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 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-6817
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 April 12, 1996 1,006 shares of the Registrant's Common Stock, par value
$.10 per share, were issued and outstanding.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 29, 1996
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Operations -
Three Months Ended February 29, 1996
and February 28, 1995 ....................................4
Consolidated Statement of Financial Condition -
February 29, 1996 and November 30, 1995 .............. 5
Consolidated Statement of Cash Flows -
Three Months Ended February 29, 1996
and February 28, 1995 ...................................7
Notes to Consolidated Financial Statements........... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ...............11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ...................... 21
Item 6. Exhibits and Reports on Form 8-K ........... 25
Signatures .................................................... 26
EXHIBIT INDEX 27
Exhibits
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<TABLE>
<CAPTION>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions)
Three months ended
February 29, February 28,
1996 1995
<S> <C> <C>
Revenues
Principal transactions ........................... $ 299 $ 157
Investment banking ............................... 152 109
Commissions ...................................... 81 93
Interest and dividends ........................... 3,059 2,413
Other ............................................ 8 8
------- -------
Total revenues ............................. 3,599 2,780
Interest expense ................................. 2,992 2,329
------- -------
Net revenues ............................... 607 451
------- -------
Non-interest expenses
Compensation and benefits ........................ 314 180
Brokerage, commissions and clearance fees ........ 47 51
Communications ................................... 26 33
Occupancy and equipment .......................... 20 23
Business development ............................. 20 22
Professional services ............................ 17 25
Depreciation and amortization .................... 14 17
Management fees .................................. 24 52
Other ............................................ 47 46
------- -------
Total non-interest expenses ................ 529 449
------- -------
Income before taxes ................................. 78 2
Provision for (benefit from) income taxes ........ 33 (3)
------- -------
Net income .......................................... $ 45 $ 5
======= =======
</TABLE>
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited)
(In millions)
ASSETS
February 29,November 30,
1996 1995
<S> <C> <C>
Cash and cash equivalents .......................................................................... $ 272 $ 287
Cash and securities segregated and on deposit
for regulatory and other purposes ................................................................ 765 785
Securities and other financial instruments owned:
Governments and agencies ....................................................................... 16,221 14,038
Corporate obligations and other contractual commitments ........................................ 8,312 8,115
Certificates of deposit and other money market instruments ..................................... 2,095 2,958
Mortgages and mortgage-backed .................................................................. 2,402 3,182
Corporate stocks and options ................................................................... 3,090 2,856
------- -------
32,120 31,149
------- -------
Collateralized short-term agreements:
Securities purchased under agreements to resell ................................................ 32,143 25,982
Securities borrowed ............................................................................ 14,646 16,562
Receivables:
Brokers, dealers and clearing organizations .................................................... 7,497 2,719
Customers ...................................................................................... 4,350 2,219
Others ......................................................................................... 4,767 2,175
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $468 in 1996 and $455 in 1995) ................................................................ 317 333
Deferred expenses and other assets ................................................................. 208 219
Excess of cost over fair value of net assets acquired (net of accumulated
amortization of $88 in 1996
and $86 in 1995) ................................................................................. 172 174
------- -------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Continued)
(Unaudited)
(In millions, except share data)
LIABILITIES AND STOCKHOLDER'S EQUITY
February 29, November 30,
1996 1995
<S> <C> <C>
Short-term debt ................................................................................ $ 879 $ 1,008
Securities and other financial instruments sold but not yet purchased:
Governments and agencies .................................................................... 8,566 6,477
Corporate stocks and options ................................................................ 2,744 3,403
Corporate obligations and other contractual commitments ..................................... 1,373 1,195
-------- --------
12,683 11,075
-------- --------
Collateralized short-term financings:
Securities sold under agreements to repurchase ............................................ 47,315 41,900
Securities loaned ......................................................................... 3,618 2,649
Advances from Holdings and other affiliates .................................................... 11,080 8,418
Payables:
Brokers, dealers and clearing organizations ................................................ 5,878 4,467
Customers .................................................................................. 7,769 5,733
Accrued liabilities and other payables ......................................................... 2,414 1,829
Long-term debt:
Senior notes ............................................................................... 379 420
Subordinated indebtedness .................................................................. 3,279 3,077
-------- --------
Total liabilities .................................................................... 95,294 80,576
-------- --------
Commitments and contingencies
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 1996 and 1995
Additional paid-in capital ................................................................ 2,243 2,353
Foreign currency translation adjustment ................................................... 3 3
Accumulated deficit ....................................................................... (283) (328)
-------- --------
Total stockholder's equity ........................................................... 1,963 2,028
-------- --------
Total liabilities and stockholder's equity ........................................... $ 97,257 $ 82,604
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions)
Three months ended Three months ended
February 29, February 28,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................................. $ 45 $ 5
Adjustments to reconcile income to net cash used in
operating activities:
Depreciation and amortization ................................................... 14 17
Provisions for losses and other reserves ........................................ 10 5
Other adjustments ............................................................... 5 4
Net change in:
Cash and securities segregated .................................................. 20 125
Receivables from brokers, dealers and clearing
organizations ................................................................ (4,778) (58)
Receivables from customers ...................................................... (2,131) (1,253)
Securities purchased under agreements to resell ................................. (6,161) 1,030
Securities borrowed ............................................................. 1,916 (10,578)
Securities and other financial instruments owned ................................ (971) (826)
Payables to brokers, dealers and clearing organizations ......................... 1,411 1,212
Payables to customers ........................................................... 2,036 2,865
Accrued liabilities and other payables .......................................... 576 946
Securities sold under agreements to repurchase .................................. 5,415 1,869
Securities loaned ............................................................... 969 5,140
Securities and other financial instruments sold but
not yet purchased ........................................................... 1,608 230
Other operating assets and liabilities, net ..................................... (2,578) (1,070)
-------- --------
Net cash used in operating activities ............................................. $ (2,594) $ (337)
======== --------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS -- (Continued)
(Unaudited)
(In millions)
Three months ended
February 29, February 28,
1996 1995
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of senior notes .................... $ (44) $ (90)
Proceeds from issuance of subordinated indebtedness ... 200
Principal payments of subordinated indebtedness ....... (63)
Proceeds from (payments for) short-term debt .......... (129) 116
Increase (decrease) in advances from Holdings
and other affiliates ................................ 2,662 282
Dividends and capital distributions paid .............. (110) (15)
------- -------
Net cash provided by financing activities ........... 2,579 230
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and
leasehold improvements ............................... _____ (6)
-------
Net cash used in investing activities ................. _____ (6)
-------
Net change in cash and cash equivalents ............... (15) (113)
------- -------
Cash and cash equivalents, beginning of period ......... 287 361
------- -------
Cash and cash equivalents, end of period .......... $ 272 $ 248
======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $2,993 and $2,340 for the three months ended
February 29, 1996 and the three months ended February 28, 1995, respectively.
Income taxes paid totaled $14 and $2 for the three months ended February 29,
1996 and the three months ended February 28, 1995, respectively.
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
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"). LBI is one of the leading global
investment banks serving institutional, corporate, government and high-net-worth
individual clients and customers. The Company's worldwide headquarters in New
York are complemented by offices in additional locations in North America,
Europe, the Middle East, Latin and South America and the Asia Pacific region.
Holdings provides investment banking and capital markets services in Europe and
Asia. The Company is engaged primarily in providing financial services. The
Company also operates a commodities trading and sales operation in London. All
material intercompany accounts and transactions have been eliminated in
consolidation. The Company's financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission (the "SEC") with respect to the Form 10-Q and reflect all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods presented. Pursuant to
such rules and regulations, certain footnote disclosures which are normally
required under generally accepted accounting principles have been omitted. The
consolidated statement of financial condition at November 30, 1995 was derived
from the audited financial statements. It is recommended that these financial
statements be read in conjunction with the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the twelve
months ended November 30, 1995.
The 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:
During the three months ended February 29, 1996, the Company issued
$200 million of 6.125% subordinated indebtedness maturing in 2001. This issuance
has been effectively converted to a floating rate obligation, based on the
London Interbank Offered Rates ("LIBOR"). In addition, $44 million of senior
notes matured during the first quarter of 1996.
3. Capital Requirements:
As a registered broker-dealer, LBI is subject to SEC Rule 15c3-1, the
Net Capital Rule, which requires LBI to maintain net capital of not less than
the greater of 2% of aggregate debit items arising from customer transactions,
as defined, or 4% of funds required to be segregated for customers' regulated
commodity accounts, as defined. At February 29, 1996, LBI's regulatory net
capital, as defined, of $1,452 million exceeded the minimum requirement by
$1,318 million. The Company's triple-A rated derivative subsidiary, Lehman
Brothers Financial Products Inc., has established certain capital and operating
restrictions which are reviewed by various rating agencies.
Repayment of subordinated indebtedness and certain advances and
dividend payments by LBI are restricted by the regulations of the SEC and other
regulatory agencies. In addition, certain instruments governing the indebtedness
of LBI contractually limit its ability to pay dividends.
<PAGE>
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 the success and
profitability of the Company. The principal types of risks involved in the
Company's activities are market risk, credit or counterparty risk, and
transaction risk. Management has developed a control infrastructure to monitor
and manage each type of risk on a global basis throughout the Company. For
further discussion of these matters, refer to Notes 13 and 15 of the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the twelve months ended November 30, 1995.
5. 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 three months ended February 29, 1996, the Company paid $110
million to Holdings as a return of capital.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business Environment
The Company's principal business activities, investment banking and
securities trading and sales, are by their nature subject to volatility,
primarily due to changes in interest and foreign exchange rates, global economic
and political trends and industry competition. As a result, revenues and
earnings may vary significantly from quarter to quarter and from year to year.
The favorable market environment experienced during the second half of
1995 continued into 1996. The U.S. bond market continued to rally as
expectations for additional easing by the U.S. Federal Reserve Bank and the
possibility of a deficit reduction package positively impacted the industry as a
whole. Internationally, weakness in the major European economies produced a
round of interest rate cuts from a number of central banks in an effort to
promote stronger economic growth. These actions led to more positive market
conditions in Europe. The favorable worldwide trend in interest rates also
supported strong performance in global equity markets. All of these factors led
to continued strength in debt and equity underwriting volumes.
By mid February, 1996, investor concerns about stronger economic data,
raising the possibility of no further interest rate reductions by the U.S.
Federal Reserve Bank, caused a significant correction in the U.S. fixed income
market and a general increase in interest rates. This change in market
conditions led to a decrease in debt underwriting volumes and more volatile
market conditions. The U.S. equity market continued to exhibit strength on the
basis of positive economic growth. Merger and acquisition activity continued at
record levels due to industry and cross-border consolidation.
Note: Except for the historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that discuss the risks and
uncertainties involved in the Company's business.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the Three Months Ended February 29, 1996 and February 28, 1995
The Company reported net income of $45 million for the first quarter
ended February 29, 1996 and net income of $5 million for the first quarter ended
February 28, 1995. The improved results for 1996 reflect stronger earnings and
enhanced margins which resulted from the fourth consecutive quarter of higher
revenues, amid a period of generally improved market conditions.
Net revenues increased to $607 million for the first quarter of 1996
from $451 million for the first quarter of 1995 and $579 million for the fourth
quarter of 1995. The increase in net revenues reflected continued strengthening
in a number of fixed income and equity areas throughout the Company. Investment
banking revenues for 1996 were well above the first quarter of 1995 but were
somewhat below the fourth quarter of 1995 due in large part to the timing of
certain corporate finance advisory fees.
As part of its market-making activities, the Company maintains
inventory positions of varying amounts across a broad range of financial
instruments which are marked-to-market on a daily basis and along with the
Company's proprietary trading positions, give rise to principal transactions
revenues. The Company utilizes various hedging strategies to minimize its
exposure to significant movements in interest and foreign exchange rates and the
equity markets.
Net revenues from the Company's market-making and trading activities in
fixed income and equity products are recognized as either principal transactions
or net interest revenues depending upon the method of financing and/or hedging
related to specific inventory positions. The Company evaluates its trading
strategies on an overall profitability basis which includes both principal
transactions revenues and net interest. Therefore, changes in net interest
should not be viewed in isolation but should be viewed in conjunction with
revenues from principal transactions. Net interest revenues were $67 million for
the first quarter of 1996 and $84 million for the first quarter of 1995. This
decrease was due to changes in the mix of the Company's assets partially offset
by an increase in the volume of fixed income matched book transactions.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table of net revenues by business unit and the
accompanying discussion have been prepared in order to present the Company's net
revenues in a format that reflects the manner in which the Company manages its
businesses. For internal management purposes, the Company has been segregated
into five major business units: Fixed Income, Equity, Corporate Finance
Advisory, Merchant Banking and Asset Management. Each business unit represents a
grouping of financial activities and products with similar characteristics.
These business activities result in revenues that are recognized in multiple
revenue categories contained in the Company's Consolidated Statement of
Operations. Net revenues by business unit contain certain internal allocations,
including funding costs, which are centrally managed.
Three Months Ended February 29, 1996
<TABLE>
<CAPTION>
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
<S> <C> <C> <C> <C> <C>
Fixed Income ...................................... $ 351 $ 17 $ 63 $ 3 $ 434
Equity ............................................ 16 59 41 2 118
Corporate Finance Advisory ........................ 40 40
Merchant Banking .................................. (2) 8 6
Asset Management .................................. 1 5 3 9
-----
$ 366 $ 81 $ 152 $ 8 $ 607
</TABLE>
Three Months Ended February 28, 1995
<TABLE>
<CAPTION>
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
<S> <C> <C> <C> <C> <C>
Fixed Income ...................................... $ 230 $ 23 $ 22 $ 1 $ 276
Equity ............................................ 16 65 20 1 102
Corporate Finance Advisory ........................ 39 39
Merchant Banking .................................. (2) 28 3 29
Asset Management .................................. (3) 5 3 5
-----
$ 241 $ 93 $ 109 $ 8 $ 451
-----
</TABLE>
Fixed Income. The Company's fixed income net revenues reflect customer
flow activities (both institutional and high-net worth retail), secondary
trading, debt underwriting, syndicate and financing activities related to fixed
income products. Fixed income products include dollar- and non-dollar government
securities, mortgage- and asset-backed securities, money market products,
dollar- and non-dollar corporate debt securities, emerging market securities,
municipal securities, financing (global access to debt financing sources
including repurchase and reverse repurchase agreements), foreign exchange,
commodities and fixed income derivative products. Fixed income net revenues
increased 57% to $434 million for the first quarter of 1996 from $276 million
for the first quarter of 1995. Reduced levels of interest rates in Europe and
the strength of the U.S. dollar versus the Japanese yen led to improved customer
flow and secondary trading results across most fixed income products, including
fixed income swaps, mortgages and high grade and high yield corporate bonds.
Investment banking revenues, as a component of fixed income revenues, increased
to $63 million for 1996 from $22 million for 1995 due to a strengthening in
origination volumes and an improved mix of underwriting revenues.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Equity. Equity net revenues reflect customer flow activities (both
institutional and high-net-worth retail), secondary trading, equity
underwriting, equity finance and arbitrage activities. The Company's equity net
revenues increased 16% to $118 million for 1996 from $102 for 1995 primarily due
to improved customer flow trading activities including the NASDAQ and
convertible securities businesses. Investment banking revenues, as a component
of equity revenues, increased to $41 million for 1996 from $20 million for 1995
due to a strengthening in origination volumes and an improved mix of
underwriting revenues.
Corporate Finance Advisory. Corporate finance advisory net revenues,
classified in the Consolidated Statement of Operations as a component of
investment banking revenues, result primarily from fees earned by the Company in
its role as strategic advisor to its clients. This role primarily consists of
advising clients on mergers and acquisitions, divestitures, leveraged buyouts,
financial restructuring, and a variety of cross-border transactions. The net
revenues for corporate finance advisory were $40 million in 1996 and $39 million
in 1995. The first quarter 1996 results, however, were below the fourth quarter
1995 results due primarily to the timing of certain merger and acquisition fees.
Merchant Banking. The Company is the fund manager for four merchant
banking partnerships, including three institutional funds and one employee
investment vehicle. Current merchant banking investments held by the
partnerships include both publicly traded and privately held companies
diversified on a geographic and industry basis. At February 29, 1996 the
Company's investment in such merchant banking partnerships, for which
the Company acts as a general partner, was $86 million.
There are no remaining commitments to these partnerships.
Merchant banking net revenues primarily represent the Company's
proportionate share of net realized and net unrealized gains and losses from the
sale and revaluation of investments held by the partnerships. Such amounts are
classified in the Consolidated Statement of Operations as a component of
investment banking revenues. Merchant banking net revenues also reflect the
related net interest expense relating to the financing of the Company's
investment in the partnerships. Merchant banking revenues for the first quarter
of 1996 were $6 million versus $29 million for the first quarter of 1995,
reflecting a decrease in the net gains resulting from the Company's investment
within the partnerships.
Asset Management. Revenues from asset management activities increased
to $9 million for 1996 from $5 million for 1995. These revenues primarily
consist of fees from the management of various funds, commissions from the sale
of funds to customers and fees from the management of certain accounts for
institutions and high-net-worth individuals.
Non-Interest Expenses. Non-interest expenses were $529 million for the
first quarter of 1996 and $449 million for the first quarter of 1995.
Compensation and benefits expense was $314 million for the first quarter of 1996
and $180 million for the first quarter of 1995 consistent with higher levels of
business activities in the current year quarter.
Non-compensation and benefits expenses were $215 million for 1996 and
$269 million for 1995. Non-compensation and benefits expenses in 1996 and 1995
includes management fees of $24 million and $52 million, respectively, which
have been allocated by Holdings to the Company.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Holdings' $300 million cost reduction program originally announced at
year-end 1994 was completed by year-end 1995. The Company's expense base was
permanently lowered as a result of Holdings' cost reduction efforts. Holdings'
plans to continue to focus on reducing its nonpersonnel costs with the goal of
achieving further annual cost savings in excess of $50 million by the end of
1996.
Income Taxes. The Company's income tax provision was $33 million for
the first quarter of 1996 as compared to a tax benefit of $3 million for the
first quarter of 1995. The effective tax rate was 42% for the first quarter of
1996. The 1996 rate reflects the increase in pretax earnings. The 1995 effective
tax rate is not meaningful due to low pretax income and benefits attributable to
income subject to preferential tax treatment.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's total assets increased to $97.3 billion at February 29, 1996 from
$82.6 billion at November 30, 1995. The increase in total assets is primarily
attributable to an increase in receivables, securities purchased under
agreements to resell (reverse repos) and government and agency inventory
positions.
The Company's balance sheet is highly liquid and consists primarily of cash and
cash equivalents, securities and other financial instruments owned which are
marked-to-market daily and collateralized short-term financing agreements which
arise primarily from the Company's customer flow securities transactions. As the
Company's primary activities are based on customer flow transactions, the
Company experiences a rapid asset turnover rate. In addition, the highly liquid
nature of these assets provides the Company with flexibility in financing and
managing its business. The overall size of the Company's total assets and
liabilities fluctuates from time to time and at specific points in time (such as
calendar quarter ends) may be higher than fiscal quarter ends.
Funding and Capital Policies
Holdings' Global Asset and Liability Committee ("ALCO"), which includes senior
officers from key areas of the Company, is responsible for establishing and
managing the funding and liquidity policies of the Company. This includes
recommendations for balance sheet size as well as the allocation of balance
sheet to product areas as determined by internal profitability models and return
on equity targets. The primary goal of the Company's funding principles as set
by ALCO are to provide sufficient liquidity and availability of funding sources
throughout all market environments.
As a policy, the Company attempts to maintain sufficient capital and funding to
finance itself on a fully secured basis, through its liquidity contingency plan.
This liquidity contingency plan meets the Company's funding requirements through
a combination of collateralized short-term financings and short-term secured
debt, as well as Total Capital, defined as long-term debt, including both senior
notes and subordinated indebtedness, plus stockholder's equity. To achieve this
objective, the Company's liquidity policies include maintaining sufficient
excess unencumbered securities to use as collateral to obtain secured financing,
if necessary, to meet maturities of short-term unsecured liabilities as well as
current maturities of long-term debt. Also, the Company maintains a sufficient
amount of Total Capital to enable the Company to fund those assets which are
less liquid.
The Company's liquidity contingency plans are continually reviewed and updated
as the Company's asset/liability mix and liquidity requirements change.
Additionally, the Company periodically tests its secured and unsecured credit
facilities to ensure availability and operational readiness. The Company's
liquidity and Total Capital policies are designed to ensure that the Company can
meet its funding needs over a wide range of economic, credit and market
environments. The Company met all liquidity and Total Capital policy
requirements at February 29, 1996.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Short-Term Funding
Each business is required to fund its products primarily through global
collateralized financings. There are two principal business areas which are
responsible for these efforts, Lehman Brothers' Fixed Income Financing
("Financing") and Equity Finance. Financing works in conjunction with the
institutional fixed income sales and trading professionals to provide financing
to customers and the Company through the repurchase markets. Equity Finance
provides a similar function in the equity markets typically through securities
loaned/securities borrowed transactions. The ability of the Company to leverage
its global market expertise and the distribution capabilities are key to a
successful financing effort. The amount of the Company's collateralized
borrowing activities will vary reflecting changes in the mix and overall levels
of securities and other financial instruments owned and global market
conditions. However, at all times, the majority of the Company's assets are
funded with collateralized borrowing sources.
The Company's treasury area works closely with Financing and Equity Finance to
develop funding plans to support the business areas, as well as to execute daily
funding activities. On a daily basis, treasury is responsible for meeting any
funding needs not met through Financing and Equity Finance. Treasury funding is
managed globally through regional centers which have access to the capital
markets though the issuance of commercial paper as well as bank lines of credit
and other short- and long-term debt instruments.
At February 29, 1996 and at November 30, 1995, $64 billion and $56 billion
respectively, of the Company's total balance sheet was financed using
collateralized borrowing sources. The remainder of the financing for the balance
sheet was comprised of short-term debt, payables and Total Capital. As of
February 29, 1996 and November 30, 1995, short-term debt was $0.9 billion and
$1.0 billion, respectively. On February 29, 1996 and November 30, 1995, there
was no commercial paper outstanding.
The Company maintains uncommitted lines of credit with a broad range of banks
and financial institutions from which it draws funds in a variety of currencies.
Uncommitted lines consist of facilities that the Company has been advised are
available but for which no contractual lending obligations exist.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Total Capital
Long-term assets are financed with Total Capital. The Company maintains Total
Capital in excess of its long-term assets to provide additional liquidity, which
the Company uses to meet its short-term funding requirements and to reduce its
reliance on commercial paper and short-term debt.
At February 29, 1996 and November 30, 1995, Total Capital consisted of the
following:
<TABLE>
<CAPTION>
February 29, November 30,
1996 1995
<S> <C> <C>
Long-term debt:
Senior notes ................................ $ 379 $ 420
Subordinated indebtedness ................... 3,279 3,077
------ ------
3,658 3,497
------ ------
Stockholder's equity:
Common equity ............................... 1,963 2,028
------ ------
Total Capital .................................... $5,621 $5,525
====== ======
</TABLE>
During the three months ended February 29, 1996, the Company issued $200 million
in long-term debt, which was $156 million in excess of its maturing debt. These
issuances were primarily utilized to refinance current and prefund expected
maturities of long term debt in 1996.
At February 29, 1996, the Company had approximately $825 million available for
issuance of debt securities under various shelf registrations.
The Company's common stockholder's equity decreased by $65 million to $1,963
million at February 29, 1996 from $2,028 million at November 30, 1995 due to the
payment of dividends to Holdings partially offset by the retention of earnings.
Dependence on Credit Ratings
The Company, like other companies in the securities industry, relies on external
sources to finance a significant portion of its day-to-day operations. Access to
global capital markets for short-term financing, such as commercial paper and
short-term debt, senior notes and subordinated indebtedness are dependent on the
Company's short- and long-term debt ratings. The current short- and long-term
senior and subordinated ratings of the Company are as follows:
LBI
Short-term Long-term**
Duff & Phelps Credit Rating Co. ................. D-1 A/A-
Fitch Investors Service Inc. .................... F-1 A/A-
IBCA ............................................ A1 A/A-
Moody's ......................................... P2 A3*/Baa1
S&P + ........................................... A-1 A+*/A
Thomson BankWatch ............................... TBW-1 A/A-
* Provisional ratings on shelf registration
** Senior/subordinated
+ Long term ratings outlook revised to negative on September 21, 1994
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 February 29, 1996 and
November 30, 1995 included long positions with an aggregate market value of
approximately $1.0 billion and $940 million, respectively, and short positions
with an aggregate market value of approximately $103 million and $72 million,
respectively. The portfolio may from time to time contain concentrated holdings
of selected issues. The Company's largest high yield position was $58 million
and $47 million at February 29, 1996 and at November 30, 1995, respectively.
Westinghouse. In May 1993, the Company and Westinghouse Electric
Corporation ("Westinghouse") entered into a partnership to facilitate the
disposition of Westinghouse's commercial real estate portfolio, valued at
approximately $1.1 billion, to be accomplished substantially through
securitizations, asset sales and mortgage remittances. The Company's original
investment in the partnership was approximately $136 million. The Company also
advanced approximately $750 million of financing to the partnership in 1993,
which has subsequently been repaid in its entirety from proceeds related to the
disposition of the real estate assets. In August 1995, the Company agreed to
purchase the partnership interests owned by Westinghouse. The Company also
entered into an agreement to sell a portion of its partnership interests to an
affiliate of Lennar Inc., a third party mortgage servicer, so that the Company
and Lennar Inc. would own 75% and 25%, respectively, of the partnership. The
Company's net investment in the partnership at February 29, 1996 is $120
million. As a result of its increased ownership percentage, the Company's
consolidated financial statements at February 29, 1996 include the accounts of
the partnership. The partnership expects to substantially liquidate the
remaining real estate assets by the end of 1996.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 billion of partnership investment
capital and manage the remaining real estate investment portfolio. At February
29, 1996, the Company had $28 million of commitments and contingent liabilities
under guarantees and credit enhancements, 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.
Non-core activities and investments have declined 53% since November
30, 1995. Management's intention with regard to noncore assets is the prudent
liquidation of these investments as and when possible.
<PAGE>
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.
Macmillan, Inc. v. Bishopsgate Investment Trust, Shearson Lehman Brothers
Holdings Plc. et al. (Reported in LBI's Annual Report on Form 10-K)
The House of Lords has denied Macmillan's request for leave to appeal.
Sinochem (USA) Inc. v. Lehman Brothers Inc. et al. (Reported in LBI's Annual
Report on Form 10-K)
Prior to the filing of defendants' answer and counterclaims, the
parties settled this dispute. The case has been dismissed.
Leetate Smith. et al. v. Merrill Lynch . et al. (Reported in LBI's Annual Report
on Form 10-K)
On September 28, 1995, a class action complaint was filed in the
Superior Court for the State of California in Orange County (the "State Court
Complaint"). The State Court Complaint was brought purportedly on behalf of the
same class as the complaint filed in the federal court and asserts the same
claims, except that it does not include a claim under Section 10(b) of the
Exchange Act of 1934. Certain of the defendants, including LBI, (the "Settling
Defendants") have reached separate agreements in principle to settle all claims,
which will be subject to court approval; and the parties are documenting those
settlements. Plaintiffs have agreed to adjourn the Settling Defendants time to
answer or respond to the State Court Complaint indefinitely. The plaintiffs have
subsequently voluntarily dismissed the action in federal court.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS (Continued)
Actions Relating to First Capital Holdings Inc. (Reported in LBI's Annual Report
on Form 10-K)
American Express Shareholder Action and American Express Derivative
Action. On March 14, 1996, the parties executed a Stipulation of Settlement to
resolve both cases. On March 16, the plaintiffs proceeded to obtain court
approval of that settlement by filing with the court a motion for an order
preliminarily approving the settlement.
Easton & Co. v. Mutual Benefit Life Insurance Co., et al.; Easton & Co. v.
Lehman Brothers Inc. (Reported in LBI's Annual Report on Form 10-K)
On or about March 1, 1996, LBI entered into a Stipulation of Settlement
covering both Easton I and Easton II. The settlement is subject to approval by
the N.J. District Court. In connection with the settlement, the class in Easton
II is to be expanded to include purchasers of one of the fixed-rate bond issues
(the "Banyan Bay" bonds), who purchased their bonds between March 28, 1991 and
April 18, 1991, and who still held those bonds as of July 16, 1991.
Warren D. Chisum, et al. v. Lehman Brothers Inc. et al.
On February 28, 1994 a purported class action was filed in the United
States District Court for the Northern District of Texas. An amended complaint
was filed on December 15, 1994. The amended complaint names LBI and two former
EFH employees as defendants. The complaint alleges that defendants violated
Section 10(b) of the Exchange Act and RICO, breached their fiduciary duties and
the limited partners' contract and committed fraud in connection with the
origination, sale and operation of nine EFH net lease real estate limited
partnerships. Plaintiffs seek: (i) to certify a class of all persons who
purchased limited partnership interests in the nine partnerships at issue, (ii)
unspecified damages, plus interest or rescission, (iii) treble damages, (iv)
punitive damages and (v) accounting and attorneys' fees. On April 2, 1996 the
Court filed an opinion and order certifying the litigation as a class action,
consisting of all persons who purchased interests in the nine EFH net lease
limited partnerships.
Actions Relating to the Sales and Marketing of Limited Partnerships
Subsequent to a January 26, 1996 article in the Wall Street Journal
entitled "SEC, Brokers Study Pact on Partnerships," various putative class
actions were filed in different state courts relating to the sales and marketing
of limited partnerships by E.F. Hutton & Co. and Shearson and their affiliates
during the 1980's.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS (Continued)
Under the terms of an agreement between American Express and Holdings,
American Express has agreed to indemnify Holdings for liabilities which it may
incur in connection with any action relating to any business conducted by The
Balcor Company, a former Lehman Brothers subsidiary ("Balcor") in which Holdings
is named as a parent company or control person of Balcor. Holdings believes that
some of the allegations in certain of the actions described below are covered by
this indemnity.
Nancy Sword, et al. v. Lehman Brothers Holdings, Inc., et al. On
February 6, 1996, a purported class action apparently asserted on behalf of all
persons (with certain exceptions) who invested in the various limited
partnerships, was filed in the Circuit Court for the City of Baltimore,
Maryland. The complaint names Holdings, E.F. Hutton & Company, Inc. and two
limited partnerships as defendants. The complaint alleges claims for fraud,
negligent misrepresentation, breach of fiduciary duty, unjust enrichment,
conversion and an accounting based on purportedly false and misleading sales
practices employed by the defendants to promote investments in the limited
partnerships. On March 21, 1996, the defendants removed the action to the United
States District Court for the District of Maryland. The complaint seeks (i)
class certification; (ii) unspecified compensatory damages; (iii) punitive
damages; (iv) disgorgement or restitution; and (v) attorneys' fees.
Ronald Ressner, et al. v. Lehman Brothers Inc., et al. On March 7,
1996, a purported class action, asserted on behalf of all persons (with certain
exceptions) who invested in limited partnerships sold by LBI or its predecessors
between January 1, 1984 and the date of the complaint, was filed in the Court of
Chancery for New Castle County, Delaware. The complaint names LBI and the
general partners of certain limited partnerships as defendants. The complaint
alleges that the defendants breached fiduciary duties by, among other things,
using false and misleading sales practices to promote investments in limited
partnerships. The complaint seeks (i) class certification; (ii) a declaration
that defendants breached their fiduciary duties; (iii) other equitable relief;
and (iv) attorneys' fees.
Lawrence Green, et al. v. Lehman Brothers, Inc., et al. On March 29,
1996, a purported class action, asserted on behalf of all persons (with certain
exceptions) who invested in limited partnerships organized and offered by LBI or
its predecessors between January 1, 1982 and the date of the complaint, was
filed in the Court of Chancery for New Castle County, Delaware. The complaint
names LBI, American Express and the general partners of certain limited
partnerships as defendants. The complaint alleges that the defendants breached
fiduciary duties by, among other things, using false and misleading sales
practices to promote investments in limited partnerships. The complaint seeks
(i) class certification; (ii) a declaration that defendants breached their
fiduciary duties; (iii) other equitable relief; and (iv) attorneys' fees.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS (Continued)
Raymond Masri v. Lehman Brothers, Inc. et al. On or about February 28,
1996, a purported class action, asserted on behalf of all persons (with certain
exceptions) who invested in limited partnerships organized and offered by LBI or
its predecessors or certain affiliates between January 1981 and the date of the
complaint, was filed in the Supreme Court of the State of New York, New York
County. The complaint names LBI, Smith Barney Holdings Inc., twenty-six
Balcor-originated limited partnerships and three Shearson-originated limited
partnerships as defendants. The complaint alleges claims for fraud, negligent
misrepresentation, breach of fiduciary duty and breach of the implied covenant
of good faith and fair dealing under customer agreements and limited partnership
agreements based on purportedly false and misleading sales practices employed by
the defendants to promote investments in limited partnerships. The complaint
seeks (i) class certification; (ii) unspecified compensatory damages; (iii)
punitive damages; (iv) disgorgement or restitution; and (v) attorneys' fees.
<PAGE>
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
<PAGE>
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 15, 1996 By /s/ Richard S. Fuld, Jr.
---------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: April 15, 1996 By /s/ Charles B. Hintz
-----------------------
Charles B. Hintz
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
Exhibit 12. Computation in Support of Ratio of Earnings to Fixed Charges
Exhibit 27. Financial Data Schedule
<PAGE>
Exhibit 12
<PAGE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS INC. and SUBSIDIARIES
COMPUTATION in SUPPORT of RATIO of EARNINGS to FIXED CHARGES
(Dollars in millions)
For the Year Ended Ended Ended Ended
Ended December 31, November 30, November 30, February 29,
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest expense:
Subordinated indebtedness ............. $ 231 $ 210 $ 192 $ 184 $ 204 $ 52
Bank loans and other
borrowings* ......................... 4,068 4,363 4,393 5,661 9,750 2,940
Interest component of
rentals of office and
equipment ............................ 64 64 62 27 25 5
other adjustments*** 88 127 101 53 2
TOTAL (A) ............................. $ 4,451 $ 4,764 $ 4,748 $ 5,925 $ 9,981 $ 2,997
======= ======= ======= ======= ======= =======
Earnings:
Pre-tax income (loss) from
continuing operations ................. $ 283 $ 319 $ (146) $ 1 $ 78 $ 78
Fixed charges ........................... 4,451 4,764 4,748 5,925 9,981 2,997
Other adjustments*** .................... (69) (68) (68) (52) (1)
TOTAL (B) ............................. $ 4,665 $ 5,015 $ 4,534 $ 5,874 $10,058 $ 3,075
======= ======= ======= ======= ======= =======
(B / A) ................................... 1.05 1.05 **** **** 1.01 1.01
* 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 $214 million in 1993 and $51 million in 1994 in
order to cover the deficiencies.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at February 29, 1996 (Unaudited)
and the Consolidated Statement of Operations for the three months ended February
29, 1996 (Unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 1,037
<RECEIVABLES> 16,614
<SECURITIES-RESALE> 32,143
<SECURITIES-BORROWED> 14,646
<INSTRUMENTS-OWNED> 32,120
<PP&E> 317
<TOTAL-ASSETS> 97,257
<SHORT-TERM> 879
<PAYABLES> 13,647
<REPOS-SOLD> 47,315
<SECURITIES-LOANED> 3,618
<INSTRUMENTS-SOLD> 12,683
<LONG-TERM> 3,658
<COMMON> 0
0
0
<OTHER-SE> 1,963
<TOTAL-LIABILITY-AND-EQUITY> 97,257
<TRADING-REVENUE> 299
<INTEREST-DIVIDENDS> 3,059
<COMMISSIONS> 81
<INVESTMENT-BANKING-REVENUES> 152
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 2,992
<COMPENSATION> 314
<INCOME-PRETAX> 78
<INCOME-PRE-EXTRAORDINARY> 45
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
