SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-6817
Lehman Brothers Inc.
(Exact Name of Registrant As Specified In Its Charter)
Delaware 13-2518466
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
3 World Financial Center
New York, New York 10285
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 526-7000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
The Registrant meets the conditions set forth in General Instructions H 1 (a)
and (b) of Form 10-Q and therefore is filing this form with the reduced
disclosure format contemplated thereby.
As of July 11, 1997 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 MAY 31, 1997
INDEX
Part I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements - (unaudited)
Consolidated Statement of Operations -
Three and Six Months Ended May 31, 1997
and 1996 .................................... 3
Consolidated Statement of Financial Condition -
May 31, 1997 and November 30, 1996 ............ 5
Consolidated Statement of Cash Flows -
Six Months Ended May 31, 1997
and 1996 .................................... 7
Notes to Consolidated Financial Statements....... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ................................ 26
Item 6. Exhibits and Reports on Form 8-K ............ 27
Signatures.................................................................. 28
EXHIBIT INDEX ..................................................... 29
Exhibits
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions)
Three months ended
May 31 May 31
1997 1996
------------- ---------
Revenues
Principal transactions $ 158 $ 287
Investment banking 210 182
Commissions 74 77
Interest and dividends 2,954 2,555
Other 9 6
-------- --------
Total revenues 3,405 3,107
Interest expense 2,850 2,492
----- -----
Net revenues 555 615
------ ------
Non-interest expenses
Compensation and benefits 259 303
Brokerage, commissions and 55 52
clearance fees
Communications 22 24
Professional services 22 21
Business development 18 18
Occupancy and equipment 16 17
Depreciation and amortization 13 13
Management fees 16 20
Other 48 52
------- -------
Total non-interest expenses 469 520
------ ------
Income before taxes 86 95
Provision for income taxes 27 40
------- -------
Net income $ 59 $ 55
======= =======
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of OPERATIONS
(Unaudited)
(In millions)
Six months ended
May 31 May 31
1997 1996
Revenues
Principal transactions $ 384 $ 578
Investment banking 402 342
Commissions 157 158
Interest and dividends 5,885 5,083
Other 17 14
------- -------
Total revenues 6,845 6,175
Interest expense 5,669 4,953
----- -----
Net revenues 1,176 1,222
----- -----
Non-interest expenses
Compensation and benefits 619 617
Brokerage, commissions and
clearance fees 105 99
Communications 44 50
Professional services 43 38
Business development 35 38
Occupancy and equipment 32 37
Depreciation and amortization 26 27
Management fees 31 44
Other 86 99
------- -------
Total non-interest expenses 1,021 1,049
----- -----
Income before taxes 155 173
Provision for income taxes 49 73
------ -------
Net income $ 106 $ 100
====== ======
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
May 31 November 30
ASSETS 1997 1996
--------------- -----------
<S> <C> <C>
Cash and cash equivalents $ 215 $ 396
Cash and securities segregated and on deposit
for regulatory and other purposes 806 663
Securities and other financial instruments owned:
Governments and agencies 18,519 21,251
Corporate stocks 3,349 3,164
Corporate debt and other 4,999 4,739
Derivatives and other contractual agreements 5,107 5,298
Mortgages and mortgage-backed 2,390 2,055
Certificates of deposit and other money market instruments 3,332 3,819
------- -------
37,696 40,326
------ ------
Collateralized short-term agreements:
Securities purchased under agreements to resell 42,884 33,145
Securities borrowed 20,901 19,035
Receivables:
Brokers, dealers and clearing organizations 3,284 4,909
Customers 3,764 3,956
Others 5,181 4,611
Property, equipment and leasehold improvements
(net of accumulated depreciation and amortization
of $521 in 1997 and $502 in 1996) 270 283
Deferred expenses and other assets 216 214
Excess of cost over fair value of net assets
acquired (net of accumulated amortization
of $97 in 1997 and $94 in 1996) 163 166
----------- -----------
Total assets $115,380 $107,704
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT of FINANCIAL CONDITION - (Continued)
(Unaudited)
(in millions, except per share data)
<TABLE>
<CAPTION>
May 31 November 30
LIABILITIES AND STOCKHOLDER'S EQUITY 1997 1996
<S> <C> <C>
Commercial paper and short-term debt $ 1,760 $ 2,299
Securities and other financial instruments sold but not yet purchased:
Governments and agencies 12,404 9,326
Corporate stocks 3,336 1,143
Corporate debt and other 3,250 2,735
Derivatives and other contractual agreements 4,017 4,662
-------- -------
23,007 17,866
------ ------
Collateralized short-term financing:
Securities sold under agreements to repurchase 49,978 52,200
Securities loaned 13,679 10,085
Advances from Holdings and other affiliates 11,646 8,552
Payables:
Brokers, dealers and clearing organizations 2,259 2,200
Customers 5,041 6,395
Accrued liabilities and other payables 1,913 2,250
Long-term debt:
Senior notes 222 215
Subordinated indebtedness 4,048 3,950
--------- ---------
Total liabilities 113,553 106,012
------- -------
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 1997 and 1996;
Additional paid-in capital 1,858 1,828
Foreign currency translation adjustment 3 3
Accumulated deficit (34) (139)
------------- ------------
Total stockholder's equity 1,827 1,692
----------- -----------
Total liabilities and stockholder's equity $115,380 $107,704
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Six months ended
May 31 May 31
1997 1996
--------------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 106 $ 100
Adjustments to reconcile income to net cash provided by
(used in) operating activities:
Depreciation and amortization 26 27
Provisions for losses and other reserves 19 21
Deferred tax benefit (24)
Other adjustments 7 11
Net change in:
Cash and securities segregated (143) 255
Securities and other financial instruments owned 2,630 (231)
Securities purchased under agreements to resell (9,739) (6,122)
Securities borrowed (1,866) (2,728)
Receivables from brokers, dealers and clearing
organizations 1,625 (690)
Receivables from customers 192 (2,218)
Securities and other financial instruments sold but
not yet purchased 5,141 445
Securities sold under agreements to repurchase (2,222) 9,933
Securities loaned 3,594 3,824
Payables to brokers, dealers and clearing organizations 59 (981)
Payables to customers (1,354) (288)
Accrued liabilities and other payables (356) 116
Other operating assets and liabilities, net (554) (4,477)
------- ------
Net cash used in operating activities $(2,859) $(3,003)
------- -------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS -- (Continued)
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Six months ended
May 31 May 31
1997 1996
--------------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Principal payments of senior notes $ (146)
Proceeds from issuance of subordinated indebtedness $ (409) 775
Principal payments of subordinated indebtedness 508 (261)
Net (payments for) proceeds from commercial paper and
short-term debt (539) 3,768
Increase (decrease) in advances from Holdings
and other affiliates 3,094 (1,044)
Capital contributions 48
Dividends and capital distributions paid (18) (123)
------ ------
Net cash provided by financing activities 2,684 2,969
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment and
leasehold improvements (6) (3)
-------- --------
Net cash used in investing activities (6) (3)
-------- --------
Net change in cash and cash equivalents (181) (37)
------ ------
Cash and cash equivalents, beginning of period 396 287
------ ------
Cash and cash equivalents, end of period $ 215 $ 250
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in millions)
Interest paid totaled $5,676 and $4,883 for the six months ended
May 31, 1997 and 1996, respectively. Income taxes paid totaled $307 and $17 for
the six months ended May 31, 1997 and 1996, respectively.
</TABLE>
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
(collectively, 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. 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, 1996 was derived from the audited financial
statements. It is recommended that these consolidated financial statements be
read in conjunction with the audited consolidated financial statements included
in the Company's Annual Report on Form 10-K for the twelve months ended November
30, 1996 (the "Form 10-K").
The nature of the Company's business is such that the results of any
interim period may vary significantly from quarter to quarter and may not be
indicative of the results to be expected for the fiscal year. Certain prior
period amounts reflect reclassifications to conform to the current period's
presentation.
2. Long-Term Debt:
During the six months ended May 31, 1997, the Company issued $508
million of fixed-rate subordinated indebtedness with maturities ranging from
1998 to 2007. Of the total issuances for the first half of 1997, $300 million
was fixed rate and $208 million was floating rate. The Company's fixed rate
issuances have been effectively converted to floating rate obligations, based on
the London Interbank Offered Rates ("LIBOR") through the use of interest rate
swaps. In addition, $409 million of long-term debt matured during the six months
ended May 31, 1997.
3. Capital Requirements:
As a registered broker-dealer, LBI is subject to SEC Rule 15c3-1, the
Net Capital Rule, which requires LBI to maintain net capital of not less than
the greater of 2% of aggregate debit items arising from customer transactions,
as defined, or 4% of funds required to be segregated for customers' regulated
commodity accounts, as defined. At May 31, 1997, LBI's regulatory net capital,
as defined, of $1,619 million exceeded the minimum requirement by $1,515
million.
The Company's triple-A rated derivatives subsidiary, Lehman Brothers
Financial Products Inc. ("LBFP"), has established certain capital and operating
restrictions which are reviewed by various rating agencies. At May 31, 1997,
LBFP had capital which exceeded the requirement of the most stringent rating
agency by $100 million.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
4. Derivative Financial Instruments:
In the normal course of business, the Company enters into derivative
transactions both in a trading capacity and as an end user. Acting in a trading
capacity, the Company enters into derivative transactions to satisfy the needs
of its clients and to manage the Company's own exposure to market and credit
risks resulting from its trading activities in cash instruments (collectively,
"Trading-Related Derivative Activities"). For a further discussion of the
Company's derivative related activities, refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Off-Balance Sheet
Financial Instruments and Derivatives" and Note 8 to the Consolidated Financial
Statements, included in the Form 10-K.
Trading-Related Derivative Activities
The Company records its Trading-Related Derivative Activities on a
mark-to-market basis with realized and unrealized gains (losses) recognized in
principal transactions in the Consolidated Statement of Operations. The Company
records unrealized gains and losses on derivative contracts on a net basis in
the Consolidated Statement of Financial Condition for those transactions with
counterparties executed under a legally enforceable master netting agreement.
Listed in the following table is the fair value and average fair value of the
Company's Trading-Related Derivative Activities (in millions):
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Six Months Ended
May 31, 1997 May 31, 1997
------------ ------------
Assets Liabilities Assets Liabilities
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $3,957 $2,696 $4,178 $2,687
Foreign exchange forward contracts and options 745 1,000 830 1,312
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 207 245 214 211
Equity contracts (including equity swaps, warrants
and options) 141 60 124 44
Commodity contracts (including swaps, forwards,
and options) 57 16 41 25
-------------------------------------------------------
Total $5,107 $4,017 $5,387 $4,279
-------------------------------------------------------
</TABLE>
* Amounts represent carrying value (exclusive of collateral) of contracts and do
not include receivables or payables related to exchange-traded futures
contracts.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Average Fair Value*
Fair Value* Twelve Months Ended
November 30, 1996 November 30, 1996
----------------- -----------------
(in millions) Assets Liabilities Assets Liabilities
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate and currency swaps and options
(including caps, collars and floors) $3,943 $3,159 $3,336 $1,917
Foreign exchange forward contracts and options 834 1,089 668 1,118
Options on other fixed income securities,
mortgage-backed securities forward contracts
and options 221 248 236 237
Equity contracts (including equity swaps, warrants
and options) 254 127 233 74
Commodity contracts (including swaps, forwards,
and options) 46 39 51 50
------------------------------------------------------
Total $5,298 $4,662 $4,524 $3,396
-----------------------------------------------------
</TABLE>
* Amounts represent carrying value (exclusive of collateral) of contracts and do
not include receivables or payables related to exchange-traded futures
contracts.
Assets included in the table above primarily represent the Company's
unrealized gains, net of unrealized losses for situations in which the Company
has a master netting agreement. Similarly, liabilities represent net amounts
owed to counterparties. Therefore, the fair value of assets related to
derivative contracts at May 31, 1997 represents the Company's net receivable for
derivative financial instruments before consideration of collateral. Included
within the $5,107 million fair value of assets at May 31, 1997 was $4,909
million related to swaps and OTC contracts and $198 million related to
exchange-traded option and warrant contracts.
With respect to OTC contracts, the Company's views its net credit
exposure to be $3,376 million at May 31, 1997, representing the fair value of
the Company's OTC contracts in an unrealized gain position, after consideration
of collateral of $1,533 million. Presented below is an analysis of the Company's
net credit exposure for OTC contracts based upon internal designations of
counterparty credit quality.
Counterparty S&P/Moody's May 31, 1997
Risk Rating Equivalent Net Credit
Exposure
1 AAA/Aaa 21%
2 AA-/Aa3 or higher 19%
3 A-/A3 or higher 49%
4 BBB-/Baa3 or higher 6%
5 BB-/Ba3 or higher 4%
6 B+/B1 or lower 1%
- - --------------------------------------------------------------------------------
These designations are based on actual ratings made by external rating
agencies or by equivalent ratings established and utilized by the Company's
Corporate Credit Department.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is also subject to credit risk related to its
exchange-traded derivative contracts. Exchange-traded contracts are transacted
directly on the exchange. To protect against the potential for a default, all
exchange clearing houses impose net capital requirements for their membership.
Additionally, the exchange clearing house requires counterparties to futures
contracts to post margin upon the origination of the contract and for any
changes in the market value of the contract on a daily basis (certain foreign
exchanges extend settlement to three days). Therefore, the potential for losses
from exchange-traded products is limited.
5. Other Commitments and Contingencies:
In the normal course of its business, the Company has been named a
defendant in a number of lawsuits and other legal proceedings. After considering
all relevant facts, available insurance coverage and the advice of outside
counsel, in the opinion of the Company such litigation will not, in the
aggregate, have a material adverse effect on the Company's consolidated
financial position or results of operations.
As a leading global investment bank, risk is an inherent part of all of
the Company's businesses and activities. The extent to which the Company
properly and effectively identifies, assesses, monitors and manages each of the
various types of risks involved in its trading (including derivatives),
brokerage, and investment banking activities is critical to the success and
profitability of the Company. The principal types of risks involved in the
Company's activities are market risk, credit or counterparty risk, and
transaction risk. Management has developed a control infrastructure to monitor
and manage each type of risk on a global basis throughout the Company. For
further discussion of these matters, refer to Note 10 to the Consolidated
Financial Statements, in the Form 10-K.
6. 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 six months ended May 31, 1997, the Company paid $18 million
to Holdings as a return of capital.
7. Incentive Plans:
In the first quarter of 1997, Holdings granted approximately 2.3
million options (the "1997 Options") under the 1996 Management Ownership Plan to
members of the Corporate Management Committee and to certain senior officers.
The 1997 Options become exercisable in four and one-half years and expire five
years after grant date; exercisability is accelerated ratably in one-third
increments at such time as the closing price of Holdings' common stock meets, or
exceeds, $39, $42, and $45 for fifteen out of twenty consecutive trading days.
No compensation expense has been recognized for these stock options as they were
issued with an exercise price above the market price of the common stock on the
date of the grant.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Severance Charge:
Holdings recorded an $84 million severance charge ($50 million
aftertax) in the fourth quarter of 1996 related to certain strategic actions
taken to improve ongoing profitability. The 1996 severance charge reflected the
culmination of a worldwide business unit economic performance review which was
undertaken in the fourth quarter of 1996 to focus the Company on its core
investment banking, equity and fixed income sales and trading areas. This
formalized review resulted in personnel reductions of approximately 270 people
across a number of underperforming fixed income and equity businesses, including
exiting the precious metals business in the U.S., Europe and Asia; exiting
energy trading in the U.S. and Europe; consolidating Asian fixed income risk
management activities into one center in Tokyo; refocusing foreign exchange
trading activities and combining the Company's New York Private Client Services
offices. Additionally, the charge reflects various other strategic personnel
reductions which were aimed at delayering management. The Holdings severance
charge is expected to lead to personnel cost savings beginning in fiscal 1997 of
$90 million annually. Holdings charge is also expected to result in a permanent
decrease in nonpersonnel expenses of approximately $20 million annually.
Holdings intends to reinvest substantially all these savings into certain
businesses to expedite the Holdings' strategic initiatives; these actions are
expected to result in improved operating revenues.
The Company recorded a $23 million severance charge ($14 million
aftertax) in the fourth quarter of 1996 related to these actions. The
Company's cash outlays relating to the charge were approximately $12
million in the fourth quarter of 1996 and approximately $11 million during the
first six months of 1997.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business Environment
Market conditions in the first half of 1997 reflected record corporate
advisory activities, strong underwriting volumes in worldwide fixed income
products, and generally active trading activities in worldwide debt and equity
markets. These favorable conditions were mitigated in part by significantly
reduced equity underwriting volumes and increased volatility in the foreign
exchange markets, particularly in Europe and Asia.
Global fixed income markets were robust throughout most of the first
quarter of 1997, with heavy trading volumes in both the U.S. and Europe.
Trading activity in the U.S. continued to reflect investor optimism that the
environment of sustained growth and low inflation levels would continue.
Additionally, U.S. trading activity was bolstered by active purchases of U.S.
securities by foreign investors due to the favorable U.S. macroeconomic
environment and the strong dollar. In late March 1997, a strong pattern of
growth in the U.S. economy prompted the Federal Reserve to raise the
Federal Funds rate by 25 basis points to 5 1/2%. This rate hike precipitated
a general decline in trading volumes and origination activities in the U.S.
fixed income market.
Rising interest rates and fears of additional rate hikes by the Federal
Reserve continued to depress U.S. trading and origination activities through
March and into April. However, by mid-April, economic data reinforced the view
that U.S. interest rates would remain stable as GDP growth decelerated and
inflation indicators remained low. This led to a recovery of the U.S. fixed
income markets in late April as interest rates began to decline and trading
volumes regained strength. This recovery further accelerated in May and into
June, with interest rates on the 30-year U.S. Treasury declining to 6.65% on
June 20, 1997 from a peak of 7.17% on April 11th.
Trading activities in worldwide equity markets continued to show
strength in 1997. U.S. trading volumes improved over prior year record levels,
as investor demand remained strong and the equity markets benefited from
increasing capital flows. The U.S. equity markets, while experiencing a
correction in the second quarter, continued to show strength surpassing prior
year valuation levels. The trough in the S&P 500 was also on April 11 when the
index reached 738; the U.S. stock market is up more than 20% since then.
European equity markets saw improved trading volumes and valuations in 1997,
despite a valuation adjustment in March, as the stronger U.S. dollar and
declining European rate environment contributed to a favorable equity
environment.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Worldwide underwriting volumes in fixed income products remained strong
in the first half of 1997. U.S. underwriting volumes, while experiencing a
slowdown in March and April, strengthened over the prior year. The improvement
was fueled in part by straight debt financings timed in anticipation of higher
interest rates, as well as favorable pricing in the spread sectors. Equity and
related underwriting volumes declined considerably from the strong 1996 levels,
as rising interest rates and the U.S. equity market correction had a negative
effect on the timing of equity offerings. New issuance activity was also
negatively impacted by the volatility experienced in the international markets,
as the weakening of the Yen and certain Asian markets caused equity-market
selloffs and corresponding reductions in new issuance activities. Elections and
EMU uncertainty also contributed to reduced European issuance activity.
Corporate finance advisory activities outpaced the record 1996 levels,
reflecting increased consolidation and globalization across industry sectors and
the overall strength in the global capital markets. The pace of strategic merger
and acquisition activity is expected to remain strong throughout 1997.
While fiscal 1996 and 1997 have been characterized by favorable
financial markets, nevertheless, the financial services industry is cyclical. As
a result, the Company's businesses are evaluated across the market cycles for
operating profitability and their contribution to the Company's long-term
strategic product base, its global presence, and its risk management practices.
Note: Except for the historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that are based on current
expectations, estimates and projections about the industries in which the
Company operates. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of
new information, future events or otherwise.
<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 May 31, 1997 and 1996
The Company reported net income of $59 million for the second quarter
ended May 31, 1997, representing an increase of 7% from net income of $55
million for the second quarter ended May 31, 1996.
Net revenues decreased to $555 million for the second quarter of 1997
from $615 million for the second quarter of 1996 as improved performances in the
Company's corporate finance advisory and merchant banking businesses were offset
by reduced revenues in fixed income and equities.
The Company, through its subsidiaries, is a market-maker of equity and
fixed income products in major domestic and international markets. As part of
its market-making activities, the Company maintains inventory positions of
varying amounts across a broad range of financial instruments that 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. Principal transactions and net interest
revenues decreased to $262 million for the second quarter of 1997 from $350
million for the second quarter of 1996. The decrease in the combined revenues
from principal transactions and net interest in the second quarter of 1997 was
the result of reduced revenues from customer flow activities in certain fixed
income and equity products.
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 four major business units: Fixed Income, Equity, Corporate Finance
Advisory, and Merchant Banking. 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.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended May 31, 1997
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income $231 $ 9 $64 $ 2 $306
Equity 34 62 37 133
Corporate Finance Advisory 56 56
Merchant Banking (4) 54 50
Other 1 3 (1) 7 10
- - ---------------------------------------------------------------------------------------------------------------------------
$262 $74 $210 $ 9 $555
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended May 31, 1996
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income $319 $13 $68 $ 1 $401
Equity 37 60 60 1 158
Corporate Finance Advisory 47 47
Merchant Banking (5) 7 2
Other (1) 4 4 7
- - ---------------------------------------------------------------------------------------------------------------------------
$350 $77 $182 $ 6 $615
- - ---------------------------------------------------------------------------------------------------------------------------
</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 and
fixed income derivative products. Fixed income net revenues decreased 24% to
$306 million for the second quarter of 1997 from $401 million for the second
quarter of 1996. The reduction in the second quarter results versus the prior
year quarter reflected reduced customer flow activities from a number of fixed
income products including mortgages, fixed income derivatives, and foreign
exchange. Investment banking revenues, as a component of fixed income revenues,
were relatively unchanged, decreasing to $64 million for the second quarter of
1997 from $68 million for the second quarter of 1996.
Equity. Equity net revenues reflect customer flow activities (both
institutional and high-net-worth retail), secondary trading, equity
underwriting, equity finance, equity derivatives and equity arbitrage
activities. The Company's equity net revenues decreased to $133 million for the
second quarter of 1997 from $158 million for the second quarter of 1996 as
customer trading and underwriting activities were negatively impacted by the
market transaction. Decreased equity revenues in 1997 resulted from reduced
contributions from most products including NASDAQ, U.S. listed, and equity
financing. Investment banking revenues, as a component of equity revenues,
decreased to $37 million for the second quarter of 1997 from $60 million for the
second quarter of 1996 as the higher interest rate environment prompted a
correction in the U.S. equity markets, resulting in lower levels of
underwritting volume.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 consists of advising
clients on mergers and acquisitions, divestitures, leveraged buyouts, financial
restructurings, and a variety of cross-border transactions. Net revenues from
corporate finance advisory activities increased to $56 million for the second
quarter of 1997, reflecting a 19% increase from the $47 million recognized in
the second quarter of 1996. This increase exemplified continued strength in the
overall merger and acquisition market environment.
Merchant Banking. The Company is the general partner for four merchant
banking partnerships. Current merchant banking investments held by the
partnerships include both publicly traded and privately held companies
diversified on a geographic and industry basis. Merchant banking net revenues
primarily represent the Company's proportionate share of net realized and net
unrealized gains and losses from the sale and revaluation of investments held by
the partnerships. Such amounts are classified in the Consolidated Statement of
Operations as a component of investment banking revenues. Merchant banking net
revenues also reflect the net interest expense relating to the financing of the
Company's investment in the partnerships. Merchant banking net revenues were $50
million for the second quarter of 1997 and $2 million in the second quarter of
1996. This increase was principally due to a realized gain on the sale of a
significant portion of a publicly traded investment held by the partnerships.
The Company expects to complete the divestiture of both this investment and an
additional investment in the third quarter of 1997.
Non-Interest Expenses. Non-interest expenses were $469 million for the
second quarter of 1997 and $520 million for the second quarter of 1996.
Compensation and benefits expense decreased to $259 million for the second
quarter of 1997 from $303 million for the second quarter of 1996 reflecting the
lower level of revenues in 1997.
Income Taxes. The Company's income tax provision was $27 million for
the second quarter of 1997 compared to $40 million for the second quarter of
1996. The effective tax rate was 31% for the second quarter of 1997 and 42% for
the second quarter of 1996. The decrease in the effective tax rate primarily
reflects an increase in tax benefits attributable to income subject to
preferential tax treatment and an increase in the Company's net deferred tax
assets resulting from a change in state and local tax laws.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the Six Months Ended May 31, 1997 and 1996
The Company reported net income of $106 million for the six months
ended May 31, 1997, representing an increase of 6% from net income of $100
million for the six months ended May 31, 1996.
Net revenues decreased to $1,176 million for the six months of 1997
from $1,222 million for the six months of 1996 as improved performances in the
Company's equities, corporate finance advisory and merchant banking businesses
were offset by reduced revenues from fixed income.
Principal transactions and net interest revenues decreased to $600
million for the six months of 1997 from $708 million for the six months of 1996.
The decrease in the combined revenues from principal transactions and net
interest in the six months of 1997 was the result of reduced revenues from
customer flow activities in certain fixed income and equity products.
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. Net revenues by business unit contain certain internal allocations,
including funding costs, which are centrally managed.
<TABLE>
<CAPTION>
Six Months Ended May 31, 1997
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income $ 533 $ 18 $152 $ 3 $ 706
Equity 70 132 91 1 294
Corporate Finance Advisory 102 102
Merchant Banking (7) 57 50
Other 4 7 13 24
- - ---------------------------------------------------------------------------------------------------------------------------
$ 600 $157 $402 $17 $1,176
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended May 31, 1996
Principal
Transactions and Investment
Net Interest Commissions Banking Other Total
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income $ 670 $ 30 $131 $ 4 $ 835
Equity 45 119 109 3 276
Corporate Finance Advisory 87 87
Merchant Banking (7) 15 8
Other 9 7 16
- - ---------------------------------------------------------------------------------------------------------------------------
$ 708 $158 $342 $14 $1,222
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Fixed Income. Fixed income net revenues decreased to $706 million for
the six months of 1997 from $835 million for the six months of 1996. The reduced
revenues were primarily in mortgages and foreign exchange. Investment banking
revenues, as a component of fixed income revenues, increased to $152 million for
the six months of 1997 from $131 million for the six months of 1996 due to
increased underwriting volumes and a mix change to higher margin debt products.
Equity. The Company's equity net revenues increased to $294 million for
the six months of 1997 from $276 million for the six months of 1996. Increased
revenues from equity derivatives and convertible securities were partially
offset by a decline in U.S. listed equity trading and NASDAQ revenues for the
first half of 1997. Investment banking revenues, as a component of equity
revenues, decreased to $91 million for the six months of 1997 from $109 million
for the six months of 1996 as the higher interest rate environment prompted a
correction in the U.S. equity markets, resulting in lower levels of underwriting
volume.
Corporate Finance Advisory. Net revenues from corporate finance
advisory activities increased to $102 million for the six months of 1997
reflecting a 17% increase from the $87 million recognized in the six months of
1996. This increase reflected continued strength in the overall merger and
acquisition market environment.
Merchant Banking. Merchant banking net revenues were $50 million for
the six months of 1997 and $8 million in the six months of 1996. This increase
was principally due to a realized gain on the sale of a significant portion of a
publicly traded investment held by the partnerships. The Company expects to
complete the divestiture of this and an additional investment in the third
quarter of 1997.
Non-Interest Expenses. Non-interest expenses were $1,021 million for
the six months of 1997 and $1,049 million for the six months of 1996.
Compensation and benefits expense was $619 million for 1997 and $617 million for
1996.
Income Taxes. The Company's income tax provision was $49 million for
the first half of 1997 compared to $73 million for the first half of 1996. The
effective tax rate was 32% for 1997 and 42% for 1996. The decrease in the
effective tax rate primarily reflects an increase in tax benefits attributable
to income subject to preferential tax treatment and an increase in the Company's
deferred tax assets resulting from a change in state and local tax laws.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Overview
As a leading global investment bank that actively participates in the
global capital markets, the Company has large and diverse capital requirements.
Many of the businesses in which the Company operates are capital intensive.
Capital is required to finance, among other things, the Company's securities
inventory, underwriting activities, principal investments, merchant banking
activities and investments in fixed assets.
The Company's total assets increased to $115.4 billion at May 31, 1997
from $107.7 billion at November 30, 1996. The increase in total assets is
primarily attributable to an increase in matched book fixed income financing
activities.
The Company's balance sheet is highly liquid and consists primarily of
cash and cash equivalents, securities and other financial instruments owned,
which are marked-to-market daily; and collateralized short-term financing
agreements. As the Company's primary activities are based on customer flow
transactions, the Company experiences a rapid asset turnover rate. 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 and various month ends) may be higher than at fiscal
quarter ends.
Funding and Capital Policies
The Company's Finance Committee, which includes senior officers from
key areas of the Company, is responsible for establishing and managing the
funding and liquidity policies of the Company. The Finance Committee's funding
and liquidity policies include recommendations for capital and balance sheet
size as well as the allocation of capital and balance sheet to product areas. In
addition, the treasury staff members of the Finance Committee work with the
Regional Asset and Liability Committees to ensure coordination of global funding
efforts. The Regional Asset and Liability Committees are aligned with the
Company's geographic funding centers and are responsible for implementing
funding strategies consistent with the direction set by the Finance Committee
and for monitoring and managing liquidity for the region.
The primary goal of the Company's funding policies is to provide
sufficient liquidity and availability of funding sources across a wide range of
market environments. There are five key elements of its funding strategy that
the Company attempts to achieve:
o To maintain an appropriate Total Capital structure to support the business
activities in which the Company is engaged.
o To minimize liquidity and refinancing risk by funding the Company's assets
on a global basis with unsecured liabilities which have maturities similar
to the anticipated liquidation period of the assets.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
o To maintain sufficient liquidity during a period of financial stress
through a combination of collateralized short-term financings, Total
Capital and a contingency funding plan. Financial stress is defined as any
event which severely constrains the Company's access to unsecured funding
sources.
o To obtain diversified funding through a global investor base which maximizes
liquidity and reduces concentration risk.
o To maintain funding availability in excess of actual utilization.
Short-Term Funding
The Company strives to maximize the portion of the Company's balance
sheet that is funded through collateralized borrowing sources, which in turn
minimizes the reliance placed upon unsecured short-term debt.
Collateralized borrowing sources include securities and other financial
instruments sold but not yet purchased, as well as collateralized short-term
financings, defined as securities sold under agreements to repurchase ("repos")
and securities loaned. Because of their secured nature, OECD government repos
and other types of collateralized borrowing sources are less credit-sensitive
and have historically been a more stable financing source under adverse market
conditions. Also, collateralized borrowing sources generally provide the Company
with access to lower cost funding.
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 vast majority of the Company's assets are funded with collateralized
borrowing sources. At May 31, 1997 and November 30, 1996, $87 billion and $80
billion, respectively, of the Company's total balance sheet was financed using
collateralized borrowing sources. As of May 31, 1997 and November 30, 1996,
respectively, short-term debt outstanding was $1.8 billion and $2.3 billion.
There was no commercial paper outstanding as of May 31, 1997 and November 30,
1996.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Total Capital
In accordance with the Company's liquidity plan, the Company increased
its Total Capital base in 1997 to $6.1 billion at May 31, 1997 from $5.9 billion
at November 30, 1996. Total Capital increased primarily due to an increase in
long-term debt and the retention of earnings.
May 31 November 30
(in millions) 1997 1996
- - --------------------------------------------------------------------------------
Long-Term Debt
Senior Notes $ 222 $ 215
Subordinated Indebtedness 4,048 3,950
------- -------
4,270 4,165
Stockholder's Equity 1,827 1,692
- - --------------------------------------------------------------------------------
Total Capital $6,097 $5,857
- - --------------------------------------------------------------------------------
During the second quarter of 1997, the Company issued $508 million in
long-term debt, which was $99 million in excess of its maturing debt. Long-term
debt increased to $4.3 billion at May 31, 1997 from $4.2 billion at November 30,
1996 with a weighted average maturity of 4.8 years at May 31, 1997 and 4.5 years
at November 30, 1996.
The increase in Total Capital also reflects an increase in
stockholders' equity to $1.8 billion at May 31, 1997 from $1.7 billion at
November 30, 1996. The net increase in stockholders' equity was primarily due to
the retention of earnings and capital contributions received.
At May 31, 1997, the Company had approximately $1.1 billion available
for the issuance of debt securities under various shelf registrations.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Credit Ratings
The Company, like other companies in the securities industry, relies on
external sources to finance a significant portion of its day-to-day operations.
The Company's access and cost of funding is generally dependent upon its short-
and long-term debt ratings. As of May 31, 1997, the current short- and long-term
senior debt 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
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-rated companies. For purposes of this
discussion, high yield debt securities are defined as securities or loans to
companies rated BB+ or lower, or equivalent ratings by recognized credit rating
agencies, as well as non-rated securities or loans which, in the opinion of
management, are non-investment grade. Non-investment grade securities generally
involve greater risks than investment grade securities due to the issuer's
creditworthiness and the liquidity of the market for such securities. In
addition, these issuers have higher levels of indebtedness, resulting in an
increased sensitivity to adverse economic conditions. The Company recognizes
these risks and aims to reduce market and credit risk through the
diversification of its products and counterparties. High yield debt securities
are carried at market value and unrealized gains or losses for these securities
are reflected in the Company's Consolidated Statement of Operations. The
Company's portfolio of such securities at May 31, 1997 and November 30, 1996
included long positions with an aggregate market value of approximately $1.6
billion and $1.3 billion, respectively, and short positions with an aggregate
market value of approximately $131 million and $99 million, respectively. The
portfolio may from time to time contain concentrated holdings of selected
issues. The Company's largest high yield position was $205 million and $78
million at May 31, 1997 and November 30, 1996, respectively.
Merchant Banking Activities
The Company's merchant banking activities include investments in four
partnerships, for which the Company acts as general partner, as well as direct
investments. At May 31, 1997, the investment in merchant banking partnerships
was $185 million. The Company's policy is to carry its investments, including
its partnership interests, at fair value based upon the Company's assessment of
the underlying investments.
<PAGE>
LEHMAN BROTHERS INC. and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Non-Core 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, the Company acts as a general partner for approximately $3.5 billion
of partnership investment capital and manages the remaining real estate
investment portfolio. At May 31, 1997, the Company's investments in these real
estate activities, as well as commitments and contingent liabilities under
guarantees and credit enhancements were fully 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.
Management's intention with regard to non-core assets is the prudent
liquidation of these investments as and when possible.
Year 2000
Holdings has developed a detailed plan to modify its computer systems
in anticipation of the year 2000. Many of the existing systems process
transactions based on storing two digits for the year of a transaction, rather
than full four digits. If these systems are not identified and reconfigured,
year 2000 transactions would be processed with year "00" which would lead to
processing inaccuracies and potential inoperability. Any costs incurred relating
to this project will be expensed as technology maintenance costs in accordance
with generally accepted accounting principles.
<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.
Actions Relating to First Capital Holdings Inc. (Reported in LBI's Annual Report
on Form 10-K)
FCH Shareholder and Agent Actions. On April 21, 1997, the California
District Court entered an order approving the settlement and dismissing the
Action.
Sonnenfeld v. The City and County of Denver, Colorado, et al (Reported in LBI's
Annual Report on Form 10-K)
On May 30, 1997, the parties entered into a Memorandum of Understanding
to settle and dismiss the action and are in the process of entering into a
definitive settlement agreement which will be submitted to the Court for
approval.
AIA Holding SA et al. v. Lehman Brothers Inc. and Bear Stearns & Co. Inc.
On July 9, 1997, LBI was served with a complaint in the U.S. District
Court for the Southern District of New York in which 277 named plaintiffs assert
24 causes of action against LBI and Bear Stearns & Co., Inc. The amount of
damages claimed is unspecified. The claims arise from the activities of an
individual named Ahmad Daouk, who was employed as an introducing broker who
introduced accounts to Shearson Lehman Hutton between 1988 and 1992. Daouk
allegedly perpetrated a fraud upon the claimants, who are mostly investors of
middle eastern origin, and the compliant alleges that Shearson breached various
contractual and common law duties owed to the investors.
<PAGE>
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
The following exhibits and reports on Form 8-K are filed as part of
this Quarterly Report, or where indicated, were heretofore filed and are hereby
incorporated by reference:
(a) Exhibits:
12. Computation in Support of Ratio of Earnings to Fixed Charges
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: July 15, 1997 By /s/ Richard S. Fuld, Jr.
-------------------------
Richard S. Fuld, Jr.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: July 15, 1997 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>
LEHMAN BROTHERS INC. and SUBSIDIARIES
COMPUTATION in SUPPORT of RATIO of EARNINGS to FIXED CHARGES
(Unaudited)
(Dollars in millions)
<TABLE>
<CAPTION>
For the For the For the For the
For the Year Eleven Months Year Year Six Months
Ended Ended Ended Ended Ended
December 31 November 30 November 30 November 30 May 31
----------- ----------- ----------- ----------- ------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
Fixed charges:
<S> <C> <C> <C> <C> <C> <C>
Interest expense:
Subordinated indebtedness $ 210 $ 192 $ 184 $ 204 $ 221 $ 126
Bank loans and other
borrowings* 4,363 4,393 5,661 9,750 9,900 5,543
Interest component of
rentals
of office and equipment 64 62 27 25 18 7
Other adjustments** 127 101 53 2 7 3
---- ---- -------- --------- --------- -------
TOTAL (A) $4,764 $4,748 $5,925 $9,981 $10,146 $5,679
====== ====== ====== ====== ======= ======
Earnings:
Pre-tax income (loss) from
continuing operations $ 319 $ (146) $ 1 $ 78 $ 309 $ 155
Fixed charges 4,764 4,748 5,925 9,981 10,146 5,679
Other adjustments*** (68) (68) (52) (1) (6) (3)
-------- -------- ------- ----------- ----------- ---------
TOTAL (B) $5,015 $4,534 $5,874 $10,058 $10,449 $5,831
====== ====== ====== ======= ======= ======
(B / A) 1.05 **** **** 1.01 1.03 1.03
</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 $214 million in 1993
and $51 million in 1994 in order to cover the deficiencies.
<PAGE>
Exhibit 27
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
LEHMAN BROTHERS INC. and SUBSIDIARIES
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at May 31, 1997 (Unaudited) and
the Consolidated Statement of Operations for the six months ended May 31, 1997
(Unaudited) and is qualified in its entirety by reference to such financial
statements.
1,000,000
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 1,021
<RECEIVABLES> 12,229
<SECURITIES-RESALE> 42,884
<SECURITIES-BORROWED> 20,901
<INSTRUMENTS-OWNED> 37,696
<PP&E> 270
<TOTAL-ASSETS> 115,450
<SHORT-TERM> 1,760
<PAYABLES> 18,946
<REPOS-SOLD> 49,978
<SECURITIES-LOANED> 13,679
<INSTRUMENTS-SOLD> 23,007
<LONG-TERM> 4,270
<COMMON> 0
0
0
<OTHER-SE> 1,827
<TOTAL-LIABILITY-AND-EQUITY> 115,450
<TRADING-REVENUE> 384
<INTEREST-DIVIDENDS> 5,885
<COMMISSIONS> 157
<INVESTMENT-BANKING-REVENUES> 402
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 5,669
<COMPENSATION> 619
<INCOME-PRETAX> 155
<INCOME-PRE-EXTRAORDINARY> 106
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
