarter of 1994 and an increase in the Company's volume of matched
book transactions.
Net interest and dividend income decreased 15% to $84 million in
the first quarter of 1995 from $99 million in the first 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.
The 1995 decrease in net interest and dividend revenue was due in part
to reduced spreads on fixed income products as a result of the higher
interest rate environment in 1995, partially offset by an increase in
interest earning assets.
Non-Interest Expenses. Non-interest expenses were $449 million
for the first quarter of 1995 and $608 million for the first quarter
of 1994. Compensation and benefits expense was $180 million for the
first quarter of 1995 and $336 million for the first 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
$269 million for the first quarter of 1995 and $272 million for the
first quarter of 1994. Non-compensation and benefits expense in 1995
includes a $52 million management fee, a portion of which relates
to employee services provided by Holdings and in 1994, includes a
$27 million Severance Charge.
Cost Reduction Effort. Significant effort was spent during 1994
on reducing both personnel and nonpersonnel expenses worldwide across
all subsidiaries of Holdings. 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.
At year end 1994, Holdings announced a cost reduction target of
$300 million on an annualized basis (pretax) compared to Holdings'
third quarter 1994 annualized expenses. During the first quarter of
1995, Holdings continued its progress in reducing costs, concentrating
on both personnel and nonpersonnel expenses. In the first quarter of
1995, Holdings' personnel expenses were further reduced as a result of
the headcount reduction from 8,512 at November 30, 1994 to 8,428 at
February 28, 1995. The process to reduce nonpersonnel expenses
consists of a highly detailed review of expense categories, with
steady progress expected to be made in this area throughout fiscal
1995. During the first quarter of 1995, a $40 million reduction on an
annualized basis was realized as Holdings nonpersonnel expenses
decreased to $277 million.
Commencing in the fourth quarter of 1994 through the first quarter
of 1995, annualized savings of $183million have been realized.
Holdings expects to achieve its cost reduction objectives by year end.
Income Taxes. For the first quarter of 1995, the Company
reported a tax benefit of $3 million on $2 million of pretax income.
For the first quarter 1994, the Company reported a tax provision of
$24 million on $65 million of pretax income resulting in an effective
tax rate of 37%. The 1995 effective tax rate is not meaningful due to
low pretax income and benefits attributable to income subject to
preferential tax treatment. The 1994 effective tax rate of 37% is
greater than the statutory rate primarily because of state and local
taxes offset by income subject to preferential tax treatment.
Liquidity and Capital Resources
Total assets increased to $91.6 billion at February 28, 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 of 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 February 28, 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. Short-term debt outstanding totaled $2.3
billion at February 28, 1995 and November 30, 1994. The Company had
no commercial paper outstanding at February 28, 1995 and 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 February 28, 1995 and
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 first quarter of 1995, the Company had no new issuances
of long-term debt, compared to $240 million in the first quarter of
1994. The Company staggers the maturities of its long-term debt to
minimize refunding risk. At February 28, 1995, the Company had long-
term debt outstanding of $3.2 billion compared to $3.4 billion
outstanding at November 30, 1994.
At February 28, 1995, the Company had approximately $525 million
available for the issuance of indebtedness under its shelf
registration.
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-
On March 21, 1995, Moody's Investors Service Inc. ("Moody's")
lowered the ratings of LBI after having affirmed such ratings on
February 16, 1995. The Company currently estimates that the Moody's
action could increase interest expense before the effect of
compensation and taxes by approximately $25 million on an annual
basis. In terms of the Company's business, the action is expected to
have only a nominal impact on customer flow activity. Management
remains comfortable with the Company's current liquidity position,
which was strengthened throughout 1994 and the first quarter of 1995.
On March 28, 1995, Standard & Poor's ("S&P") reaffirmed the short-
and long-term ratings of the Company. On the same date, S&P revised
the long-term debt outlook on six of the Company's competitors in the
securities industry from stable to negative. The Company's long-term
debt outlook from S&P was revised to negative in September 1994, and
remains negative.
Duff and Phelps Credit Rating Co. and Fitch Investors Service Inc.
have affirmed the Company's ratings. IBCA and Thomson BankWatch have
maintained the Company's existing ratings.
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 below BBB- by S&P and below Baa3 by Moody's, as well as non-
rated securities or loans which, in the opinion of management, are non-
investment grade. 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 February 28, 1995 and
November 30, 1994 included long positions with an aggregate market
value of approximately $668 and $624 million, respectively, and short
positions with an aggregate market value of approximately $43 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 $91 million and $54 million at
February 28, 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 February 28, 1995, the carrying value of the Company's
investment in the partnership was $147 million. The outstanding
balance of the loan to the partnership was fully paid in the first
quarter of 1995. The remaining investment is expected to be fully
recovered by the second half of 1995 through a combination of
securitizations, asset sales, mortgage remittances and refinancings by
third parties.
Merchant Banking Partnerships. At February 28, 1995, the
Company's investment in merchant banking partnerships was $90 million.
At February 28, 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 February 28, 1995, the
Company had net exposure to these investments of $80 million. This
amount includes $34 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. The Company believes any exposure under these
commitments and contingent liabilities has been adequately reserved.
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 real estate reserves, the Company
believes that it is adequately reserved.
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.
Bishopsgate Investment Management Limited (in liquidation) v. Lehman
Brothers International (Europe) and Lehman Brothers Holdings Plc
(Reported in LBI's Annual Report on Form 10-K)
On March 31, 1995, the parties settled all remaining claims.
Lehman Brothers Commercial Corporation and Lehman Brothers Special
Financing Inc. v. China International United Petroleum and Chemical Co.,
Ltd. (Reported in LBI's Annual Report on Form 10-K)
On March 13, 1995, Unipec filed an answer with counterclaims
seeking $8 million in compensatory damages.
Lehman Brothers Commercial Corporation and Lehman Brothers Special
Financing Inc. v. Minmetals International Non-Ferrous Metals Trading
Company (Reported in LBI's Annual Report on Form 10-K)
On March 9, 1995, Minmetals filed an answer with counterclaims
seeking $28 million in compensatory damages and CNM moved to dismiss the
complaint.
Glynwill Investment, Ltd. v. Shearson Lehman Brothers Inc. (Reported
in LBI's Annual Report on Form 10-K) Glynwill's appeal was argued
during the March 1995 term of the Appellate Division, First
Department, and a decision is expected within the next several months.
Actions Relating to National Association of Securities Dealers Automated
Quotations Systems ("NASDAQ") Market Maker Antitrust and Securities
Litigation. (Report in Holdings' Annual Report on Form 10-K.
State Court Action. On consent of all parties this action is being
dismissed without prejudice to refiling upon conclusion of the federal
action.
Leetate Smith. et al. v. Merrill Lynch . et al.
On February 28, 1995 a First Amended Consolidated Class Action
Complaint for Violations of the Federal Securities Laws and the
California Corporations Code (the "Complaint") was filed in the United
States District Court for the Central District of California amending a
previously filed complaint and adding, among other defendants, Lehman
Brothers Inc. The Complaint is purportedly brought on behalf of
purchasers of bonds, notes and other securities during the period July
1, 1992 through December 6, 1994 (the "Class Period") that were issued
by Orange County or by other public entities which had funds invested in
Orange County's Investment Pool (collectively "the County"). Also named
as defendants are eight other broker-dealers who like LBI, are alleged
to have acted as underwriters of the County's debt securities and the
five financial advisors who allegedly advised the County during the
Class Period. The Complaint alleges violations of Section 10b of the
Exchange Act of 1934 and various sections of the California Corporations
Code based on alleged misstatements and omissions in the Official
Statements of the debt offerings by the County primarily relating to the
County's creditworthiness and ability to repay the debts. The Complaint
seeks (i) to certify the action as a class action; (ii) unspecified
damages plus interest; and (iii) attorneys' fees.
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: April 13, 1995 By /s/ Richard S. Fuld,Jr.
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: April 13, 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)
For the For the
Eleven Months Three Months
Ended Ended
For the Year Ended December 31, November 30, February 28,
1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense:
Subordinated
indebtedness $ 277 $ 231 $ 210 $ 192 $ 184 $ 50
Bank loans and other
borrowings* 3,753 4,068 4,363 4,393 5,661 2,279
Interest component of
rentals of office
and equipment 57 64 64 62 27 7
Other adjustments** 73 88 127 101 53
TOTAL (A) $4,160 $4,451 $4,764 $4,748 $5,925 $2,336
Earnings:
Pre-tax income (loss)
from continuing
operations $ (501) $ 283 $ 319 $ (146) $ 1 $ 2
Fixed charges 4,160 4,451 4,764 4,748 5,925 2,336
Other adjustments*** (68) (69) (68) (68) (52)
TOTAL (B) $3,591 $4,665 $5,015 $4,534 $5,874 $2,338
(B/A) 1.05 1.05 1.00
</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 and $51 million in 1994 in order to cover the
deficiency.
Exhibit 27
LEHMAN BROTHERS INC. and SUBSIDIARIES
This schedule contains summary financial information extracted from
the Consolidated Statement of Financial Condition at February 28,
1995 (Unaudited) and the Consolidated Statement of Operations for the
three months ended February 28, 1995 (Unaudited) and is qualified in
its entirety by reference to such financial statements.
1,000,000
PERIOD TYPE 3 MOS
FISCAL YEAR END NOV-30-1995
PERIOD START DEC-01-1994
PERIOD END FEB-28-1995
CASH $ 1,386
RECEIVABLES $ 11,354
SECURITIES-RESALE $ 28,362
SECURITIES BORROWED $ 19,788
INSTRUMENTS OWNED $ 29,955
PP&E $ 389
TOTAL ASSETS $ 91,638
SHORT TERM $ 2,294
PAYABLES $ 8,976
REPOS SOLD $ 46,043
SECURITIES LOANED $ 5,455
INSTRUMENTS SOLD $ 9,608
LONG-TERM $ 3,231
PREFERRED-MANDATORY $ 0
PREFERRED $ 0
COMMON $ 0
OTHER SE $ 2,576
TOTAL LIABILITY AND EQUITY $ 91,638
TRADING REVENUE $ 157
INTEREST DIVIDENDS $ 2,413
COMMISSIONS $ 93
INVESTMENT BANKING REVENUES $ 109
FEE REVENUE $ 0
INTEREST EXPENSE $ 2,329
COMPENSATION $ 180
INCOME-PRETAX $ 2
INCOME PRE-EXTRAORDINARY $ 5
EXTRAORDINARY $ 0
CHANGES $ 0
NET INCOME $ 5
EPS-PRIMARY $ 0
EPS-DILUTED $ 0
